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EX-10.1 - EX-10.1 - Sunstone Hotel Investors, Inc.sho-20150930ex101a7ee31.htm
EX-32.1 - EX-32.1 - Sunstone Hotel Investors, Inc.sho-20150930ex321afdb27.htm
EX-10.5 - EX-10.5 - Sunstone Hotel Investors, Inc.sho-20150930ex105a33a64.htm
EX-31.2 - EX-31.2 - Sunstone Hotel Investors, Inc.sho-20150930ex3121bafb6.htm
EX-31.1 - EX-31.1 - Sunstone Hotel Investors, Inc.sho-20150930ex3118be6a5.htm
EX-10.4 - EX-10.4 - Sunstone Hotel Investors, Inc.sho-20150930ex1042ea4ef.htm
EX-10.2 - EX-10.2 - Sunstone Hotel Investors, Inc.sho-20150930ex102c6f1d2.htm
EX-10.3 - EX-10.3 - Sunstone Hotel Investors, Inc.sho-20150930ex103560d26.htm

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

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

 

For the quarterly period ended September 30, 2015

 

OR

 

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

 

For the transition period from                to               

 

Commission file number 001-32319

 


 

Sunstone Hotel Investors, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 


 

 

 

 

Maryland

 

20-1296886

(State or Other Jurisdiction of
Incorporation or Organization)

 

(I.R.S. Employer
Identification Number)

 

 

 

120 Vantis, Suite 350
Aliso Viejo, California

 

92656

(Address of Principal Executive Offices)

 

(Zip Code)

 

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

 


 

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

 

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

 

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

 

 

 

 

Large accelerated filer 

 

Accelerated filer 

 

 

 

Non-accelerated filer 

 

Smaller reporting company 

(Do not check if a smaller reporting company)

 

 

 

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

 

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

208,590,736 shares of Common Stock, $0.01 par value, as of October 30, 2015

 

 


 

 

SUNSTONE HOTEL INVESTORS, INC.

QUARTERLY REPORT ON

FORM 10-Q

 

For the Quarterly Period Ended September 30, 2015

 

TABLE OF CONTENTS

 

 

 

 

 

 

Page

PART I—FINANCIAL INFORMATION 

 

 

 

Item 1. 

Financial Statements:

 

 

 

 

Consolidated Balance Sheets as of September 30, 2015 (unaudited) and December 31, 2014

 

 

 

 

Unaudited Consolidated Statements of Operations and Comprehensive Income for the Three and Nine Months Ended September 30, 2015 and 2014

 

 

 

 

Consolidated Statement of Equity for the Nine Months Ended September 30, 2015

 

 

 

 

Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2015 and 2014

 

 

 

 

Notes to Unaudited Consolidated Financial Statements

 

 

 

Item 2. 

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

20 

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures about Market Risk

42 

 

 

 

Item 4. 

Controls and Procedures

43 

 

 

 

PART II—OTHER INFORMATION 

 

 

 

Item 1. 

Legal Proceedings

43 

 

 

 

Item 1A. 

Risk Factors

43 

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

43 

 

 

 

Item 3. 

Defaults Upon Senior Securities

43 

 

 

 

Item 4. 

Mine Safety Disclosures

43 

 

 

 

Item 5. 

Other Information

43 

 

 

 

Item 6. 

Exhibits

44 

 

 

 

SIGNATURES 

45 

 

 

 

i

 


 

 

PART I—FINANCIAL INFORMATION

Item 1.Financial Statements

 

SUNSTONE HOTEL INVESTORS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

    

2015

    

2014

 

 

(unaudited)

 

 

 

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

176,190

 

$

222,096

Restricted cash

 

 

91,541

 

 

82,074

Accounts receivable, net

 

 

47,818

 

 

34,227

Inventories

 

 

1,363

 

 

1,439

Prepaid expenses

 

 

11,877

 

 

14,909

Total current assets

 

 

328,789

 

 

354,745

Investment in hotel properties, net

 

 

3,523,290

 

 

3,538,129

Deferred financing fees, net

 

 

10,637

 

 

8,201

Goodwill

 

 

990

 

 

9,405

Other assets, net

 

 

8,077

 

 

14,485

Total assets

 

$

3,871,783

 

$

3,924,965

LIABILITIES AND EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

33,401

 

$

32,577

Accrued payroll and employee benefits

 

 

30,495

 

 

31,919

Dividends payable

 

 

12,730

 

 

76,694

Other current liabilities

 

 

50,341

 

 

36,466

Current portion of notes payable

 

 

206,822

 

 

121,328

Total current liabilities

 

 

333,789

 

 

298,984

Notes payable, less current portion

 

 

1,106,341

 

 

1,307,964

Capital lease obligations, less current portion

 

 

15,575

 

 

15,576

Other liabilities

 

 

35,258

 

 

33,607

Total liabilities

 

 

1,490,963

 

 

1,656,131

Commitments and contingencies (Note 11)

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

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

 

 

 

 

 

 

8.0% Series D Cumulative Redeemable Preferred Stock, 4,600,000 shares issued and outstanding at September 30, 2015 and December 31, 2014, stated at liquidation preference of $25.00 per share

 

 

115,000

 

 

115,000

Common stock, $0.01 par value, 500,000,000 shares authorized, 207,604,391 shares issued and outstanding at September 30, 2015 and 204,766,718 shares issued and outstanding at December 31, 2014

 

 

2,076

 

 

2,048

Additional paid in capital

 

 

2,457,566

 

 

2,418,567

Retained earnings

 

 

416,804

 

 

305,503

Cumulative dividends

 

 

(662,744)

 

 

(624,545)

Total stockholders’ equity

 

 

2,328,702

 

 

2,216,573

Non-controlling interests in consolidated joint ventures

 

 

52,118

 

 

52,261

Total equity

 

 

2,380,820

 

 

2,268,834

Total liabilities and equity

 

$

3,871,783

 

$

3,924,965

 

See accompanying notes to consolidated financial statements.

2

 


 

SUNSTONE HOTEL INVESTORS, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME 

(In thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Three Months Ended

 

Nine Months Ended

 

Nine Months Ended

 

    

September 30, 2015

    

September 30, 2014

    

September 30, 2015

    

September 30, 2014

REVENUES

 

 

 

 

 

 

 

 

 

 

 

 

Room

 

$

233,787

 

$

223,877

 

$

666,756

 

$

606,944

Food and beverage

 

 

68,371

 

 

64,273

 

 

219,820

 

 

192,917

Other operating

 

 

22,437

 

 

19,633

 

 

61,671

 

 

52,257

Total revenues

 

 

324,595

 

 

307,783

 

 

948,247

 

 

852,118

OPERATING EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

Room

 

 

58,332

 

 

57,492

 

 

169,742

 

 

159,829

Food and beverage

 

 

50,381

 

 

45,649

 

 

153,412

 

 

133,666

Other operating

 

 

5,605

 

 

5,475

 

 

16,073

 

 

15,476

Advertising and promotion

 

 

15,325

 

 

14,114

 

 

46,252

 

 

40,740

Repairs and maintenance

 

 

11,859

 

 

12,053

 

 

34,798

 

 

33,640

Utilities

 

 

9,374

 

 

9,511

 

 

26,736

 

 

25,588

Franchise costs

 

 

10,591

 

 

10,022

 

 

30,009

 

 

28,360

Property tax, ground lease and insurance

 

 

25,649

 

 

22,550

 

 

72,413

 

 

63,015

Property general and administrative

 

 

37,828

 

 

32,908

 

 

109,384

 

 

93,793

Corporate overhead

 

 

6,046

 

 

7,177

 

 

27,222

 

 

21,410

Depreciation and amortization

 

 

41,331

 

 

40,000

 

 

122,911

 

 

115,588

Total operating expenses

 

 

272,321

 

 

256,951

 

 

808,952

 

 

731,105

Operating income

 

 

52,274

 

 

50,832

 

 

139,295

 

 

121,013

Interest and other income

 

 

576

 

 

981

 

 

3,350

 

 

2,588

Interest expense

 

 

(16,405)

 

 

(18,052)

 

 

(51,020)

 

 

(54,666)

Loss on extinguishment of debt

 

 

 —

 

 

(531)

 

 

(2)

 

 

(531)

Gain on sale of asset

 

 

11,682

 

 

 —

 

 

11,682

 

 

 —

Income before income taxes and discontinued operations

 

 

48,127

 

 

33,230

 

 

103,305

 

 

68,404

Income tax (provision) benefit

 

 

(938)

 

 

413

 

 

(1,256)

 

 

79

Income from continuing operations

 

 

47,189

 

 

33,643

 

 

102,049

 

 

68,483

Income from discontinued operations

 

 

15,895

 

 

 —

 

 

15,895

 

 

5,199

NET INCOME

 

 

63,084

 

 

33,643

 

 

117,944

 

 

73,682

Income from consolidated joint ventures attributable to non-controlling interests

 

 

(1,982)

 

 

(1,803)

 

 

(6,643)

 

 

(5,704)

Preferred stock dividends

 

 

(2,300)

 

 

(2,300)

 

 

(6,900)

 

 

(6,900)

INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS

 

$

58,802

 

$

29,540

 

$

104,401

 

$

61,078

COMPREHENSIVE INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS

 

$

58,802

 

$

29,540

 

$

104,401

 

$

61,078

Basic and diluted per share amounts:

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations attributable to common stockholders

 

$

0.20

 

$

0.14

 

$

0.42

 

$

0.29

Income from discontinued operations

 

 

0.08

 

 

 —

 

 

0.08

 

 

0.03

Basic and diluted income attributable to common stockholders per common share

 

$

0.28

 

$

0.14

 

$

0.50

 

$

0.32

Basic and diluted weighted average common shares outstanding

 

 

207,604

 

 

202,800

 

 

207,264

 

 

188,901

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.05

 

$

0.05

 

$

0.15

 

$

0.15

 

 

 

See accompanying notes to consolidated financial statements.

 

3

 


 

 

SUNSTONE HOTEL INVESTORS, INC.

CONSOLIDATED STATEMENT OF EQUITY

(In thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-Controlling

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interests in

 

 

 

 

 

Preferred Stock

 

Common Stock

 

Additional

 

 

 

 

 

Consolidated

 

 

 

 

    

Number of Shares

    

Amount

    

Number of Shares

    

Amount

    

Paid in Capital

    

Retained Earnings

    

Cumulative Dividends

    

    Joint Ventures    

    

Total

Balance at December 31, 2014

 

4,600,000

 

$

115,000

 

204,766,718

 

$

2,048

 

$

2,418,567

 

$

305,503

 

$

(624,545)

 

$

52,261

 

$

2,268,834

Vesting of restricted common stock (unaudited)

 

 —

 

 

 —

 

710,108

 

 

7

 

 

1,671

 

 

 —

 

 

 —

 

 

 —

 

 

1,678

Distributions to non-controlling interests (unaudited)

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(6,786)

 

 

(6,786)

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

 

 —

 

 

 —

 

2,127,565

 

 

21

 

 

37,328

 

 

 —

 

 

 —

 

 

 —

 

 

37,349

Common stock dividends and dividends payable at $0.15 per share year to date (unaudited)

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(31,299)

 

 

 —

 

 

(31,299)

Series D preferred stock dividends and dividends payable at $1.50 per share year to date (unaudited)

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(6,900)

 

 

 —

 

 

(6,900)

Net income (unaudited)

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

111,301

 

 

 —

 

 

6,643

 

 

117,944

Balance at September 30, 2015 (unaudited)

 

4,600,000

 

$

115,000

 

207,604,391

 

$

2,076

 

$

2,457,566

 

$

416,804

 

$

(662,744)

 

$

52,118

 

$

2,380,820

 

See accompanying notes to consolidated financial statements.

 

4

 


 

SUNSTONE HOTEL INVESTORS, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

Nine Months Ended

 

    

September 30, 2015

    

September 30, 2014

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

Net income

 

$

117,944

 

$

73,682

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

 

 

 

 

 

 

Bad debt expense

 

 

115

 

 

216

Gain on sale of assets, net

 

 

(27,708)

 

 

(5,281)

Loss on extinguishment of debt

 

 

2

 

 

531

Gain on redemption of note receivable

 

 

(939)

 

 

 —

Loss (gain) on derivatives, net

 

 

12

 

 

(395)

Depreciation

 

 

119,811

 

 

113,297

Amortization of franchise fees and other intangibles

 

 

6,048

 

 

5,507

Amortization and write-off of deferred financing fees

 

 

2,472

 

 

2,145

Amortization of deferred stock compensation

 

 

5,505

 

 

4,769

Changes in operating assets and liabilities:

 

 

 

 

 

 

Restricted cash

 

 

550

 

 

(803)

Accounts receivable

 

 

(13,892)

 

 

(15,302)

Inventories

 

 

76

 

 

200

Prepaid expenses and other assets

 

 

1,403

 

 

5,441

Accounts payable and other liabilities

 

 

14,075

 

 

15,475

Accrued payroll and employee benefits

 

 

(5,693)

 

 

792

Net cash provided by operating activities

 

 

219,781

 

 

200,274

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

Proceeds from sales of other assets

 

 

42,432

 

 

99

Proceeds from redemption of note receivable

 

 

1,125

 

 

 —

Restricted cash — replacement reserve

 

 

(10,017)

 

 

(3,015)

Acquisitions of hotel property and other real estate

 

 

 —

 

 

(276,558)

Renovations and additions to hotel properties

 

 

(106,575)

 

 

(93,364)

Payment for interest rate derivative

 

 

(13)

 

 

 —

Net cash used in investing activities

 

 

(73,048)

 

 

(372,838)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

Proceeds from common stock offerings

 

 

 —

 

 

264,192

Payment of common stock offering costs

 

 

 —

 

 

(614)

Proceeds from credit facility

 

 

38,000

 

 

23,250

Payments on notes payable and credit facility

 

 

(154,129)

 

 

(40,833)

Payments for costs related to extinguishment of notes payable

 

 

(2)

 

 

(25)

Payments of deferred financing costs

 

 

(4,908)

 

 

(1,332)

Dividends paid

 

 

(64,814)

 

 

(35,280)

Distributions to non-controlling interests

 

 

(6,786)

 

 

(5,730)

Net cash (used in) provided by financing activities

 

 

(192,639)

 

 

203,628

Net (decrease) increase in cash and cash equivalents

 

 

(45,906)

 

 

31,064

Cash and cash equivalents, beginning of period

 

 

222,096

 

 

104,363

Cash and cash equivalents, end of period

 

$

176,190

 

$

135,427

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

 

 

 

 

 

 

Cash paid for interest

 

$

47,319

 

$

51,654

Cash (refunds received) paid for income taxes, net

 

$

(99)

 

$

166

NONCASH INVESTING ACTIVITY

 

 

 

 

 

 

Accounts payable related to renovations and additions to hotel properties

 

$

11,450

 

$

8,863

Amortization of deferred stock compensation — construction activities

 

$

442

 

$

354

NONCASH FINANCING ACTIVITY

 

 

 

 

 

 

Issuance of common stock dividends

 

$

37,349

 

$

—  

Issuance of common stock in connection with acquisition of hotel property

 

$

—  

 

$

60,000

Dividends payable

 

$

12,730

 

$

12,570

 

 

See accompanying notes to consolidated financial statements.

5


 

SUNSTONE HOTEL INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1. Organization and Description of Business

 

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

 

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

 

 

 

 

 

 

 

 

 

    

Number of Hotels

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

 

11

Interstate Hotels & Resorts, Inc.

 

6

Highgate Hotels L.P. and an affiliate

 

4

Crestline Hotels & Resorts

 

2

Hilton Worldwide

 

2

Hyatt Corporation

 

2

Davidson Hotels & Resorts

 

1

Fairmont Hotels & Resorts (U.S.)

 

1

HEI Hotels & Resorts

 

1

 

 

 

Total hotels held for investment

 

30

In addition, prior to its sale in September 2015, the Company owned BuyEfficient, LLC (“BuyEfficient”), an electronic purchasing platform that allows members to procure food, operating supplies, furniture, fixtures and equipment.

2. Summary of Significant Accounting Policies

 

Basis of Presentation

 

The accompanying consolidated financial statements as of September 30, 2015 and December 31, 2014, and for the three and nine months ended September 30, 2015 and 2014, include the accounts of the Company, the Operating Partnership, the TRS Lessee and their subsidiaries. All significant intercompany balances and transactions have been eliminated. If the Company determines that it has an interest in a variable interest entity within the meaning of the Consolidation Topic of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”), the Company will consolidate the entity when it is determined to be the primary beneficiary of the entity. Based on its review, the Company determined that all of its subsidiaries were properly consolidated as of September 30, 2015 and December 31, 2014, and for the three and nine months ended September 30, 2015 and 2014.

 

Non-controlling interests at both September 30, 2015 and December 31, 2014 represent the outside equity interests in various consolidated affiliates of the Company.

 

The accompanying interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and in conformity with the rules and regulations of the Securities and Exchange Commission. In the Company’s opinion, the interim financial statements presented herein reflect all adjustments, consisting solely of normal and recurring adjustments, which are necessary to fairly present the interim financial statements. These financial statements should be read in conjunction with the financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014, filed with the Securities and Exchange Commission on February 19, 2015.

 

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

 

6


 

Use of Estimates

 

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

 

Fair Value of Financial Instruments

 

As of September 30, 2015 and December 31, 2014, the carrying amount of certain financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued expenses were representative of their fair values due to the short-term maturity of these instruments.

 

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

 

 

 

Level 1

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

 

 

Level 2

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

 

 

Level 3

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

 

As discussed in Note 5, the Company held two interest rate cap agreements at September 30, 2015 and December 31, 2014 to manage, or hedge, interest rate risks related to its floating rate debt. The Company records interest rate protection agreements on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in the consolidated statements of operations and comprehensive income as they are not designated as hedges. In accordance with the Fair Value Measurement and Disclosure Topic of the FASB ASC, the Company estimates the fair value of its interest rate protection agreements based on quotes obtained from the counterparties, which are based upon the consideration that would be required to terminate the agreements. Using Level 2 measurements, the Company determined that the total values of its interest rate cap agreements were de minimis at both September 30, 2015 and December 31, 2014. The interest rate cap agreements are included in other assets, net on the accompanying consolidated balance sheets.

 

On an annual basis and periodically when indicators of impairment exist, the Company analyzes the carrying values of its hotel properties and other assets using Level 3 measurements, including a discounted cash flow analysis to estimate the fair value of its hotel properties and other assets taking into account each property’s expected cash flow from operations, holding period and estimated proceeds from the disposition of the property. The factors addressed in determining estimated proceeds from disposition include anticipated operating cash flow in the year of disposition and terminal capitalization rate. The Company did not identify any properties or other assets with indicators of impairment during either the three or nine months ended September 30, 2015 and 2014.

 

On an annual basis and periodically when indicators of impairment exist, the Company also analyzes the carrying value of its goodwill using Level 3 measurements, including a discounted cash flow analysis to estimate the fair value of its reporting units. The Company did not identify any properties or other assets with indicators of goodwill impairment during either the three or nine months ended September 30, 2015 and 2014.

 

As of September 30, 2015 and December 31, 2014, 69.4% and 71.6%, respectively, of the Company’s outstanding debt had fixed interest rates. The Company’s carrying value of its debt totaled $1.3 billion and $1.4 billion as of September 30, 2015 and December 31, 2014, respectively. Using Level 3 measurements, including the Company’s weighted average cost of debt of 4.5%, the Company estimates that the fair market value of its debt totaled $1.3 billion and $1.4 billion as of September 30, 2015 and December 31, 2014, respectively.

 

The following table presents the Company’s assets measured at fair value on a recurring and non-recurring basis at September 30, 2015 and December 31, 2014 (in thousands):

 

 

7


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at Reporting Date

 

    

Total

    

Level 1

    

Level 2

    

Level 3

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2015 (unaudited):

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate cap derivative agreements

 

$

 

$

 

$

 

$

Life insurance policy (1)

 

 

984

 

 

 

 

984

 

 

Total assets at September 30, 2015

 

$

984

 

$

 

$

984

 

$

December 31, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate cap derivative agreements

 

$

 

$

 

$

 

$

Life insurance policy (1)

 

 

1,198

 

 

 

 

1,198

 

 

Total assets at December 31, 2014

 

$

1,198

 

$

 

$

1,198

 

$

 

(1)

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

 

The following table presents the Company’s liabilities measured at fair value on a recurring and non-recurring basis at September 30, 2015 and December 31, 2014 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at Reporting Date

 

    

Total

    

Level 1

    

Level 2

    

Level 3

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2015 (unaudited):

 

 

 

 

 

 

 

 

 

 

 

 

Retirement benefit agreement (1)

 

$

984

 

$

 

$

984

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

Retirement benefit agreement (1)

 

$

1,198

 

$

 

$

1,198

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Includes the retirement benefit agreement for one of the Company’s former associates, which the Company values using Level 2 measurements. The agreement calls for the balance of the retirement benefit to be paid out to the former associate in 10 annual installments, beginning in 2011. As such, the Company has paid the former associate a total of $1.0 million through September 30, 2015, which was reimbursed to the Company using funds from the related split life insurance policy noted above. These amounts are included in accrued payroll and employee benefits on the accompanying consolidated balance sheets.

 

Accounts Receivable

 

Accounts receivable primarily represents receivables from hotel guests who occupy hotel rooms and utilize hotel services. Accounts receivable also includes, among other things, receivables from tenants who lease space in the Company’s hotels. In addition, prior to the Company’s sale of BuyEfficient in September 2015 (see Notes 4 and 6), accounts receivable included receivables from customers who utilized purchase volume rebates through BuyEfficient. The Company maintains an allowance for doubtful accounts sufficient to cover potential credit losses. The Company’s accounts receivable includes an allowance for doubtful accounts of $0.2 million at both September 30, 2015 and December 31, 2014.

 

Acquisitions of Hotel Properties and Other Entities

 

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

8


 

Assets Held for Sale

 

The Company considers a hotel or other asset held for sale if it is probable that the sale will be completed within twelve months, among other requirements. A sale may be considered probable once the buyer completes its due diligence of the asset, there is an executed purchase and sale agreement between the Company and the buyer, the buyer waives any closing contingencies, and the Company has received a substantial non-refundable deposit. Depreciation ceases when a property is held for sale. Should an impairment loss be required for assets held for sale, the related assets are adjusted to their estimated fair values, less costs to sell. If the sale of a hotel or other asset represents a strategic shift that will have a major effect on the Company’s operations and financial results, the hotel or other asset is included in discontinued operations, and operating results are removed from income from continuing operations and reported as discontinued operations. The operating results for any such assets for any prior periods presented must also be reclassified as discontinued operations. As of both September 30, 2015 and December 31, 2014, the Company had no hotels or other assets held for sale.

 

Deferred Financing Fees

 

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

 

Earnings Per Share

 

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

 

The Company follows the requirements of the Earnings Per Share Topic of the FASB ASC, which states that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. For the three months ended September 30, 2015 and 2014, distributed earnings representing nonforfeitable dividends of $49,000 and $0.1 million, respectively, were allocated to the participating securities. For the nine months ended September 30, 2015 and 2014, distributed earnings representing nonforfeitable dividends of $0.2 million and $0.3 million, respectively, were allocated to the participating securities. For the three months ended September 30, 2015 and 2014, undistributed earnings representing nonforfeitable dividends of $0.2 million and $0.1 million, respectively, were allocated to the participating securities. For the nine months ended September 30, 2015 and 2014, undistributed earnings representing nonforfeitable dividends of $0.3 million and $0.2 million, respectively, were allocated to the participating securities.

 

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

 

9


 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Three Months Ended

 

Nine Months Ended

 

Nine Months Ended

 

    

September 30, 2015

    

September 30, 2014

    

September 30, 2015

    

September 30, 2014

 

 

(unaudited)

 

(unaudited)

 

(unaudited)

 

(unaudited)

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

63,084

 

$

33,643

 

$

117,944

 

$

73,682

Income from consolidated joint ventures attributable to non-controlling interests

 

 

(1,982)

 

 

(1,803)

 

 

(6,643)

 

 

(5,704)

Preferred stock dividends

 

 

(2,300)

 

 

(2,300)

 

 

(6,900)

 

 

(6,900)

Dividends paid on unvested restricted stock compensation

 

 

(49)

 

 

(94)

 

 

(162)

 

 

(291)

Undistributed income allocated to unvested restricted stock compensation

 

 

(161)

 

 

(119)

 

 

(270)

 

 

(213)

Numerator for basic and diluted income attributable to common stockholders

 

$

58,592

 

$

29,327

 

$

103,969

 

$

60,574

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average basic and diluted common shares outstanding

 

 

207,604

 

 

202,800

 

 

207,264

 

 

188,901

Basic and diluted income attributable to common stockholders per common share

 

$

0.28

 

$

0.14

 

$

0.50

 

$

0.32

 

The Company’s unvested restricted shares associated with its long-term incentive plan and shares associated with common stock options have been excluded from the above calculation of earnings per share for the three and nine months ended September 30, 2015 and 2014, as their inclusion would have been anti-dilutive.

 

Goodwill

 

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

 

In September 2015, the Company sold BuyEfficient (see Notes 4 and 6). In conjunction with this sale, the Company removed $8.4 million of goodwill related to BuyEfficient from its balance sheet.

 

Non-Controlling Interests

 

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

 

At both September 30, 2015 and December 31, 2014, the non-controlling interests reported in the Company’s financial statements include Hilton Worldwide’s 25.0% ownership in the Hilton San Diego Bayfront, as well as investors that own a $0.1 million preferred equity interest in a subsidiary captive REIT that owns the Doubletree Guest Suites Times Square.

 

Segment Reporting

 

The Company considers each of its hotels to be an operating segment, none of which meets the threshold for a reportable segment in accordance with the Segment Reporting Topic of the FASB ASC. Currently, the Company operates in one segment, hotel ownership.

10


 

3. Investment in Hotel Properties

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

    

2015

    

2014

 

 

(unaudited)

 

 

 

Land

 

$

570,011

 

$

570,011

Buildings and improvements

 

 

3,300,555

 

 

3,237,596

Furniture, fixtures and equipment

 

 

486,333

 

 

450,057

Intangibles

 

 

147,703

 

 

147,947

Franchise fees

 

 

1,167

 

 

1,167

Construction in process

 

 

78,790

 

 

68,275

Investment in hotel properties, gross

 

 

4,584,559

 

 

4,475,053

Accumulated depreciation and amortization

 

 

(1,061,269)

 

 

(936,924)

Investment in hotel properties, net

 

$

3,523,290

 

$

3,538,129

 

 

 

In June 2014, the Company acquired the land underlying the Fairmont Newport Beach, and in July 2014, the Company acquired the Wailea Beach Marriott Resort & Spa. Acquired properties are included in the Company’s results of operations and comprehensive income from the date of acquisition. The following unaudited pro forma results of operations reflect the Company’s results as if the acquisitions of the Wailea Beach Marriott Resort & Spa and the land underlying the Fairmont Newport Beach had occurred on January 1, 2014. In the Company’s opinion, all significant adjustments necessary to reflect the effects of the acquisitions have been made (in thousands, except per share data):

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

    

September 30, 2014

    

September 30, 2014

 

 

(unaudited)

 

(unaudited)

Revenues

 

$

310,268

 

$

885,487

Income attributable to common stockholders

 

$

30,390

 

$

63,508

Income per diluted share attributable to common stockholders

 

$

0.15

 

$

0.34

 

 

 

4. Disposals

 

In September 2015, the Company sold BuyEfficient for net proceeds of $26.4 million. The Company recognized a net gain on the sale of $11.7 million. The sale did not represent a strategic shift that had a major impact on the Company’s business plan or its primary markets, and therefore, did not qualify as a discontinued operation.

 

Coterminous with the sale of BuyEfficient, the Company wrote off $8.4 million of goodwill, along with net intangible assets of $6.2 million related to certain trademarks, customer and supplier relationships and intellectual property related to internally developed software (see Note 6).

 

The following table provides summary results of operations for BuyEfficient, which are included in continuing operations (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Three Months Ended

 

Nine Months Ended

 

Nine Months Ended

 

    

September 30, 2015

    

September 30, 2014

    

September 30, 2015

    

September 30, 2014

 

 

(unaudited)

 

(unaudited)

 

(unaudited)

 

(unaudited)

Revenues

 

$

2,002

 

$

1,824

 

$

5,730

 

$

5,155

Income (loss) before income taxes (1)

 

$

(1,092)

 

$

543

 

$

(352)

 

$

1,169

Gain on sale of asset

 

$

11,682

 

$

 —

 

$

11,682

 

$

 —

 

(1)

Income (loss) before income taxes for both the three and nine months ended September 30, 2015 includes $1.6 million in severance costs related to the Company’s sale of BuyEfficient. These costs are included in property general and administrative expenses on the Company’s statements of operations and comprehensive income.

 

In January 2013, the Company sold a four-hotel, 1,222-room portfolio (the “Rochester Hotels”) and a commercial laundry facility (together with the Rochester Hotels, the “Rochester Portfolio”) in Rochester, Minnesota, to an unaffiliated third party. Upon sale of the Rochester Hotels in January 2013, the Company retained a $25.0 million preferred equity investment (the “Preferred Equity Investment”) in the Rochester Hotels that yielded an 11% dividend, and provided the buyer of the Rochester Portfolio with a $3.7 million working capital loan, resulting in a deferred gain on the sale. The gain was to be deferred until the Preferred Equity Investment was either redeemed or sold and the working capital loan was repaid. Both the Preferred Equity Investment and the working capital

11


 

loan were carried net of deferred gains, resulting in zero balances on the Company’s consolidated balance sheets as of both June 30, 2015 and December 31, 2014.

 

In July 2015, the Company sold its $25.0 million Preferred Equity Investment and settled its $3.7 million working capital loan provided to the buyer of the Rochester Portfolio for an aggregate payment of $16.0 million, plus accrued interest. In accordance with the Real Estate Sales Subtopic under the Property, Plant and Equipment Topic of the FASB ASC, the Company recognized a $16.0 million gain on the sale of the Rochester Portfolio, along with related income tax expense of $0.1 million, in discontinued operations for the three and nine months ended September 30, 2015, as these additional sales proceeds could not be recognized until realized.

 

In May 2014, the Company was released from a  $7.0 million pension plan liability related to the Rochester Portfolio, causing the Company to recognize additional gain on the sale of the Rochester Portfolio of $7.0 million, which is included in discontinued operations for the three and nine months ended September 30, 2014. In addition, during the second quarter of 2014, the Company accrued $1.8 million in accordance with the Contingencies Topic of the FASB ASC related to potential future costs for certain capital expenditures at one of the hotels in the Rochester Portfolio, which is also included in discontinued operations for the three and nine months ended September 30, 2014. During the first quarter of 2015, the Company paid all remaining amounts due related to this contingency.

 

 

 

5. Interest Rate Derivative Agreements

 

At September 30, 2015 and December 31, 2014, the Company held two interest rate cap agreements to mitigate its exposure to the interest rate risks related to its floating rate debt. The first interest rate cap agreement is on the Hilton San Diego Bayfront mortgage, which mortgage currently bears an interest rate of one-month LIBOR plus 225 basis points. In April 2015, the Company and its joint venture partner entered into a new interest rate cap agreement on the Hilton San Diego Bayfront mortgage which caps the interest rate at 4.25% and matures in May 2017. The previous Hilton San Diego Bayfront cap agreement capped the LIBOR rate at 3.75% until April 2015. The notional amount of the related debt capped totaled $113.2 million and $117.0 million at September 30, 2015 and December 31, 2014, respectively.  

 

The second interest rate cap agreement is on the Doubletree Guest Suites Times Square mortgage, which mortgage currently bears an interest rate of one-month LIBOR plus 325 basis points. The Doubletree Guest Suites Times Square cap agreement caps the LIBOR rate at 4.0% until October 2015. The notional amount of the related debt capped totaled $175.6 million and $177.4 million at September 30, 2015 and December 31, 2014, respectively.

 

None of the interest rate derivative agreements qualifies for effective hedge accounting treatment. Accordingly, changes in the fair value of the Company’s interest rate derivative agreements are reflected as increases or decreases in interest expense on the Company’s statements of operations and comprehensive income. During both the three and nine months ended September 30, 2015 and 2014, changes in the fair value of the Company’s interest rate cap agreements resulted in nominal losses reflected as increases in interest expense during the respective periods. As of both September 30, 2015 and December 31, 2014, the fair values of the interest rate cap agreements were de minimis. The interest rate cap agreements are included in other assets, net on the Company’s consolidated balance sheets.

 

During the three and nine months ended September 30, 2014, the Company also had an interest rate swap agreement on the JW Marriott New Orleans mortgage, which swap agreement was terminated in December 2014. Changes in the fair value of the interest rate swap agreement resulted in net gains of $0.2 million and $0.4 million for the three and nine months ended September 30, 2014, respectively, which are reflected as decreases in interest expense for the three and nine months ended September 30, 2014.

6. Other Assets

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

    

2015

    

2014

 

 

(unaudited)

 

 

 

Property and equipment, net

 

$

1,400

 

$

2,127

Land held for development

 

 

188

 

 

188

Intangibles, net

 

 

 —

 

 

6,677

Deferred expense on straightlined third-party tenant leases

 

 

3,206

 

 

1,426

Other receivables

 

 

1,337

 

 

2,094

Other

 

 

1,946

 

 

1,973

Total other assets

 

$

8,077

 

$

14,485

 

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

12


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

    

2015

    

2014

 

 

(unaudited)

 

 

 

Cost basis

 

$

10,691

 

$

11,573

Accumulated depreciation

 

 

(9,291)

 

 

(9,446)

Property and equipment, net

 

$

1,400

 

$

2,127

 

Prior to the sale of BuyEfficient in September 2015 (see Note 4), the Company’s other assets, net included BuyEfficient’s intangible assets related to certain trademarks, customer and supplier relationships and intellectual property related to internally developed software.  Coterminous with the sale of BuyEfficient, the Company wrote off $6.2 million of net intangible assets. As of December 31, 2014, these intangible assets totaled $6.7 million, net of accumulated amortization. BuyEfficient’s intangibles were amortized using the straight-line method over their useful lives ranging between seven and 20 years. Accumulated amortization totaled zero and $2.4 million at September 30, 2015 and December 31, 2014, respectively. Amortization expense totaled $0.1 million for both the three months ended September 30, 2015 and 2014, and $0.4 million for both the nine months ended September 30, 2015 and 2014.

7. Notes Payable

 

Notes payable consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

    

2015

    

2014

 

 

(unaudited)

 

 

 

Notes payable requiring payments of interest and principal, with fixed rates ranging from 4.12% to 5.95%; maturing at dates ranging from January 2016 through January 2025. The notes are collateralized by first deeds of trust on 10 hotel properties at September 30, 2015, and 14 hotel properties at December 31, 2014.

 

$

911,574

 

$

1,023,780

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

 

 

226,146

 

 

228,296

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

 

 

175,443

 

 

177,216

Total notes payable

 

 

1,313,163

 

 

1,429,292

Less: current portion

 

 

(206,822)

 

 

(121,328)

Notes payable, less current portion

 

$

1,106,341

 

$

1,307,964

 

In April 2015, the Company entered into a $400.0 million senior unsecured credit facility, which replaced its prior $150.0 million senior unsecured credit facility. The credit facility’s interest rate is based on a pricing grid with a range of 155 to 230 basis points over LIBOR, depending on the Company’s leverage ratios, and represents a decline in pricing from the prior credit facility of approximately 30 to 60 basis points. The initial term of the credit facility is four years, expiring in April 2019, with an option to extend for an additional one year subject to the satisfaction of certain customary conditions. The credit facility also includes an accordion option, which allows the Company to request additional lender commitments for up to a total capacity of $800.0 million. During the second quarter of 2015, the Company wrote off $0.5 million in deferred financing fees related to its prior credit facility. As of September 30, 2015, the Company has no outstanding amounts due under its credit facility. During September 2015, however, the Company entered into a term loan supplement agreement under its credit facility, which provides the Company with a six month period within which the Company has the option to borrow up to $85.0 million (see Note 12).

 

In May 2015, the Company repaid $99.1 million of debt secured by four of its hotels: the Marriott Houston, the Marriott Park City, the Marriott Philadelphia and the Marriott Tysons Corner. Following the repayment of the four mortgages, the Company has 18 unencumbered hotels.

 

During the three months ended September 30, 2015, the Company paid $0.8 million in deferred financing fees related to its new credit facility and the related term loan supplement. During the nine months ended September 30, 2015, the Company paid $4.9 million in deferred financing fees related to its new credit facility and related term loan supplement, as well as its new loans entered into in December 2014 secured by the Embassy Suites La Jolla and the JW Marriott New Orleans. During both the three and nine months ended September 30, 2014, the Company paid $1.3 million in deferred financing fees related to the amendment of the loan secured by the Hilton San Diego Bayfront.

 

13


 

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