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EX-31.2 - EXHIBIT 31.2 - Carey Watermark Investors Inccwi2015q210-qexh312.htm
EX-32.0 - EXHIBIT 32.0 - Carey Watermark Investors Inccwi2015q210-qexh32.htm
EX-31.1 - EXHIBIT 31.1 - Carey Watermark Investors Inccwi2015q210-qexh311.htm


 

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 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: 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 131,957,441 shares of common stock, $0.001 par value, outstanding at August 7, 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 6/30/2015 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)
 
June 30, 2015
 
December 31, 2014
Assets
 
 
 
Investments in real estate:
 
 
 
   Hotels, at cost
$
2,111,554

 
$
1,569,200

   Accumulated depreciation
(88,914
)
 
(59,903
)
         Net investments in hotels
2,022,640

 
1,509,297

Equity investments in real estate
87,259

 
13,177

Cash
110,907

 
330,811

Intangible assets, net
92,649

 
41,869

Accounts receivable
27,154

 
14,583

Restricted cash
73,577

 
61,624

Other assets
27,398

 
30,894

Total assets
$
2,441,584

 
$
2,002,255

Liabilities and Equity
 
 
 
Liabilities:
 
 
 
Non-recourse debt
$
1,318,826

 
$
969,594

Accounts payable, accrued expenses and other liabilities
98,312

 
68,798

Due to related parties and affiliates
6,998

 
2,059

Distributions payable
17,995

 
14,859

Total liabilities
1,442,131

 
1,055,310

Commitments and contingencies (Note 10)

 


Equity:
 
 
 
CWI stockholders’ equity:
 
 
 
Common stock, $0.001 par value; 300,000,000 shares authorized; 131,541,891 and
    129,395,679 shares issued, respectively; and 130,873,237 and 129,083,977 shares
    outstanding, respectively
132

 
129

Additional paid-in capital
1,100,092

 
1,078,768

Distributions and accumulated losses
(188,810
)
 
(142,123
)
Accumulated other comprehensive loss
(1,086
)
 
(517
)
Less: treasury stock at cost, 668,654 and 311,702 shares, respectively
(6,508
)
 
(3,000
)
Total CWI stockholders’ equity
903,820

 
933,257

Noncontrolling interests
95,633

 
13,688

Total equity
999,453

 
946,945

Total liabilities and equity
$
2,441,584

 
$
2,002,255


See Notes to Consolidated Financial Statements.

 
CWI 6/30/2015 10-Q  2



CAREY WATERMARK INVESTORS INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except share and per share amounts)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2015
 
2014
 
2015
 
2014
Revenues
 
 
 
 
 
 
 
 
Hotel Revenues
 
 
 
 
 
 
 
 
Rooms
 
$
97,497

 
$
62,354

 
$
173,604

 
$
102,570

Food and beverage
 
28,297

 
16,758

 
52,129

 
29,962

Other operating revenue
 
10,397

 
7,745

 
20,246

 
14,010

Total Hotel Revenues
 
136,191

 
86,857

 
245,979

 
146,542

Operating Expenses
 
 
 
 
 
 
 
 
Hotel Expenses
 
 
 
 
 
 
 
 
Rooms
 
19,903

 
15,607

 
37,093

 
28,485

Food and beverage
 
19,765

 
12,060

 
36,792

 
22,207

Other hotel operating expenses
 
5,609

 
4,209

 
10,888

 
7,693

Sales and marketing
 
13,220

 
7,450

 
24,804

 
12,916

General and administrative
 
10,757

 
6,516

 
20,363

 
11,905

Property taxes, insurance, rent and other
 
12,543

 
6,140

 
24,072

 
10,698

Repairs and maintenance
 
4,350

 
2,926

 
8,839

 
5,525

Utilities
 
3,385

 
2,349

 
6,764

 
4,518

Management fees
 
3,180

 
2,039

 
5,808

 
3,242

Depreciation and amortization
 
16,972

 
10,566

 
31,272

 
19,485

Total Hotel Expenses
 
109,684

 
69,862

 
206,695

 
126,674

 
 
 
 
 
 
 
 
 
Other Operating Expenses
 
 
 
 
 
 
 
 
Acquisition-related expenses
 
11,105

 
14,998

 
17,493

 
15,377

Corporate general and administrative expenses
 
2,938

 
2,593

 
5,924

 
5,222

Asset management fees to affiliate and other expenses
 
2,847

 
1,602

 
5,415

 
3,019

Total Other Operating Expenses
 
16,890

 
19,193

 
28,832

 
23,618

Operating Income (Loss)
 
9,617

 
(2,198
)
 
10,452

 
(3,750
)
Other Income and (Expenses)
 
 
 
 
 
 
 
 
Interest expense
 
(12,863
)
 
(8,344
)
 
(24,358
)
 
(15,297
)
Equity in earnings of equity method investments in real
   estate
 
2,256

 
273

 
2,916

 
398

Net gain on extinguishment of debt (Note 9)
 
1,987

 

 
1,840

 

Other income
 
2,375

 
15

 
2,386

 
26

 
 
(6,245
)
 
(8,056
)
 
(17,216
)
 
(14,873
)
Income (Loss) from Operations Before Income Taxes
 
3,372

 
(10,254
)
 
(6,764
)
 
(18,623
)
Provision for income taxes
 
(2,465
)
 
(1,684
)
 
(3,476
)
 
(2,101
)
Net Income (Loss)
 
907

 
(11,938
)
 
(10,240
)
 
(20,724
)
Loss (income) attributable to noncontrolling interests (inclusive of Available Cash Distributions to a related party of $2,045, $108, $3,892 and $1,055, respectively)
 
206

 
(188
)
 
(597
)
 
24

Net Income (Loss) Attributable to CWI Stockholders
 
$
1,113

 
$
(12,126
)
 
$
(10,837
)
 
$
(20,700
)
Basic and Diluted Income (Loss) Per Share
 
$
0.01

 
$
(0.16
)
 
$
(0.08
)
 
$
(0.29
)
Basic and Diluted Weighted-Average Shares Outstanding
 
130,859,012

 
76,074,511

 
130,353,785

 
72,349,047

 
 
 
 
 
 
 
 
 
Distributions Declared Per Share
 
$
0.1375

 
$
0.1375

 
$
0.2750

 
$
0.2750


See Notes to Consolidated Financial Statements.

 
CWI 6/30/2015 10-Q  3



CAREY WATERMARK INVESTORS INCORPORATED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
(in thousands)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Net Income (Loss)
$
907

 
$
(11,938
)
 
$
(10,240
)
 
$
(20,724
)
Other Comprehensive Income (Loss)
 
 
 
 
 
 
 
Other comprehensive loss before reclassifications — unrealized loss on derivative instruments
(70
)
 
(1,548
)
 
(1,801
)
 
(2,229
)
Amounts reclassified from accumulated other comprehensive loss to Interest expense — loss on derivative instruments
403

 
414

 
807

 
826

Amounts reclassified from accumulated other comprehensive loss to Equity in earnings of equity method investment in real estate — loss on derivative instruments
133

 
135

 
265

 
267

Comprehensive Income (Loss)
1,373

 
(12,937
)
 
(10,969
)
 
(21,860
)
 
 
 
 
 
 
 
 
Amounts Attributable to Noncontrolling Interests
 
 
 
 
 
 
 
Net loss (income)
206

 
(188
)
 
(597
)
 
24

Change in unrealized (gain) loss on derivative instruments
(150
)
 
293

 
160

 
528

Comprehensive loss attributable to noncontrolling interests
56

 
105

 
(437
)
 
552

Comprehensive Income (Loss) Attributable to CWI Stockholders
$
1,429

 
$
(12,832
)
 
$
(11,406
)
 
$
(21,308
)

See Notes to Consolidated Financial Statements.

 
CWI 6/30/2015 10-Q  4



CAREY WATERMARK INVESTORS INCORPORATED
CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)
Six Months Ended June 30, 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
 
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
 
 
 
 
 
 
(10,837
)
 
 
 
 
 
(10,837
)
 
597

 
(10,240
)
Shares issued, net of offering costs
2,014,660

 
3

 
20,101

 
 
 
 
 
 
 
20,104

 
 
 
20,104

Shares issued to affiliates
96,471

 
 
 
994

 
 
 
 
 
 
 
994

 
 
 
994

Contributions from noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 

 
86,397

 
86,397

Distributions to noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 

 
(4,889
)
 
(4,889
)
Shares issued under share incentive plans
17,605

 
 
 
49

 
 
 
 
 
 
 
49

 
 
 
49

Stock-based compensation to directors
17,476

 
 
 
180

 
 
 
 
 
 
 
180

 
 
 
180

Distributions declared ($0.2750 per share)
 
 
 
 
 
 
(35,850
)
 
 
 
 
 
(35,850
)
 
 
 
(35,850
)
Other comprehensive loss:
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 

   Change in net unrealized loss on derivative instruments
 
 
 
 
 
 
 
 
(569
)
 
 
 
(569
)
 
(160
)
 
(729
)
Repurchase of shares
(356,952
)
 
 
 
 
 
 
 
 
 
(3,508
)
 
(3,508
)
 
 
 
(3,508
)
Balance at June 30, 2015
130,873,237

 
$
132

 
$
1,100,092

 
$
(188,810
)
 
$
(1,086
)
 
$
(6,508
)
 
$
903,820

 
$
95,633

 
$
999,453

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2014
67,703,835

 
$
68

 
$
525,000

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

 
$
12,746

 
$
474,285

Net loss
 
 
 
 
 
 
(20,700
)
 
 
 
 
 
(20,700
)
 
(24
)
 
(20,724
)
Shares issued, net of offering costs
12,384,238

 
13

 
111,453

 
 
 
 
 
 
 
111,466

 
 
 
111,466

Shares issued to affiliates
373,818

 

 
3,745

 
 
 
 
 
 
 
3,745

 
 
 
3,745

Contributions from noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 

 
7,886

 
7,886

Distributions to noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
 

 
(1,055
)
 
(1,055
)
Shares issued under share incentive plans
8,662

 
 
 
93

 
 
 
 
 
 
 
93

 
 
 
93

Stock-based compensation to directors
18,000

 
 
 
180

 
 
 
 
 
 
 
180

 
 
 
180

Distributions declared ($0.2750 per share)
 
 
 
 
 
 
(19,861
)
 
 
 
 
 
(19,861
)
 
 
 
(19,861
)
Other comprehensive loss:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   Change in net unrealized loss on derivative instruments
 
 
 
 
 
 
 
 
(608
)
 
 
 
(608
)
 
(528
)
 
(1,136
)
Repurchase of shares
(124,471
)
 
 
 
 
 
 
 
 
 
(1,195
)
 
(1,195
)
 
 
 
(1,195
)
Balance at June 30, 2014
80,364,082

 
$
81

 
$
640,471

 
$
(103,429
)
 
$
(744
)
 
$
(1,720
)
 
$
534,659

 
$
19,025

 
$
553,684



See Notes to Consolidated Financial Statements.

 
CWI 6/30/2015 10-Q  5



CAREY WATERMARK INVESTORS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
 
Six Months Ended June 30,
 
2015
 
2014
Cash Flows — Operating Activities
 
 
 
Net loss
$
(10,240
)
 
$
(20,724
)
Adjustments to net loss:
 
 
 
Depreciation and amortization
31,272

 
19,485

Straight-line rent adjustments
2,694

 
1,499

Equity in earnings of equity method investments in real estate in excess of distributions
   received
(2,660
)
 
(398
)
Net gain on extinguishment of debt (Note 9)
(1,982
)
 

Amortization of deferred financing costs, ground lease intangible and other
762

 
995

Amortization of stock-based compensation expense
320

 
273

Asset management fees and reimbursable costs to affiliates settled in shares

 
4,761

Increase (decrease) in due to related parties and affiliates
5,839

 
(2,174
)
Net changes in other operating assets and liabilities
3,960

 
1,368

Receipt of key money and other deferred incentive payments
2,713

 

Net Cash Provided by Operating Activities
32,678

 
5,085

 
 
 
 
Cash Flows — Investing Activities
 
 
 
Acquisition of hotels
(511,333
)
 
(415,278
)
Funds placed in escrow
(51,790
)
 
(33,630
)
Purchase of equity interest
(38,327
)
 

Funds released from escrow
36,616

 
27,952

Proceeds from sale of investment (Note 4)
28,995

 

Capital expenditures
(31,342
)
 
(10,494
)
Deposits released for hotel investments
8,600

 
8,230

Deposits for hotel investments
(2,100
)
 
(8,230
)
Distributions received from equity investments in excess of equity income
563

 
298

Net Cash Used in Investing Activities
(560,118
)
 
(431,152
)
 
 
 
 
Cash Flows — Financing Activities
 
 
 
Proceeds from mortgage financing
274,000

 
266,547

Contributions from noncontrolling interests
86,397

 
7,886

Distributions paid
(32,712
)
 
(18,737
)
Scheduled payments and prepayments of mortgage principal
(27,285
)
 
(941
)
Proceeds from issuance of shares, net of offering costs
19,823

 
108,427

Distributions to noncontrolling interests
(4,889
)
 
(1,055
)
Deferred financing costs
(3,862
)
 
(2,089
)
Purchase of treasury stock
(3,508
)
 
(1,230
)
Deposits for mortgage financing
(2,014
)
 
(647
)
Deposits released for mortgage financing
1,914

 
183

Purchase of interest rate caps
(238
)
 
(113
)
Withholding on restricted stock units
(90
)
 
(49
)
Proceeds from note payable to affiliate

 
11,000

Net Cash Provided by Financing Activities
307,536

 
369,182

 
 
 
 
Change in Cash During the Period
 
 
 
Net decrease in cash
(219,904
)
 
(56,885
)
Cash, beginning of period
330,811

 
109,373

Cash, end of period
$
110,907

 
$
52,488

See Notes to Consolidated Financial Statements.

 
CWI 6/30/2015 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 the 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 Carey Lodging Advisors, LLC, or our advisor, 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 33 hotels at June 30, 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 the hotels that we record as equity investments, or our Unconsolidated Hotels, at June 30, 2015.

Public Offerings

We raised $575.8 million through our initial public offering, which ran from September 15, 2010 through 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 ran from December 20, 2013 through December 31, 2014. From inception through June 30, 2015, we also raised $55.5 million through our distribution reinvestment plan, or DRIP. We intend to continue to invest the remaining proceeds from our follow-on offering and DRIP in lodging and lodging-related properties.

Note 2. Basis of Presentation

Basis of Presentation

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

In the opinion of management, the unaudited financial information for the interim periods presented in this Report reflects all normal and recurring adjustments necessary for a fair statement of financial position, results of operations and cash flows. Our interim consolidated financial statements should be read in conjunction with our audited consolidated financial statements and accompanying notes for the year ended December 31, 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.

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.


 
CWI 6/30/2015 10-Q  7


Notes to Consolidated Financial Statements (Unaudited)

Reclassifications 

Certain prior period amounts have been reclassified to conform to the current period presentation.  Additionally, on January 1, 2015, we adopted the Uniform System of Accounts for the Lodging Industry, Eleventh Revised Edition, which mandates a prospective reclassification of certain hotel revenue and hotel expense items within the income statement. During the three and six months ended June 30, 2014, we included rent paid to third-party condominium owners totaling $2.6 million and $5.3 million, respectively, in Room expense in our consolidated financial statements. Beginning in 2015, these expenses, which totaled $2.7 million and $5.7 million for the three and six months ended June 30, 2015, respectively, 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 portions of equity in consolidated subsidiaries that are not attributable, directly or indirectly, to us are 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 and six months ended June 30, 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. In July 2015, the Financial Accounting Standards Board affirmed its proposal to defer the effective date of the new revenue standard for all entities by one year and directed the staff to draft a final ASU for vote by written ballot. Upon issuance of the final ASU deferring the effective date, 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 6/30/2015 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 will 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 June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Amounts Included in the Consolidated Statements of Operations
 
 
 
 
 
 
 
Acquisition fees
$
8,237

 
$
10,753

 
$
13,919

 
$
10,753

Asset management fees
2,841

 
1,597

 
5,394

 
2,999

Available Cash Distribution
2,045

 
108

 
3,892

 
1,055

Personnel and overhead reimbursements
1,778

 
1,273

 
3,626

 
2,588

 
$
14,901

 
$
13,731

 
$
26,831

 
$
17,395

 
 
 
 
 
 
 
 
Other Transaction Fees Incurred
 
 
 
 
 
 
 
Capitalized acquisition fees for equity method investments
$
1,915

 
$

 
$
1,915

 
$

Capitalized loan refinancing fee
150

 

 
270

 

Offering costs
43

 
1,591

 
171

 
2,317

Selling commissions and dealer manager fees

 
9,073

 

 
10,845

 
$
2,108

 
$
10,664

 
$
2,356

 
$
13,162

 
June 30, 2015
 
December 31, 2014
Amounts Due to Related Parties and Affiliates
 
 
 
Other amounts due to our advisor
$
4,300

 
$
965

Reimbursable costs
1,872

 
338

Due to joint venture partners and other
715

 
367

Due to WPC
67

 
67

Organization and offering costs due to our advisor
44

 
322

 
$
6,998

 
$
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.

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

 
CWI 6/30/2015 10-Q  9


Notes to Consolidated Financial Statements (Unaudited)

three and six months ended June 30, 2015 and in shares of our common stock for the three and six months ended June 30, 2014. For the six months ended June 30, 2015, $1.0 million in asset management fees were settled in shares, which related to fees incurred during the fourth quarter of 2014. For the six months ended June 30, 2014, $2.8 million in asset management fees were settled in shares. At June 30, 2015, our advisor owned 1,501,028 shares (1.1%) of our outstanding common stock. Asset management fees are included in Asset management fees to affiliate and other expenses in the consolidated financial statements. No disposition fees were recognized during the three and six months ended June 30, 2015 and 2014.

Personnel and Overhead Reimbursements/Reimbursable Costs

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, as well as rent expense. These reimbursements are included in Corporate general and administrative expenses and Due to related parties and affiliates in the consolidated financial statements. We paid these reimbursements in cash for the three and six months ended June 30, 2015 and in shares of our common stock, at the election of our advisor, for the three and six months ended June 30, 2014. For the six months ended June 30, 2015, less than $0.1 million in reimbursements were settled in shares that related to reimbursements incurred during the fourth quarter of 2014. For the six months ended June 30, 2014, $0.9 million of such fees were settled in shares.

Available Cash Distributions

Carey Watermark Holdings’ special general partner interest entitles it to receive distributions of 10% of Available Cash, as defined in the agreement of limited partnership of the Operating Partnership, or Available Cash Distributions, generated by the Operating Partnership, subject to certain limitations. In addition, in the event of the dissolution of the Operating Partnership, Carey Watermark Holdings will be entitled to receive distributions of up to 15% of net proceeds, provided certain return thresholds are met for the initial investors in the Operating Partnership. Available Cash Distributions by the Operating Partnership are included in Loss (income) 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.

Other Amounts Due to Our Advisor

At June 30, 2015, this balance primarily represented acquisition fees of $2.2 million payable to the advisor in relation to the Ritz-Carlton Fort Lauderdale acquired on June 30, 2015, which was paid in the third quarter of 2015 (Note 4). The remainder of the balance at June 30, 2015 and the entire balance at December 31, 2014 primarily represents asset management fees payable.

Due to Joint Venture Partners and Other

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.

Organization and Offering Costs

Pursuant to our advisory agreement, we were liable for certain expenses related to our public offerings, including filing, legal, accounting, printing, advertising, transfer agent, and escrow fees, which were 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)

 
CWI 6/30/2015 10-Q  10


Notes to Consolidated Financial Statements (Unaudited)

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 June 30, 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 June 30, 2015, less than $0.1 million was unpaid and included in Due to related parties and affiliates in the consolidated financial statements. During the six months ended June 30, 2015, we charged $0.2 million of deferred offering costs to stockholder’s equity.

Jointly-Owned Investments and Other Transactions with Affiliates

At June 30, 2015, we owned interests in two jointly-owned investments with our affiliate, Carey Watermark Investors 2 Incorporated, or CWI 2, which is a publicly-owned, non-listed REIT that is also advised by our advisor and invests in lodging and lodging-related properties: the Ritz-Carlton Key Biscayne, a Consolidated Hotel, and the Marriott Sawgrass Golf Resort & Spa, an Unconsolidated Hotel. See Notes 4 and 5 for further discussion.

In September 2014, our board of directors and the board of directors of WPC approved unsecured loans to us and our affiliate, CWI 2, 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 respective investment committees 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 June 30, 2015, we had not borrowed any amounts under this unsecured loan but $102.5 million had been borrowed by CWI 2. On July 29, 2015, CWI 2 made a repayment of $25.0 million on the unsecured loan.

Note 4. Net Investments in Hotels

Net investments in hotels are summarized as follows (in thousands):
 
June 30, 2015
 
December 31, 2014
Buildings
$
1,553,552

 
$
1,226,880

Land
376,712

 
214,522

Furniture, fixtures and equipment
121,142

 
88,464

Building and site improvements
49,795

 
21,989

Construction in progress
10,353

 
17,345

Hotels, at cost
2,111,554

 
1,569,200

Less: Accumulated depreciation
(88,914
)
 
(59,903
)
Net investments in hotels
$
2,022,640

 
$
1,509,297


2015 Acquisitions

During the six months ended June 30, 2015, we acquired five Consolidated Hotels, with real estate and other hotel assets, net of assumed liabilities and contributions from noncontrolling interests, totaling $424.9 million. In connection with these acquisitions, we expensed acquisition costs of $17.4 million, including acquisition fees of $13.9 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.

 
CWI 6/30/2015 10-Q  11


Notes to Consolidated Financial Statements (Unaudited)


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 June 30, 2015 (in thousands):
 
2015 Acquisitions (a)
 
Westin Minneapolis
 
Westin
Pasadena
 
Hilton Garden Inn/Homewood Suites Atlanta Midtown
 
Ritz-Carlton Key Biscayne (b)
 
Ritz-Carlton
Fort Lauderdale
Acquisition date
February 12, 2015
 
March 19, 2015
 
April 29, 2015
 
May 29, 2015
 
June 30, 2015
Cash consideration
$
66,176

 
$
141,738

 
$
58,492

 
$
68,925

 
$
89,605

Assets acquired at fair value:
 
 
 
 
 
 
 
 
 
Land
6,405

 
22,785

 
5,700

 
117,200

 
36,500

Building and site improvements
57,105

 
112,215

 
47,680

 
144,282

 
60,022

Furniture, fixtures and equipment
2,846

 
7,379

 
4,135

 
9,907

 
3,484

Construction in progress

 

 

 
450

 

Intangible assets

 

 
720

 
43,100

 
7,500

Accounts receivable
97

 
94

 
100

 
7,957

 
2,894

Other assets
164

 
608

 
328

 
1,703

 
637

Liabilities assumed at fair value:
 
 
 
 
 
 
 
 
 
Non-recourse debt

 

 

 
(171,500
)
 

Accounts payable, accrued expenses and other liabilities
(441
)
 
(1,343
)
 
(171
)
 
(12,935
)
 
(6,274
)
Noncontrolling interests at fair value

 

 

 
(71,239
)
 
(15,158
)
Net assets acquired at fair value
$
66,176

 
$
141,738

 
$
58,492

 
$
68,925

 
$
89,605

 
From Acquisition date through June 30, 2015
Revenues
$
6,199

 
$
8,189

 
$
2,087

 
$
6,363

 
$
52

Net income (loss)
$
1,123

 
$
1,741

 
$
481

 
$
29

 
$
(26
)
___________
(a)
The purchase price was allocated to the assets acquired and liabilities assumed based upon their preliminary fair values. The information in this table is based on the current best estimates of management. We are in the process of finalizing our assessment of the fair value of the assets acquired and liabilities assumed. Accordingly, the fair value of these assets acquired and liabilities assumed are subject to change.
(b)
We acquired a 47.34% interest in the joint venture owning this hotel, with our affiliate, CWI 2, acquiring a 19.33% interest. The remaining interest was retained by the seller.

Disposition

On April 1, 2015, we sold a 50% controlling interest in the Marriott Sawgrass Golf Resort & Spa, which we acquired in October 2014, to our affiliate, CWI 2, for a contractual sales price of $37.2 million. Our remaining 50% interest in the hotel is accounted for as an equity method investment (Note 5). We recognized other income of $2.4 million in our consolidated financial statements resulting primarily from the reimbursement we received from CWI 2 of 50% of the acquisition costs we incurred on our acquisition of the hotel in October 2014, which were expensed in prior periods.

Total revenue and net income from operations from this hotel prior to the date of sale were $13.3 million and $2.4 million, respectively, for the six months ended June 30, 2015.


 
CWI 6/30/2015 10-Q  12


Notes to Consolidated Financial Statements (Unaudited)

Pro Forma Financial Information

The following unaudited consolidated pro forma financial information presents our financial results as if our acquisitions, which are accounted for as business combinations, that we completed during the six months ended June 30, 2015 and 2014, and the new financings related to these acquisitions, had occurred on January 1, 2014 and 2013, respectively. 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 June 30,
 
Six Months Ended June 30,
 
 
2015
 
2014
 
2015
 
2014
Pro forma total revenues
 
$
162,406

 
$
147,222

 
$
325,666

 
$
282,588

 
 
 
 
 
 
 
 
 
Pro forma net income (loss)
 
$
12,235

 
$
4,398

 
$
13,132

 
$
(14,024
)
Pro forma (income) loss from continuing operations attributable to noncontrolling interests
 
(4,708
)
 
383

 
(8,112
)
 
(599
)
Pro forma income (loss) from continuing operations attributable to CWI stockholders
 
$
7,527

 
$
4,781

 
$
5,020

 
$
(14,623
)
Pro forma loss per share:
 
 
 
 
 
 
 
 
Basic and diluted pro forma net income (loss) attributable to
   CWI stockholders
 
$
0.06

 
$
0.04

 
$
0.04

 
$
(0.12
)
Basic and diluted pro forma weighted-average shares
   outstanding
 
130,859,012

 
125,196,796

 
130,353,785

 
125,582,601


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 Consolidated Hotel acquisitions that we completed during the six months ended June 30, 2015 and 2014 were issued on January 1, 2014 and 2013, respectively. All acquisition costs for our acquisitions completed during the six months ended June 30, 2015 and 2014 are presented as if they were incurred on January 1, 2014 and 2013, respectively.

Construction in Progress

At June 30, 2015 and December 31, 2014, construction in progress, recorded at cost, was $10.4 million and $17.3 million, respectively, and related primarily to renovations at Hawks Cay Resort, Marriott Boca Raton at Boca Center, Fairmont Sonoma Mission Inn & Spa, Sheraton Austin Hotel at the Capitol and Renaissance Chicago Downtown at June 30, 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 $0.2 million and $1.2 million during the three and six months ended June 30, 2015, respectively, and $0.1 million during both the three and six months ended June 30, 2014.

During the six months ended June 30, 2015 and 2014, accrued capital expenditures increased by $3.3 million and decreased by $1.3 million, respectively, representing non-cash investing activity.

Note 5. Equity Investments in Real Estate

At June 30, 2015, we owned equity interests in four Unconsolidated Hotels, three of which with unrelated third parties and one with an affiliate, CWI 2. We do not control the ventures that own these hotels, but we exercise significant influence over them. We account for these investments under the equity method of accounting (i.e., at cost, increased or decreased by our share of earnings or losses, less distributions, plus contributions and other adjustments required by equity method accounting, such as basis differences from acquisition costs paid to 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 if the venture’s capital structure gives different rights and priorities to its investors. We have priority returns on several of our equity method investments. Therefore, we follow the hypothetical liquidation at book value method in

 
CWI 6/30/2015 10-Q  13


Notes to Consolidated Financial Statements (Unaudited)

determining our share of these 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.

Ritz-Carlton Philadelphia Venture

On May 15, 2015, we purchased a 60% equity interest in an existing venture that owns and operates the Ritz-Carlton Philadelphia. The joint venture is not a VIE as there is sufficient equity at risk, the equity holders as a group have the characteristics of sufficient financial control, and neither party holds voting rights that are disproportionately less than its obligation to absorb expected losses. The Ritz-Carlton Philadelphia is undergoing a comprehensive public space and guestroom renovation estimated at $21.4 million. At the date we purchased our equity interest in the venture, the hotel planned to, and as of the date of this Report, is currently incurring capital expenditures, therefore capital expenditure decisions are expected to be made in the ordinary course of business. The annual operating budget for the hotel may not be effective without approval by the venture partner. Given the substantial renovations discussed above, the operations of the hotel are evolving and the budget is expected to fluctuate from year to year, and as a result, the above decisions will need to be made in the ordinary course of the operations of the hotel as contemplated in Accounting Standards Codification, or ASC, 810-20-55-9.

Based on the foregoing analysis, we determined that each of the rights outlined above represent substantive participating rights under ASC 810-20-25-16 and that the presumption of control has been overcome as detailed in ASC 810-20-25-11 and we further concluded that we should account for our interests in the Ritz-Carlton Philadelphia venture under the equity method of accounting.

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
June 30, 2015
 
Carrying Value at
 
 
 
 
 
 
 
 
June 30, 2015
 
December 31, 2014
Unconsolidated Hotels
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Hyatt French Quarter Venture (b)
 
LA
 
254

 
80%
 
$
13,000

 
9/6/2011
 
Full-service
 
Completed
 
$
5,358

 
$
4,197

Westin Atlanta Venture (c)
 
GA
 
372

 
57%
 
13,170

 
10/3/2012
 
Full-service
 
Completed
 
8,200

 
8,980

Marriott Sawgrass Golf Resort & Spa Venture (d)
 
FL
 
511

 
50%
 
33,758

 
10/3/2014
 
Resort
 
In progress
 
34,956

 

Ritz-Carlton Philadelphia Venture
 
PA
 
299

 
60%
 
38,327

 
5/15/2015
 
Full-service
 
Planned Future
 
38,745

 

 
 
 
 
1,436

 
 
 
$
98,255

 
 
 
 
 
 
 
$
87,259

 
$
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 and $0.3 million from this investment during the three and six months ended June 30, 2015, respectively.
(c)
We received cash distributions of $0.3 million and $0.6 million from this investment during the three and six months ended June 30, 2015, respectively.
(d)
On October 3, 2014, we acquired the Marriott Sawgrass Golf Resort & Spa. On April 1, 2015, we sold a 50% controlling interest to CWI 2 and began accounting for our interest in the hotel as an equity method investment. Our initial investment represents our remaining 50% interest in the Marriott Sawgrass Golf Resort & Spa venture.


 
CWI 6/30/2015 10-Q  14


Notes to Consolidated Financial Statements (Unaudited)

The following table sets forth our share of equity earnings from our Unconsolidated Hotels, which are based on the hypothetical liquidation at book value model, as well as certain depreciation and amortization adjustments related to basis differentials from acquisitions of investments (in thousands):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
Venture
 
2015
 
2014
 
2015
 
2014
Hyatt French Quarter Venture
 
$
683

 
$
559

 
$
1,518

 
$
930

Westin Atlanta Venture
 
(42
)
 
(286
)
 
(217
)
 
(532
)
Marriott Sawgrass Golf Resort & Spa Venture
 
1,197

 

 
1,197

 

Ritz-Carlton Philadelphia Venture

 
418

 

 
418

 

 
 
$
2,256

 
$
273

 
$
2,916

 
$
398


No other-than-temporary impairment charges were recognized during either the six months ended June 30, 2015 or 2014.

At June 30, 2015 and December 31, 2014, the unamortized basis differences on our equity investments were $3.4 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 six months ended June 30, 2015 and 2014.

Note 6. Intangible Assets and Liabilities

In connection with our investment activity during the six months ended June 30, 2015, we recorded intangible assets totaling $50.6 million, representing condo rental programs at the Ritz-Carlton Key Biscayne and Ritz-Carlton Fort Lauderdale with a weighted average life of 50.7 years and a below-market ground lease of $0.7 million at Hilton Garden Inn/Homewood Suites Atlanta Midtown with a life of 9.6 years.

Intangible assets and liabilities, included in Intangible assets, net and Accounts payable, accrued expenses and other liabilities, respectively, in the consolidated financial statements, are summarized as follows (dollars in thousands):
 
 
 
June 30, 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/condo rental programs
45 55
 
$
82,300

 
$
(1,268
)
 
$
81,032

 
$
31,700

 
$
(837
)
 
$
30,863

Below-market hotel ground leases and parking garage lease
9.6 - 92.5
 
11,657

 
(240
)
 
11,417

 
10,936

 
(167
)
 
10,769

In-place leases
1 – 21
 
317

 
(117
)
 
200

 
317

 
(80
)
 
237

Total intangible assets, net
 
 
$
94,274

 
$
(1,625
)
 
$
92,649

 
$
42,953

 
$
(1,084
)
 
$
41,869

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amortizable Intangible Liability
 
 
 
 
 
 
 
 
 
 
 
 
 
Above-market hotel ground lease
85
 
$
(2,100
)
 
$
26

 
$
(2,074
)
 
$
(2,100
)
 
$
15

 
$
(2,085
)

Net amortization of intangibles was $0.3 million for each of the three months ended June 30, 2015 and 2014 and $0.5 million and $0.7 million for the six months ended June 30, 2015 and 2014, respectively. Amortization of in-place lease intangibles and the villa/condo rental programs 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, rent and other in the consolidated financial statements.


 
CWI 6/30/2015 10-Q  15


Notes to Consolidated Financial Statements (Unaudited)

Based on the intangible assets recorded at June 30, 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)
 
$
888

 
$
85

 
$
973

2016
 
1,765

 
170

 
1,935

2017
 
1,729

 
170

 
1,899

2018
 
1,718

 
170

 
1,888

2019
 
1,718

 
170

 
1,888

Thereafter
 
73,412

 
8,580

 
81,992

Total
 
$
81,230

 
$
9,345

 
$
90,575


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. 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 and six months ended June 30, 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 $1.3 billion and $1.0 billion, and an estimated fair value of $1.3 billion and $990.1 million, at June 30, 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 June 30, 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

 
CWI 6/30/2015 10-Q  16


Notes to Consolidated Financial Statements (Unaudited)

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 the change in fair value of any derivative 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
 
June 30, 2015
 
December 31, 2014
 
June 30, 2015
 
December 31, 2014
Interest rate swaps
 
Other assets
 
$
83

 
$
346

 
$

 
$

Interest rate caps
 
Other assets
 
198

 
218

 

 

Interest rate swaps
 
Accounts payable, accrued expenses and other liabilities
 

 

 
(1,024
)
 
(690
)
 
 
 
 
$
281

 
$
564

 
$
(1,024
)
 
$
(690
)

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 June 30, 2015 and December 31, 2014, no cash collateral had been posted nor received for any of our derivative positions.

We recognized unrealized losses of $0.1 million and $1.5 million in Other comprehensive loss on derivatives in connection with our interest rate swaps during the three months ended June 30, 2015 and 2014, respectively, and losses of $1.8 million and $2.2 million during the six months ended June 30, 2015 and 2014, respectively.

We reclassified losses of $0.4 million from Other comprehensive loss on derivatives into interest expense during both the three months ended June 30, 2015 and 2014, respectively, and losses of $0.8 million during both the six months ended June 30, 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 June 30, 2015, we estimated that an additional $1.2 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 a 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.


 
CWI 6/30/2015 10-Q  17


Notes to Consolidated Financial Statements (Unaudited)

The interest rate swaps and caps that we had outstanding on our Consolidated Hotels at June 30, 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
 
June 30, 2015
Interest rate swaps
 
4
 
$
193,680

 
$
(941
)
Interest rate caps
 
6
 
153,000

 
198

 
 
 
 
 
 
$
(743
)

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 any collateral received. No collateral was received as of June 30, 2015. At June 30, 2015, our total credit exposure was $0.2 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 June 30, 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 $1.1 million and $0.8 million at June 30, 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 June 30, 2015 or December 31, 2014, we could have been required to settle our obligations under these agreements at their aggregate termination value of $1.1 million and $0.8 million, respectively.


 
CWI 6/30/2015 10-Q  18


Notes to Consolidated Financial Statements (Unaudited)

Note 9. Debt

The following table presents the non-recourse debt on our Consolidated Hotel investments (dollars in thousands):
 
 
 
 
 
 
 
 
Carrying Amount at
Consolidated Hotels
 
Interest Rate
 
Rate Type
 
Current Maturity Date
 
June 30, 2015
 
December 31, 2014
Hawks Cay Resort (a) (b)
 
5.74%
 
Variable
 
11/2016
 
$
79,000

 
$
79,000

Courtyard Pittsburgh Shadyside (b) (c)
 
4.09%
 
Variable
 
3/2017
 
20,600

 
21,000

Ritz-Carlton Key Biscayne (d)
 
6.09%
 
Fixed
 
6/2017
 
171,172

 

Sanderling Resort (a) (b)
 
4.68%
 
Variable
 
10/2017
 
22,000

 
22,000

Courtyard San Diego Mission Valley (a) (b)
 
4.60%
 
Variable
 
12/2017
 
49,880

 
50,420

Hampton Inn Memphis Beale Street
 
4.07%
 
Fixed
 
3/2018
 
21,309

 
21,585

Hampton Inn Atlanta Downtown
 
4.12%
 
Fixed
 
3/2018
 
13,211

 
13,370

Hampton Inn Birmingham Colonnade
 
4.12%
 
Fixed
 
3/2018
 
9,132

 
9,241

Hampton Inn Frisco Legacy Park
 
4.12%
 
Fixed
 
3/2018
 
8,937

 
9,045

Hilton Garden Inn Baton Rouge Airport
 
4.12%
 
Fixed
 
3/2018
 
9,520

 
9,635

Hampton Inn Boston Braintree (a) (b) (e)
 
3.19%
 
Variable
 
3/2018
 
12,000

 
9,500

Lake Arrowhead Resort and Spa (a) (b) (f)
 
2.44%
 
Variable
 
6/2018
 
15,000

 
17,955

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

 
44,000

Ritz-Carlton Fort Lauderdale (a) (b) (g)
 
2.59%
7.42%
 
Variable
 
7/2018
 
70,000

 

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

 
67,000

Marriott Boca Raton at Boca Center (b)
 
3.43%
 
Variable
 
7/2019
 
41,000

 
34,000

Hilton Garden Inn New Orleans French Quarter/CBD
 
5.30%
 
Fixed
 
7/2019
 
10,715

 
10,793

Marriott Sawgrass Golf Resort & Spa (b) (h)
 
4.03%
 
Variable
 
11/2019
 

 
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

 

Westin Pasadena
 
3.83%
 
Fixed
 
5/2022
 
88,500

 

Hilton Garden Inn/Homewood Suites
  Atlanta Midtown
 
3.75%
 
Fixed
 
5/2022
 
38,000

 

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 (i)
 
4.61%
 
Fixed
 
9/2038
 
51,500

 
51,500

 
 
 
 
 
 
 
 
$
1,318,826

 
$
969,594

___________
(a)
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.
(b)
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 June 30, 2015 through the use of an interest rate cap or swap, when applicable.
(c)
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.

 
CWI 6/30/2015 10-Q  19


Notes to Consolidated Financial Statements (Unaudited)

(d)
In connection with our assumption of this loan at the time of acquisition in May 2015, we recorded a fair market value adjustment that resulted in a premium of $7.5 million, which will be amortized over the remaining term of the loan.
(e)
During the first quarter of 2015, we completed the refinancing of our Hampton Inn Boston Braintree mortgage loan and recognized a loss of $0.1 million on the extinguishment of debt within Other income in the consolidated financial statements.
(f)
During the second quarter of 2015, we completed the refinancing of our Lake Arrowhead Resort and Spa mortgage loan and recognized a gain of $2.0 million on the extinguishment of debt within Other income in the consolidated financial statements.
(g)
The debt is comprised of a senior mortgage loan for $49.0 million with an interest rate of 2.59% and a mezzanine loan for $21.0 million with an interest rate of 7.42%. Both loans have effectively been capped through the use of interest rate caps and both have a maturity date of July 2018.
(h)
On April 1, 2015, we sold a 50% controlling interest in the hotel to CWI 2. Our remaining 50% interest in the hotel is accounted for as an equity method investment (Note 5).
(i)
The mortgage loan includes a call option by the lender, with the earliest repayment date being September 1, 2018.

Financing Activity During