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EX-31.1 - EXHIBIT 31.1 - RLJ Lodging Trustexhibit3119302015.htm
EX-32.1 - EXHIBIT 32.1 - RLJ Lodging Trustexhibit3219302015.htm
EX-31.2 - EXHIBIT 31.2 - RLJ Lodging Trustexhibit3129302015.htm

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q 
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2015

OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                   to                  
 
Commission File Number 001-35169
  
 

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

 
Maryland
 
27-4706509
(State or Other Jurisdiction of Incorporation or Organization)
 
(I.R.S. Employer Identification No.)
 
3 Bethesda Metro Center, Suite 1000
 
 
Bethesda, Maryland
 
20814
(Address of Principal Executive Offices)
 
(Zip Code)
 
(301) 280-7777
(Registrant’s Telephone Number, Including Area Code)
  
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ý Yes  o No 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  ý Yes  o No 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer” and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
ý
 
Accelerated filer
 
o
 
 
 
 
 
 
 
Non-accelerated filer
 
o (do not check if a smaller reporting company)
 
Smaller reporting company
 
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  o Yes  ý No 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 
As of October 28, 2015, 125,725,658 common shares of beneficial interest of the Registrant, $0.01 par value per share, were outstanding.
 




TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
Consolidated Financial Statements (unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


ii


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

 
 

Investment in hotel properties, net
$
3,677,386

 
$
3,518,803

Cash and cash equivalents
140,461

 
262,458

Restricted cash reserves
57,487

 
63,054

Hotel and other receivables, net of allowance of $182 and $166, respectively
39,514

 
25,691

Deferred financing costs, net
8,976

 
11,421

Deferred income tax asset
7,517

 
7,502

Prepaid expense and other assets
35,128

 
42,115

Assets of hotel properties held for sale

 
197,335

Total assets
$
3,966,469

 
$
4,128,379

Liabilities and Equity
 

 
 

Mortgage loans
$
407,389

 
$
532,747

Term loans
1,175,000

 
1,025,000

Accounts payable and other liabilities
142,663

 
129,388

Deferred income tax liability
7,242

 
7,879

Advance deposits and deferred revenue
12,234

 
9,984

Accrued interest
4,589

 
2,783

Distributions payable
41,776

 
42,114

Total liabilities
1,790,893

 
1,749,895

 
 
 
 
Commitments and Contingencies (Note 10)


 


 
 
 
 
Equity
 
 
 

Shareholders’ equity:
 
 
 

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

 

Common shares of beneficial interest, $0.01 par value, 450,000,000 shares authorized; 125,726,018 and 131,964,706 shares issued and outstanding at September 30, 2015 and December 31, 2014, respectively
1,257

 
1,319

Additional paid-in-capital
2,219,407

 
2,419,731

Accumulated other comprehensive loss
(32,294
)
 
(13,644
)
Distributions in excess of net earnings
(30,217
)
 
(46,415
)
Total shareholders’ equity
2,158,153

 
2,360,991

Noncontrolling interest
 

 
 

Noncontrolling interest in joint venture
6,126

 
6,295

Noncontrolling interest in Operating Partnership
11,297

 
11,198

Total noncontrolling interest
17,423

 
17,493

Total equity
2,175,576

 
2,378,484

Total liabilities and equity
$
3,966,469

 
$
4,128,379

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

1


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

 
 

Operating revenue
 
 
 
 
 

 
 

Room revenue
$
253,163

 
$
261,895

 
$
747,962

 
$
727,367

Food and beverage revenue
27,027

 
27,076

 
85,607

 
77,924

Other operating department revenue
9,230

 
8,695

 
27,508

 
23,795

Total revenue
$
289,420

 
$
297,666

 
$
861,077

 
$
829,086

Expense
 

 
 

 
 

 
 

Operating expense
 

 
 

 
 

 
 

Room expense
$
56,310

 
$
57,012

 
$
165,603

 
$
158,669

Food and beverage expense
19,494

 
19,397

 
60,750

 
55,016

Management and franchise fee expense
28,985

 
30,709

 
88,704

 
86,574

Other operating expense
61,676

 
64,133

 
181,485

 
180,346

Total property operating expense
166,465

 
171,251

 
496,542

 
480,605

Depreciation and amortization
39,847

 
37,243

 
114,828

 
105,541

Impairment loss

 
9,200

 

 
9,200

Property tax, insurance and other
19,458

 
17,874

 
57,782

 
53,064

General and administrative
8,249

 
11,029

 
29,041

 
31,293

Transaction and pursuit costs
2,017

 
480

 
3,005

 
4,375

Total operating expense
236,036

 
247,077

 
701,198

 
684,078

Operating income
53,384

 
50,589

 
159,879

 
145,008

Other income
557

 
48

 
1,103

 
563

Interest income
373

 
337

 
1,181

 
1,622

Interest expense
(14,042
)
 
(13,858
)
 
(39,885
)
 
(42,646
)
Income from continuing operations before income tax expense
40,272

 
37,116

 
122,278

 
104,547

Income tax expense
(151
)
 
(374
)
 
(615
)
 
(1,162
)
Income from continuing operations
40,121

 
36,742

 
121,663

 
103,385

Gain (loss) on disposal of hotel properties
812

 
322

 
23,782

 
(975
)
Net income
40,933

 
37,064

 
145,445

 
102,410

Net income attributable to noncontrolling interests
 

 
 

 
 

 
 

Noncontrolling interest in consolidated joint venture
(49
)
 
(57
)
 
(26
)
 
(102
)
Noncontrolling interest in common units of Operating Partnership
(290
)
 
(247
)
 
(984
)
 
(712
)
Net income attributable to common shareholders
$
40,594

 
$
36,760

 
$
144,435

 
$
101,596

 
 
 
 
 
 
 
 
Basic per common share data
 
 
 
 
 

 
 

Net income per share attributable to common shareholders
$
0.32

 
$
0.28

 
$
1.10

 
$
0.80

Weighted-average number of common shares
127,663,480

 
131,106,440

 
129,855,686


126,070,309

 
 
 
 
 
 
 
 

2


Diluted per common share data
 
 
 
 
 

 
 

Net income per share attributable to common shareholders
$
0.31

 
$
0.28

 
$
1.10

 
$
0.79

Weighted-average number of common shares
128,143,154

 
132,386,843

 
130,410,613


127,297,901

 
 
 
 
 
 
 
 
Amounts attributable to the Company’s common shareholders
 
 
 
 
 

 
 

Income from continuing operations
$
39,788

 
$
36,440

 
$
120,819

 
$
102,564

Gain (loss) on disposal of hotel properties
806

 
320

 
23,616

 
(968
)
Net income attributable to common shareholders
$
40,594

 
$
36,760

 
$
144,435

 
$
101,596

 
 
 
 
 
 
 
 
Comprehensive income
 
 
 
 
 

 
 

Net income
$
40,933

 
$
37,064

 
$
145,445

 
$
102,410

Unrealized gain (loss) on interest rate derivatives
(15,166
)
 
5,567

 
(18,650
)
 
(1,346
)
Comprehensive income
25,767

 
42,631

 
126,795

 
101,064

Comprehensive income attributable to the noncontrolling interest in consolidated joint venture
(49
)
 
(57
)
 
(26
)
 
(102
)
Comprehensive income attributable to the noncontrolling interest in the Operating Partnership
(290
)
 
(247
)
 
(984
)
 
(712
)
Comprehensive income attributable to the Company
$
25,428

 
$
42,327

 
$
125,785

 
$
100,250

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

3


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

 
$
1,319

 
$
2,419,731

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

 
$
6,295

 
$
17,493

 
$
2,378,484

Net income

 

 

 
144,435

 

 
984

 
26

 
1,010

 
145,445

Unrealized loss on interest rate derivative

 

 

 

 
(18,650
)
 

 

 

 
(18,650
)
Distributions to joint venture partner

 

 

 

 

 

 
(195
)
 
(195
)
 
(195
)
Issuance of restricted stock
1,126,431

 
11

 
(11
)
 

 

 

 

 

 

Amortization of share-based compensation

 

 
10,488

 

 

 

 

 

 
10,488

Share grants to trustees
3,477

 

 
99

 

 

 

 

 

 
99

Shares acquired to satisfy minimum required federal and state tax withholding on vesting restricted stock
(363,512
)
 
(3
)
 
(11,026
)
 

 

 

 

 

 
(11,029
)
Shares acquired as part of a share repurchase program
(6,992,708
)
 
(70
)
 
(199,874
)
 

 

 

 

 

 
(199,944
)
Forfeiture of restricted stock
(12,376
)
 

 

 

 

 

 

 

 

Distributions on common shares and units

 

 

 
(128,237
)
 

 
(885
)
 

 
(885
)
 
(129,122
)
Balance at September 30, 2015
125,726,018

 
$
1,257

 
$
2,219,407

 
$
(30,217
)
 
$
(32,294
)
 
$
11,297

 
$
6,126

 
$
17,423

 
$
2,175,576

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














4


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

 
$
1,226

 
$
2,178,004

 
$
(45,522
)
 
$
(5,941
)
 
$
11,261

 
$
7,306

 
$
18,567

 
$
2,146,334

Net income

 

 

 
101,596

 

 
712

 
102

 
814

 
102,410

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

 
92

 
232,664

 

 

 

 

 

 
232,756

Unrealized loss on interest rate derivative

 

 

 

 
(1,346
)
 

 

 

 
(1,346
)
Distributions to joint venture partner

 

 

 

 

 

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

 
3

 
(3
)
 

 

 

 

 

 

Amortization of share-based compensation

 

 
11,244

 

 

 

 

 

 
11,244

Share grants to trustees
3,360

 

 
94

 

 

 

 

 

 
94

Shares acquired to satisfy minimum required federal and state tax withholding on vesting restricted stock
(154,277
)
 
(2
)
 
(4,244
)
 

 

 

 

 

 
(4,246
)
Forfeiture of restricted stock
(8,716
)
 

 

 

 

 

 

 

 

Distributions on common shares and units

 

 

 
(96,443
)
 

 
(664
)
 

 
(664
)
 
(97,107
)
Balance at September 30, 2014
132,024,296

 
$
1,319

 
$
2,417,759

 
$
(40,369
)
 
$
(7,287
)
 
$
11,309

 
$
6,226

 
$
17,535

 
$
2,388,957


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

5


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

 
 

Net income
$
145,445

 
$
102,410

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

 
 

Loss on defeasance

 
804

(Gain) loss on disposal of hotel properties
(23,782
)
 
975

Impairment loss

 
9,200

Depreciation and amortization
114,828

 
105,541

Amortization of deferred financing costs
3,111

 
3,312

Amortization of deferred management fees
595

 
719

Accretion of interest income on investment in loan
(275
)
 
(175
)
Share grants to trustees
99

 
94

Amortization of share-based compensation
10,488

 
11,244

Deferred income taxes
(652
)
 
(635
)
Changes in assets and liabilities:
 

 
 

Hotel and other receivables, net
(13,644
)
 
(14,005
)
Prepaid expense and other assets
1,773

 
(6,912
)
Accounts payable and other liabilities
(9,065
)
 
8,953

Advance deposits and deferred revenue
2,204

 
2,564

Accrued interest
1,806

 
16

Net cash flow provided by operating activities
232,931

 
224,105

Cash flows from investing activities
 

 
 

Acquisition of hotel properties, net
(143,769
)
 
(631,640
)
Proceeds from the disposal of hotel properties, net
232,938

 
124,076

Purchase deposits

 
6,246

Improvements and additions to hotel properties
(100,252
)
 
(70,987
)
Additions to property and equipment
(919
)
 
(26
)
Releases from restricted cash reserves, net
7,115

 
2,946

Net cash flow used in investing activities
(4,887
)
 
(569,385
)
Cash flows from financing activities
 

 
 

Borrowings under revolving credit facility

 
292,500

Repayments under revolving credit facility

 
(292,500
)
Borrowings on term loans
150,000

 
175,000

Proceeds from mortgage loans
7,000

 

Payment of mortgage principal
(165,747
)
 
(27,134
)
Repurchase of common shares under a share repurchase program
(199,944
)
 

Repurchase of common shares to satisfy employee withholding requirements
(11,029
)
 
(4,246
)
Distributions on common shares
(128,602
)
 
(85,532
)
Distributions on Operating Partnership units
(858
)
 
(611
)
Payment of deferred financing costs
(666
)
 
(1,579
)
Distribution to noncontrolling interest
(195
)
 
(1,182
)
Proceeds from issuance of common shares

 
232,756

Net cash flow (used in) provided by financing activities
(350,041
)
 
287,472

Net change in cash and cash equivalents
(121,997
)
 
(57,808
)
Cash and cash equivalents, beginning of period
262,458

 
332,248

Cash and cash equivalents, end of period
$
140,461

 
$
274,440

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

6


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

1.              Organization
 
RLJ Lodging Trust (the "Company") was formed as a Maryland real estate investment trust ("REIT") on January 31, 2011. The Company is a self-advised and self-administered REIT that acquires primarily premium-branded, focused-service and compact full-service hotels. The Company qualified and elected to be taxed as a REIT for U.S. federal income tax purposes, commencing with the portion of its taxable year ended December 31, 2011.
 
Substantially all of the Company’s assets are held by, and all of its operations are conducted through, RLJ Lodging Trust, L.P. (the "Operating Partnership"). The Company is the sole general partner of the Operating Partnership. As of September 30, 2015, there were 126,620,018 units of limited partnership interest in the Operating Partnership ("OP units") outstanding and the Company owned, through a combination of direct and indirect interests, 99.3% of the outstanding OP units.
 
As of September 30, 2015, the Company owned 127 hotel properties with approximately 21,100 rooms, located in 22 states and the District of Columbia, and an interest in one mortgage loan secured by a hotel.  The Company owned, through wholly-owned subsidiaries, 100% of the interests in all properties, with the exception of the DoubleTree Metropolitan Hotel-New York City, in which the Company, through wholly-owned subsidiaries, owned a 98.3% controlling interest in a joint venture, DBT Met Hotel Venture, LP, which was formed to engage in hotel operations related to the DoubleTree Metropolitan Hotel. An independent operator manages each property.
 
2.              Summary of Significant Accounting Policies
 
The Company's Annual Report on Form 10-K for the year ended December 31, 2014 contains a discussion of significant accounting policies. There have been no significant changes to the Company's significant accounting policies since December 31, 2014.

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

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

7


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

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

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

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

In August 2015, the FASB issued ASU 2015-15, Interest - Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements. ASU 2015-15 allows debt issuance costs related to a line of credit arrangement to be presented in the balance sheet as an asset and amortized ratably over the term of the line of credit arrangement, regardless of whether there are any amounts outstanding on the line of credit arrangement. The guidance is effective for fiscal years beginning after December 15, 2015 with early adoption permitted. The Company does not believe this ASU will have a material impact on its financial position, results of operations or cash flows.

In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments. ASU 2015-16 requires that the cumulative impact of a measurement period adjustment be recognized in the period in which the adjustment is identified. The guidance is effective for fiscal years beginning after December 15, 2016 with early adoption permitted. The Company does not believe this ASU will have a material impact on its financial position, results of operations or cash flows.



8


3.              Investment in Hotel Properties
 
Investment in hotel properties as of September 30, 2015 and December 31, 2014 consisted of the following (in thousands):
 
September 30, 2015
 
December 31, 2014
Land and improvements
$
735,068

 
$
706,497

Buildings and improvements
3,192,290

 
3,005,390

Furniture, fixtures and equipment
550,867

 
498,126

Intangible assets
2,507

 
2,507

 
4,480,732

 
4,212,520

Accumulated depreciation and amortization
(803,346
)
 
(693,717
)
Investment in hotels properties, net
$
3,677,386

 
$
3,518,803

 
For the three and nine months ended September 30, 2015, depreciation and amortization expense related to investment in hotel properties was approximately $39.7 million and $114.5 million, respectively. For the three and nine months ended September 30, 2014, depreciation and amortization expense related to investment in hotel properties was approximately $37.1 million and $105.2 million, respectively.
 
Impairment
 
The Company determined that there was no impairment of any assets for the three and nine months ended September 30, 2015.

In connection with the preparation of the unaudited consolidated financial statements for the three and nine months ended September 30, 2014, the Company evaluated the recoverability of the carrying values of hotels given the current expectation to sell certain hotels before the end of their previously estimated useful lives. Based on an analysis of estimated undiscounted net cash flows, the Company concluded that the carrying values of three hotels were not recoverable. The Company estimated the fair value of the hotels using a widely accepted revenue multiple approach with significant unobservable inputs, including revenue growth projections and prevailing market multiples, from third-party sources. During the three and nine months ended September 30, 2014, the Company recorded an impairment loss of $9.2 million related to these hotels.


4.              Acquisition of Hotel Properties
 
During the nine months ended September 30, 2015, the Company acquired a 100% interest in the following properties:

Property
 
Location
 
Acquisition Date
 
Management Company
 
Rooms
 
Purchase Price (in thousands)
Hyatt Place Washington DC Downtown K Street
 
Washington, DC
 
July 15, 2015
 
Aimbridge Hospitality
 
164

 
$
68,000

Homewood Suites Seattle Lynnwood
 
Lynnwood, WA
 
July 20, 2015
 
InnVentures
 
170

 
37,900

Residence Inn Palo Alto Los Altos
 
Los Altos, CA
 
September 25, 2015
 
InnVentures
 
156

 
70,000

 
 
 
 
 
 
 
 
490

 
$
175,900


9



During the nine months ended September 30, 2014, the Company acquired a 100% interest in the following properties:

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

 
$
32,496

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

 
14,753

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

 
39,274

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

 
35,985

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

 
44,159

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

 
20,833

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

 
40,570

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

 
25,817

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

 
23,525

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

 
35,088

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

 
67,000

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

 
53,000

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

 
71,700

Hyatt Atlanta Midtown
 
Atlanta, GA
 
July 14, 2014
 
Interstate Hotels and Resorts
 
194

 
49,500

DoubleTree Grand Key Resort (1)
 
Key West, FL
 
September 11, 2014
 
Interstate Hotels and Resorts
 
215

 
78,250

 
 
 
 
 
 
 
 
2,749

 
$
631,950

(1)
Purchase price includes $1.3 million paid for five condominium units.

The allocation of the purchase price for the properties acquired during the nine months ended September 30, 2015 and 2014 was as follows (in thousands):
 
For the nine months ended September 30,
 
2015
 
2014
Land and improvements
$
28,696

 
$
164,335

Buildings and improvements
135,174

 
409,506

Furniture, fixtures and equipment
12,030

 
57,571

Intangible and other assets

 
538

Total purchase price
$
175,900

 
$
631,950

 
The allocation of the purchase price for Residence Inn Palo Alto Los Altos is preliminary given the short period of time between the acquisition date and the issuance of these financial statements.

For properties acquired during the nine months ended September 30, 2015, total revenues and net loss from the date of acquisition through September 30, 2015 are included in the accompanying consolidated statements of operations for the three and nine months ended September 30, 2015 as follows (in thousands):
 
2015 acquisitions
 
For the three months ended September 30, 2015
 
For the nine months ended September 30, 2015
Revenue
$
3,905

 
$
3,905

Net loss
$
(1,674
)
 
$
(1,674
)

For properties acquired during the nine months ended September 30, 2014, total revenues and net income from the date of acquisition through September 30, 2014 are included in the accompanying consolidated statements of operations for the three and nine months ended September 30, 2014 as follows (in thousands):

10


 
2014 acquisitions
 
For the three months ended September 30, 2014
 
For the nine months ended September 30, 2014
Revenue
$
38,181

 
$
67,988

Net income
$
8,628

 
$
11,639

 
The following unaudited condensed pro forma financial information presents the results of operations as if the 2015 acquisitions had taken place on January 1, 2014 and the 2014 acquisitions had taken place on January 1, 2013. The unaudited condensed pro forma financial information is not necessarily indicative of what actual results of operations of the Company would have been assuming the 2015 and 2014 acquisitions had taken place on January 1, 2014 and 2013, respectively, nor does it purport to represent the results of operations for future periods.  The unaudited condensed pro forma financial information is as follows (in thousands, except share and per share data): 
 
For the three months ended September 30,
 
For the nine months ended September 30,
 
2015
 
2014
 
2015
 
2014
Revenue
$
293,099

 
$
305,610

 
$
874,190

 
$
881,605

Net income attributable to common shareholders
$
43,341

 
$
38,391

 
$
148,103

 
$
111,083

Net income per share attributable to common shareholders - basic
$
0.34

 
$
0.29

 
$
1.14

 
$
0.88

Net income per share attributable to common shareholders - diluted
$
0.34

 
$
0.29

 
$
1.14

 
$
0.87

Weighted average number of shares outstanding - basic
127,663,480

 
131,106,440

 
129,855,686

 
126,070,309

Weighted average number of shares outstanding - diluted
128,143,154

 
132,386,843

 
130,410,613

 
127,297,901

 
5.            Disposal of Hotel Properties
 
During the nine months ended September 30, 2015, the Company sold 22 hotel properties in three transactions for a total sales price of approximately $238.5 million. In conjunction with these transactions, the Company recorded a $23.8 million gain on disposal which is included in the accompanying consolidated statement of operations.


11


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

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

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

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

Courtyard Mesquite
 
Mesquite, TX
 
February 23, 2015
 
101

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

Courtyard Tampa Brandon
 
Tampa, FL
 
February 23, 2015
 
90

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

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

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

Hampton Inn Merrillville
 
Merrillville, IN
 
February 23, 2015
 
64

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

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

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

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

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

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

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

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

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

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

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

Residence Inn South Bend
 
South Bend, IN
 
July 7, 2015
 
80

 
 
 
 
Total
 
2,604


During the nine months ended September 30, 2014, the Company sold 14 hotel properties in four separate transactions for a total sales price of approximately $128.0 million. In conjunction with these transactions, the Company recorded a $1.0 million loss on disposal, which is included in the accompanying consolidated statement of operations. Additionally, the Company defeased the mortgage indebtedness secured by three of the properties that were sold. The cost of the defeasance was approximately $0.8 million, which is included in interest expense in the accompanying consolidated statement of operations.


12


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

Location

Disposal Date

Rooms
Courtyard Denver Southwest Lakewood

Lakewood, CO

February 20, 2014

90

Residence Inn Denver Southwest Lakewood

Lakewood, CO

February 20, 2014

102

Hyatt House Colorado Springs

Colorado Springs, CO

February 20, 2014

125

SpringHill Suites Gainesville

Gainesville, FL

February 20, 2014

126

Residence Inn Indianapolis Airport

Indianapolis, IN

February 20, 2014

95

Fairfield Inn & Suites Indianapolis Airport

Indianapolis, IN

February 20, 2014

86

Courtyard Grand Rapids Airport

Kentwood, MI

February 20, 2014

84

Hampton Inn Suites Las Vegas Red Rock Summerlin

Las Vegas, NV

February 20, 2014

106

Courtyard Austin University Area

Austin, TX

February 20, 2014

198

Fairfield Inn & Suites Austin University Area

Austin, TX

February 20, 2014

63

Hyatt House Dallas Richardson

Richardson, TX

February 20, 2014

130

Hilton Garden Inn St. George

St. George, UT

February 25, 2014

150

Hilton Mystic

Mystic, CT

March 26, 2014

182

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





Total

1,731


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

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

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

13


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

 
November 2016
 
n/a
 
$
268

 
$
287

 
$
793

 
$
906

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

 
August 2018
 
3.07%
 
3,148

 
3,137

 
9,294

 
9,090

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

 
March 2019
 
2.72%
 
2,783

 
1,748

 
7,659

 
4,898

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

 
November 2019
 
4.04%
 
2,324

 
2,320

 
6,865

 
6,870

2014 Seven-Year Term Loan (7)(8)
 
150,000

 
January 2022
 
3.43%
 
1,319

 

 
1,414

 

Total
 
$
1,175,000

 
 
 
 
 
$
9,842

 
$
7,492

 
$
26,025

 
$
21,764

 
(1)
Interest rate at September 30, 2015 gives effect to interest rate hedges, as applicable.
(2)
At September 30, 2015 there was $300.0 million of borrowing capacity on the Revolver.
(3)
Includes an unused facility fee of $0.3 million and $0.8 million for the three and nine months ended September 30, 2015, respectively, and $0.3 million and $0.8 million for the three and nine months ended September 30, 2014, respectively.
(4)
Includes interest expense related to an interest rate hedge of $1.3 million and $3.7 million for the three and nine months ended September 30, 2015, respectively, and $1.3 million and $3.8 million for the three and nine months ended September 30, 2014, respectively.
(5)
Includes interest expense related to an interest rate hedge of $1.0 million and $2.4 million for the three and nine months ended September 30, 2015, respectively.
(6)
Includes interest expense related to an interest rate hedge of $1.0 million and $3.1 million for the three and nine months ended September 30, 2015, respectively, and $1.0 million and $3.1 million for the three and nine months ended September 30, 2014, respectively.
(7)
Includes an unused facility fee of $0 and $0.1 million for the three and nine months ended September 30, 2015, respectively.
(8)
Includes interest expense related to an interest rate hedge of $0.6 million and $0.6 million for the three and nine months ended September 30, 2015, respectively.


Mortgage Loans
 
As of September 30, 2015 and December 31, 2014, the Company was subject to the following mortgage loans (in thousands):
 
 
 
 
 
 
 
 
 
 
 
 
Principal balance at
Lender
 
Number of Assets Encumbered
 
Interest Rate at September 30, 2015 (1)
 
Maturity Date
 
September 30, 2015
 
December 31, 2014
PNC Bank (2)
 
5
 
2.54
%
 
(3)
 
May 2016
 
(5)
 
$
74,000

 
$
74,000

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

 
150,000

Wells Fargo
 
4
 
3.98
%
 
(3)
 
October 2017
 
(7)
 
150,000

 
143,000

Wells Fargo
 
1
 
5.25
%
 
 
 
June 2022
 
 
 
33,389

 

Capmark Financial Group
 

 

 
 
 
May 2015
 

 

 
10,513

Capmark Financial Group
 

 

 
 
 
June 2015
 

 

 
4,561

Barclays Bank
 
 
 
 
 
 
 
June 2015
 
 
 

 
107,544

Barclays Bank
 

 

 
 
 
June 2015
 

 

 
26,775

Capmark Financial Group
 
 
 
 
 
 
 
July 2015
 
 
 

 
6,214

Barclays Bank
 

 

 
 
 
September 2015
 

 

 
10,140


 
14
 
 
 
 
 
 
 
 
 
$
407,389

 
$
532,747



14


(1)
Interest rate at September 30, 2015 gives effect to interest rate hedges, as applicable.
(2)
The five hotels encumbered by the PNC Bank loan are cross-collateralized.
(3)
Requires payments of interest only until the commencement of the extension period(s).
(4)
Requires payments of interest only until October 2015.
(5)
Maturity date may be extended for a one-year term at the Company’s option, subject to certain lender requirements.
(6)
Two of the four hotels encumbered by the Wells Fargo loan are cross-collateralized.
(7)
Maturity date may be extended for four one-year terms at the Company’s option, subject to certain lender requirements.
 
Mortgage interest expense for the three and nine months ended September 30, 2015 was $3.7 million and $12.5 million, respectively, including interest expense related to interest rate hedges of $1.2 million and $3.6 million, respectively. Mortgage interest expense for the three and nine months ended September 30, 2014 was $5.8 million and $17.4 million, respectively, including interest expense related to interest rate hedges of $0.6 million and $1.9 million, respectively. Some mortgage agreements are subject to customary financial covenants. The Company was in compliance with these covenants at September 30, 2015 and December 31, 2014.
  
7.              Derivatives and Hedging
 
The Company employs derivative instruments to hedge against interest rate fluctuations. For derivative instruments designated as cash flow hedges, unrealized gains and losses on the effective portion are reported in accumulated other comprehensive loss, a component of shareholders’ equity.  Unrealized gains and losses on the ineffective portion of all designated hedges are recognized in earnings in the current period.  For derivative instruments not designated as hedging instruments, unrealized gains or losses are recognized in earnings in the current period. At September 30, 2015 and December 31, 2014, all derivative instruments were designated as cash flow hedges.
 
At September 30, 2015 and December 31, 2014, the aggregate fair value of interest rate swap liabilities of $32.3 million and $13.6 million, respectively, was included in accounts payable and other liabilities in the accompanying consolidated balance sheets.
 

15


As of September 30, 2015 and December 31, 2014, the Company had entered into the following derivative instruments (in thousands):
 
 
Notional value at
 
 
 
 
 
Fair value at
Hedge type
September 30, 2015
 
December 31, 2014
 
Interest rate
 
Maturity
 
September 30, 2015
 
December 31, 2014
Swap-cash flow
$
275,000

 
$
275,000

 
1.12%
 
November 2017
 
$
(2,810
)
 
$
(232
)
Swap-cash flow
175,000

 
175,000

 
1.56%
 
March 2018
 
(3,694
)
 
(2,182
)
Swap-cash flow
175,000

 
175,000

 
1.64%
 
March 2018
 
(4,015
)
 
(2,596
)
Swap-cash flow
16,500

 
16,500

 
1.83%
 
September 2018
 
(487
)
 
(315
)
Swap-cash flow
16,500

 
16,500

 
1.75%
 
September 2018
 
(451
)
 
(270
)
Swap-cash flow
40,500

 
40,500

 
1.83%
 
September 2018
 
(1,196
)
 
(772
)
Swap-cash flow
41,500

 
41,500

 
1.75%
 
September 2018
 
(1,134
)
 
(678
)
Swap-cash flow
18,000

 
18,000

 
1.83%
 
September 2018
 
(531
)
 
(343
)
Swap-cash flow
17,000

 
17,000

 
1.75%
 
September 2018
 
(464
)
 
(278
)
Swap-cash flow
125,000

 
125,000

 
2.02%
 
March 2019
 
(4,743
)
 
(3,073
)
Swap-cash flow
100,000

 
100,000

 
1.94%
 
March 2019
 
(3,534
)
 
(2,145
)
Swap-cash flow
125,000

 

 
1.27%
 
March 2019
 
(1,436
)
 

Swap-cash flow (1)
100,000

 

 
1.96%
 
March 2019
 
(691
)
 

Swap-cash flow (1)
50,000

 

 
1.85%
 
March 2019
 
(272
)
 

Swap-cash flow (1)
50,000

 

 
1.81%
 
March 2019
 
(246
)
 

Swap-cash flow (1)
25,000

 

 
1.74%
 
March 2019
 
(101
)
 

Swap-cash flow
143,000

 
143,000

 
1.81%
 
October 2020
 
(4,149
)
 
(760
)
Swap-cash flow
50,000

 

 
1.61%
 
June 2021
 
(742
)
 

Swap-cash flow
50,000

 

 
1.56%
 
June 2021
 
(577
)
 

Swap-cash flow
50,000

 

 
1.71%
 
June 2021
 
(1,021
)
 

 
$
1,643,000

 
$
1,143,000

 
 
 
 
 
$
(32,294
)
 
$
(13,644
)
     
(1)
Effective between the maturity of the existing swap in November 2017 and the maturity of the debt in March 2019.

As of September 30, 2015 and December 31, 2014, there was approximately $32.3 million and $13.6 million, respectively, in net unrealized losses included in accumulated other comprehensive loss related to interest rate hedges that are effective in offsetting the variable cash flows.  There was no ineffectiveness recorded on designated hedges during the three and nine month periods ended September 30, 2015 and 2014. For the three and nine months ended September 30, 2015, approximately $5.0 million and $13.3 million, respectively, of amounts included in accumulated other comprehensive loss were reclassified into interest expense. For the three and nine months ended September 30, 2014, approximately $3.0 million and $8.7 million, respectively, of amounts included in accumulated other comprehensive loss were reclassified into interest expense. Approximately $17.5 million of the net unrealized losses included in accumulated other comprehensive loss at September 30, 2015 is expected to be reclassified into interest expense within the next 12 months.
 
8.              Fair Value
 
Fair Value Measurement
 
Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or most advantageous market.  The fair value hierarchy has three levels of inputs, both observable and unobservable:
 
Level 1 — Inputs include quoted market prices in an active market for identical assets or liabilities.
 
Level 2 — Inputs are market data, other than Level 1, that are observable either directly or indirectly.  Level 2 inputs include quoted market prices for similar assets or liabilities, quoted market prices in an inactive market, and other observable information that can be corroborated by market data.

16



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

Fixed rate mortgage notes payable — The fair value estimated at September 30, 2015 and December 31, 2014 of $36.1 million and $171.1 million, respectively, is calculated based on the net present value of payments over the term of the loans using estimated market rates for similar mortgage loans with similar terms and loan-to-value ratios. As a result, the Company determined that its fixed rate mortgage notes payable in their entirety are classified in Level 3 of the fair value hierarchy.  The carrying value of fixed rate mortgage notes payable at September 30, 2015 and December 31, 2014 was $33.4 million and $165.7 million, respectively.
 
Recurring Fair Value Measurements
 
The following table presents the Company’s fair value hierarchy for those financial liabilities measured at fair value on a recurring basis as of September 30, 2015 (in thousands):

 
Fair Value at September 30, 2015
 
Level 1
 
Level 2
 
Level 3
 
Total
Interest rate swap liability
$

 
$
(32,294
)
 
$

 
$
(32,294
)
 
The following table presents the Company’s fair value hierarchy for those financial liabilities measured at fair value on a recurring basis as of December 31, 2014 (in thousands):
 
Fair Value at December 31, 2014
 
Level 1
 
Level 2
 
Level 3
 
Total
Interest rate swap liability
$

 
$
(13,644
)
 
$

 
$
(13,644
)

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


17


9.              Income Taxes
 
The Company elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code when it filed its U.S. federal tax return for its short taxable year ended December 31, 2011.  To qualify as a REIT, the Company must meet a number of organizational and operational requirements, including a requirement that it distribute at least 90% of its adjusted taxable income to its shareholders, subject to certain adjustments and excluding any net capital gain.  The Company’s intention is to adhere to these requirements and maintain the qualification for taxation as a REIT.  As a REIT, the Company is not subject to federal corporate income tax on that portion of net income that is currently distributed to its shareholders.  However, the Company’s taxable REIT subsidiaries ("TRS") will generally be subject to federal, state, and local income taxes.
 
The Company accounts for income taxes using the asset and liability method.  Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities from a change in tax rates is recognized in earnings in the period when the new rate is enacted.
 
The Company had no accruals for tax uncertainties as of September 30, 2015 and December 31, 2014.
 
10.       Commitments and Contingencies
 
Restricted Cash Reserves
 
The Company is obligated to maintain reserve funds for capital expenditures at the hotels (including the periodic replacement or refurbishment of furniture, fixtures and equipment ("FF&E")) as determined pursuant to the management agreements, franchise agreements and/or mortgage loan documents. The management agreements, franchise agreements and/or mortgage loan documents require the Company to reserve restricted cash ranging typically from 3.0% to 5.0% of the individual hotel’s revenues and maintain the reserves in restricted cash reserve escrows. Any unexpended amounts will remain the property of the Company upon termination of the management agreements, franchise agreements or mortgage loan documents. As of September 30, 2015 and December 31, 2014, approximately $57.5 million and $63.1 million, respectively, was available in restricted cash reserves for future capital expenditures, real estate taxes and insurance.
 
Litigation
 
Neither the Company nor any of its subsidiaries are currently involved in any regulatory or legal proceedings that management believes will have a material adverse effect on the financial position, operations or liquidity of the Company.

Data Breach
 
During the first quarter of 2014, one of the Company's third-party hotel managers notified the Company of a data breach that occurred over a nine-month period ending in December 2013 affecting a number of hotels it manages, including seven hotels that are owned by the Company. During the first quarter of 2015, the same third-party hotel manager notified the Company of a second data breach that occurred over a seven-month period ending in February 2015 affecting a number of hotels it manages, including six hotels owned by the Company. The third-party hotel manager is cooperating with the relevant authorities in their investigations of these criminal cyber-attacks. The Company and its third-party hotel manager are continuing to take steps to assess and further strengthen information security systems.
The Company believes that each of the credit card companies impacted may seek to impose fines, fees or assessments in connection with the breach against various parties, including the Company. The Company may also incur other costs, including legal fees and other professional services fees, related to investigating the breach. Because the investigation into each of these matters is ongoing and certain factual and legal questions remain unanswered, the Company is unable to estimate with certainty the total costs, fines, fees or assessments that may be associated with any potential claims. However, the Company currently believes that any amounts that the Company may ultimately be required to pay as a result of this incident will not be material to its financial position, results of operations or cash flows.




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Management Agreements
As of September 30, 2015, 127 of the Company's hotel properties were operated pursuant to long-term agreements with initial terms ranging from 3 to 30 years. This number includes five Marriott and ten Hyatt hotels that receive the benefits of a franchise agreement pursuant to a management agreement. Each management company receives a base management fee generally between 3.0% and 3.5% of hotel revenues. Management agreements that include the benefits of a franchise agreement incur a base management fee generally equal to 7.0% of hotel revenues. The management companies are also eligible to receive an incentive management fee if hotel operating income, as defined in the management agreements, exceeds certain thresholds. The incentive management fee is generally calculated as a percentage of hotel operating income after the Company has received a priority return on their investment in the hotel. Management fees are included in management and franchise fee expense in the accompanying consolidated statements of operations. For the three and nine months ended September 30, 2015, the Company incurred management fee expense, including amortization of deferred management fees, of approximately $10.4 million and $33.8 million, respectively. For the three and nine months ended September 30, 2014, the Company incurred management fee expense, including amortization of deferred management fees, of approximately $11.6 million and $32.6 million, respectively.
Franchise Agreements
 
As of September 30, 2015, 112 of the Company’s hotel properties were operated under franchise agreements with initial terms ranging from 10 to 30 years. This number excludes five Marriott and ten Hyatt hotels that receive the benefits of a franchise agreement pursuant to their respective management agreements. Franchise agreements allow the properties to operate under the respective brands. Pursuant to the franchise agreements, the Company pays a royalty fee, generally between 4.0% and 6.0% of room revenue, plus additional fees for marketing, central reservation systems and other franchisor costs generally between 1.0% and 4.3% of room revenue. Certain hotels are also charged a royalty fee generally between 1.0% and 3.0% of food and beverage revenues.  Franchise fees are included in management and franchise fee expense in the accompanying consolidated statements of operations. For the three and nine months ended September 30, 2015, the Company incurred franchise fee expense of approximately $18.6 million and $54.9 million, respectively. For the three and nine months ended September 30, 2014, the Company incurred franchise fee expense of approximately $19.1 million and $53.9 million, respectively.

11.       Equity
 
On May 1, 2015, the Company's board of trustees authorized a share repurchase program to acquire up to $200.0 million of the Company's common shares through April 30, 2016. Between May 1, 2015 and September 30, 2015, the Company repurchased 6,992,708 of its common shares for approximately $199.9 million. On October 30, 2015, the Company's board of trustees extended the duration of the share repurchase program to December 31, 2016 and increased the amount by $200.0 million to a total of $400.0 million.

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

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

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

 
$
21.21

Granted (1)
290,974

 
32.16

Vested (1)
(382,475