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EX-32.0 - EXHIBIT 32.0 - Carey Watermark Investors Inccwi2015q110-qexh32.htm
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EX-10.4 - EXHIBIT 10.4 - Carey Watermark Investors Inccwi2015q110-qexh104.htm
EX-31.2 - EXHIBIT 31.2 - Carey Watermark Investors Inccwi2015q110-qexh312.htm
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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 March 31, 2015
 
 
 
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 þ 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 þ 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 þ

Registrant has 131,037,385 shares of common stock, $0.001 par value, outstanding at May 8, 2015.
 




INDEX


Forward-Looking Statements

This Quarterly Report on Form 10-Q, or this Report, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, 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 that 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 for the year ended December 31, 2014 as filed with the SEC on March 12, 2015, or the 2014 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 3/31/2015 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)
 
March 31, 2015
 
December 31, 2014
Assets
 
 
 
Investments in real estate:
 
 
 
   Hotels, at cost
$
1,663,178

 
$
1,569,200

   Accumulated depreciation
(72,214
)
 
(59,903
)
         Net investments in hotels
1,590,964

 
1,509,297

Assets held for sale
128,880

 

Equity investments in real estate
13,198

 
13,177

Cash
158,998

 
330,811

Intangible assets, net
41,645

 
41,869

Accounts receivable
18,345

 
14,583

Restricted cash
58,396

 
61,624

Other assets
37,077

 
30,894

Total assets
$
2,047,503

 
$
2,002,255

Liabilities and Equity
 
 
 
Liabilities:
 
 
 
Non-recourse debt and debt attributable to Assets held for sale
$
1,014,717

 
$
969,594

Accounts payable, accrued expenses and other liabilities
83,423

 
68,798

Due to related parties and affiliates
8,718

 
2,059

Distributions payable
17,853

 
14,859

Total liabilities
1,124,711

 
1,055,310

Commitments and contingencies (Note 10)

 


Equity:
 
 
 
CWI stockholders’ equity:
 
 
 
Common stock, $0.001 par value; 300,000,000 shares authorized; 130,427,229 and
    129,395,679 shares issued, respectively; and 129,941,188 and 129,083,977 shares
    outstanding, respectively
130

 
129

Additional paid-in capital
1,088,861

 
1,078,768

Distributions and accumulated losses
(171,930
)
 
(142,123
)
Accumulated other comprehensive loss
(1,402
)
 
(517
)
Less: treasury stock at cost, 486,041 and 311,702 shares, respectively
(4,717
)
 
(3,000
)
Total CWI Incorporated stockholders’ equity
910,942

 
933,257

Noncontrolling interests
11,850

 
13,688

Total equity
922,792

 
946,945

Total liabilities and equity
$
2,047,503

 
$
2,002,255


See Notes to Consolidated Financial Statements.


CWI 3/31/2015 10-Q 2



CAREY WATERMARK INVESTORS INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except share and per share amounts)
 
Three Months Ended March 31,
 
2015
 
2014
Revenues
 
 
 
Hotel Revenues
 
 
 
Rooms
$
76,107

 
$
40,216

Food and beverage
23,832

 
13,204

Other hotel income
9,848

 
6,265

Total Hotel Revenues
109,787

 
59,685

Operating Expenses
 
 
 
Hotel Expenses
 
 
 
Rooms
17,191

 
12,878

Food and beverage
17,027

 
10,148

Other hotel operating expenses
5,279

 
3,484

Sales and marketing
11,585

 
5,466

General and administrative
9,606

 
5,390

Property taxes, insurance, rent and other
11,530

 
4,559

Repairs and maintenance
4,489

 
2,598

Utilities
3,378

 
2,168

Management fees
2,628

 
1,202

Depreciation and amortization
14,300

 
8,919

Total Hotel Expenses
97,013

 
56,812

 
 
 
 
Other Operating Expenses
 
 
 
Acquisition-related expenses
6,388

 
379

Corporate general and administrative expenses
2,986

 
2,629

Asset management fees to affiliate and other
2,569

 
1,417

Total Other Operating Expenses
11,943

 
4,425

Operating Income (Loss)
831

 
(1,552
)
Other Income and (Expenses)
 
 
 
Interest expense
(11,495
)
 
(6,953
)
Equity in earnings of equity method investments in real estate
660

 
125

Other income and (expenses)
(136
)
 
11

 
(10,971
)
 
(6,817
)
Loss from Operations Before Income Taxes
(10,140
)
 
(8,369
)
Provision for income taxes
(1,011
)
 
(417
)
Net Loss
(11,151
)
 
(8,786
)
(Income) loss attributable to noncontrolling interest (inclusive of Available Cash Distributions to a related party of $1,847 and $946, respectively)
(803
)
 
212

Net Loss Attributable to CWI Stockholders
$
(11,954
)
 
$
(8,574
)
Basic and Diluted Loss Per Share
$
(0.09
)
 
$
(0.13
)
Basic and Diluted Weighted-Average Shares Outstanding
129,842,946

 
68,575,077

 
 
 
 
Distributions Declared Per Share
$
0.1375

 
$
0.1375


See Notes to Consolidated Financial Statements.


CWI 3/31/2015 10-Q 3



CAREY WATERMARK INVESTORS INCORPORATED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (UNAUDITED)
(in thousands)
 
Three Months Ended March 31,
 
2015
 
2014
Net Loss
$
(11,151
)
 
$
(8,786
)
Other Comprehensive Loss
 
 
 
Other comprehensive loss before reclassifications — unrealized loss on derivative instruments
(1,731
)
 
(681
)
Amounts reclassified from accumulated other comprehensive loss to interest expense — loss on derivative instruments
404

 
412

Amounts reclassified from accumulated other comprehensive loss to Equity in earnings of equity method investment in real estate — loss on derivative instruments
132

 
132

Comprehensive Loss
(12,346
)
 
(8,923
)
 
 
 
 
Amounts Attributable to Noncontrolling Interests
 
 
 
Net (income) loss
(803
)
 
212

Change in unrealized loss on derivative instruments
310

 
235

Comprehensive (income) loss attributable to noncontrolling interests
(493
)
 
447

Comprehensive Loss Attributable to CWI Stockholders
$
(12,839
)
 
$
(8,476
)

See Notes to Consolidated Financial Statements.


CWI 3/31/2015 10-Q 4



CAREY WATERMARK INVESTORS INCORPORATED
CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)
Three Months Ended March 31, 2015 and 2014
(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, 2015
129,083,977

 
$
129

 
$
1,078,768

 
$
(142,123
)
 
$
(517
)
 
$
(3,000
)
 
$
933,257

 
$
13,688

 
$
946,945

Net loss
 
 
 
 
 
 
(11,954
)
 
 
 
 
 
(11,954
)
 
803

 
(11,151
)
Shares issued, net of offering costs
935,081

 
1

 
9,026

 
 
 
 
 
 
 
9,027

 
 
 
9,027

Shares issued to affiliates
96,469

 
 
 
994

 
 
 
 
 
 
 
994

 
 
 
994

Distributions to noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 

 
(2,331
)
 
(2,331
)
Shares issued under share incentive plans
 
 
 
 
73

 
 
 
 
 
 
 
73

 
 
 
73

Distributions declared ($0.1375 per share)
 
 
 
 
 
 
(17,853
)
 
 
 
 
 
(17,853
)
 
 
 
(17,853
)
Other comprehensive loss:
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 

   Change in net unrealized loss on derivative instruments
 
 
 
 
 
 
 
 
(885
)
 
 
 
(885
)
 
(310
)
 
(1,195
)
Repurchase of shares
(174,339
)
 
 
 
 
 
 
 
 
 
(1,717
)
 
(1,717
)
 
 
 
(1,717
)
Balance at March 31, 2015
129,941,188

 
$
130

 
$
1,088,861

 
$
(171,930
)
 
$
(1,402
)
 
$
(4,717
)
 
$
910,942

 
$
11,850

 
$
922,792

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2014
67,703,835

 
$
68

 
$
525,000

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

 
$
12,746

 
$
474,285

Net loss
 
 
 
 
 
 
(8,574
)
 
 
 
 
 
(8,574
)
 
(212
)
 
(8,786
)
Shares issued, net of offering costs
2,396,341

 
2

 
21,783

 
 
 
 
 
 
 
21,785

 
 
 
21,785

Shares issued to affiliates
152,619

 

 
1,338

 
 
 
 
 
 
 
1,338

 
 
 
1,338

Distributions to noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 

 
(946
)
 
(946
)
Shares issued under share incentive plans

 
 
 
29

 
 
 
 
 
 
 
29

 
 
 
29

Distributions declared ($0.1375 per share)
 
 
 
 
 
 
(9,428
)
 
 
 
 
 
(9,428
)
 
 
 
(9,428
)
Other comprehensive loss:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   Change in net unrealized gain (loss) on derivative instruments
 
 
 
 
 
 
 
 
98

 
 
 
98

 
(235
)
 
(137
)
Repurchase of shares
(60,755
)
 
 
 
 
 
 
 
 
 
(587
)
 
(587
)
 
 
 
(587
)
Balance at March 31, 2014
70,192,040

 
$
70

 
$
548,150

 
$
(80,870
)
 
$
(38
)
 
$
(1,112
)
 
$
466,200

 
$
11,353

 
$
477,553



See Notes to Consolidated Financial Statements.


CWI 3/31/2015 10-Q 5



CAREY WATERMARK INVESTORS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
 
Three Months Ended March 31,
 
2015
 
2014
Cash Flows — Operating Activities
 
 
 
Net loss
$
(11,151
)
 
$
(8,786
)
Adjustments to net loss:
 
 
 
Depreciation and amortization
14,300

 
8,919

Straight-line rent adjustments
1,342

 
603

Amortization of deferred financing costs, ground lease intangible and other
519

 
487

Equity in earnings of equity method investments in real estate in excess of distributions
   received
(533
)
 
(125
)
Amortization of share incentive plans
73

 
29

Asset management fees and reimbursable costs to affiliates settled in shares

 
1,402

Increase (decrease) in due to related parties and affiliates
6,074

 
(3,254
)
Receipt of key money and other deferred incentive payments
2,713

 

Net changes in other operating assets and liabilities
2,593

 
928

Net Cash Provided by Operating Activities
15,930

 
203

 
 
 
 
Cash Flows — Investing Activities
 
 
 
Acquisition of hotels
(207,914
)
 

Funds released from escrow
19,889

 
13,930

Funds placed in escrow
(16,661
)
 
(12,372
)
Capital expenditures
(13,698
)
 
(4,994
)
Deposits for hotel investments
(2,100
)
 
(8,230
)
Distributions received from equity investments in excess of equity income
282

 
127

Net Cash Used in Investing Activities
(220,202
)
 
(11,539
)
 
 
 
 
Cash Flows — Financing Activities
 
 
 
Proceeds from mortgage financing
55,500

 

Distributions paid
(14,859
)
 
(9,309
)
Scheduled payments and prepayments of mortgage principal
(10,399
)
 
(493
)
Proceeds from issuance of shares, net of offering costs
8,772

 
20,338

Distributions to noncontrolling interests
(2,331
)
 
(946
)
Deposits for mortgage financing
(1,914
)
 
(183
)
Purchase of treasury stock
(1,717
)
 
(587
)
Deferred financing costs
(558
)
 

Purchase of interest rate cap
(35
)
 

Net Cash Provided by Financing Activities
32,459

 
8,820

 
 
 
 
Change in Cash During the Period
 
 
 
Net decrease in cash
(171,813
)
 
(2,516
)
Cash, beginning of period
330,811

 
109,373

Cash, end of period
$
158,998

 
$
106,857



See Notes to Consolidated Financial Statements.


CWI 3/31/2015 10-Q 6



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

Note 1. Business

Organization

Carey Watermark Investors Incorporated, or CWI or CWI 1, 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, hold 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 our 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, our 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 29 hotels at March 31, 2015. See Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 2 — Portfolio Overview for a complete listing of the hotels that we consolidate, or our Consolidated Hotels, and Note 5 complete listing of the hotels that we record as equity investments, or our Unconsolidated Hotels, at March 31, 2015.

Public Offerings

We raised $575.8 million through our initial public offering, which commenced on September 15, 2010 and closed on September 15, 2013. The proceeds from our initial public offering were fully invested by the end of the second quarter of 2014. We raised $577.4 million through our follow-on offering, which commenced on December 20, 2013 and closed on December 31, 2014. The gross offering proceeds raised exclude reinvested distributions through our distribution reinvestment plan, or DRIP, of $44.3 million as of March 31, 2015. We intend to continue to invest the remaining proceeds from our follow-on offering in lodging and lodging-related properties.

Distributions

Our first quarter 2015 declared daily distribution was $0.0015277 per share, payable in cash, which equated to $0.5500 per share on an annualized basis and was paid on April 15, 2015 to stockholders of record on each day during the first quarter.

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, 2014, which are included in our 2014 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 3/31/2015 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.

Reclassifications 

Certain prior period amounts have been reclassified to conform to the current period presentation. Additionally, on January 1, 2015, we adopted the Eleventh Revised Edition of the Uniform System of Accounts, which mandates a prospective reclassification of certain hotel revenue and hotel expense items within the income statement. During the three months ended March 31, 2014, we included $2.6 million related to rental of third-party owned condominiums in Rooms expense in our consolidated financial statements. Beginning in 2015, these expenses, which totaled $3.0 million for the three months ended March 31, 2015, were included in Property taxes, insurance, rent and other.

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.

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 given 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 three months ended March 31, 2015 or 2014.

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. In April 2015, the Financial Accounting Standards Board issued a proposed ASU to defer the effective date of ASU 2014-09 by one year. Under the proposal, ASU 2014-09 would be effective beginning in 2018, and early adoption is permitted but not before 2017, the original public company effective date. 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.

ASU 2015-03, Interest-Imputation of Interest (Subtopic 835-30). ASU 2015-03 changes the presentation of debt issuance costs, which are currently recognized as a deferred charge (that is, an asset) and requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. ASU 2015-03 does not affect the recognition and measurement guidance for debt issuance costs. ASU 2015-03 is effective for periods beginning after December 15, 2015, early adoption is permitted and retrospective application is required. We are currently evaluating the impact of ASU 2015-03 on our consolidated financial statements.



CWI 3/31/2015 10-Q 8


Notes to Consolidated Financial Statements (Unaudited)

Note 3. Agreements and Transactions with Related Parties

Agreements with our Advisor and Affiliates

We have an advisory agreement with our 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. Our advisor has entered into a subadvisory agreement with our subadvisor, whereby our advisor pays 20% of the fees earned under the advisory agreement to our subadvisor and our subadvisor provides certain personnel services to us.

The following tables present a summary of fees we paid and expenses we reimbursed to our advisor, subadvisor and other affiliates, as described below, in accordance with the terms of those agreements (in thousands):
 
Three Months Ended March 31,
 
2015
 
2014
Amounts Included in the Consolidated Statements of Operations
 
 
 
Acquisition fees
$
5,682

 
$

Asset management fees
2,553

 
1,402

Personnel and overhead reimbursements
1,848

 
1,315

Available Cash Distribution
1,847

 
946

 
$
11,930

 
$
3,663

 
 
 
 
Other Transaction Fees Incurred
 
 
 
Selling commissions and dealer manager fees
$

 
$
1,773

Offering costs
127

 
726

 
$
127

 
$
2,499

 
March 31, 2015
 
December 31, 2014
Amounts Due to Related Parties and Affiliates
 
 
 
Other amounts due to our advisor
$
6,499

 
$
965

Reimbursable costs
1,674

 
338

Due to joint venture partners
404

 
367

Organization and offering costs due to our advisor
70

 
322

Due to WPC
71

 
67

 
$
8,718

 
$
2,059


Acquisition Fees

Our 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 our advisor an annual asset management fee equal to 0.5% of the aggregate Average Market Value of our Investments, both as defined in our advisory agreement with our advisor. Our 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 our 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 most recently published estimated net asset value per share, or NAV, or, during an offering, our offering price of $10.00 per share. We paid our asset management fees in cash for the three months ended March 31, 2015 and in shares of our common stock, at the election of the advisor, for the three months ended March 31, 2014. For the three months ended March 31, 2015, $1.0 million in asset management fees were settled in


CWI 3/31/2015 10-Q 9


Notes to Consolidated Financial Statements (Unaudited)

shares, which related to fees incurred during the fourth quarter of 2014. For the three months ended March 31, 2014, $1.3 million in asset management fees were settled in shares. At March 31, 2015, our advisor owned 1,501,028 shares (1.2%) 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, after we reimburse our advisor, it will subsequently reimburse our subadvisor for personnel costs and other charges. We also grant restricted stock units to employees of our subadvisor pursuant to our 2010 Equity Incentive Plan. Our 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.

In addition, pursuant to the advisory agreement, we reimburse our advisor for the actual cost of personnel allocable to their time devoted to providing administrative services to us, which totaled $1.2 million and $0.8 million, respectively, for the three months ended March 31, 2015 and 2014, as well as rent expense that totaled $0.1 million for both the three months ended March 31, 2015 and 2014. These reimbursements are included in Corporate general and administrative expenses and Amounts due to affiliates in the consolidated financial statements. We paid these reimbursements in cash for the three months ended March 31, 2015 and in shares of our common stock, at the election of the advisor, for the three months ended March 31, 2014. For the three months ended March 31, 2015, less than $0.1 million in reimbursements were settled in shares that related to reimbursements incurred during the fourth quarter of 2014.

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 totaled $1.8 million and $0.9 million during the three months ended March 31, 2015 and 2014, respectively, and are included in (Income) loss attributable to noncontrolling interests in the consolidated financial statements.

Selling Commissions and Dealer Manager Fees

We had a dealer manager agreement with Carey Financial, LLC, or Carey Financial, whereby Carey Financial received a selling commission of up to $0.70 per share sold and a dealer manager fee of up to $0.30 per share sold through the termination of our follow on offering on December 31, 2014, a portion of which may have been re-allowed to selected broker dealers. These amounts are recorded in Additional paid-in capital in the consolidated financial statements.

Due from Related Parties and Affiliates

At March 31, 2015, amounts due from related parties and affiliates, included in Other assets in the consolidated financial statements, totaled $1.8 million and primarily represents amounts due from CWI 2 for a deposit of $1.5 million we placed on its behalf during the first quarter of 2015 in connection with an acquisition made during the second quarter of 2015.

Other Amounts Due to Our Advisor

At March 31, 2015, this balance primarily represents acquisition fees of $3.9 million payable to the advisor related to the Westin Pasadena acquired on March 19, 2015, which was paid in the second quarter of 2015. The remainder of the balance at that date and the entire balance at December 31, 2014 represents asset management fees payable.

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.



CWI 3/31/2015 10-Q 10


Notes to Consolidated Financial Statements (Unaudited)

Organization and Offering Costs

Pursuant to our advisory agreement with our advisor, we were liable for certain expenses related to our public offerings, which included filing, legal, accounting, printing, advertising, transfer agent, and escrow fees and are to be deducted from the gross proceeds of the offering. We reimbursed Carey Financial or selected dealers for reasonable bona fide due diligence expenses incurred that were 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. Our 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 March 31, 2015, our advisor incurred organization and offering costs on our behalf related to our follow-on offering of approximately $3.5 million, all of which we were obligated to pay. As of March 31, 2015, $3.4 million had been reimbursed. During the three months ended March 31, 2015, we charged $0.1 million of deferred offering costs to stockholder’s equity.

Other Transactions with Affiliates

In September 2014, our board of directors and the board of directors of WPC approved unsecured loans to us and our affiliate, Carey Watermark Investors 2 Incorporated, of up to $75.0 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 that we might not otherwise have sufficient available funds to complete. Any such loans may be made solely at the discretion of WPC’s management. In April 2015, this aggregate amount was increased to $110.0 million. At March 31, 2015, we had no such loans outstanding.

Note 4. Net Investments in Hotels

Net investments in hotels are summarized as follows (in thousands):
 
March 31, 2015
 
December 31, 2014
Buildings
$
1,301,567

 
$
1,226,880

Land
217,312

 
214,522

Furniture, fixtures and equipment
90,665

 
88,464

Building and site improvements
23,158

 
21,989

Construction in progress
30,476

 
17,345

Hotels, at cost
1,663,178

 
1,569,200

Less: Accumulated depreciation
(72,214
)
 
(59,903
)
Net investments in hotels
$
1,590,964

 
$
1,509,297




CWI 3/31/2015 10-Q 11


Notes to Consolidated Financial Statements (Unaudited)

2015 Acquisitions

During the three months ended March 31, 2015, we acquired two hotels with real estate and other hotel assets, net of assumed liabilities, totaling $207.9 million. In connection with these acquisitions, we expensed acquisition costs of $6.4 million, including acquisition fees of $5.7 million paid to our advisor. See Note 9 for information about mortgage financing obtained in connection with our 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 thereon, since their respective dates of acquisition through March 31, 2015 (in thousands):
 
2015 Acquisitions
 
Westin Minneapolis
 
Westin
Pasadena
Cash consideration
$
66,176

 
$
141,738

Assets acquired at fair value:
 
 
 
Land
$
6,405

 
$
22,785

Buildings and improvements
57,105

 
112,215

Furniture, fixtures and equipment
2,846

 
7,379

Accounts receivable
97

 
94

Other assets
164

 
608

Liabilities assumed at fair value:
 
 
 
Accounts payable, accrued expenses and other liabilities
(441
)
 
(1,343
)
Net assets acquired at fair value
$
66,176

 
$
141,738

 
For the Period from
 
February 12, 2015
through
March 31, 2015
 
March 19, 2015
through
March 31, 2015
Revenues
$
1,724

 
$
1,107

Net income
$
146

 
$
309


Assets Held for Sale

A 50% controlling interest in the Marriott Sawgrass Golf Resort and Spa, which we acquired in October 2014, was subsequently sold to our affiliate, Carey Watermark Investors 2 Incorporated, during the second quarter of 2015, and therefore met the criteria for held for sale at March 31, 2015 (Note 11). At December 31, 2014, no hotels were classified as held for sale.

There have been no material changes to the fair market value of the property between the date we acquired the hotel and the date it was reclassified into assets held for sale therefore, our acquisition cost has remained equal to the estimated fair market value of the property. As the sales price was equal to 50% of the original acquisition price, which approximates fair market value, we believe there is no economic gain to either party as a result of this transaction.

Below is a summary of our assets held for sale (in thousands):
 
March 31, 2015
 
December 31, 2014
Buildings
$
94,375

 
$

Land
26,400

 

Furniture, fixtures and equipment
9,102

 

Construction in progress and improvements
797

 

Less: Accumulated depreciation
(1,794
)
 

Assets held for sale
$
128,880

 
$


In addition, there was $66.7 million of non-recourse debt attributable to this hotel at March 31, 2015, which was assumed by Carey Watermark Investors 2 Incorporated.


CWI 3/31/2015 10-Q 12


Notes to Consolidated Financial Statements (Unaudited)


Total revenue and net income from operations from this hotel were $13.3 million and $2.4 million, respectively, for the three months ended March 31, 2015.
 
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 both March 31, 2015 and December 31, 2014, our asset retirement obligation was $0.5 million, and are included in Accounts payable, accrued expenses and other liabilities in the consolidated financial statements.

Pro Forma Financial Information

The following unaudited consolidated pro forma financial information presents our financial results as if our 2015 Acquisitions, and the new financings related to these acquisitions, had occurred on January 1, 2014. 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, 2014, nor does it purport to represent the results of operations for future periods.

(Dollars in thousands, except per share amounts)
 
Three Months Ended March 31,
 
2015
 
2014
Pro forma total revenues
$
116,969

 
$
70,283

 
 
 
 
Pro forma net loss
$
(4,271
)
 
$
(14,568
)
Pro forma (income) loss from continuing operations attributable to noncontrolling interests
(803
)
 
212

Pro forma loss from continuing operations attributable to CWI stockholders
$
(5,074
)
 
$
(14,356
)
Pro forma loss per share:
 
 
 
Net loss attributable to CWI stockholders
$
(0.04
)
 
$
(0.17
)
Pro forma weighted-average shares outstanding
129,842,946

 
86,513,512


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 2015 acquisitions were issued on January 1, 2014. All acquisition costs for our acquisitions completed during the three months ended March 31, 2015 are presented as if they were incurred on January 1, 2014. We did not complete any acquisitions during the three months ended March 31, 2014.

Construction in Progress

At March 31, 2015 and December 31, 2014, construction in progress was $30.5 million and $17.3 million, recorded at cost, respectively, and related primarily to renovations at Renaissance Chicago Downtown, Hawks Cay Resort and Sanderling Resort at March 31, 2015 and Hawks Cay Resort and Renaissance Chicago Downtown at December 31, 2014 (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 $1.0 million and $0.1 million of such costs during the three months ended March 31, 2015 and 2014, respectively.

During the three months ended March 31, 2015 and 2014, accrued capital expenditures increased by $2.2 million and decreased by $1.8 million, respectively, representing non-cash investing activity.

Note 5. Equity Investments in Real Estate

At March 31, 2015, 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


CWI 3/31/2015 10-Q 13


Notes to Consolidated Financial Statements (Unaudited)

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 our 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 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
March 31, 2015
 
Carrying Value at
 
 
 
 
 
 
 
 
March 31, 2015
 
December 31, 2014
Unconsolidated Hotels
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Hyatt French Quarter Venture (b)
 
Louisiana
 
254

 
80
%
 
$
13,000

 
9/6/2011
 
Full-service
 
Completed
 
$
4,675

 
$
4,197

Westin Atlanta
Venture (c)
 
Georgia
 
372

 
57
%
 
13,170

 
10/3/2012
 
Full-service
 
Completed
 
8,523

 
8,980

 
 
 
 
626

 
 
 
$
26,170

 
 
 
 
 
 
 
$
13,198

 
$
13,177

___________
(a)
This amount represents purchase price plus capitalized costs, inclusive of fees paid to our advisor, at the time of acquisition.
(b)
We received cash distributions of $0.1 million from this investment during the three months ended March 31, 2015.
(c)
We received cash distributions of $0.3 million from this investment during the three months ended March 31, 2015.

The following table sets forth our share of equity earnings (loss) 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 investments (in thousands):
 
 
Three Months Ended March 31,
Venture
 
2015
 
2014
Hyatt French Quarter Venture
 
$
835

 
$
371

Westin Atlanta Venture
 
(175
)
 
(246
)
 
 
$
660

 
$
125


No other-than-temporary impairment charges were recognized during either the three months ended March 31, 2015 or 2014.

At March 31, 2015 and December 31, 2014, the unamortized basis differences on our equity investments were $1.5 million and $1.6 million, respectively. Net amortization of the basis differences reduced the carrying values of our equity investments by less than $0.1 million for each of the three months ended March 31, 2015 and 2014.



CWI 3/31/2015 10-Q 14


Notes to Consolidated Financial Statements (Unaudited)

Note 6. Intangible Assets and Liabilities

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):
 
 
 
March 31, 2015
 
December 31, 2014
 
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

 
$
(1,013
)
 
$
30,687

 
$
31,700

 
$
(837
)
 
$
30,863

Below-market hotel ground leases
73.5 92.5
 
9,446

 
(170
)
 
9,276

 
9,446

 
(144
)
 
9,302

Below-market hotel parking garage lease
92.5
 
1,490

 
(27
)
 
1,463

 
1,490

 
(23
)
 
1,467

In-place leases
1 – 21
 
317

 
(98
)
 
219

 
317

 
(80
)
 
237

Total intangible assets, net
 
 
$
42,953

 
$
(1,308
)
 
$
41,645

 
$
42,953

 
$
(1,084
)
 
$
41,869

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amortizable Intangible Liability
 
 
 
 
 
 
 
 
 
 
 
 
 
Above-market hotel ground lease
85
 
$
(2,100
)
 
$
21

 
$
(2,079
)
 
$
(2,100
)
 
$
15

 
$
(2,085
)

Net amortization of intangibles was $0.2 million and $0.3 million for the three months ended March 31, 2015 and 2014, 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 March 31, 2015, scheduled annual amortization of intangibles for the remainder of 2015, each of the next four calendar years following December 31, 2015, and thereafter is as follows (in thousands):
Years Ending December 31,
 
Increase to Depreciation and Amortization
 
Increase to Property Taxes, Insurance and Rent
 
Total
2015 (remainder)
 
$
583

 
$
71

 
$
654

2016
 
766

 
95

 
861

2017
 
731

 
95

 
826

2018
 
720

 
95

 
815

2019
 
720

 
95

 
815

Thereafter
 
27,386

 
8,209

 
35,595

Total
 
$
30,906

 
$
8,660

 
$
39,566


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 caps. These derivative instruments were measured at fair value using readily observable market inputs, such as quotations on interest rates.


CWI 3/31/2015 10-Q 15


Notes to Consolidated Financial Statements (Unaudited)

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 the three months ended March 31, 2015 or 2014. 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 $1.0 billion at both March 31, 2015 and December 31, 2014 and an estimated fair value of $1.0 billion and $990.1 million at March 31, 2015 and December 31, 2014, 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 March 31, 2015 and December 31, 2014.

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 into, 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 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.

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
 
March 31, 2015
 
December 31, 2014
 
March 31, 2015
 
December 31, 2014
Interest rate swaps
 
Other assets
 
$
43

 
$
346

 
$

 
$

Interest rate caps
 
Other assets
 
120

 
218

 

 

Interest rate swaps
 
Accounts payable, accrued expenses and other liabilities
 

 

 
(1,209
)
 
(690
)
 
 
 
 
$
163

 
$
564

 
$
(1,209
)
 
$
(690
)



CWI 3/31/2015 10-Q 16


Notes to Consolidated Financial Statements (Unaudited)

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 March 31, 2015 and December 31, 2014, no cash collateral had been posted nor received for any of our derivative positions.

We recognized unrealized losses of $1.7 million and $0.7 million in Other comprehensive loss on derivatives in connection with our interest rate swaps during the three months ended March 31, 2015 and 2014, respectively.

We reclassified losses of $0.4 million and $0.4 million from Other comprehensive loss on derivatives into interest expense during the three months ended March 31, 2015 and 2014, respectively.

Amounts reported in Other comprehensive loss related to interest rate swaps will be reclassified to interest expense as interest payments are made on our variable-rate debt. At March 31, 2015, we estimate that an additional $1.3 million, inclusive of amounts attributable to noncontrolling interests of $0.1 million, will be reclassified as Interest expense during the next 12 months related to our interest rate swaps.

Interest Rate Swaps and Caps

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 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 caps that we had outstanding on our Consolidated Hotel investments at March 31, 2015 were designated as cash flow hedges and are summarized as follows (dollars in thousands): 
 
 
Number of
 
Face
 
Fair Value at
Interest Rate Derivatives
 
Instruments
 
Amount
 
March 31, 2015
Interest rate swaps
 
5
 
$
203,500

 
$
(1,166
)
Interest rate caps
 
4
 
125,250

 
120

 
 
 
 
 
 
$
(1,046
)

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 March 31, 2015. At March 31, 2015, our total credit exposure was $0.1 million and the maximum exposure to any single counterparty was $0.1 million.

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 March 31, 2015, 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 $1.3 million and $0.8 million at March 31, 2015 and December 31, 2014, respectively, which included accrued interest and any adjustment for nonperformance risk. If we had breached any of these provisions at either March 31, 2015 or December 31, 2014, we could have been required to settle our obligations under these agreements at their aggregate termination value of $1.4 million and $0.8 million, respectively.



CWI 3/31/2015 10-Q 17


Notes to Consolidated Financial Statements (Unaudited)

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
 
March 31, 2015
 
December 31, 2014
Lake Arrowhead Resort and Spa (a)
 
4.34%
 
Fixed
 
7/2015
 
$
17,977

 
$
17,955

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

 
79,000

Courtyard Pittsburgh Shadyside (c) (d)
 
4.09%
 
Variable
 
3/2017
 
20,800

 
21,000

Sanderling Resort (b) (c)
 
4.67%
 
Variable
 
10/2017
 
22,000

 
22,000

Courtyard San Diego Mission Valley (b) (c)
 
4.60%
 
Variable
 
12/2017
 
50,150

 
50,420

Hampton Inn Memphis Beale Street
 
4.07%
 
Fixed
 
3/2018
 
21,445

 
21,585

Hampton Inn Atlanta Downtown
 
4.12%
 
Fixed
 
3/2018
 
13,290

 
13,370

Hampton Inn Birmingham Colonnade
 
4.12%
 
Fixed
 
3/2018
 
9,186

 
9,241

Hampton Inn Frisco Legacy Park
 
4.12%
 
Fixed
 
3/2018
 
8,990

 
9,045

Hilton Garden Inn Baton Rouge Airport
 
4.12%
 
Fixed
 
3/2018
 
9,577

 
9,635

Hampton Inn Boston Braintree (b) (c)
 
3.18%
 
Variable
 
3/2018
 
12,000

 
9,500

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

 
44,000

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

 
67,000

Marriott Boca Raton at Boca Center (c) (e)
 
3.42%
 
Variable
 
7/2019
 
34,000

 
34,000

Hilton Garden Inn New Orleans French Quarter/CBD
 
5.30%
 
Fixed
 
7/2019
 
10,752

 
10,793

Marriott Sawgrass Golf Resort and Spa (c) (f)
 
4.03%
 
Variable
 
11/2019
 
66,700

 
66,700

Staybridge Suites Savannah Historic District
 
4.70%
 
Fixed
 
11/2019
 
14,850

 
14,850

Hutton Hotel Nashville
 
5.25%
 
Fixed
 
7/2020
 
44,000

 
44,000

Renaissance Chicago Downtown
 
4.71%
 
Fixed
 
1/2021
 
90,000

 
90,000

Courtyard Times Square West
 
4.62%
 
Fixed
 
6/2021
 
56,000

 
56,000

Hampton Inn & Suites/Homewood Suites Denver Downtown Convention Center
 
3.80%
 
Fixed
 
7/2021
 
53,000

 
53,000

Marriott Kansas City Country Club Plaza
 
4.42%
 
Fixed
 
12/2021
 
38,500

 
38,500

Westin Minneapolis
 
3.63%
 
Fixed
 
3/2022
 
43,500

 

Holiday Inn Manhattan 6th Avenue Chelsea
 
4.49%
 
Fixed
 
6/2023
 
80,000

 
80,000

Hyatt Place Austin Downtown
 
4.88%
 
Fixed
 
4/2024
 
56,500

 
56,500

Marriott Raleigh City Center (g)
 
4.61%
 
Fixed
 
9/2038
 
51,500

 
51,500

 
 
 
 
 
 
 
 
$
1,014,717

 
$
969,594

___________
(a)
The loan agreement allows early settlement at any time prior to maturity upon 60 days notice with no penalty at a discounted amount comprised of a discounted payoff of $16.0 million and a lender participation payment of up to $2.0 million, provided there is no uncured event of default under the loan agreement or the cash management agreement. The non-discounted principal balance of the debt is $27.4 million.
(b)
These loans each have two one-year extension options. All of these extensions are subject to certain conditions. The maturity dates in the table do not reflect extension options.
(c)
These mortgage loans have variable interest rates, which have effectively been capped or converted to fixed rates through the use of interest rate caps or swaps (Note 8). The interest rates presented for these mortgage loans reflect the rate in effect at March 31, 2015 through the use of an interest rate cap or swap, when applicable.
(d)
The mortgage loan has a one-year extension option. The extension is subject to certain conditions. The maturity date in the table does not reflect the extension option.
(e)
Total mortgage financing commitment is up to $41.0 million, with the difference between the commitment and the carrying amount available for renovation draws.


CWI 3/31/2015 10-Q 18


Notes to Consolidated Financial Statements (Unaudited)

(f)
This debt is attributable to an Asset held for sale (Note 4). Total mortgage financing commitment is up to $78.0 million, with the difference between the commitment and the carrying amount available for renovation draws.
(g)
The mortgage loan includes a call option by the lender, with the earliest repayment date being September 1, 2018.

Financing Activity During 2015

In connection with our acquisition of Westin Minneapolis (Note 4), we obtained $43.5 million in non-recourse mortgage financing, with an annual interest rate and term of 3.63% and seven years, respectively. We capitalized $0.3 million of deferred financing costs related to this loan.

Additionally, we refinanced our $9.5 million non-recourse mortgage loan on the Hampton Inn Boston Braintree with a new non-recourse mortgage loan in the amount of $12.0 million. The new loan has a stated interest rate of one-month London Interbank Offered Rate, or LIBOR, plus 3.0%, for which we have purchased an interest rate cap, and a term of three years, with two, one-year extension options. We recognized a loss on extinguishment of debt of $0.1 million

Covenants

Most of our loan agreements contain “lock-box” provisions, which permit the lender to access or sweep a hotel’s restricted cash account and would be triggered under limited circumstances, including the failure to maintain minimum debt service coverage ratios. If the provisions were triggered, the lender would retain a portion of cash sufficient to cover the required debt service; however, we would generally be permitted to spend an amount equal to our budgeted hotel operating expenses, taxes, insurance and capital expenditure reserves for the relevant hotel, even if a lock-box provision were triggered.

Pursuant to our mortgage loan agreements, our wholly-owned subsidiaries are subject to various operational and financial covenants, including minimum debt service coverage ratios. At March 31, 2015, we were in compliance with the applicable covenants for each of our mortgage loans.

Scheduled Debt Principal Payments

Scheduled debt principal payments during the remainder of 2015, each of the next four calendar years following December 31, 2015, and thereafter are as follows (in thousands):
Years Ending December 31,
 
Total
2015 (remainder)
 
$
21,490

2016
 
85,802

2017
 
98,351

2018
 
172,706

2019
 
197,942

Thereafter through 2038
 
438,449

 
 
1,014,740

Fair market value adjustment (a)
 
(23
)
Total
 
$
1,014,717

___________
(a)
Represents the unamortized fair market value adjustment recorded as of March 31, 2015 in connection with the assumption of the Lake Arrowhead Resort and Spa mortgage loan as part of the acquisition of that hotel in July 2012.



CWI 3/31/2015 10-Q 19


Notes to Consolidated Financial Statements (Unaudited)

Note 10. Commitments and Contingencies

At March 31, 2015, we were not involved in any material litigation. Various claims and lawsuits arising in the normal course of business are pending against us, but we do not expect the results of such proceedings to have a material adverse effect on our consolidated financial position or results of operations.

Renovation Commitments

Certain of our hotel franchise and loan agreements require us to make planned renovations to our hotels (Note 4). We do not currently expect to, and are not obligated to, fund any planned renovations on our Unconsolidated Hotels. The following table summarizes our capital commitments related to our Consolidated Hotels (in thousands):
 
 
March 31, 2015
 
December 31, 2014
Capital commitments
 
$
109,000

 
$
100,600

Less: paid
 
(25,054
)
 
(16,363
)
Unpaid commitments
 
83,946

 
84,237

Less: amount held in escrow
 
(38,948
)
 
(44,080
)
Unfunded commitments
 
$
44,998

 
$
40,157


At March 31, 2015, ten hotels were either undergoing renovation or in the planning stage of renovations and we currently expect that two will be completed during the first half of 2015, three will be completed during the second half of 2015, four will be completed during the first half of 2016 and one will be completed during the second half of 2016. At March 31, 2015, $18.3 million of our unfunded commitments are expected to be funded by future renovation draws on the related mortgage loans and the remainder is expected to be funded through our cash accounts.

Ground Lease Commitments

Three of our hotels are subject to ground leases. Scheduled future minimum ground lease payments during the remainder of 2015, each of the next four calendar years following December 31, 2015, and thereafter are as follows (in thousands):
Years Ending December 31,
 
Total
2015 (remainder)
 
$
2,285

2016
 
3,110

2017
 
3,181

2018
 
3,254

2019
 
3,328

Thereafter through 2106
 
658,004

Total
 
$
673,162


For the three months ended March 31, 2015 and 2014, we recorded rent expense of $0.8 million and $0.4 million, respectively, inclusive of percentage rents of less than $0.1 million for both periods, related to these ground leases, which are included in Property taxes, insurance and rent in the consolidated financial statements.



CWI 3/31/2015 10-Q 20


Notes to Consolidated Financial Statements (Unaudited)

Note 11. Subsequent Events
 
Acquisitions

On April 29, 2015, we acquired a 100% interest in the dual-branded Hilton Garden Inn/Homewood Suites Atlanta Midtown for $58.3 million from Northpoint Hospitality, an unaffiliated third party, and obtained a non-recourse mortgage loan at closing of $38.0 million. We also paid acquisition fees of approximately $1.5 million. The 228-room select-service hotel is located in Atlanta, Georgia. The hotel will be managed by Crescent Hotels & Resorts.

It was not practicable to disclose the preliminary purchase price allocation or consolidated pro forma financial information for this transaction given the short period of time between the respective acquisition date and the issuance of this Report.

Disposition

On April 1, 2015, we sold a 50% controlling interest in the Marriott Sawgrass Golf Resort and Spa venture to Carey Watermark Investors 2 Incorporated, a related party, for $70.5 million, inclusive of cash and the assumption of 50% of the property-level debt. Carey Watermark Investors 2 Incorporated is the managing member of the joint venture.

Financing

On April 2, 2015, in connection with the acquisition of the Westin Pasadena on March 19, 2015, we obtained a non-recourse mortgage loan of $88.5 million, with an annual interest rate of 3.8% and a term of seven years.





CWI 3/31/2015 10-Q 21



Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to provide the reader with information that will assist in understanding our financial statements and the reasons for changes in certain key components of our financial statements from period to period. Management’s Discussion and Analysis of Financial Condition and Results of Operations also provides the reader with our perspective on our financial position and liquidity, as well as certain other factors that may affect our future results. Our Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the 2014 Annual Report.

Business Overview

As described in Item 1 of the 2014 Annual Report, we are a publicly-owned, non-listed REIT formed 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. As a REIT, we are not subject to U.S. federal income taxation as long as we satisfy certain requirements, principally relating to the nature of our income, the level of our distributions to our stockholders and other factors. We conduct substantially all of our investment activities and own all of our assets through the Operating Partnership. We are a general partner and a limited partner of, and own a 99.985% capital interest in, the Operating Partnership. Carey Watermark Holdings, which is owned indirectly by WPC and Watermark Capital Partners, holds a special general partner interest of 0.015% in the Operating Partnership. At March 31, 2015, we held ownership interests in 29 hotels, with a total of 6,617 rooms, as compared to our ownership interests in 18 hotels, with a total of 3,967 rooms, at March 31, 2014.

Significant Developments

Acquisitions

During the three months ended March 31, 2015, we acquired ownership interests in two Consolidated Hotels, with real estate and other hotel assets, net of assumed liabilities, totaling $207.9 million (Note 4).

Financings

In connection with our 2015 Acquisitions (Note 4) during the three months ended March 31, 2015, we obtained new non-recourse mortgage financings totaling $43.5 million with an annual interest rate and term of 3.6% and seven years, respectively (Note 9).

Additionally, we refinanced a $9.5 million non-recourse mortgage loan with a new non-recourse mortgage loan totaling $12.0 million, with a stated interest rate of one-month LIBOR plus 3.0%, for which we have purchased an interest rate cap, and a term of three years, with two one-year extension options. 

Disposition

A 50% controlling interest in the Marriott Sawgrass Golf Resort and Spa, which we acquired in October 2014, was subsequently sold to our affiliate, Carey Watermark Investors 2 Incorporated, during the second quarter of 2015, and therefore met the criteria for held for sale at March 31, 2015 (Notes 4 and 11).



CWI 3/31/2015 10-Q 22



Financial and Operating Highlights

(Dollars in thousands, except ADR and RevPAR)
 
Three Months Ended March 31,
 
2015
 
2014
Hotel revenues
$
109,787

 
$
59,685

Acquisition-related expenses
6,388

 
379

Net loss attributable to CWI stockholders
(11,954
)
 
(8,574
)
 
 
 
 
Cash distributions paid
14,859

 
9,309

 
 
 
 
Net cash provided by operating activities
15,930

 
203

Net cash used in investing activities
(220,202
)
 
(11,539
)
Net cash provided by financing activities
32,459

 
8,820

 
 
 
 
Supplemental financial measures: (a)
 
 
 
FFO
831

 
(412
)
MFFO
8,815

 
225

 
 
 
 
Combined Portfolio Data (b)
 
 
 
Occupancy
72.5
%
 
70.6
%
ADR
$
188.04

 
$
176.50

RevPAR
136.33

 
124.68

___________
(a)
We consider the performance metrics listed above, including funds from (used in) operations, or FFO, and modified funds from operations, or MFFO, which are supplemental measures that are not defined by GAAP, or non-GAAP, to be important measures in the evaluation of our results of operations, liquidity, and capital resources. We evaluate our results of operations with a primary focus on the ability to generate cash flow necessary to meet our objective of funding distributions to stockholders. See Supplemental Financial Measures below for our definitions of these non-GAAP measures and reconciliations to their most directly comparable GAAP measures.
(b)
Represents portfolio data for our Consolidated Hotels.

The comparison of our results period over period is influenced by both the number and size of the hotels consolidated in each of the respective periods. At March 31, 2015, we owned 27 Consolidated Hotels, of which two were acquired during the three months ended March 31, 2015, as compared to 16 Consolidated Hotels at March 31, 2014.

Increases in revenue, net cash provided by operating activities, FFO and MFFO for the three months ended March 31, 2015 as compared to the three months ended March 31, 2014 were primarily driven by our 2014 and 2015 Acquisitions.

For the three months ended March 31, 2015, we recognized net loss attributable to CWI stockholders of $12.0 million as compared to $8.6 million for the three months ended March 31, 2014, reflecting an increase in acquisition-related expenses, which was partially offset by the significant increase in revenue as a result of our 2014 and 2015 Acquisitions.



CWI 3/31/2015 10-Q 23



Portfolio Overview

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.

Our Same Store Hotels are comprised of our 2012 Acquisitions and 2013 Acquisitions and our Recently Acquired Hotels are comprised of our 2014 Acquisitions and 2015 Acquisitions, excluding the Marriott Sawgrass Golf Resort and Spa, which is included as Held for Sale Hotel below (Note 11).

(Dollars in thousands)
Hotels
 
State
 
Number
of Rooms
 
% Owned
 
Our
Initial
Investment
 
Acquisition Date
 
Hotel Type
 
Renovation Status at
March 31, 2015
Consolidated Hotels
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2012 Acquisitions
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Hampton Inn Boston Braintree
 
MA
 
103

 
100
%
 
$
12,500

 
5/31/2012
 
Select-service
 
Completed
Hilton Garden Inn New Orleans French Quarter/CBD
 
LA
 
155

 
88
%
 
16,176

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

 
97
%
 
24,039

 
7/9/2012
 
Resort
 
Completed
Courtyard San Diego Mission Valley
 
CA
 
317

 
100
%
 
85,000

 
12/6/2012
 
Select-service
 
Planned future
2013 Acquisitions
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Hampton Inn Atlanta Downtown
 
GA
 
119

 
100
%
 
18,000

 
2/14/2013
 
Select-service
 
Completed
Hampton Inn Frisco Legacy Park
 
TX
 
105

 
100
%
 
16,100

 
2/14/2013
 
Select-service
 
Completed
Hampton Inn Memphis Beale Street
 
TN
 
144

 
100
%
 
30,000

 
2/14/2013
 
Select-service
 
Completed
Hampton Inn Birmingham Colonnade
 
AL
 
133

 
100
%
 
15,500

 
2/14/2013
 
Select-service
 
Completed
Hilton Garden Inn Baton Rouge Airport
 
LA
 
131

 
100
%
 
15,000

 
2/14/2013
 
Select-service
 
Completed
Courtyard Pittsburgh Shadyside
 
PA
 
132

 
100
%
 
29,900

 
3/12/2013
 
Select-service
 
Completed
Hutton Hotel Nashville
 
TN
 
247

 
100
%
 
73,600

 
5/29/2013
 
Full-service
 
None planned
Holiday Inn Manhattan 6th Avenue
Chelsea
 
NY
 
226

 
100
%
 
113,000

 
6/6/2013
 
Full-service
 
Completed
Fairmont Sonoma Mission Inn & Spa
 
CA
 
226

 
75
%
 
76,647

 
7/10/2013
 
Resort
 
In progress
Marriott Raleigh City Center
 
NC
 
400

 
100
%
 
82,193

 
8/13/2013
 
Full-service
 
Completed
Hawks Cay Resort (b)
 
FL
 
432

 
100
%
 
131,301

 
10/23/2013
 
Resort
 
In progress
Renaissance Chicago Downtown
 
IL
 
553

 
100
%
 
134,939

 
12/20/2013
 
Full-service
 
In progress
2014 Acquisitions
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Hyatt Place Austin Downtown
 
TX
 
296

 
100
%
 
86,673

 
4/1/2014
 
Select-service
 
None planned
Courtyard Times Square West
 
NY
 
224

 
100
%
 
87,443

 
5/27/2014
 
Select-service
 
None planned
Sheraton Austin Hotel at the Capitol
 
TX
 
363

 
80
%
 
90,220

 
5/28/2014
 
Full-service
 
Planned future
Marriott Boca Raton at Boca Center
 
FL
 
256

 
100
%
 
61,794

 
6/12/2014
 
Full-service
 
Planned future
Hampton Inn & Suites/Homewood Suites Denver Downtown Convention Center
 
CO
 
302

 
100
%
 
81,262

 
6/25/2014
 
Select-service
 
None planned
Marriott Sawgrass Golf Resort and Spa
 
FL
 
511

 
100
%
 
128,124

 
10/3/2014
 
Resort
 
Planned future
Sanderling Resort
 
NC
 
106

 
100
%
 
37,052

 
10/28/2014
 
Resort
 
In progress
Staybridge Suites Savannah Historic District
 
GA
 
104

 
100
%
 
22,922

 
10/30/2014
 
Select-service
 
None planned
Marriott Kansas City Country Club Plaza
 
MO
 
295

 
100
%
 
56,644

 
11/18/2014
 
Full-service
 
Planned future
2015 Acquisitions
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Westin Minneapolis
 
MN
 
214

 
100
%
 
66,176

 
2/12/2015
 
Full-service
 
Planned future
Westin Pasadena
 
CA
 
350

 
100
%
 
141,738

 
3/19/2015
 
Full-service
 
Planned future
 
 
 
 
6,617

 
 
 
$
1,733,943

 
 
 
 
 
 
_________
(a)
This hotel is a member of the Marriott Autograph Collection.
(b)
Includes 255 two-, three- and four-bedroom privately-owned villas that participate in the Villa Rental Program.


CWI 3/31/2015 10-Q 24




Results of Operations

We evaluate our results of operations with a primary focus on our ability to generate cash flow necessary to fund distributions to stockholders and to increase the value in our real estate investments. As a result, our assessment of operating results gives less emphasis to the effect of unrealized gains and losses, which may cause fluctuations in net income for comparable periods but have no impact on cash flows, and to other non-cash charges, such as depreciation and impairment charges.

In addition, we use other information that may not be financial in nature, including statistical information to evaluate the operating performance of our business, including occupancy rate, average daily rates, or ADR, and revenue per available room, or RevPAR. Occupancy rate, ADR and RevPAR are commonly used measures within the hotel industry to evaluate operating performance. RevPAR, which is calculated as the product of ADR and occupancy rate, is an important statistic for monitoring oper