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EX-31.1 - EXHIBIT 31.1 - RLJ Lodging Trustexhibit3116302015.htm
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EX-32.1 - EXHIBIT 32.1 - RLJ Lodging Trustexhibit3216302015.htm

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q 
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 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 001-35169
  
 

RLJ LODGING TRUST
(Exact Name of Registrant as Specified in Its Charter)

 
Maryland
 
27-4706509
(State or Other Jurisdiction of Incorporation or Organization)
 
(I.R.S. Employer Identification No.)
 
3 Bethesda Metro Center, Suite 1000
 
 
Bethesda, Maryland
 
20814
(Address of Principal Executive Offices)
 
(Zip Code)
 
(301) 280-7777
(Registrant’s Telephone Number, Including Area Code)
  
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ý Yes  o No 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  ý Yes  o No 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer” and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
ý
 
Accelerated filer
 
o
 
 
 
 
 
 
 
Non-accelerated filer
 
o (do not check if a smaller reporting company)
 
Smaller reporting company
 
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  o Yes  ý No 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 
As of July 28, 2015, 130,769,039 common shares of beneficial interest of the Registrant, $0.01 par value per share, were outstanding.
 




TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
Consolidated Financial Statements (unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


ii


PART I. FINANCIAL INFORMATION

 
Item 1.         Financial Statements.
RLJ Lodging Trust
Consolidated Balance Sheets
(Amounts in thousands, except share and per share data)
 
 
June 30,
2015
 
December 31, 2014
 
(unaudited)
 
 
Assets
 

 
 

Investment in hotels and other properties, net
$
3,508,958

 
$
3,518,803

Cash and cash equivalents
263,881

 
262,458

Restricted cash reserves
59,941

 
63,054

Hotel and other receivables, net of allowance of $170 and $166, respectively
31,802

 
25,691

Deferred financing costs, net
9,483

 
11,421

Deferred income tax asset
7,517

 
7,502

Purchase deposits
7,000

 

Prepaid expense and other assets
33,757

 
42,115

Assets of hotel properties held for sale

 
197,335

Total assets
$
3,922,339

 
$
4,128,379

Liabilities and Equity
 

 
 

Mortgage loans
$
376,939

 
$
532,747

Term loans
1,025,000

 
1,025,000

Accounts payable and other liabilities
117,383

 
129,388

Deferred income tax liability
7,542

 
7,879

Advance deposits and deferred revenue
10,854

 
9,984

Accrued interest
2,743

 
2,783

Distributions payable
46,154

 
42,114

Total liabilities
1,586,615

 
1,749,895

 
 
 
 
Commitments and Contingencies (Note 10)


 


 
 
 
 
Equity
 
 
 

Shareholders’ equity:
 
 
 

Preferred shares of beneficial interest, $0.01 par value, 50,000,000 shares authorized; zero shares issued and outstanding at June 30, 2015 and December 31, 2014, respectively

 

Common shares of beneficial interest, $0.01 par value, 450,000,000 shares authorized; 130,133,618 and 131,964,706 shares issued and outstanding at June 30, 2015 and December 31, 2014, respectively
1,301

 
1,319

Additional paid-in-capital
2,363,965

 
2,419,731

Accumulated other comprehensive loss
(17,128
)
 
(13,644
)
Distributions in excess of net earnings
(29,793
)
 
(46,415
)
Total shareholders’ equity
2,318,345

 
2,360,991

Noncontrolling interest
 

 
 

Noncontrolling interest in joint venture
6,077

 
6,295

Noncontrolling interest in Operating Partnership
11,302

 
11,198

Total noncontrolling interest
17,379

 
17,493

Total equity
2,335,724

 
2,378,484

Total liabilities and equity
$
3,922,339

 
$
4,128,379

 
The accompanying notes are an integral part of these consolidated financial statements.

1


RLJ Lodging Trust
Consolidated Statements of Operations and Comprehensive Income
(Amounts in thousands, except share and per share data)
(unaudited)
 
For the three months ended June 30,
 
For the six months ended June 30,
 
2015
 
2014
 
2015
 
2014
Revenue
 
 
 
 
 

 
 

Operating revenue
 
 
 
 
 

 
 

Room revenue
$
262,240

 
$
259,447

 
$
494,799

 
$
465,472

Food and beverage revenue
29,587

 
27,481

 
58,580

 
50,848

Other operating department revenue
9,425

 
8,119

 
18,278

 
15,100

Total revenue
$
301,252

 
$
295,047

 
$
571,657

 
$
531,420

Expense
 

 
 

 
 

 
 

Operating expense
 

 
 

 
 

 
 

Room expense
$
55,207

 
$
54,136

 
$
109,293

 
$
101,657

Food and beverage expense
20,492

 
18,746

 
41,256

 
35,619

Management and franchise fee expense
31,677

 
31,052

 
59,719

 
55,865

Other operating expense
59,228

 
59,837

 
119,809

 
116,213

Total property operating expense
166,604

 
163,771

 
330,077

 
309,354

Depreciation and amortization
37,778

 
35,422

 
74,981

 
68,298

Property tax, insurance and other
18,281

 
17,938

 
38,324

 
35,190

General and administrative
10,393

 
10,135

 
20,792

 
20,264

Transaction and pursuit costs
853

 
2,411

 
988

 
3,895

Total operating expense
233,909

 
229,677

 
465,162

 
437,001

Operating income
67,343

 
65,370

 
106,495

 
94,419

Other income
456

 
405

 
546

 
515

Interest income
363

 
962

 
808

 
1,285

Interest expense
(12,335
)
 
(14,142
)
 
(25,843
)
 
(28,788
)
Income from continuing operations before income tax expense
55,827

 
52,595

 
82,006

 
67,431

Income tax expense
(89
)
 
(494
)
 
(464
)
 
(788
)
Income from continuing operations
55,738

 
52,101

 
81,542

 
66,643

Gain (loss) on disposal of hotel properties
672

 
1,260

 
22,970

 
(1,297
)
Net income
56,410

 
53,361

 
104,512

 
65,346

Net (income) loss attributable to noncontrolling interests
 

 
 

 
 

 
 

Noncontrolling interest in consolidated joint venture
(46
)
 
(79
)
 
23

 
(45
)
Noncontrolling interest in common units of Operating Partnership
(373
)
 
(378
)
 
(694
)
 
(465
)
Net income attributable to common shareholders
$
55,991

 
$
52,904

 
$
103,841

 
$
64,836

 
 
 
 
 
 
 
 
Basic per common share data:
 
 
 
 
 

 
 

Net income per share attributable to common shareholders
$
0.43

 
$
0.42

 
$
0.79

 
$
0.52

Weighted-average number of common shares
130,670,629

 
125,260,607

 
130,969,957


123,510,507

 
 
 
 
 
 
 
 

2


Diluted per common share data:
 
 
 
 
 

 
 

Net income per share attributable to common shareholders
$
0.42

 
$
0.42

 
$
0.78

 
$
0.52

Weighted-average number of common shares
131,618,693

 
126,475,051

 
131,947,932


124,696,925

 
 
 
 
 
 
 
 
Amounts attributable to the Company’s common shareholders
 
 
 
 
 

 
 

Income from continuing operations
$
55,324

 
$
51,652

 
$
81,028

 
$
66,124

Gain (loss) on disposal of hotel properties
667

 
1,252

 
22,813

 
(1,288
)
Net income attributable to common shareholders
$
55,991

 
$
52,904

 
$
103,841

 
$
64,836

 
 
 
 
 
 
 
 
Comprehensive income
 
 
 
 
 

 
 

Net income
$
56,410

 
$
53,361

 
$
104,512

 
$
65,346

Unrealized gain (loss) on interest rate derivatives
5,919

 
(6,913
)
 
(3,484
)
 
(8,274
)
Comprehensive income
62,329

 
46,448

 
101,028

 
57,072

Comprehensive (income) loss attributable to the noncontrolling interest in consolidated joint venture
(46
)
 
(79
)
 
23

 
(45
)
Comprehensive income attributable to the noncontrolling interest in the Operating Partnership
(373
)
 
(378
)
 
(694
)
 
(465
)
Comprehensive income attributable to the Company
$
61,910

 
$
45,991

 
$
100,357

 
$
56,562

 
The accompanying notes are an integral part of these consolidated financial statements.

3


RLJ Lodging Trust
Consolidated Statements of Changes in Equity
(Amounts in thousands, except share data)
(unaudited)
 
 
Shareholders’ Equity
 
 
 
Noncontrolling Interests
 
 
 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
Shares
 
Par Value
 
Additional Paid-in Capital
 
Distributions in Excess of
Net Earnings
 
Accumulated Other Comprehensive
Loss
 
Operating
Partnership
 
Consolidated
Joint Venture
 
Total Non-controlling
Interest
 
Total Equity
Balance at December 31, 2014
131,964,706

 
$
1,319

 
$
2,419,731

 
$
(46,415
)
 
$
(13,644
)
 
$
11,198

 
$
6,295

 
$
17,493

 
$
2,378,484

Net income (loss)

 

 

 
103,841

 

 
694

 
(23
)
 
671

 
104,512

Unrealized loss on interest rate derivative

 

 

 

 
(3,484
)
 

 

 

 
(3,484
)
Distributions to joint venture partner

 

 

 

 

 

 
(195
)
 
(195
)
 
(195
)
Issuance of restricted stock
287,497

 
3

 
(3
)
 

 

 

 

 

 

Amortization of share-based compensation

 

 
7,791

 

 

 

 

 

 
7,791

Share grants to trustees
2,168

 

 
66

 

 

 

 

 

 
66

Shares acquired to satisfy minimum required federal and state tax withholding on vesting restricted stock
(120,249
)
 
(1
)
 
(3,799
)
 

 

 

 

 

 
(3,800
)
Shares acquired as part of a share repurchase program
(1,995,177
)
 
(20
)
 
(59,821
)
 

 

 

 

 

 
(59,841
)
Forfeiture of restricted stock
(5,327
)
 

 

 

 

 

 

 

 

Distributions on common shares and units

 

 

 
(87,219
)
 

 
(590
)
 

 
(590
)
 
(87,809
)
Balance at June 30, 2015
130,133,618

 
$
1,301

 
$
2,363,965

 
$
(29,793
)
 
$
(17,128
)
 
$
11,302

 
$
6,077

 
$
17,379

 
$
2,335,724

 
The accompanying notes are an integral part of these consolidated financial statements.











4





RLJ Lodging Trust
Consolidated Statements of Changes in Equity
(Amounts in thousands, except share data)
(unaudited)
 
Shareholders’ Equity
 
 
 
Noncontrolling Interests
 
 
 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
Shares
 
Par Value
 
Additional Paid-in Capital
 
Distributions in Excess of
Net Earnings
 
Accumulated Other Comprehensive Income
 
Operating
Partnership
 
Consolidated
Joint Venture
 
Total Non-controlling
Interests
 
Total Equity
Balance at December 31, 2013
122,640,042

 
$
1,226

 
$
2,178,004

 
$
(45,522
)
 
$
(5,941
)
 
$
11,261

 
$
7,306

 
$
18,567

 
$
2,146,334

Net income

 

 

 
64,836

 

 
465

 
45

 
510

 
65,346

Proceeds from sale of common stock, net
9,200,000

 
92

 
232,722

 

 

 

 

 

 
232,814

Unrealized loss on interest rate derivative

 

 

 

 
(8,274
)
 

 

 

 
(8,274
)
Distributions to joint venture partner

 

 

 

 

 

 
(1,182
)
 
(1,182
)
 
(1,182
)
Issuance of restricted stock
343,887

 
3

 
(3
)
 

 

 

 

 

 

Amortization of share-based compensation

 

 
7,393

 

 

 

 

 

 
7,393

Share grants to trustees
2,197

 

 
61

 

 

 

 

 

 
61

Shares acquired to satisfy minimum required federal and state tax withholding on vesting restricted stock
(98,204
)
 

 
(2,599
)
 

 

 

 

 

 
(2,599
)
Forfeiture of restricted stock
(3,568
)
 

 

 

 

 

 

 

 

Distributions on common shares and units

 

 

 
(56,537
)
 

 
(392
)
 

 
(392
)
 
(56,929
)
Balance at June 30, 2014
132,084,354

 
$
1,321

 
$
2,415,578

 
$
(37,223
)
 
$
(14,215
)
 
$
11,334

 
$
6,169

 
$
17,503

 
$
2,382,964


The accompanying notes are an integral part of these consolidated financial statements.

5


RLJ Lodging Trust
Consolidated Statements of Cash Flows
(Amounts in thousands)
(unaudited)
 
For the six months ended June 30,
 
2015
 
2014
Cash flows from operating activities:
 

 
 

Net income
$
104,512

 
$
65,346

Adjustments to reconcile net income to cash flow provided by operating activities:
 

 
 

Loss on defeasance

 
804

(Gain) loss on disposal of hotel properties
(22,970
)
 
1,297

Depreciation and amortization
74,981

 
68,298

Amortization of deferred financing costs
2,056

 
2,261

Amortization of deferred management fees
407

 
482

Accretion of interest income on investment in loan
(173
)
 
(109
)
Share grants to trustees
66

 
61

Amortization of share-based compensation
7,791

 
7,393

Deferred income taxes
(352
)
 
(781
)
Changes in assets and liabilities:
 

 
 

Hotel and other receivables, net
(6,111
)
 
(11,497
)
Prepaid expense and other assets
3,611

 
2,625

Accounts payable and other liabilities
(18,727
)
 
(4,714
)
Advance deposits and deferred revenue
870

 
590

Accrued interest
(40
)
 
(15
)
Net cash flow provided by operating activities
145,921

 
132,041

Cash flows from investing activities:
 

 
 

Acquisition of hotel and other properties, net

 
(504,103
)
Proceeds from the disposal of hotel properties, net
227,837

 
124,076

Purchase deposits
(7,000
)
 
6,246

Improvements and additions to hotel and other properties
(64,695
)
 
(38,581
)
Additions to property and equipment
(222
)
 
(20
)
Releases from restricted cash reserves, net
3,113

 
1,820

Net cash flow provided by (used in) investing activities
159,033

 
(410,562
)
Cash flows from financing activities:
 

 
 

Borrowings under revolving credit facility

 
258,500

Repayments under revolving credit facility

 
(258,500
)
Borrowings on term loans

 
175,000

Payment of mortgage principal
(155,808
)
 
(25,569
)
Repurchase of common shares to satisfy employee withholding requirements
(3,800
)
 
(2,599
)
Repurchase of common shares under a share repurchase program
(59,841
)
 

Distributions on common shares
(83,204
)
 
(56,469
)
Distributions on Operating Partnership units
(565
)
 
(411
)
Payment of deferred financing costs
(118
)
 
(1,579
)
Distribution to noncontrolling interest
(195
)
 
(1,182
)
Proceeds from issuance of common shares

 
232,814

Net cash flow (used in) provided by financing activities
(303,531
)
 
320,005

Net change in cash and cash equivalents
1,423

 
41,484

Cash and cash equivalents, beginning of period
262,458

 
332,248

Cash and cash equivalents, end of period
$
263,881

 
$
373,732

 The accompanying notes are an integral part of these consolidated financial statements.

6


RLJ Lodging Trust
Notes to the Consolidated Financial Statements
(unaudited)

1.              Organization
 
RLJ Lodging Trust (the "Company") was formed as a Maryland real estate investment trust ("REIT") on January 31, 2011. The Company is a self-advised and self-administered REIT that acquires primarily premium-branded, focused-service and compact full-service hotels. The Company qualified and elected to be taxed as a REIT for U.S. federal income tax purposes, commencing with the portion of its taxable year ended December 31, 2011.
 
Substantially all of the Company’s assets are held by, and all of its operations are conducted through, RLJ Lodging Trust, L.P. (the "Operating Partnership"). The Company is the sole general partner of the Operating Partnership. As of June 30, 2015, there were 131,027,618 units of limited partnership interest in the Operating Partnership ("OP units") outstanding and the Company owned, through a combination of direct and indirect interests, 99.3% of the outstanding OP units.
 
As of June 30, 2015, the Company owned 125 properties, comprised of 123 hotels with approximately 20,400 rooms and two planned hotel conversions, located in 21 states and the District of Columbia, and an interest in one mortgage loan secured by a hotel.  The Company owned, through wholly-owned subsidiaries, 100% of the interests in all properties, with the exception of the DoubleTree Metropolitan Hotel-New York City, in which the Company, through wholly-owned subsidiaries, owned a 98.3% controlling interest in a joint venture, DBT Met Hotel Venture, LP, which was formed to engage in hotel operations related to the DoubleTree Metropolitan Hotel. An independent operator manages each property.
 
2.              Summary of Significant Accounting Policies
 
The Company's Annual Report on Form 10-K for the year ended December 31, 2014 contains a discussion of significant accounting policies. There have been no significant changes to the Company's significant accounting policies since December 31, 2014.

Basis of Presentation and Principles of Consolidation
 
The unaudited consolidated financial statements and related notes have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America ("GAAP") and in conformity with the rules and regulations of the Securities and Exchange Commission ("SEC") applicable to financial information. As such, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted in accordance with the rules and regulations of the SEC.  The unaudited financial statements include adjustments based on management’s estimates (consisting of normal recurring adjustments), which the Company considers necessary for the fair statement of the consolidated balance sheets, statements of operations and comprehensive income, statements of changes in equity and statements of cash flows for the periods presented. The unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto as of and for the year ended December 31, 2014, included in the Company's Annual Report on Form 10-K filed with the SEC on February 26, 2015.  Operating results for the three and six months ended June 30, 2015 are not necessarily indicative of actual operating results for the entire year.
 
The consolidated financial statements include all subsidiaries controlled by the Company. For controlled subsidiaries that are not wholly-owned, the noncontrolling interests in these subsidiaries are presented separately in the consolidated financial statements. As of June 30, 2015, the Company consolidated DBT Met Hotel Venture, LP, a majority-owned partnership that has a third-party, noncontrolling 1.7% ownership interest. The third-party partnership interest is included in noncontrolling interest in joint venture on the consolidated balance sheets. Profits and losses are allocated in proportion to each party's respective ownership interest.

As of June 30, 2015, the Company consolidated the Operating Partnership, which is a majority-owned partnership that has a third-party, noncontrolling 0.7% ownership interest. The third-party partnership interest is included in noncontrolling interest in Operating Partnership on the consolidated balance sheets. Profits and losses are allocated in proportion to each party's respective ownership interest.
 

7


Reclassifications
 
Certain prior year amounts in these financial statements have been reclassified to conform to the current year presentation with no impact to net income, shareholders’ equity or cash flows.
 
Use of Estimates
 
The preparation of the Company’s financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and the amounts of contingent assets and liabilities at the balance sheet date and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
 
Recently Issued Accounting Pronouncements
 
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers, which supersedes or replaces nearly all GAAP revenue recognition guidance. The new guidance establishes a new control-based revenue recognition model, changes the basis for deciding when revenue is recognized over time or at a point in time and expands disclosures about revenue. The guidance is effective for annual reporting periods beginning after December 15, 2017, and interim periods within those annual periods. Early adoption is permitted for annual reporting periods beginning after December 15, 2016. The Company is currently evaluating whether this ASU will have a material impact on its financial position, results of operations or cash flows.

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. ASU 2014-15 requires management to evaluate whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern, and to provide certain disclosures when it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued. ASU 2014-15 is effective for the annual period ended December 31, 2016 and for annual periods and interim periods thereafter with early adoption permitted. The Company does not believe this ASU will have a material impact on its financial position, results of operations or cash flows.

In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. ASU 2015-02 requires reporting entities to reevaluate whether they should consolidate certain legal entities under the revised consolidation model. This standard modifies the evaluation of whether limited partnerships and similar legal entities are variable interest entities ("VIEs"), eliminates the presumption that a general partner should consolidate a limited partnership, and affects the consolidation analysis of reporting entities that are involved with VIEs, especially those that have fee arrangements and related party relationships. This ASU is effective for fiscal years beginning after December 15, 2015, and for interim periods within those fiscal years. The Company does not believe this ASU will have a material impact on its financial position, results of operations or cash flows.

In April 2015, the FASB issued ASU 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. ASU 2015-03 requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. The guidance is effective for fiscal years beginning after December 15, 2015 with early adoption permitted. The Company does not believe this ASU will have a material impact on its financial position, results of operations or cash flows.



8


3.              Investment in Hotel and Other Properties
 
Investment in hotel and other properties as of June 30, 2015 and December 31, 2014 consisted of the following (in thousands):
 
June 30, 2015
 
December 31, 2014
Land and land improvements
$
706,932

 
$
706,497

Buildings and improvements
3,044,096

 
3,005,390

Furniture, fixtures and equipment
522,688

 
498,126

Intangible assets
2,507

 
2,507

 
4,276,223

 
4,212,520

Accumulated depreciation and amortization
(767,265
)
 
(693,717
)
Investment in hotels and other properties, net
$
3,508,958

 
$
3,518,803

 
For the three and six months ended June 30, 2015, depreciation and amortization expense related to investment in hotel and other properties was approximately $37.7 million and $74.8 million, respectively. For the three and six months ended June 30, 2014, depreciation and amortization expense related to investment in hotel and other properties was approximately $35.3 million and $68.1 million, respectively.
 
Impairment
 
The Company determined that there was no impairment of any assets for either the three and six months ended June 30, 2015 or 2014.
 

4.              Acquisition of Hotel and Other Properties
 
There were no acquisitions during the six months ended June 30, 2015. During the six months ended June 30, 2014, the Company acquired a 100% interest in the following properties:

Property
 
Location
 
Acquisition Date
 
Management Company
 
Rooms
 
Purchase Price (in thousands)
Hyatt House Charlotte Center City
 
Charlotte, NC
 
March 12, 2014
 
Hyatt Affiliate
 
163

 
$
32,496

Hyatt House Cypress Anaheim
 
Cypress, CA
 
March 12, 2014
 
Hyatt Affiliate
 
142

 
14,753

Hyatt House Emeryville San Francisco Bay Area
 
Emeryville, CA
 
March 12, 2014
 
Hyatt Affiliate
 
234

 
39,274

Hyatt House San Diego Sorrento Mesa
 
San Diego, CA
 
March 12, 2014
 
Hyatt Affiliate
 
193

 
35,985

Hyatt House San Jose Silicon Valley
 
San Jose, CA
 
March 12, 2014
 
Hyatt Affiliate
 
164

 
44,159

Hyatt House San Ramon
 
San Ramon, CA
 
March 12, 2014
 
Hyatt Affiliate
 
142

 
20,833

Hyatt House Santa Clara
 
Santa Clara, CA
 
March 12, 2014
 
Hyatt Affiliate
 
150

 
40,570

Hyatt Market Street The Woodlands
 
The Woodlands, TX
 
March 12, 2014
 
Hyatt Corporation
 
70

 
25,817

Hyatt Place Fremont Silicon Valley
 
Fremont, CA
 
March 12, 2014
 
Hyatt Affiliate
 
151

 
23,525

Hyatt Place Madison Downtown
 
Madison, WI
 
March 12, 2014
 
Hyatt Affiliate
 
151

 
35,088

Courtyard Portland City Center
 
Portland, OR
 
May 22, 2014
 
Sage Hospitality
 
256

 
67,000

Embassy Suites Irvine Orange County
 
Irvine, CA
 
May 22, 2014
 
Sage Hospitality
 
293

 
53,000

Hilton Cabana Miami Beach
 
Miami, FL
 
June 19, 2014
 
Highgate Hotels
 
231

 
71,700

 
 
 
 
 
 
 
 
2,340

 
$
504,200



9


The allocation of purchase price for the properties acquired during the six months ended June 30, 2014 was as follows (in thousands):
 
For the six months ended June 30,
 
2014
Land and land improvements
$
112,467

Buildings and improvements
339,889

Furniture, fixtures and equipment
51,844

Total purchase price
$
504,200

 
For properties acquired during the six months ended June 30, 2014, total revenues and net income from the date of acquisition through June 30, 2014 are included in the accompanying consolidated statements of operations for the three and six months ended June 30, 2014 as follows (in thousands):
 
2014 acquisitions
 
For the three months ended June 30, 2014
 
For the six months ended June 30, 2014
Revenue
$
25,276

 
$
29,807

Net income
$
4,301

 
$
3,272

 
The following unaudited condensed pro forma financial information presents the results of operations as if the 2014 acquisitions had taken place on January 1, 2013.  The unaudited condensed pro forma financial information is not necessarily indicative of what actual results of operations of the Company would have been assuming the 2014 acquisitions had taken place on January 1, 2013 nor does it purport to represent the results of operations for future periods.  The unaudited condensed pro forma financial information is as follows (in thousands, except share and per share data): 
 
For the three months ended June 30, 2014
 
For the six months ended June 30, 2014
Revenue
$
305,929

 
$
570,325

Net income attributable to common shareholders
$
55,411

 
$
73,692

Net income per share attributable to common shareholders - basic
$
0.44

 
$
0.60

Net income per share attributable to common shareholders - diluted
$
0.44

 
$
0.59

Weighted-average number of common shares - basic
125,260,607

 
123,510,507

Weighted-average number of common shares - diluted
126,475,051

 
124,696,925

 
5.            Disposal of Hotel Properties
 
During the six months ended June 30, 2015, the Company sold 21 hotel properties in two transactions for a total sales price of approximately $232.7 million. In conjunction with these transactions, the Company recorded a $23.0 million gain on disposal which is included in the accompanying consolidated statement of operations.


10


The following table provides a list of properties that were sold during the six months ended June 30, 2015:

Property Name
 
Location
 
Disposal Date
 
Rooms
Courtyard Chicago Schaumburg
 
Schaumburg, IL
 
February 23, 2015
 
162

Courtyard Detroit Pontiac Bloomfield
 
Pontiac, MI
 
February 23, 2015
 
110

Courtyard Grand Junction
 
Grand Junction, CO
 
February 23, 2015
 
136

Courtyard Mesquite
 
Mesquite, TX
 
February 23, 2015
 
101

Courtyard San Antonio Airport Northstar
 
San Antonio, TX
 
February 23, 2015
 
78

Courtyard Tampa Brandon
 
Tampa, FL
 
February 23, 2015
 
90

Fairfield Inn & Suites Merrillville
 
Merrillville, IN
 
February 23, 2015
 
112

Fairfield Inn & Suites San Antonio Airport
 
San Antonio, TX
 
February 23, 2015
 
120

Fairfield Inn & Suites Tampa Brandon
 
Tampa, FL
 
February 23, 2015
 
107

Hampton Inn Merrillville
 
Merrillville, IN
 
February 23, 2015
 
64

Holiday Inn Grand Rapids Airport
 
Kentwood, MI
 
February 23, 2015
 
148

Homewood Suites Tampa Brandon
 
Tampa, FL
 
February 23, 2015
 
126

Marriott Auburn Hills Pontiac at Centerpoint
 
Pontiac, MI
 
February 23, 2015
 
290

Residence Inn Austin Round Rock
 
Round Rock, TX
 
February 23, 2015
 
96

Residence Inn Chicago Schaumburg
 
Schaumburg, IL
 
February 23, 2015
 
125

Residence Inn Detroit Pontiac Auburn Hills
 
Pontiac, MI
 
February 23, 2015
 
114

Residence Inn Grand Junction
 
Grand Junction, CO
 
February 23, 2015
 
104

Residence Inn Indianapolis Carmel
 
Carmel, IN
 
February 23, 2015
 
120

Springhill Suites Chicago Schaumburg
 
Schaumburg, IL
 
February 23, 2015
 
132

Springhill Suites Indianapolis Carmel
 
Carmel, IN
 
February 23, 2015
 
126

Fairfield Inn and Suites Valparaiso
 
Valparaiso, IN
 
May 22, 2015
 
63

 
 
 
 
Total
 
2,524


During the six months ended June 30, 2014, the Company sold 14 hotel properties in four separate transactions for a total sales price of approximately $128.0 million. In conjunction with these transactions, the Company recorded a $1.3 million loss on disposal, which is included in the accompanying consolidated statement of operations. Additionally, the Company defeased the mortgage indebtedness secured by three of the properties that were sold. The cost of the defeasance was approximately $0.8 million, which is included in interest expense in the accompanying consolidated statement of operations.


11


The following table provides a list of properties that were sold during the six months ended June 30, 2014:
Property Name

Location

Disposal Date

Rooms
Courtyard Denver Southwest Lakewood

Lakewood, CO

February 20, 2014

90

Residence Inn Denver Southwest Lakewood

Lakewood, CO

February 20, 2014

102

Hyatt House Colorado Springs

Colorado Springs, CO

February 20, 2014

125

SpringHill Suites Gainesville

Gainesville, FL

February 20, 2014

126

Residence Inn Indianapolis Airport

Indianapolis, IN

February 20, 2014

95

Fairfield Inn & Suites Indianapolis Airport

Indianapolis, IN

February 20, 2014

86

Courtyard Grand Rapids Airport

Kentwood, MI

February 20, 2014

84

Hampton Inn Suites Las Vegas Red Rock Summerlin

Las Vegas, NV

February 20, 2014

106

Courtyard Austin University Area

Austin, TX

February 20, 2014

198

Fairfield Inn & Suites Austin University Area

Austin, TX

February 20, 2014

63

Hyatt House Dallas Richardson

Richardson, TX

February 20, 2014

130

Hilton Garden Inn St. George

St. George, UT

February 25, 2014

150

Hilton Mystic

Mystic, CT

March 26, 2014

182

Holiday Inn Austin NW Arboretum Area
 
Austin, TX
 
June 18, 2014
 
194





Total

1,731


6.              Debt
 
Credit Facilities
 
The Company has in place the following unsecured credit agreements:

$300.0 million revolving credit facility with a scheduled maturity date of November 20, 2016 with a one-year extension option if certain conditions are satisfied (the "Revolver");
$400.0 million term loan with a scheduled maturity date of August 27, 2018 (the "2013 Five-Year Term Loan");
$400.0 million term loan with a scheduled maturity date of March 20, 2019 (which was originally scheduled to mature in 2017) (the "2012 Five-Year Term Loan");
$225.0 million term loan with a scheduled maturity date of November 20, 2019 (the "2012 Seven-Year Term Loan"); and
$150.0 million term loan with a scheduled maturity date of January 22, 2022 (the "2014 Seven-Year Term Loan").

The 2012 Five-Year Term Loan, the 2012 Seven-Year Term Loan, the 2013 Five-Year Term Loan and the 2014 Seven-Year Term loan are collectively the "Term Loans". The Revolver and Term Loans are subject to customary financial covenants.  As of June 30, 2015, the Company was in compliance with all financial covenants.
 

12


As of and for the three and six months ended June 30, 2015 and 2014, details of the Revolver and Term Loans are as follows (in thousands):
 
 
 
 
 
 
 
Interest expense for the
 
 
 
 
 
 
 
three months ended June 30,
 
six months ended June 30,
 
Outstanding Borrowings at June 30, 2015
 
Maturity Date
 
Interest Rate at June 30, 2015 (1)
 
2015
 
2014
 
2015
 
2014
Revolver (2)(3)
$

 
November 2016
 
n/a
 
$
265

 
$
296

 
$
525

 
$
619

2013 Five-Year Term Loan (4)
400,000

 
August 2018
 
3.07%
 
3,108

 
3,102

 
6,145

 
5,953

2012 Five-Year Term Loan (5)
400,000

 
March 2019
 
2.72%
 
2,530

 
1,728

 
4,877

 
3,150

2012 Seven-Year Term Loan (6)
225,000

 
November 2019
 
4.04%
 
2,296

 
2,294

 
4,541

 
4,550

2014 Seven-Year Term Loan (7)(8)

 
January 2022
 
n/a
 
95

 

 
95

 

Total
$
1,025,000

 
 
 
 
 
$
8,294

 
$
7,420

 
$
16,183

 
$
14,272

 
(1)
Interest rate at June 30, 2015 gives effect to interest rate hedges, as applicable.
(2)
At June 30, 2015 there was $300.0 million of borrowing capacity on the Revolver.
(3)
Includes an unused facility fee of $0.3 million and $0.5 million for the three and six months ended June 30, 2015, respectively, and $0.3 million and $0.5 million for the three and six months ended June 30, 2014, respectively.
(4)
Includes interest expense related to an interest rate hedge of $1.2 million and $2.5 million for the three and six months ended June 30, 2015, respectively, and $1.3 million and $2.5 million for the three and six months ended June 30, 2014, respectively.
(5)
Includes interest expense related to an interest rate hedge of $0.8 million and $1.4 million for the three and six months ended June 30, 2015, respectively.
(6)
Includes interest expense related to an interest rate hedge of $1.0 million and $2.0 million for the three and six months ended June 30, 2015, respectively, and $1.0 million and $2.0 million for the three and six months ended June 30, 2014, respectively.
(7)
At June 30, 2015 there was $150.0 million of borrowing capacity on the 2014 Seven-Year Term Loan.
(8)
Includes an unused facility fee of $0.1 million and $0.1 million for the three and six months ended June 30, 2015, respectively.

Mortgage Loans
 
As of June 30, 2015 and December 31, 2014, the Company was subject to the following mortgage loans (in thousands):
 
 
 
 
 
 
 
 
 
 
 
 
Principal balance at
Lender
 
Number of Assets Encumbered
 
Interest Rate at June 30, 2015 (1)
 
 
 
Maturity Date
 
 
 
June 30, 2015
 
 
 
December 31, 2014
Barclays Bank
 
1
 
5.44%
 
 
 
September 2015
 
(2)
 
9,939

 
 
 
10,140

PNC Bank (3)
 
5
 
2.54%
 
(4)
 
May 2016
 
(5)
 
74,000

 
 
 
74,000

Wells Fargo (6)
 
4
 
4.19%
 
(4)
 
September 2016
 
(7)
 
150,000

 
 
 
150,000

Wells Fargo
 
4
 
4.06%
 
(4)
 
October 2017
 
(7)
 
143,000

 
 
 
143,000

Capmark Financial Group
 

 

 
 
 
May 2015
 

 

 
 
 
10,513

Capmark Financial Group
 

 

 
 
 
June 2015
 

 

 
 
 
4,561

Barclays Bank
 

 

 
 
 
June 2015
 

 

 
 
 
26,775

Barclays Bank
 
 
 
 
 
 
 
June 2015
 
 
 

 
 
 
107,544

Capmark Financial Group
 
 
 
 
 
 
 
July 2015
 
 
 

 
 
 
6,214


 
14
 
 
 
 
 
 
 
 
 
$
376,939

 
 
 
$
532,747


(1)
Interest rate at June 30, 2015 gives effect to interest rate hedges, as applicable.
(2)
The Company is currently evaluating its options for repayment.
(3)
The five hotels encumbered by the PNC Bank loan are cross-collateralized.
(4)
Requires payments of interest only until the commencement of the extension period(s).

13


(5)
Maturity date may be extended for a one-year term at the Company’s option, subject to certain lender requirements.
(6)
Two of the four hotels encumbered by the Wells Fargo loan are cross-collateralized.
(7)
Maturity date may be extended for four one-year terms at the Company’s option, subject to certain lender requirements.
 
Mortgage interest expense for the three and six months ended June 30, 2015 was $3.7 million and $8.8 million, respectively, including interest expense related to interest rate hedges of $1.2 million and $2.4 million, respectively. Mortgage interest expense for the three and six months ended June 30, 2014 was $5.8 million and $11.6 million, respectively, including interest expense related to interest rate hedges of $0.6 million and $1.2 million, respectively. Some mortgage agreements are subject to customary financial covenants.  The Company was in compliance with these covenants at June 30, 2015 and December 31, 2014.
  
7.              Derivatives and Hedging
 
The Company employs derivative instruments to hedge against interest rate fluctuations. For derivative instruments designated as cash flow hedges, unrealized gains and losses on the effective portion are reported in accumulated other comprehensive loss, a component of shareholders’ equity.  Unrealized gains and losses on the ineffective portion of all designated hedges are recognized in earnings in the current period.  For derivative instruments not designated as hedging instruments, unrealized gains or losses are recognized in earnings in the current period. At June 30, 2015 and December 31, 2014, all derivative instruments were designated as cash flow hedges.
 
At June 30, 2015, the aggregate fair value of interest rate swap assets of $1.4 million was included in prepaid expense and other assets in the accompanying consolidated balance sheets. There were no interest rate swap assets at December 31, 2014. At June 30, 2015 and December 31, 2014, the aggregate fair value of interest rate swap liabilities of $18.6 million and $13.6 million, respectively, was included in accounts payable and other liabilities in the accompanying consolidated balance sheets.
 
As of June 30, 2015 and December 31, 2014, the Company had entered into the following derivative instruments (in thousands):
 
 
Notional value at
 
 
 
 
 
Fair value at
Hedge type
June 30, 2015
 
December 31, 2014
 
Hedge interest rate
 
Maturity
 
June 30, 2015
 
December 31, 2014
Swap-cash flow
$
275,000

 
$
275,000

 
1.12%
 
November 2017
 
$
(1,683
)
 
$
(232
)
Swap-cash flow
175,000

 
175,000

 
1.56%
 
March 2018
 
(2,900
)
 
(2,182
)
Swap-cash flow
175,000

 
175,000

 
1.64%
 
March 2018
 
(3,253
)
 
(2,596
)
Swap-cash flow
16,500

 
16,500

 
1.83%
 
September 2018
 
(379
)
 
(315
)
Swap-cash flow
16,500

 
16,500

 
1.75%
 
September 2018
 
(339
)
 
(270
)
Swap-cash flow
40,500

 
40,500

 
1.83%
 
September 2018
 
(929
)
 
(772
)
Swap-cash flow
41,500

 
41,500

 
1.75%
 
September 2018
 
(853
)
 
(678
)
Swap-cash flow
18,000

 
18,000

 
1.83%
 
September 2018
 
(413
)
 
(343
)
Swap-cash flow
17,000

 
17,000

 
1.75%
 
September 2018
 
(350
)
 
(278
)
Swap-cash flow
125,000

 
125,000

 
2.02%
 
March 2019
 
(3,561
)
 
(3,073
)
Swap-cash flow
100,000

 
100,000

 
1.94%
 
March 2019
 
(2,571
)
 
(2,145
)
Swap-cash flow
125,000

 

 
1.27%
 
March 2019
 
(17
)
 

Swap-cash flow
143,000

 
143,000

 
1.81%
 
October 2020
 
(1,305
)
 
(760
)
Swap-cash flow
50,000

 

 
1.61%
 
June 2021
 
514

 

Swap-cash flow
50,000

 

 
1.56%
 
June 2021
 
681

 

Swap-cash flow
50,000

 

 
1.71%
 
June 2021
 
230

 

 
$
1,418,000

 
$
1,143,000

 
 
 
 
 
$
(17,128
)
 
$
(13,644
)
 
 As of June 30, 2015 and December 31, 2014, there was approximately $17.1 million and $13.6 million, respectively, in net unrealized losses included in accumulated other comprehensive loss related to interest rate hedges that are effective in offsetting the variable cash flows.  There was no ineffectiveness recorded on designated hedges during the three and six month periods ended June 30, 2015 and 2014. For the three and six months ended June 30, 2015, approximately $4.2 million and $8.3

14


million, respectively, of amounts included in accumulated other comprehensive loss were reclassified into interest expense. For the three and six months ended June 30, 2014, approximately $2.9 million and $5.8 million, respectively, of amounts included in accumulated other comprehensive loss were reclassified into interest expense.
 
8.              Fair Value
 
Fair Value Measurement
 
Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or most advantageous market.  The fair value hierarchy has three levels of inputs, both observable and unobservable:
 
Level 1 — Inputs include quoted market prices in an active market for identical assets or liabilities.
 
Level 2 — Inputs are market data, other than Level 1, that are observable either directly or indirectly.  Level 2 inputs include quoted market prices for similar assets or liabilities, quoted market prices in an inactive market, and other observable information that can be corroborated by market data.

Level 3 — Inputs are unobservable and corroborated by little or no market data.
 
Fair Value of Financial Instruments
 
The estimated fair values of financial instruments have been determined by the Company using available market information and appropriate valuation methods.  Considerable judgment is required in interpreting market data to develop the estimates of fair value.  Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange.  The use of different market assumptions and/or estimation methods may have a material effect on the estimated fair value amounts.  The Company used the following market assumptions and/or estimation methods:
 
Cash and cash equivalents, restricted cash, hotel and other receivables, accounts payable and other liabilities - The carrying amounts reported in the consolidated balance sheets for these financial instruments approximate fair value because of their short maturities.
 
Variable rate mortgage notes payable and borrowings under the Revolver and Term Loans - The carrying amounts reported in the consolidated balance sheets for these financial instruments approximate fair value, as they bear interest at market rates.  The Company determined that its variable rate mortgage notes payable and borrowings under the Revolver and Term Loans are classified in Level 3 of the fair value hierarchy.

Fixed rate mortgage notes payable - The fair value estimated at June 30, 2015 and December 31, 2014 of $10.0 million and $171.1 million, respectively, is calculated based on the net present value of payments over the term of the loans using estimated market rates for similar mortgage loans with similar terms and loan to value ratios. As a result, the Company determined that its fixed rate mortgage notes payable in their entirety are classified in Level 3 of the fair value hierarchy.  The carrying value of fixed rate mortgage notes payable at June 30, 2015 and December 31, 2014 was $9.9 million and $165.7 million, respectively.
 
Recurring Fair Value Measurements
 
The following table presents the Company’s fair value hierarchy for those financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2015 (in thousands):
 
Fair Value at June 30, 2015
 
Level 1
 
Level 2
 
Level 3
 
Total
Interest rate swap asset
$

 
$
1,425

 
$

 
$
1,425

Interest rate swap liability
$

 
$
(18,553
)
 
$

 
$
(18,553
)
Total
$

 
$
(17,128
)
 
$

 
$
(17,128
)
 

15


The following table presents the Company’s fair value hierarchy for those financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2014 (in thousands):
 
Fair Value at December 31, 2014
 
Level 1
 
Level 2
 
Level 3
 
Total
Interest rate swap asset
$

 
$

 
$

 
$

Interest rate swap liability
$

 
$
(13,644
)
 
$

 
$
(13,644
)
Total
$

 
$
(13,644
)
 
$

 
$
(13,644
)

The fair values of the derivative financial instruments are determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. The Company determined that the significant inputs, such as interest yield curves and discount rates, used to value its derivatives fall within Level 2 of the fair value hierarchy and that the credit valuation adjustments associated with the Company’s counterparties and its own credit risk utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. As of June 30, 2015, the Company assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and determined that the credit valuation adjustments were not significant to the overall valuation of its derivatives. As a result, the Company determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

9.              Income Taxes
 
The Company elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code when it filed its U.S. federal tax return for its short taxable year ended December 31, 2011.  To qualify as a REIT, the Company must meet a number of organizational and operational requirements, including a requirement that it distribute at least 90% of its adjusted taxable income to its shareholders, subject to certain adjustments and excluding any net capital gain.  The Company’s intention is to adhere to these requirements and maintain the qualification for taxation as a REIT.  As a REIT, the Company is not subject to federal corporate income tax on that portion of net income that is currently distributed to its shareholders.  However, the Company’s taxable REIT subsidiaries ("TRS") will generally be subject to federal, state, and local income taxes.
 
The Company accounts for income taxes using the asset and liability method.  Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities from a change in tax rates is recognized in earnings in the period when the new rate is enacted.
 
The Company had no accruals for tax uncertainties as of June 30, 2015 and December 31, 2014.
 
10.       Commitments and Contingencies
 
Restricted Cash Reserves
 
The Company is obligated to maintain reserve funds for capital expenditures at the hotels (including the periodic replacement or refurbishment of FF&E) as determined pursuant to the management agreements, franchise agreements and/or mortgage loan documents. The management agreements, franchise agreements and/or mortgage loan documents require the Company to reserve restricted cash ranging typically from 3.0% to 5.0% of the individual hotel’s revenues and maintain the reserves in restricted cash reserve escrows. Any unexpended amounts will remain the property of the Company upon termination of the management agreements, franchise agreements or mortgage loan documents. Additionally, some loan agreements require the Company to reserve restricted cash for the periodic payment of real estate taxes and insurance. As of June 30, 2015 and December 31, 2014, approximately $59.9 million and $63.1 million, respectively, was available in restricted cash reserves for future capital expenditures, real estate taxes and insurance.
 
Litigation
 
Neither the Company nor any of its subsidiaries are currently involved in any regulatory or legal proceedings that management believes will have a material adverse effect on the financial position, operations or liquidity of the Company.


16


Data Breach
 
During the first quarter of 2014, one of the Company's third-party hotel managers notified the Company of a data breach that occurred over a nine-month period ending in December 2013 affecting a number of hotels it manages, including seven hotels that are owned by the Company. During the first quarter of 2015, the same third-party hotel manager notified the Company of a second data breach that occurred over a seven-month period ending in February 2015 affecting a number of hotels it manages, including six hotels owned by the Company. The third-party hotel manager is cooperating with the relevant authorities in their investigations of these criminal cyber-attacks. The Company and its third-party hotel manager are continuing to take steps to assess and further strengthen information security systems.
The Company believes that each of the credit card companies impacted may seek to impose fines, fees or assessments in connection with the breach against various parties, including the Company. The Company may also incur other costs, including legal fees and other professional services fees, related to investigating the breach. Because the investigation into each of these matters is ongoing and certain factual and legal questions remain unanswered, the Company is unable to estimate with certainty the total costs, fines, fees or assessments that may be associated with any potential claims; however, the Company currently believes that any amounts that the Company may ultimately be required to pay as a result of this incident will not be material to its financial position, results of operations or cash flows.
Management Agreements
As of June 30, 2015, 123 of the Company's hotel properties were operated pursuant to long-term agreements with initial terms ranging from 3 to 30 years. This number includes five Marriott and ten Hyatt hotels that receive the benefits of a franchise agreement pursuant to a management agreement. Each management company receives a base management fee generally between 2.5% and 3.5% of hotel revenues. Management agreements that include the benefits of a franchise agreement incur a base management fee generally between 3.0% and 7.0% of hotel revenues. The management companies are also eligible to receive an incentive management fee if hotel operating income, as defined in the management agreements, exceeds certain thresholds. The incentive management fee is generally calculated as a percentage of hotel operating income after the Company has received a priority return on their investment in the hotel. Management fees are included in management and franchise fee expense in the accompanying consolidated statements of operations. For the three and six months ended June 30, 2015, the Company incurred management fee expense, including amortization of deferred management fees, of approximately $12.5 million and $23.4 million, respectively. For the three and six months ended June 30, 2014, the Company incurred management fee expense, including amortization of deferred management fees, of approximately $12.0 million and $21.1 million, respectively.
Franchise Agreements
 
As of June 30, 2015, 108 of the Company’s hotel properties were operated under franchise agreements with initial terms ranging from 10 to 30 years. This number excludes five Marriott and ten Hyatt hotels that receive the benefits of a franchise agreement pursuant to their respective management agreements. Franchise agreements allow the properties to operate under the respective brands. Pursuant to the franchise agreements, the Company pays a royalty fee, generally between 3.0% and 6.0% of room revenue, plus additional fees for marketing, central reservation systems and other franchisor costs that amount to between 1.0% and 4.3% of room revenue. Certain hotels are also charged a royalty fee between 1.0% and 3.0% of food and beverage revenues.  Franchise fees are included in management and franchise fee expense in the accompanying consolidated statements of operations. For the three and six months ended June 30, 2015, the Company incurred franchise fee expense of approximately $19.2 million and $36.3 million, respectively. For the three and six months ended June 30, 2014, the Company incurred franchise fee expense of approximately $19.1 million and $34.8 million, respectively.

11.       Equity
 
On May 1, 2015, the Company's board of trustees authorized a share repurchase program to acquire up to $200.0 million of the Company's common shares. The share repurchase program will expire on April 30, 2016. During the three months ended June 30, 2015, the Company repurchased 1,995,177 of its common shares for approximately $59.8 million. As of June 30, 2015 there is approximately $140.2 million remaining for future repurchases of common shares.

On May 22, 2014, the Company issued and sold 9,200,000 common shares of beneficial interest, $0.01 par value per share, at a price per share of $26.45, for total gross proceeds of $243.3 million. The Company received aggregate net proceeds of approximately $232.8 million.


17


12.       Equity Incentive Plan
 
On May 1, 2015, the Company’s shareholders approved the 2015 Equity Incentive Plan (the "2015 Plan"), which constitutes an amendment and restatement of the 2011 Equity Incentive Plan (the "2011 Plan"), including an increase in the total number of available shares under the 2015 Plan by 2,500,000 shares and changes to certain other terms of the 2011 Plan. The Company may issue equity-based awards to officers, employees, non-employee trustees and other eligible persons under the 2015 Plan. The 2015 Plan provides for a maximum of 7,500,000 common shares of beneficial interest to be issued in the form of share options, share appreciation rights, restricted share awards, unrestricted share awards, share units, dividend equivalent rights, long-term incentive units, other equity-based awards and cash bonus awards.
 
Share Awards
 
From time to time, the Company may award non-vested restricted shares under the 2015 Plan, as compensation to officers, employees and non-employee trustees. The shares issued to officers and employees vest over a period of time as determined by the board of trustees at the date of grant. The Company recognizes compensation expense for time-based non-vested shares on a straight-line basis over the vesting period based upon the fair market value of the shares on the date of issuance, adjusted for forfeitures.

The Company may also award unrestricted shares under the 2015 Plan as compensation to non-employee trustees that would otherwise be paid in cash for their services. The shares issued to trustees are unrestricted and include no vesting conditions. The Company recognizes compensation expense for the unrestricted shares issued in lieu of cash compensation on the date of issuance based upon the fair market value of the shares on that date.
 
A summary of the non-vested shares as of June 30, 2015 is as follows:
 
2015
 
Number of
Shares
 
Weighted-Average
Grant Date Fair
Value
Unvested at January 1,
731,459

 
$
21.21

Granted (1)
289,665

 
32.19

Vested (1)
(293,693
)
 
20.38

Forfeited
(5,327
)
 
24.71

Unvested at June 30,
722,104

 
$
25.92

 
(1)
Includes 2,168 unrestricted shares issued in lieu of cash compensation to non-employee trustees at a weighted-average grant date fair value of $30.53.

For the three and six months ended June 30, 2015, the Company recognized approximately $2.6 million and $5.6 million, respectively, of share-based compensation expense related to restricted share awards. For the three and six months ended June 30, 2014, the Company recognized approximately $2.7 million and $5.2 million, respectively, of share-based compensation expense related to restricted share awards. As of June 30, 2015, there was $17.8 million of total unrecognized compensation costs related to non-vested share awards and these costs are expected to be primarily recognized over a weighted-average period of 2.8 years. The total fair value of shares vested (calculated as number of shares multiplied by vesting date share price) during the six months ended June 30, 2015 was approximately $9.3 million.
 
Performance Units
 
The Company awarded performance units to certain employees under the 2015 Plan.  The performance units vest over a four-year period, including three years of performance-based vesting ("measurement period") plus an additional one year of time-based vesting.
 
As of June 30, 2015, there were 1.0 million unvested performance units with a weighted-average grant date fair value of $15.36 per performance unit.
 
For the three and six months ended June 30, 2015, the Company recognized $1.1 million and $2.2 million of share-based compensation expense related to the performance units, respectively.  For the three and six months ended June 30, 2014, the Company recognized $1.1 million and $2.2 million of share-based compensation expense related to the performance units,

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respectively. As of June 30, 2015, there was $2.2 million of total unrecognized compensation cost related to the performance units and these costs are expected to be recognized over a weighted-average period of 0.6 years.
 
As of June 30, 2015, there were 4,957,142 common shares available for future grant under the 2015 Plan.  Any performance units that convert into restricted shares will reduce the number of common shares available for future grant under the 2015 Plan.

13.       Earnings per Common Share
 
Basic earnings per common share is calculated by dividing income from continuing operations attributable to common shareholders, including gain or loss on disposal of hotel properties, by the weighted-average number of common shares outstanding during the period excluding the weighted-average number of unvested restricted shares outstanding during the period. Diluted earnings per common share is calculated by dividing income from continuing operations attributable to common shareholders, including gain or loss on disposal of hotel properties, by the weighted-average number of common shares outstanding during the period, plus any shares that could potentially be outstanding during the period. Potential shares consist of unvested restricted share grants and unvested performance units, calculated using the treasury stock method. Any anti-dilutive shares have been excluded from the diluted earnings per share calculation.
 
Unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating shares and are considered in the computation of earnings per share pursuant to the two-class method. If there were any undistributed earnings allocable to participating shares, they would be deducted from net income attributable to common shareholders utilized in the basic and diluted earnings per share calculations.
 
For the three and six months ended June 30, 2015, $0.1 million and $0.1 million represented undistributed earnings that were allocated to participating shares. For the three and six months ended June 30, 2014, $0.2 million and $0.1 million, respectively, represented undistributed earnings that were allocated to participating shares.
 
The limited partners’ outstanding limited partnership units in the Operating Partnership (which may be redeemed for common shares of beneficial interest under certain circumstances) have been excluded from the diluted earnings per share calculation as there was no effect on the amounts for the three and six months ended June 30, 2015 and 2014, since the limited partners’ share of income would also be added back to net income attributable to common shareholders.
 
The computation of basic and diluted earnings per common share is as follows (in thousands, except share and per share data):
 
For the three months ended June 30,
 
For the six months ended June 30,
 
2015
 
2014
 
2015
 
2014
Numerator:
 
 
 
 
 

 
 

Net income attributable to common shareholders
$
55,991

 
$
52,904

 
$
103,841

 
$
64,836

Less: Dividends paid on unvested restricted shares
(238
)
 
(224
)
 
(518
)
 
(470
)
Less: Undistributed earnings attributable to unvested restricted shares
(72
)
 
(184
)
 
(95
)
 
(67
)
Net income attributable to common shareholders excluding amounts attributable to unvested restricted shares
$
55,681

 
$
52,496

 
$
103,228

 
$
64,299

Denominator:
 
 
 
 
 

 
 

Weighted-average number of common shares - basic
130,670,629

 
125,260,607

 
130,969,957


123,510,507

Unvested restricted shares
188,138

 
308,580

 
232,682

 
295,684

Unvested performance units
759,926

 
905,864

 
745,293

 
890,734

Weighted-average number of common shares - diluted
131,618,693

 
126,475,051

 
131,947,932


124,696,925

 
 
 
 
 
 
 
 
Net income attributable to common shareholders - basic
$
0.43

 
$
0.42

 
$
0.79

 
$
0.52

 
 
 
 
 
 
 
 
Net income attributable to common shareholders - diluted
$
0.42

 
$
0.42

 
$
0.78

 
$
0.52