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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2015

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                to               

 

Commission file number 001-32319

 


 

Sunstone Hotel Investors, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 


 

 

 

 

Maryland

 

20-1296886

(State or Other Jurisdiction of
Incorporation or Organization)

 

(I.R.S. Employer
Identification Number)

 

 

 

120 Vantis, Suite 350
Aliso Viejo, California

 

92656

(Address of Principal Executive Offices)

 

(Zip Code)

 

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

 


 

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

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

Large accelerated filer 

 

Accelerated filer 

 

 

 

Non-accelerated filer 

 

Smaller reporting company 

(Do not check if a smaller reporting company)

 

 

 

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

 

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

                                               208,684,693 shares of Common Stock, $0.01 par value, as of April 30, 2015

 

 


 

 

SUNSTONE HOTEL INVESTORS, INC.

QUARTERLY REPORT ON

FORM 10-Q

 

For the Quarterly Period Ended March 31, 2015

 

TABLE OF CONTENTS

 

 

 

 

 

 

Page

PART I—FINANCIAL INFORMATION 

 

 

 

Item 1. 

Financial Statements:

 

 

 

 

Consolidated Balance Sheets as of March 31, 2015 (unaudited) and December 31, 2014

 

 

 

 

Unaudited Consolidated Statements of Operations and Comprehensive Loss for the Three Months Ended March 31, 2015 and 2014

 

 

 

 

Consolidated Statement of Equity for the Three Months Ended March 31, 2015

 

 

 

 

Unaudited Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2015 and 2014

 

 

 

 

Notes to Unaudited Consolidated Financial Statements

 

 

 

Item 2. 

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

19 

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures about Market Risk

34 

 

 

 

Item 4. 

Controls and Procedures

35 

 

 

 

PART II—OTHER INFORMATION 

 

 

 

Item 1. 

Legal Proceedings

35 

 

 

 

Item 1A. 

Risk Factors

35 

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

35 

 

 

 

Item 3. 

Defaults Upon Senior Securities

35 

 

 

 

Item 4. 

Mine Safety Disclosures

35 

 

 

 

Item 5. 

Other Information

35 

 

 

 

Item 6. 

Exhibits

36 

 

 

 

SIGNATURES 

37 

 

 

 

1

 


 

 

PART I—FINANCIAL INFORMATION

Item 1.Financial Statements

 

SUNSTONE HOTEL INVESTORS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

    

2015

    

2014

 

 

(unaudited)

 

 

 

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

156,972 

 

$

222,096 

Restricted cash

 

 

87,260 

 

 

82,074 

Accounts receivable, net

 

 

50,907 

 

 

34,227 

Inventories

 

 

1,371 

 

 

1,439 

Prepaid expenses

 

 

15,890 

 

 

14,909 

Total current assets

 

 

312,400 

 

 

354,745 

Investment in hotel properties, net

 

 

3,537,125 

 

 

3,538,129 

Deferred financing fees, net

 

 

7,572 

 

 

8,201 

Goodwill

 

 

9,405 

 

 

9,405 

Other assets, net

 

 

14,855 

 

 

14,485 

Total assets

 

$

3,881,357 

 

$

3,924,965 

LIABILITIES AND EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

35,811 

 

$

32,577 

Accrued payroll and employee benefits

 

 

22,964 

 

 

31,919 

Dividends payable

 

 

12,734 

 

 

76,694 

Other current liabilities

 

 

44,159 

 

 

36,466 

Current portion of notes payable

 

 

235,970 

 

 

121,328 

Total current liabilities

 

 

351,638 

 

 

298,984 

Notes payable, less current portion

 

 

1,187,447 

 

 

1,307,964 

Capital lease obligations, less current portion

 

 

15,576 

 

 

15,576 

Other liabilities

 

 

34,670 

 

 

33,607 

Total liabilities

 

 

1,589,331 

 

 

1,656,131 

Commitments and contingencies (Note 10)

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

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

 

 

 

 

 

 

8.0% Series D Cumulative Redeemable Preferred Stock, 4,600,000 shares issued and outstanding at March 31, 2015 and December 31, 2014, stated at liquidation preference of $25.00 per share

 

 

115,000 

 

 

115,000 

Common stock, $0.01 par value, 500,000,000 shares authorized, 207,518,510 shares issued and outstanding at March 31, 2015 and 204,766,718 shares issued and outstanding at December 31, 2014

 

 

2,075 

 

 

2,048 

Additional paid in capital

 

 

2,454,720 

 

 

2,418,567 

Retained earnings

 

 

304,525 

 

 

305,503 

Cumulative dividends

 

 

(637,279)

 

 

(624,545)

Total stockholders’ equity

 

 

2,239,041 

 

 

2,216,573 

Non-controlling interests in consolidated joint ventures

 

 

52,985 

 

 

52,261 

Total equity

 

 

2,292,026 

 

 

2,268,834 

Total liabilities and equity

 

$

3,881,357 

 

$

3,924,965 

 

See accompanying notes to consolidated financial statements.

2

 


 

SUNSTONE HOTEL INVESTORS, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Three Months Ended

 

    

March 31, 2015

    

March 31, 2014

REVENUES

 

 

 

 

 

 

Room

 

$

193,291 

 

 

168,127 

Food and beverage

 

 

72,184 

 

 

59,911 

Other operating

 

 

18,910 

 

 

15,445 

Total revenues

 

 

284,385 

 

 

243,483 

OPERATING EXPENSES

 

 

 

 

 

 

Room

 

 

53,842 

 

 

48,919 

Food and beverage

 

 

50,219 

 

 

42,908 

Other operating

 

 

5,131 

 

 

4,995 

Advertising and promotion

 

 

15,360 

 

 

12,971 

Repairs and maintenance

 

 

11,558 

 

 

10,881 

Utilities

 

 

8,985 

 

 

8,289 

Franchise costs

 

 

8,600 

 

 

8,077 

Property tax, ground lease and insurance

 

 

23,613 

 

 

19,052 

Property general and administrative

 

 

34,449 

 

 

28,922 

Corporate overhead

 

 

14,253 

 

 

6,559 

Depreciation and amortization

 

 

40,707 

 

 

37,615 

Total operating expenses

 

 

266,717 

 

 

229,188 

Operating income

 

 

17,668 

 

 

14,295 

Interest and other income

 

 

946 

 

 

716 

Interest expense

 

 

(17,326)

 

 

(18,283)

Income (loss) before income taxes

 

 

1,288 

 

 

(3,272)

Income tax provision

 

 

(85)

 

 

(224)

NET INCOME (LOSS)

 

 

1,203 

 

 

(3,496)

Income from consolidated joint ventures attributable to non-controlling interests

 

 

(2,181)

 

 

(2,234)

Preferred stock dividends

 

 

(2,300)

 

 

(2,300)

LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS

 

$

(3,278)

 

$

(8,030)

COMPREHENSIVE LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS

 

$

(3,278)

 

$

(8,030)

Basic and diluted per share amounts:

 

 

 

 

 

 

Basic and diluted loss attributable to common stockholders per common share

 

$

(0.02)

 

$

(0.04)

Basic and diluted weighted average common shares outstanding

 

 

206,600 

 

 

181,061 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.05 

 

$

0.05 

 

See accompanying notes to consolidated financial statements.

 

 

3

 


 

SUNSTONE HOTEL INVESTORS, INC.

CONSOLIDATED STATEMENT OF EQUITY

(In thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-Controlling

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interests in

 

 

 

 

 

Preferred Stock

 

Common Stock

 

Additional

 

 

 

 

 

Consolidated

 

 

 

 

    

Number of Shares

    

Amount

    

Number of Shares

    

Amount

    

Paid in Capital

    

Retained Earnings

    

Cumulative Dividends

    

    Joint Ventures    

    

Total

Balance at December 31, 2014

 

4,600,000 

 

$

115,000 

 

204,766,718 

 

$

2,048 

 

$

2,418,567 

 

$

305,503 

 

$

(624,545)

 

$

52,261 

 

$

2,268,834 

Vesting of restricted common stock (unaudited)

 

 —

 

 

 —

 

624,227 

 

 

 

 

(1,175)

 

 

 —

 

 

 —

 

 

 —

 

 

(1,169)

Distributions to non-controlling interests (unaudited)

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(1,457)

 

 

(1,457)

Issuance of common stock dividends declared in 2014 at $0.36 per share (unaudited)

 

 —

 

 

 —

 

2,127,565 

 

 

21 

 

 

37,328 

 

 

 —

 

 

 —

 

 

 —

 

 

37,349 

Common stock dividends payable at $0.05 per share year to date (unaudited)

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(10,434)

 

 

 —

 

 

(10,434)

Series D preferred stock dividends payable at $0.50 per share year to date (unaudited)

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(2,300)

 

 

 —

 

 

(2,300)

Net income (loss) (unaudited)

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(978)

 

 

 —

 

 

2,181 

 

 

1,203 

Balance at March 31, 2015 (unaudited)

 

4,600,000 

 

$

115,000 

 

207,518,510 

 

$

2,075 

 

$

2,454,720 

 

$

304,525 

 

$

(637,279)

 

$

52,985 

 

$

2,292,026 

 

See accompanying notes to consolidated financial statements.

 

4

 


 

SUNSTONE HOTEL INVESTORS, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Three Months Ended

 

    

March 31, 2015

    

March 31, 2014

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

Net income (loss)

 

$

1,203 

 

$

(3,496)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

 

Bad debt expense

 

 

138 

 

 

95 

Gain on sale of assets

 

 

 —

 

 

(6)

Gain on derivatives, net

 

 

 —

 

 

(109)

Depreciation

 

 

39,465 

 

 

36,934 

Amortization of franchise fees and other intangibles

 

 

2,049 

 

 

1,755 

Amortization of deferred financing fees

 

 

639 

 

 

736 

Amortization of deferred stock compensation

 

 

2,895 

 

 

1,372 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Restricted cash

 

 

6,113 

 

 

6,168 

Accounts receivable

 

 

(16,818)

 

 

(9,045)

Inventories

 

 

68 

 

 

129 

Prepaid expenses and other assets

 

 

(1,768)

 

 

(289)

Accounts payable and other liabilities

 

 

8,182 

 

 

12,650 

Accrued payroll and employee benefits

 

 

(13,184)

 

 

(7,611)

Net cash provided by operating activities

 

 

28,982 

 

 

39,283 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

Proceeds from sales of other assets

 

 

 —

 

 

Restricted cash — replacement reserve

 

 

(11,299)

 

 

390 

Renovations and additions to hotel properties

 

 

(36,120)

 

 

(33,346)

Net cash used in investing activities

 

 

(47,419)

 

 

(32,949)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

Proceeds from common stock offerings

 

 

 —

 

 

1,392 

Payment of common stock offering costs

 

 

 —

 

 

(173)

Payments on notes payable

 

 

(5,875)

 

 

(5,673)

Payments of deferred financing costs

 

 

(10)

 

 

—  

Dividends paid

 

 

(39,345)

 

 

(11,443)

Distributions to non-controlling interests

 

 

(1,457)

 

 

(8)

Net cash used in financing activities

 

 

(46,687)

 

 

(15,905)

Net decrease in cash and cash equivalents

 

 

(65,124)

 

 

(9,571)

Cash and cash equivalents, beginning of period

 

 

222,096 

 

 

104,363 

Cash and cash equivalents, end of period

 

$

156,972 

 

$

94,792 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

 

 

 

 

 

 

Cash paid for interest

 

$

15,240 

 

$

16,428 

Income tax refunds received net of cash paid

 

$

(647)

 

$

—  

NONCASH INVESTING ACTIVITY

 

 

 

 

 

 

Accounts payable related to renovations and additions to hotel properties

 

$

12,479 

 

$

9,077 

Amortization of deferred stock compensation — construction activities

 

$

165 

 

$

114 

NONCASH FINANCING ACTIVITY

 

 

 

 

 

 

Issuance of common stock dividend

 

$

37,349 

 

$

—  

Dividends payable

 

$

12,734 

 

$

11,467 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

5


 

SUNSTONE HOTEL INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1. Organization and Description of Business

 

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

 

As a REIT, certain tax laws limit the amount of “non-qualifying” income the Company can earn, including income derived directly from the operation of hotels. As a result, the Company leases all of its hotels to its TRS Lessee, which in turn enters into long-term management agreements with third parties to manage the operations of the Company’s hotels. As of March 31, 2015, the Company had interests in 30 hotels (the “30 hotels”) held for investment, and the Company’s third-party managers included the following:

 

 

 

 

 

 

 

 

 

    

Number of Hotels

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

 

11 

Interstate Hotels & Resorts, Inc.

 

Highgate Hotels L.P. and an affiliate

 

Davidson Hotels & Resorts

 

Hilton Worldwide

 

Hyatt Corporation

 

Crestline Hotels & Resorts

 

Dimension Development Company

 

Fairmont Hotels & Resorts (U.S.)

 

 

 

 

Total hotels held for investment

 

30 

 

In addition, as of March 31, 2015, the Company owned BuyEfficient, LLC (“BuyEfficient”), an electronic purchasing platform that allows members to procure food, operating supplies, furniture, fixtures and equipment.

2. Summary of Significant Accounting Policies

 

Basis of Presentation

 

The accompanying consolidated financial statements as of March 31, 2015 and December 31, 2014, and for the three months ended March 31, 2015 and 2014, include the accounts of the Company, the Operating Partnership, the TRS Lessee and their subsidiaries. All significant intercompany balances and transactions have been eliminated. The Company consolidates subsidiaries when it has the ability to direct the activities that most significantly impact the economic performance of the entity. The Company also evaluates its subsidiaries to determine if they should be considered variable interest entities (“VIEs”). Typically, the entity that has the power to direct the activities that most significantly impact economic performance would consolidate the VIE. The Company considers an entity a VIE if equity investors own an interest therein that does not have the characteristics of a controlling financial interest or if such investors do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. In accordance with the Consolidation Topic of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”), the Company reviewed its subsidiaries to determine if (i) they should be considered VIEs, and (ii) whether the Company should change its consolidation determination based on changes in the characteristics of these entities. Based on its review, the Company determined that all of its subsidiaries were properly consolidated as of March 31, 2015 and December 31, 2014, and for the three months ended March 31, 2015 and 2014.

 

Non-controlling interests at both March 31, 2015 and December 31, 2014 represent the outside equity interests in various consolidated affiliates of the Company.

 

The accompanying interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and in conformity with the rules and regulations of the Securities and Exchange Commission. In the Company’s opinion, the interim financial statements presented herein reflect all adjustments, consisting solely of normal and recurring adjustments, which are necessary to fairly present the interim financial statements. These financial statements should be read in

6


 

conjunction with the financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014, filed with the Securities and Exchange Commission on February 19, 2015.

 

Certain prior year amounts have been reclassified in the consolidated financial statements in order to conform to the current year’s presentation.  

 

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

 

Use of Estimates

 

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates.

 

Fair Value of Financial Instruments

 

As of March 31, 2015 and December 31, 2014, the carrying amount of certain financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued expenses were representative of their fair values due to the short-term maturity of these instruments.

 

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

 

 

 

Level 1

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

 

 

Level 2

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

 

 

Level 3

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

 

As discussed in Note 4, the Company held two interest rate cap agreements at March 31, 2015 and December 31, 2014 to manage, or hedge, interest rate risks related to its floating rate debt. The Company records interest rate protection agreements on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in the consolidated statements of operations and comprehensive loss as they are not designated as hedges. In accordance with the Fair Value Measurement and Disclosure Topic of the FASB ASC, the Company estimates the fair value of its interest rate protection agreements based on quotes obtained from the counterparties, which are based upon the consideration that would be required to terminate the agreements. Using Level 2 measurements, the Company determined that the total values of its interest rate cap agreements were de minimis at both March 31, 2015 and December 31, 2014. The interest rate cap agreements are included in other assets, net on the accompanying consolidated balance sheets.

 

On an annual basis and periodically when indicators of impairment exist, the Company analyzes the carrying values of its hotel properties and other assets using Level 3 measurements, including a discounted cash flow analysis to estimate the fair value of its hotel properties and other assets taking into account each property’s expected cash flow from operations, holding period and estimated proceeds from the disposition of the property. The factors addressed in determining estimated proceeds from disposition include anticipated operating cash flow in the year of disposition and terminal capitalization rate. The Company did not identify any properties or other assets with indicators of impairment during the three months ended March 31, 2015 and 2014.

 

On an annual basis and periodically when indicators of impairment exist, the Company also analyzes the carrying value of its goodwill using Level 3 measurements, including a discounted cash flow analysis to estimate the fair value of its reporting units. The Company did not identify any properties or other assets with indicators of goodwill impairment during the three months ended March 31, 2015 and 2014.

 

As of both March 31, 2015 and December 31, 2014, 71.6% of the Company’s outstanding debt had fixed interest rates. The Company’s carrying value of its debt totaled $1.4 billion as of both March 31, 2015 and December 31, 2014. Using Level 3 measurements, including the Company’s weighted average cost of debt of 4.5%, the Company estimates that the fair market value of its debt totaled $1.4 billion as of both March 31, 2015 and December 31, 2014.

7


 

 

The following table presents the Company’s assets measured at fair value on a recurring and non-recurring basis at March 31, 2015 and December 31, 2014 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at Reporting Date

 

    

Total

    

Level 1

    

Level 2

    

Level 3

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2015 (unaudited):

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate cap derivative agreements

 

$

 

$

 

$

 

$

Life insurance policy (1)

 

 

1,013 

 

 

 

 

1,013 

 

 

Total assets at March 31, 2015

 

$

1,013 

 

$

 

$

1,013 

 

$

December 31, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate cap derivative agreements

 

$

 

$

 

$

 

$

Life insurance policy (1)

 

 

1,198 

 

 

 

 

1,198 

 

 

Total assets at December 31, 2014

 

$

1,198 

 

$

 

$

1,198 

 

$

 

(1)

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

 

The following table presents the Company’s liabilities measured at fair value on a recurring and non-recurring basis at March 31, 2015 and December 31, 2014 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at Reporting Date

 

    

Total

    

Level 1

    

Level 2

    

Level 3

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2015 (unaudited):

 

 

 

 

 

 

 

 

 

 

 

 

Retirement benefit agreement (1)

 

$

1,013 

 

$

 

$

1,013 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

Retirement benefit agreement (1)

 

$

1,198 

 

$

 

$

1,198 

 

$

 

(1)

Includes the retirement benefit agreement for one of the Company’s former associates, which the Company values using Level 2 measurements. The agreement calls for the balance of the retirement benefit to be paid out to the former associate in 10 annual installments, beginning in 2011. As such, the Company has paid the former associate a total of $1.0 million through March 31, 2015, which was reimbursed to the Company using funds from the related split life insurance policy noted above. These amounts are included in accrued payroll and employee benefits on the accompanying consolidated balance sheets.

 

Accounts Receivable

 

Accounts receivable primarily represents receivables from hotel guests who occupy hotel rooms and utilize hotel services. Accounts receivable also includes, among other things, receivables from customers who utilize purchase volume rebates through BuyEfficient, as well as tenants who lease space in the Company’s hotels. The Company maintains an allowance for doubtful accounts sufficient to cover potential credit losses. The Company’s accounts receivable includes an allowance for doubtful accounts of $0.2 million at both March 31, 2015 and December 31, 2014.

 

Acquisitions of Hotel Properties and Other Entities

 

Accounting for the acquisition of a hotel property or other entity as a purchase transaction requires an allocation of the purchase price to the assets acquired and the liabilities assumed in the transaction at their respective estimated fair values. The most difficult estimations of individual fair values are those involving long-lived assets, such as property, equipment, intangible assets and any capital lease obligations that are assumed as part of the acquisition of a leasehold interest. During 2014, the Company used all available information to make these fair value determinations, and engaged an independent valuation specialist to assist in the fair value determination of the long-lived assets acquired and the liabilities assumed in the Company’s purchase of the Marriott Wailea. Due to the inherent subjectivity in determining the estimated fair value of long-lived assets, the Company believes that the recording of acquired assets and liabilities is a critical accounting policy.

8


 

Assets Held for Sale

 

The Company considers a hotel or other asset held for sale if it is probable that the sale will be completed within twelve months, among other requirements. A sale is determined to be probable once the buyer completes its due diligence of the asset, there is an executed purchase and sale agreement between the Company and the buyer, and the Company has received a substantial non-refundable deposit. Depreciation ceases when a property is held for sale. Should an impairment loss be required for assets held for sale, the related assets are adjusted to their estimated fair values, less costs to sell. If the sale of a hotel or other asset represents a strategic shift that will have a major effect on the Company’s operations and financial results, the hotel or other asset is included in discontinued operations, and operating results are removed from income from continuing operations and reported as discontinued operations. The operating results for any such assets for any prior periods presented must also be reclassified as discontinued operations. As of both March 31, 2015 and December 31, 2014, the Company had no hotels or other assets held for sale.

 

Deferred Financing Fees

 

Deferred financing fees consist of loan fees and other financing costs related to the Company’s outstanding indebtedness and credit facility commitments, and are amortized to interest expense over the terms of the related debt or commitment. If a loan is refinanced or paid before its maturity, any unamortized deferred financing costs will generally be expensed unless specific rules are met that would allow for the carryover of such costs to the refinanced debt.

 

Earnings Per Share

 

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

 

The Company follows the requirements of the Earnings Per Share Topic of the FASB ASC, which states that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. For both the three months ended March 31, 2015 and 2014, distributed earnings representing nonforfeitable dividends of $0.1 million were allocated to the participating securities. There were no undistributed earnings representing nonforfeitable dividends allocated to the participating securities for either the three months ended March 31, 2015 or 2014.

 

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

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Three Months Ended

 

    

March 31, 2015

    

March 31, 2014

 

 

(unaudited)

 

(unaudited)

Numerator:

 

 

 

 

 

 

Net income (loss)

 

$

1,203 

 

$

(3,496)

Income from consolidated joint ventures attributable to non-controlling interests

 

 

(2,181)

 

 

(2,234)

Preferred stock dividends

 

 

(2,300)

 

 

(2,300)

Dividends paid on unvested restricted stock compensation

 

 

(58)

 

 

(100)

Numerator for basic and diluted loss attributable to common stockholders

 

$

(3,336)

 

$

(8,130)

Denominator:

 

 

 

 

 

 

Weighted average basic and diluted common shares outstanding

 

 

206,600 

 

 

181,061 

Basic and diluted loss attributable to common stockholders per common share

 

$

(0.02)

 

$

(0.04)

 

The Company’s unvested restricted shares associated with its long-term incentive plan and shares associated with common stock options have been excluded from the above calculation of earnings per share for the three months ended March 31, 2015 and 2014, as their inclusion would have been anti-dilutive.

9


 

 

Goodwill

 

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

 

Non-Controlling Interests

 

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

 

At both March 31, 2015 and December 31, 2014, the non-controlling interests reported in the Company’s financial statements include Hilton Worldwide’s 25.0% ownership in the Hilton San Diego Bayfront, as well as investors that own a $0.1 million preferred equity interest in a subsidiary captive REIT that owns the Doubletree Guest Suites Times Square.

 

Segment Reporting

 

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

3. Investment in Hotel Properties

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

    

2015

    

2014

 

 

(unaudited)

 

 

 

Land

 

$

570,011 

 

$

570,011 

Buildings and improvements

 

 

3,245,398 

 

 

3,237,596 

Furniture, fixtures and equipment

 

 

457,182 

 

 

450,057 

Intangibles

 

 

147,826 

 

 

147,947 

Franchise fees

 

 

1,167 

 

 

1,167 

Construction in process

 

 

93,394 

 

 

68,275 

Investment in hotel properties, gross

 

 

4,514,978 

 

 

4,475,053 

Accumulated depreciation and amortization

 

 

(977,853)

 

 

(936,924)

Investment in hotel properties, net

 

$

3,537,125 

 

$

3,538,129 

 

 

 

In June 2014, the Company acquired the land underlying the Fairmont Newport Beach, and in July 2014, the Company acquired the Marriott Wailea. Acquired properties are included in the Company’s results of operations and comprehensive loss from the date of acquisition. The following unaudited pro forma results of operations reflect the Company’s results as if the acquisitions of the Marriott

10


 

Wailea and the land underlying the Fairmont Newport Beach had occurred on January 1, 2014. In the Company’s opinion, all significant adjustments necessary to reflect the effects of the acquisitions have been made (in thousands, except per share data):

 

 

 

 

 

 

 

 

Three Months Ended

 

    

March 31, 2014

 

 

(unaudited)

Revenues

 

$

260,987 

Loss attributable to common stockholders

 

$

(3,173)

Loss per diluted share attributable to common stockholders

 

$

(0.02)

 

 

 

 

4. Interest Rate Derivative Agreements

 

At March 31, 2015 and December 31, 2014, the Company held two interest rate cap agreements to manage its exposure to the interest rate risks related to its floating rate debt. The first interest rate cap agreement is on the Hilton San Diego Bayfront mortgage, which mortgage currently bears an interest rate of one-month LIBOR plus 225 basis points. The Hilton San Diego Bayfront cap agreement caps the LIBOR rate at 3.75% until April 2015. The notional amount of the related debt capped totaled $117.0 million at both March 31, 2015 and December 31, 2014. The second interest rate cap agreement is on the Doubletree Guest Suites Times Square mortgage, which mortgage currently bears an interest rate of one-month LIBOR plus 325 basis points. The Doubletree Guest Suites Times Square cap agreement caps the LIBOR rate at 4.0% until October 2015. The notional amount of the related debt capped totaled $176.8 million and $177.4 million at March 31, 2015 and December 31, 2014, respectively.

 

None of the interest rate derivative agreements qualifies for effective hedge accounting treatment. Accordingly, changes in the fair value of the Company’s interest rate derivative agreements are reflected as increases or decreases in interest expense on the Company’s statements of operations and comprehensive loss. During both the three months ended March 31, 2015 and 2014, changes in the fair value of the Company’s interest rate cap agreements resulted in nominal losses reflected as increases in interest expense during the respective periods. As of both March 31, 2015 and December 31, 2014, the fair values of the interest rate cap agreements were de minimus. The interest rate cap agreements are included in other assets, net on the Company’s consolidated balance sheets. During the three months ended March 31, 2014, the Company also had an interest rate swap agreement on the JW Marriott New Orleans mortgage, which swap agreement was terminated in December 2014. Changes in the fair value of the interest rate swap agreement resulted in a net gain of $0.1 million for the three months ended March 31, 2014, which is reflected as a decrease in interest expense for the three months ended March 31, 2014.

5. Other Assets

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

    

2015

    

2014

 

 

(unaudited)

 

 

 

Property and equipment, net

 

$

1,990 

 

$

2,127 

Land held for development

 

 

188 

 

 

188 

Intangibles, net

 

 

6,527 

 

 

6,677 

Deferred expense on straightlined third-party tenant leases

 

 

2,494 

 

 

1,426 

Other receivables

 

 

1,613 

 

 

2,094 

Other

 

 

2,043 

 

 

1,973 

Total other assets, net

 

$

14,855 

 

$

14,485 

 

Property and equipment, net consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

    

2015

    

2014

 

 

(unaudited)

 

 

 

Cost basis

 

$

11,683 

 

$

11,573 

Accumulated depreciation

 

 

(9,693)

 

 

(9,446)

Property and equipment, net

 

$

1,990 

 

$

2,127 

 

11


 

The Company’s other assets, net as of March 31, 2015 and December 31, 2014, include BuyEfficient’s intangible assets totaling $6.5 million and $6.7 million, respectively, net of accumulated amortization related to certain trademarks, customer and supplier relationships and intellectual property related to internally developed software. These intangibles are amortized using the straight-line method over their useful lives ranging between seven and 20 years. Accumulated amortization totaled $2.5 million and $2.4 million at March 31, 2015 and December 31, 2014, respectively, and amortization expense totaled $0.1 million for both the three months ended March 31, 2015 and 2014.

 

In January 2013, the Company sold a four-hotel, 1,222-room portfolio (the “Rochester Hotels”) and a commercial laundry facility (together with the Rochester Hotels, the “Rochester Portfolio”) in Rochester, Minnesota, to an unaffiliated third party. The Company retained a $25.0 million preferred equity investment (the “Preferred Equity Investment”) in the Rochester Hotels that yields an 11% dividend, resulting in a deferred gain on the sale of $25.0 million. The $25.0 million gain will be deferred until the Preferred Equity Investment is redeemed. The Preferred Equity Investment is recorded at face value on the Company’s consolidated balance sheets net of the deferred gain, resulting in a net book value of zero on the Company’s consolidated balance sheets as of both March 31, 2015 and December 31, 2014. During both the three months ended March 31, 2015 and 2014, the Company recognized $0.7 million in dividends on the Preferred Equity Investment.

6. Notes Payable

 

Notes payable consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

    

2015

    

2014

 

 

(unaudited)

 

 

 

Notes payable requiring payments of interest and principal, with fixed rates ranging from 4.12% to 5.95%; maturing at dates ranging from May 2015 through January 2025. The notes are collateralized by first deeds of trust on 14 hotel properties at both March 31, 2015, and December 31, 2014.

 

$

1,019,193 

 

$

1,023,780 

Note payable requiring payments of interest and principal, bearing a blended rate of one-month LIBOR plus 225 basis points; maturing in August 2019. The note is collateralized by a first deed of trust on one hotel property.

 

 

227,590 

 

 

228,296 

Note payable requiring payments of interest only through October 2013, and interest and principal thereafter, with a blended interest rate of one-month LIBOR plus 325 basis points; maturing in October 2018. The note is collateralized by a first deed of trust on one hotel property.

 

 

176,634 

 

 

177,216 

Total notes payable

 

 

1,423,417 

 

 

1,429,292 

Less: current portion

 

 

(235,970)

 

 

(121,328)

Notes payable, less current portion

 

$

1,187,447 

 

$

1,307,964 

 

Total interest incurred and expensed on the notes payable was as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Three Months Ended

 

    

March 31, 2015

    

March 31, 2014

 

 

(unaudited)

 

(unaudited)

Interest expense on debt and capital lease obligations

 

$

16,687 

 

$

17,656 

Gain on derivatives, net

 

 

 —

 

 

(109)

Amortization of deferred financing fees

 

 

639 

 

 

736 

Total interest expense

 

$

17,326 

 

$

18,283 

 

 

 

12


 

7. Other Current Liabilities and Other Liabilities

 

Other current liabilities consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

    

2015

    

2014

 

 

(unaudited)

 

 

 

Property, sales and use taxes payable

 

$

17,796 

 

$

14,490 

Income tax payable

 

 

463 

 

 

295 

Accrued interest

 

 

4,640 

 

 

3,289 

Advance deposits

 

 

14,388 

 

 

10,742 

Management fees payable

 

 

1,553 

 

 

3,467 

Other

 

 

5,319 

 

 

4,183 

Total other current liabilities

 

$

44,159 

 

$

36,466 

 

Other liabilities consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

    

2015

    

2014

 

 

(unaudited)

 

 

 

Deferred gain on sale of asset

 

$

7,000 

 

$

7,000 

Accrued income tax

 

 

1,554 

 

 

1,541 

Deferred revenue

 

 

6,874 

 

 

6,790 

Deferred rent

 

 

15,781 

 

 

15,075 

Deferred incentive management fees

 

 

714 

 

 

534 

Other

 

 

2,747 

 

 

2,667 

Total other liabilities

 

$

34,670 

 

$

33,607 

 

In accordance with the Contingencies Topic of the FASB ASC, which requires a liability to be recorded based on the Company’s estimate of the probable cost of the resolution of a contingency, the Company accrued $0.3 million when it sold the Rochester Portfolio related to potential future costs for certain capital expenditures at one of the hotels in the Rochester Portfolio. During the second quarter of 2014, the Company determined that its total costs for these capital expenditures may range from $2.0 million to $3.0 million. As such, the Company accrued an additional $1.8 million during the second quarter of 2014 in accordance with the Contingencies Topic of the FASB ASC, bringing the total amount accrued for this contingency to $2.1 million. During 2014, the Company paid $1.3 million of the liability, reducing the accrued balance for this contingency to $0.8 million as of December 31, 2014. During the first quarter of 2015, the Company paid all remaining amounts due related to this contingency.

8. Stockholders’ Equity

 

Series D Cumulative Redeemable Preferred Stock

 

The Company’s 4,600,000 shares of 8.0% Series D Cumulative Redeemable Preferred Stock (“Series D preferred stock”) have a liquidation preference of $25.00 per share. On or after April 6, 2016, the Series D preferred stock will be redeemable at the Company’s option, in whole or in part, at any time or from time to time, for cash at a redemption price of $25.00 per share, plus accrued and unpaid dividends up to, but not including, the redemption date.

 

Common Stock

 

In February 2014, the Company entered into separate Equity Distribution Agreements (the “Agreements”) with Wells Fargo Securities, LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated (the “Managers”). Under the terms of the Agreements, the Company may issue and sell from time to time through or to the Managers, as sales agents and/or principals, shares of the Company’s common stock having an aggregate offering amount of up to $150.0 million. The Company did not issue any shares of its common stock in connection with the Agreements during the three months ended March 31, 2015. As of March 31, 2015, the Company has $128.4 million available for sale under the Agreements.

13


 

9. Long-Term Incentive Plan

 

Stock Grants

 

Restricted shares granted pursuant to the Company’s Long-Term Incentive Plan (“LTIP”) generally vest over periods from three to five years from the date of grant.

 

Compensation expense related to awards of restricted shares and performance shares are measured at fair value on the date of grant and amortized over the relevant requisite service period or derived service period.

 

The Company’s compensation expense and forfeitures related to restricted shares and performance awards for the three months ended March 31, 2015 and 2014 were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Three Months Ended

 

    

March 31, 2015

    

March 31, 2014

 

 

(unaudited)

 

(unaudited)

Compensation expense, including forfeitures

 

$

4,432 

 

$

2,036 

 

The Company’s total compensation expense differs from the vesting of restricted common stock amount presented in the Company’s consolidated statement of equity due to the Company withholding and using a portion of its restricted shares granted pursuant to its LTIP for purposes of remitting statutory minimum withholding and payroll taxes in connection with the release of restricted common shares to plan participants (“net-settle”). In addition, the Company capitalizes all restricted shares granted to certain of those employees who work on the design and construction of its hotels. The Company’s total compensation expense in relation to its vesting of restricted common stock presented in the Company’s consolidated statement of equity for the three months ended March 31, 2015 is as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

    

March 31, 2015

 

 

(unaudited)

Compensation expense, including forfeitures

 

$

4,432 

Net-settle adjustment

 

 

(5,766)

Amortization related to shares issued to design and construction employees

 

 

165 

Vesting of restricted stock presented on statement of equity

 

$

(1,169)

 

In January 2015, the Company recognized a total of $2.5 million in stock compensation and amortization expense related to the departure of its former Chief Executive Officer, including $1.6 million in deferred stock amortization.

 

Stock Grants

 

In April 2008, the Compensation Committee of the Company’s board of directors approved a grant of 200,000 non-qualified stock options (the “Options”) to one of the Company’s former associates. The Options fully vested in April 2009, and will expire in April 2018. The exercise price of the options is $17.71 per share.

 

 

10. Commitments and Contingencies

 

Management Agreements

 

Management agreements with the Company’s third-party hotel managers require the Company to pay between 2.0% and 3.5% of total revenue of the managed hotels to the third-party managers each month as a basic management fee. In addition to basic management fees, provided that certain operating thresholds are met, the Company may also be required to pay incentive management fees to certain of its third-party managers. Total basic and incentive management fees incurred by the Company during the three months ended March 31, 2015 and 2014 were included in property general and administrative expense on the Company’s consolidated statements of operations and comprehensive loss as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Three Months Ended

 

    

March 31, 2015

    

March 31, 2014

 

 

(unaudited)

 

(unaudited)

Basic management fees

 

$

7,822 

 

$

6,713 

Incentive management fees

 

 

1,289 

 

 

1,032 

Total basic and incentive management fees

 

$

9,111 

 

$

7,745 

 

14


 

 

License and Franchise Agreements

 

The Company has entered into license and franchise agreements related to certain of its hotel properties. The license and franchise agreements require the Company to, among other things, pay monthly fees that are calculated based on specified percentages of certain revenues. The license and franchise agreements generally contain specific standards for, and restrictions and limitations on, the operation and maintenance of the hotels which are established by the franchisors to maintain uniformity in the system created by each such franchisor. Such standards generally regulate the appearance of the hotel, quality and type of goods and services offered, signage and protection of trademarks. Compliance with such standards may from time to time require the Company to make significant expenditures for capital improvements.

 

Total license and franchise costs incurred by the Company during the three months ended March 31, 2015 and 2014 were included in the Company’s consolidated statements of operations and comprehensive loss as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Three Months Ended

 

    

March 31, 2015

    

March 31, 2014

 

 

(unaudited)

 

(unaudited)

Franchise assessments (1)

 

$

6,087 

 

$

5,592 

Franchise royalties

 

 

2,513 

 

 

2,485 

Total franchise costs

 

$

8,600 

 

$

8,077 

 

(1)

Includes advertising, reservation and priority club assessments.

 

Renovation and Construction Commitments

 

At March 31, 2015, the Company had various contracts outstanding with third parties in connection with the renovation of certain of its hotel properties aimed at maintaining the appearance and quality of its hotels. The remaining commitments under these contracts at March 31, 2015 totaled $52.6 million.

 

Capital Leases

 

The Hyatt Chicago Magnificent Mile is subject to a building lease which expires in December 2097. Upon acquisition of the hotel in June 2012, the Company evaluated the terms of the lease agreement and determined the lease to be a capital lease pursuant to the Leases Topic of the FASB ASC.

 

The Company leases certain printers and copiers which leases have been determined to be capital leases pursuant to the Leases Topic of the FASB ASC. All of the leases expired in December 2014.

 

Assets under capital lease were included in investment in hotel properties, net on the Company’s consolidated balance sheets as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

    

2015

    

2014

 

 

(unaudited)

 

 

 

Buildings and improvements

 

$

58,799 

 

$

58,799 

Furniture, fixtures and equipment

 

 

 

 

104 

Capital lease assets, gross

 

 

58,799 

 

 

58,903 

Accumulated depreciation

 

 

(4,165)

 

 

(3,841)

Capital lease assets, net

 

$

54,634 

 

$

55,062 

 

15


 

Future minimum lease payments under capital leases together with the present value of the net minimum lease payments as of March 31, 2015 are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

2015

    

$

1,403 

2016

 

 

1,403 

2017

 

 

1,403 

2018

 

 

1,403 

2019

 

 

1,403 

Thereafter

 

 

109,064 

Total minimum lease payments (1)

 

 

116,079 

Less: Amount representing interest (2)

 

 

(100,502)

Present value of net minimum lease payments (3)

 

$

15,577 

 

(1)

Minimum lease payments do not include percentage rent which may be paid under the Hyatt Chicago Magnificent Mile building lease on the basis of 4.0% of the hotel’s gross room revenues over a certain threshold. No percentage rent was due for the three months ended March 31, 2015 and 2014.

 

(2)

Interest includes the amount necessary to reduce net minimum lease payments to present value calculated at the Company’s incremental borrowing rate at lease inception.

 

(3)

The present value of net minimum lease payments are presented on the Company’s consolidated balance sheet as of March 31, 2015 as a current obligation of $1,000, which is included in accounts payable and accrued expenses, and as a long term obligation of $15.6 million, which is included in capital lease obligations, less current portion.

 

Ground, Building and Air Leases

 

Total rent expense incurred pursuant to ground, building and air lease agreements for the three months ended March 31, 2015 and 2014 was included in property tax, ground lease and insurance on the Company’s consolidated statements of operations and comprehensive loss as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Three Months Ended

 

    

March 31, 2015

    

March 31, 2014

 

 

(unaudited)

 

(unaudited)

Minimum rent, including straightline adjustments

 

$

3,697 

 

$

3,828 

Percentage rent (1)

 

 

818 

 

 

628 

Total

 

$

4,515 

 

$

4,456 

 

(1)

Several of the Company’s hotels pay percentage rent, which is calculated on operating revenues above certain thresholds.

 

Prior to the Company’s June 2014 acquisition of the land underlying the Fairmont Newport Beach, the land was leased to the Company by a third party. The Company’s acquisition of the land reduced its ground lease expense by $0.3 million during the three months ended March 31, 2015.

 

Rent expense incurred pursuant to leases on the corporate facility totaled $0.1 million for both the three months ended March 31, 2015 and 2014, and was included in corporate overhead expense.