Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
x | 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 |
Commission file number: 000-55394
AMERICAN REALTY CAPITAL HOSPITALITY TRUST, INC.
(Exact Name of Registrant as Specified in its Charter)
Maryland | 80-0943668 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |
405 Park Avenue, 14th Floor New York, New York | 10022 | |
(Address of Principal Executive Office) | (Zip Code) | |
(212) 415-6500
(Registrant’s Telephone Number, Including Area Code)
Not applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
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 x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x
No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (check one):
Large accelerated filer o | Accelerated filer o | |
Non-accelerated filer o | Smaller reporting company x | |
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
The number of shares of the registrant's common stock, $0.01 par value, outstanding as of November 1, 2015 was 33,797,374.
TABLE OF CONTENTS
Page | |
Condensed Consolidated Balance Sheets as of September 30, 2015 (Unaudited) and December 31, 2014 | |
Condensed Consolidated/Combined Statements of Operations and Comprehensive Income (Loss) (Unaudited) of the Successor for the Three Months Ended September 30, 2015 and the Three Months Ended September 30, 2014 and for the Nine Months Ended September 30, 2015 and for the period of March 21 to September 30, 2014 and of the Predecessor for the Period from January 1 to March 20, 2014 | |
Condensed Consolidated Statement of Changes in Equity (Unaudited) for the Nine Months Ended September 30, 2015 | |
Condensed Consolidated/Combined Statements of Cash Flows (Unaudited) of the Successor for the Nine Months Ended September 30, 2015 and for the period of March 21 to September 30, 2014 and of the Predecessor for the Period from January 1 to March 20, 2014 | |
Notes to Condensed Consolidated/Combined Financial Statements (Unaudited) | |
i
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
AMERICAN REALTY CAPITAL HOSPITALITY TRUST, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except for share and per share data)
September 30, 2015 | December 31, 2014 | ||||||
(unaudited) | |||||||
ASSETS | |||||||
Real estate investments: | |||||||
Land | $ | 286,540 | $ | 12,061 | |||
Buildings and improvements | 1,498,155 | 81,176 | |||||
Furniture, fixtures and equipment | 140,383 | 5,308 | |||||
Total real estate investments | 1,925,078 | 98,545 | |||||
Less: accumulated depreciation and amortization | (48,586 | ) | (2,796 | ) | |||
Total real estate investments, net | 1,876,492 | 95,749 | |||||
Cash and cash equivalents | 89,659 | 131,861 | |||||
Acquisition deposits | 73,144 | 75,000 | |||||
Restricted cash | 73,833 | 3,437 | |||||
Investments in unconsolidated entities | 3,455 | 5,475 | |||||
Below-market lease asset, net | 10,324 | 8,060 | |||||
Prepaid expenses and other assets | 42,320 | 11,801 | |||||
Deferred financing fees, net | 21,351 | 1,991 | |||||
Total Assets | $ | 2,190,578 | $ | 333,374 | |||
LIABILITIES, NON-CONTROLLING INTEREST AND EQUITY | |||||||
Mortgage notes payable | $ | 1,187,040 | $ | 45,500 | |||
Promissory notes payable | — | 64,849 | |||||
Mandatorily redeemable preferred securities | 356,337 | — | |||||
Accounts payable and accrued expenses | 61,127 | 14,219 | |||||
Due to affiliates | 4,204 | 7,011 | |||||
Total Liabilities | $ | 1,608,708 | $ | 131,579 | |||
Equity | |||||||
Preferred stock, $0.01 par value, 50,000,000 shares authorized, none issued and outstanding | — | — | |||||
Common stock, $0.01 par value, 300,000,000 shares authorized, 30,668,065 and 10,163,206 shares issued and outstanding, respectively | 307 | 102 | |||||
Additional paid-in capital | 669,319 | 221,379 | |||||
Deficit | (90,672 | ) | (19,686 | ) | |||
Total equity of American Realty Capital Hospitality Trust, Inc. stockholders | 578,954 | 201,795 | |||||
Non-controlling interest - consolidated variable interest entity | 2,916 | — | |||||
Total Equity | $ | 581,870 | $ | 201,795 | |||
Total Liabilities, Non-controlling Interest and Equity | $ | 2,190,578 | $ | 333,374 | |||
The accompanying notes are an integral part of these statements.
1
AMERICAN REALTY CAPITAL HOSPITALITY TRUST, INC.
CONDENSED CONSOLIDATED/COMBINED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except for share and per share data)
(Unaudited)
Successor | Successor | Successor | Successor | Predecessor | ||||||||||||||||
Three Months Ended September 30, 2015 | Three Months Ended September 30, 2014 | Nine Months Ended September 30, 2015 | For the Period from March 21 to September 30, 2014 | For the Period from January 1 to March 20, 2014 | ||||||||||||||||
Revenues | ||||||||||||||||||||
Rooms | $ | 126,205 | $ | 8,954 | $ | 302,706 | $ | 18,462 | $ | 6,026 | ||||||||||
Food and beverage | 4,041 | 1,545 | 11,202 | 3,566 | 1,543 | |||||||||||||||
Other | 2,606 | 888 | 7,260 | 2,139 | 676 | |||||||||||||||
Total revenue | $ | 132,852 | $ | 11,387 | $ | 321,168 | $ | 24,167 | $ | 8,245 | ||||||||||
Operating expenses | ||||||||||||||||||||
Rooms | 29,752 | 1,840 | 68,395 | 3,753 | 1,405 | |||||||||||||||
Food and beverage | 3,410 | 1,159 | 8,933 | 2,497 | 1,042 | |||||||||||||||
Management fees | 5,433 | 456 | 12,965 | 967 | 289 | |||||||||||||||
Other property-level operating expenses | 50,793 | 4,246 | 120,321 | 9,077 | 3,490 | |||||||||||||||
Depreciation and amortization | 19,817 | 907 | 46,438 | 1,919 | 994 | |||||||||||||||
Rent | 1,865 | 1,311 | 4,693 | 2,664 | 933 | |||||||||||||||
Total operating expenses | 111,070 | 9,919 | 261,745 | 20,877 | 8,153 | |||||||||||||||
Income from operations | $ | 21,782 | $ | 1,468 | $ | 59,423 | $ | 3,290 | $ | 92 | ||||||||||
Interest expense | (23,081 | ) | (2,070 | ) | (56,724 | ) | (4,313 | ) | (531 | ) | ||||||||||
Acquisition and transaction related costs | (698 | ) | (2,965 | ) | (39,129 | ) | (7,610 | ) | — | |||||||||||
Other income (expense) | (200 | ) | — | 2,001 | — | — | ||||||||||||||
Equity in earnings (losses) of unconsolidated entities | 228 | 261 | 236 | 2,607 | (166 | ) | ||||||||||||||
General and administrative | (2,020 | ) | (50 | ) | (5,984 | ) | (1,519 | ) | — | |||||||||||
Total other expenses, net | (25,771 | ) | (4,824 | ) | (99,600 | ) | (10,835 | ) | (697 | ) | ||||||||||
Net loss before taxes | $ | (3,989 | ) | $ | (3,356 | ) | $ | (40,177 | ) | $ | (7,545 | ) | $ | (605 | ) | |||||
Provision for income taxes | 939 | 193 | 4,295 | 1,368 | — | |||||||||||||||
Net loss and comprehensive loss | $ | (4,928 | ) | $ | (3,549 | ) | $ | (44,472 | ) | $ | (8,913 | ) | $ | (605 | ) | |||||
Less: Net income attributable to non-controlling interest | $ | 154 | $ | — | $ | 148 | $ | — | $ | — | ||||||||||
Net loss attributable to American Realty Capital Hospitality Trust, Inc. | $ | (5,082 | ) | $ | (3,549 | ) | $ | (44,620 | ) | $ | (8,913 | ) | $ | (605 | ) | |||||
Basic and diluted net loss per share | $ | (0.20 | ) | $ | (1.27 | ) | $ | (2.15 | ) | $ | (8.13 | ) | NA | |||||||
Basic and diluted weighted average shares outstanding | 25,076,350 | 2,792,350 | 20,715,216 | 1,096,566 | NA | |||||||||||||||
___________________________________________________
NA - not applicable
The accompanying notes are an integral part of these statements.
2
AMERICAN REALTY CAPITAL HOSPITALITY TRUST, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(In thousands, except for share data)
(Unaudited)
Common Stock | ||||||||||||||||||||||||
Number of Shares | Par Value | Additional Paid-in Capital | Deficit | Total Equity of American Realty Capital Hospitality Trust, Inc. Stockholders | Non-controlling Interest | Total Non-controlling Interest and Equity | ||||||||||||||||||
Balance, December 31, 2014 | 10,163,206 | $ | 102 | $ | 221,379 | $ | (19,686 | ) | $201,795 | $ | — | $ | 201,795 | |||||||||||
Issuance of common stock, net | 20,024,109 | 200 | 498,085 | — | 498,285 | — | 498,285 | |||||||||||||||||
Net loss attributable to American Realty Capital Hospitality Trust, Inc. | — | — | — | (44,620 | ) | (44,620) | — | (44,620 | ) | |||||||||||||||
Net income attributable to non-controlling interest | — | — | — | — | — | 148 | 148 | |||||||||||||||||
Non-controlling interest - consolidated variable interest entity | — | — | — | — | — | 2,768 | 2,768 | |||||||||||||||||
Dividends paid or declared | — | — | — | (26,366 | ) | (26,366) | — | (26,366 | ) | |||||||||||||||
Common stock issued through Distribution Reinvestment Plan | 480,750 | 5 | 11,418 | — | 11,423 | — | 11,423 | |||||||||||||||||
Share-based payments | — | — | 66 | — | 66 | — | 66 | |||||||||||||||||
Common stock offering costs, commissions and dealer manager fees | — | — | (61,629 | ) | — | (61,629) | — | (61,629 | ) | |||||||||||||||
Balance, September 30, 2015 | 30,668,065 | $ | 307 | $ | 669,319 | $ | (90,672 | ) | $578,954 | $ | 2,916 | $ | 581,870 | |||||||||||
The accompanying notes are an integral part of these statements.
3
AMERICAN REALTY CAPITAL HOSPITALITY TRUST, INC.
CONDENSED CONSOLIDATED/COMBINED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Successor | Successor | Predecessor | |||||||||||
Nine Months Ended September 30, 2015 | For the Period from March 21 to September 30, 2014 | For the Period from January 1 to March 20, 2014 | |||||||||||
Cash flows from operating activities: | |||||||||||||
Net loss | $ | (44,472 | ) | $ | (8,913 | ) | $ | (605 | ) | ||||
Adjustments to reconcile net loss to net cash used in operating activities: | |||||||||||||
Depreciation and amortization | 46,438 | 1,919 | 994 | ||||||||||
Amortization of deferred financing costs | 7,764 | 400 | 75 | ||||||||||
Change in fair value of contingent consideration | (1,720 | ) | — | — | |||||||||
Distributions from variable interest entities | 1,079 | 257 | — | ||||||||||
Equity in (earnings) losses of unconsolidated entities | (236 | ) | (2,607 | ) | 166 | ||||||||
Other adjustments, net | 87 | 601 | — | ||||||||||
Changes in assets and liabilities: | |||||||||||||
Prepaid expenses and other assets | (19,175 | ) | (2,917 | ) | (581 | ) | |||||||
Restricted cash | (27,950 | ) | (604 | ) | — | ||||||||
Due to affiliates | (3,417 | ) | 2,752 | — | |||||||||
Accounts payable and accrued expenses | 44,907 | 6,079 | (605 | ) | |||||||||
Net cash provided by (used in) operating activities | $ | 3,305 | $ | (3,033 | ) | $ | (556 | ) | |||||
Cash flows from investing activities: | |||||||||||||
Acquisition of hotel assets, net of cash received | (375,777 | ) | (41,390 | ) | — | ||||||||
Real estate investment improvements and purchases of property and equipment | (17,386 | ) | (1,399 | ) | (83 | ) | |||||||
Acquisition deposits | (73,144 | ) | (75,000 | ) | — | ||||||||
Increase in restricted cash related to real estate improvements | (39,699 | ) | (2,204 | ) | (468 | ) | |||||||
Net cash used in investing activities | $ | (506,006 | ) | $ | (119,993 | ) | $ | (551 | ) | ||||
Cash flows from financing activities: | |||||||||||||
Proceeds from issuance of common stock, net | 495,774 | 123,177 | — | ||||||||||
Payments of offering costs | (61,131 | ) | (12,987 | ) | — | ||||||||
Dividends/Distributions paid | (12,164 | ) | (500 | ) | (800 | ) | |||||||
Mandatorily redeemable preferred securities redemptions | (90,760 | ) | — | — | |||||||||
Repayments of promissory and mortgage notes payable | (64,849 | ) | — | (137 | ) | ||||||||
Affiliate financing advancement | — | 2,570 | — | ||||||||||
Proceeds from affiliate note payable used to fund acquisition deposit | — | 40,500 | — | ||||||||||
Repayment of affiliate note payable used to fund acquisition deposit | — | (40,500 | ) | — | |||||||||
Payment of deferred consideration payable | (3,500 | ) | — | — | |||||||||
Proceeds from mortgage note payable | 227,000 | 45,500 | — | ||||||||||
Proceeds from promissory note payable | — | 1,775 | — | ||||||||||
Deferred financing fees | (27,124 | ) | (1,671 | ) | — | ||||||||
Restricted cash for debt service | (2,747 | ) | — | — | |||||||||
Net cash provided by (used in) financing activities | $ | 460,499 | $ | 157,864 | $ | (937 | ) | ||||||
Net change in cash and cash equivalents | (42,202 | ) | 34,838 | (2,044 | ) | ||||||||
Cash and cash equivalents, beginning of period | 131,861 | — | 10,520 | ||||||||||
Cash and cash equivalents, end of period | $ | 89,659 | $ | 34,838 | $ | 8,476 | |||||||
Supplemental disclosure of cash flow information: | |||||||||||||
Interest paid | $ | 44,617 | $ | 3,424 | $ | 458 | |||||||
4
AMERICAN REALTY CAPITAL HOSPITALITY TRUST, INC.
CONDENSED CONSOLIDATED/COMBINED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Successor | Successor | Predecessor | |||||||||||
Nine Months Ended September 30, 2015 | For the Period from March 21 to September 30, 2014 | For the Period from January 1 to March 20, 2014 | |||||||||||
Income taxes paid | $ | 4,870 | $ | 586 | — | ||||||||
Non-cash investing and financing activities: | |||||||||||||
Reclassification of deferred offering costs to additional paid-in capital | — | $ | 1,505 | — | |||||||||
Offering costs payable | $ | 650 | $ | 2,019 | — | ||||||||
Real estate investment improvements and purchases of property and equipment in accounts payable and accrued expenses | $ | 5,321 | $ | 753 | — | ||||||||
Proceeds receivable from stock sales (1) | $ | 2,516 | $ | 1,801 | — | ||||||||
Seller financing of real estate investments | — | $ | 58,074 | — | |||||||||
Seller financing of investment in unconsolidated entities | — | $ | 5,000 | — | |||||||||
Mortgage and mezzanine debt assumed on real estate investments | $ | 904,185 | — | — | |||||||||
Preferred securities issued in acquisition of property and equipment | $ | 447,097 | — | — | |||||||||
Contingent consideration on acquisition | — | $ | 4,100 | — | |||||||||
Deferred consideration on acquisition | — | $ | 3,400 | — | |||||||||
Dividends declared but not paid | $ | 4,150 | $ | 612 | — | ||||||||
Common stock issued through distribution reinvestment plan | $ | 11,418 | $ | 301 | — | ||||||||
___________________________________________________
(1) | The proceeds receivable from the sale of shares of common equity were received by the Company prior to the filing date of this Quarterly Report on Form 10-Q. |
The accompanying notes are an integral part of these statements.
5
AMERICAN REALTY CAPITAL HOSPITALITY TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
September 30, 2015
(Unaudited)
Note 1 - Organization
American Realty Capital Hospitality Trust, Inc. (the "Company") was incorporated on July 25, 2013 as a Maryland corporation and qualified as a real estate investment trust ("REIT") for U.S. federal income tax purposes beginning with the taxable year ended December 31, 2014. The Company was formed primarily to acquire lodging properties in the midscale limited service, extended stay, select service, upscale select service, and upper upscale full service segments within the hospitality sector. The Company has no limitation as to the number of franchise or license brands with which the Company's hotels will be associated. All such properties may be acquired by the Company alone or jointly with another party. The Company may also originate or acquire first mortgage loans secured by real estate and invest in other real estate-related debt. In March 2014, the Company completed its first acquisition comprising investments in six hotels (the "Barceló Portfolio"), and in February 2015, the Company completed its second acquisition (the "Grace Acquisition") comprising investments in 116 hotels (the "Grace Portfolio"). As of September 30, 2015, the Company had acquired or had an interest in a total of 122 properties. In June 2015, the Company entered into a series of agreements (collectively, the “SWN Acquisitions”), to acquire an aggregate of 44 hotels from three different independent parties for an aggregate contract purchase price of $739.8 million. In October and November 2015, the Company completed the acquisition of 12 of these hotels for an aggregate purchase price of $198.7 million, exclusive of closing costs. (See Note 13 - Subsequent Events)
On January 7, 2014, the Company commenced its initial public offering ("IPO" or the "Offering") on a "reasonable best efforts" basis of up to 80,000,000 shares of common stock, $0.01 par value per share, at a price of $25.00 per share, subject to certain volume and other discounts, pursuant to a registration statement on Form S-11 (File No. 333-190698), as amended (the "Registration Statement"), filed with the U.S. Securities and Exchange Commission (the "SEC") under the Securities Act of 1933, as amended. The Registration Statement also covers up to 21,052,631 shares of common stock available pursuant to the Distribution Reinvestment Plan (the "DRIP") under which the Company's common stockholders may elect to have their distributions reinvested in additional shares of the Company's common stock.
Until the filing of the Company's second quarterly financial filing with the SEC, pursuant to the Securities Exchange Act of 1934, as amended, following the earlier to occur of (i) the Company's acquisition of at least $2.0 billion in total investment portfolio assets or (ii) January 7, 2016 (the "NAV pricing date"), the per share purchase price in the IPO will be up to $25.00 per share (including the maximum allowed to be charged for commissions and fees) and shares issued under the DRIP will initially be equal to $23.75 per share, which is 95% of the initial per share offering price in the IPO. Thereafter, the per share purchase price will vary quarterly and will be equal to the Company's net asset value ("NAV") per share plus applicable commissions and fees in the case of the primary offering, and the per share purchase price in the DRIP will be equal to the NAV per share. On February 3, 2014, the Company received and accepted subscriptions in excess of the minimum offering amount of $2.0 million in Offering proceeds, broke escrow and issued shares of common stock to the initial investors who were admitted as stockholders. As of September 30, 2015, the Company had approximately 30.7 million shares of common stock outstanding and had received total gross proceeds of approximately $762.6 million, including shares issued under the DRIP.
Substantially all of the Company's business is conducted through American Realty Capital Hospitality Operating Partnership, L.P. (the "OP"), a Delaware limited partnership. The Company is the sole general partner and holds substantially all of the units of limited partner interest in the OP ("OP Units"). Additionally, American Realty Capital Hospitality Advisors, LLC (the "Advisor") contributed $2,020 to the OP in exchange for 90 OP Units, which represents a nominal percentage of the aggregate OP ownership. The holders of OP Units have the right to convert OP Units for the cash value of a corresponding number of shares of common stock or, at the option of the OP, a corresponding number of shares of common stock of the Company in accordance with the limited partnership agreement of the OP. The remaining rights of the limited partner interests are limited, however, and do not include the ability to replace the general partner or to approve the sale, purchase or refinancing of the OP's assets.
The Company has no direct employees. The Company has retained the Advisor to manage certain aspects of its affairs on a day-to-day basis. American Realty Capital Hospitality Properties, LLC or one of its subsidiaries (collectively, the "Property Manager"), serves as the Company's property manager and the Property Manager has retained Crestline Hotels & Resorts, LLC ("Crestline"), an entity under common control with the parent of American Realty Capital IX, LLC (the "Sponsor") to provide services, including locating investments, negotiating financing and operating certain hotel assets in the Company's portfolio. Realty Capital Securities, LLC (the "Dealer Manager"), an entity under common control with the parent of the Sponsor, serves as the dealer manager of the Offering, and certain of its affiliates provide other services to the Company. The Advisor, American
6
AMERICAN REALTY CAPITAL HOSPITALITY TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
September 30, 2015
(Unaudited)
Realty Capital Hospitality Special Limited Partner, LLC (the "Special Limited Partner"), the Property Manager, Crestline and the Dealer Manager and its affiliates are related parties and receive fees, distributions and other compensation for services related to the Offering and the investment and management of the Company's assets.
The Company, directly or indirectly through its taxable REIT subsidiaries, enters into agreements with the Property Manager, which, in turn, engages Crestline or a third-party sub-property manager to manage the Company’s hotel properties. Crestline is a leading hospitality management company in the United States, and as of September 30, 2015, has 87 hotels and 13,523 rooms under management in 25 states and the District of Columbia. As of September 30, 2015, 53 of the Company's hotels are managed by Crestline, and 69 of the Company's hotels are managed by third-party sub-property managers.
Note 2 - Summary of Significant Accounting Policies
The accompanying condensed consolidated financial statements of the Company included herein were prepared in accordance with the instructions to this Quarterly Report on Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by United States Generally Accepted Accounting Principles ("GAAP") for complete financial statements. The information furnished includes all adjustments and accruals of a normal recurring nature, which, in the opinion of management, are necessary for a fair presentation of results for the interim periods. All inter-company accounts and transactions have been eliminated in consolidation.
The operating results presented for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto as of and for the year ended December 31, 2014, which are included in the Company's Annual Report on Form 10-K filed with the SEC on March 31, 2015.
Principles of Consolidation/Combination and Basis of Presentation
The accompanying condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All inter-company accounts and transactions have been eliminated in consolidation. In determining whether the Company has a controlling financial interest in a joint venture and the requirement to consolidate the accounts of that entity, management considers factors such as percentage ownership interest, authority to make decisions and contractual and substantive participating rights of the other partners or members as well as whether the entity is a variable interest entity for which the Company is the primary beneficiary.
The Predecessor consists of the Barceló Portfolio, which consists of hospitality assets and operations owned by Barceló Crestline Corporation and certain consolidated subsidiaries ("BCC") that had been maintained in various legal entities until the Company acquired them from BCC on March 21, 2014. Historically, financial statements had not been prepared for the Predecessor as a discrete stand-alone entity. The accompanying condensed consolidated financial statements for the Predecessor, for the period from January 1 to March 20, 2014 have been derived from the historical accounting records of BCC and reflect revenue and expenses and cash flows directly attributable to the Predecessor, as well as allocations deemed reasonable by management, to present the combined results of operations and cash flows of the Predecessor on a stand-alone basis.
Use of Estimates
The preparation of the accompanying condensed 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 from those estimates. Management makes significant estimates regarding revenue recognition, purchase price allocations to record investments in real estate, the useful lives of real estate and real estate taxes, as applicable.
Real Estate Investments
The Company allocates the purchase price of properties acquired in real estate investments to tangible and identifiable intangible assets acquired based on their respective fair values at the date of acquisition. Tangible assets include land, land improvements, buildings and fixtures. The Company utilizes various estimates, processes and information to determine the fair value. Estimates of value are made using customary methods, including data from appraisals, comparable sales, discounted cash
7
AMERICAN REALTY CAPITAL HOSPITALITY TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
September 30, 2015
(Unaudited)
flow analysis and other methods. Amounts allocated to land, land improvements, and buildings and fixtures are based on purchase price allocation studies performed by independent third parties or on the Company’s analysis of comparable properties in the Company’s portfolio. Identifiable intangible assets and liabilities, as applicable, are typically related to contracts, including operating lease agreements, ground lease agreements and hotel management agreements, which will be recorded at fair value. The Company also considers information obtained about each property as a result of the Company’s pre-acquisition due diligence in estimating the fair value of the tangible and intangible assets acquired and intangible liabilities assumed.
Investments in real estate that are not considered to be business combinations under GAAP are recorded at cost. Improvements and replacements are capitalized when they extend the useful life of the asset. Costs of repairs and maintenance are expensed as incurred. Depreciation of the Company's assets is computed using the straight-line method over the estimated useful lives of up to 40 years for buildings, 15 years for land improvements, five years for furniture, fixtures and equipment, and the shorter of the useful life or the remaining lease term for leasehold interests.
The Company is required to make subjective assessments as to the useful lives of the Company’s assets for purposes of determining the amount of depreciation to record on an annual basis with respect to the Company’s investments in real estate. These assessments have a direct impact on the Company’s net income because if the Company were to shorten the expected useful lives of the Company’s investments in real estate, the Company would depreciate these investments over fewer years, resulting in more depreciation expense and lower net income on an annual basis.
Below-Market Lease
The below-market lease intangibles are based on the difference between the market rent and the contractual rent as of the date the Company assumed the obligations and are discounted to a present value using an interest rate reflecting the Company's current assessment of the risk associated with the leases assumed. Acquired lease intangible assets are amortized over the remaining lease term. The amortization of below-market leases is recorded as an increase to rent expense on the condensed consolidated statements of operations.
Impairment of Long Lived Assets and Investments in Unconsolidated Entities
When circumstances indicate the carrying value of a property may not be recoverable, the Company reviews the asset for impairment. This review is based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property’s use and eventual disposition. The estimates consider factors such as expected future operating income, market and other applicable trends and residual value, as well as the effects of demand, competition and other factors. If impairment exists, due to the inability to recover the carrying value of a property, an impairment loss will be recorded to the extent that the carrying value exceeds the estimated fair value of the property for properties to be held and used. For properties held for sale, the impairment loss is the adjustment to fair value less the estimated cost to dispose of the asset. These assessments have a direct impact on net income because recording an impairment loss results in an immediate negative adjustment to net income. No such impairment losses were recorded in the periods presented.
Cash and Cash Equivalents
Cash and cash equivalents include cash in bank accounts as well as investments in highly-liquid money market funds with original maturities of three months or less.
Restricted Cash
Restricted cash consists of amounts required under mortgage agreements for future capital improvements to owned assets, future interest and property tax payments and cash flow deposits while subject to mortgage agreement restrictions. For purposes of the statement of cash flows, changes in restricted cash caused by changes to the amount needed for future capital improvements are treated as investing activities, changes related to future debt service payments are treated as financing activities, and changes related to real estate tax payments and excess cash flow deposits are treated as operating activities.
Deferred Financing Fees
Deferred financing fees represent commitment fees, legal fees and other costs associated with obtaining commitments for financing. These fees are amortized over the terms of the respective financing agreements using the effective interest method. Unamortized deferred financing fees are expensed when the associated debt is refinanced or repaid before maturity. Costs
8
AMERICAN REALTY CAPITAL HOSPITALITY TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
September 30, 2015
(Unaudited)
incurred in seeking financial transactions that do not close are expensed in the period in which it is determined that the financing will not be successful.
Variable Interest Entities
Accounting Standards Codification ("ASC") 810, Consolidation contains the guidance surrounding the definition of variable interest entities ("VIE"), the definition of variable interests and the consolidation rules surrounding VIEs. In general, VIEs are entities in which equity investors lack the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. The Company has variable interests in VIEs through its investments in entities which own the Westin Virginia Beach Town Center (the "Westin Virginia Beach") and the Hilton Garden Inn Blacksburg.
Once it is determined that the Company holds a variable interest in an entity, GAAP requires that the Company perform a qualitative analysis to determine (i) which entity has the power to direct the matters that most significantly impact the VIE’s financial performance; and (ii) if the Company has the obligation to absorb the losses of the VIE that could potentially be significant to the VIE or the right to receive the benefits of the VIE that could potentially be significant to the VIE. The entity that has both of these characteristics is deemed to be the primary beneficiary and is required to consolidate the VIE.
The Company holds an interest in BSE/AH Blacksburg Hotel, LLC (the "HGI Blacksburg JV"), an entity that owns the assets of the Hilton Garden Inn Blacksburg, and an interest in TCA Block 7 Hotel, LLC (the "Westin Virginia Beach JV"), an entity that owns the assets of the Westin Virginia Beach.
During the quarter ended June 30, 2015, upon the acquisition of an additional equity interest in the HGI Blacksburg JV, the Company concluded that it was the primary beneficiary, with the power to direct activities that most significantly impact its economic performance, and therefore consolidated the entity in its condensed consolidated financial statements subsequent to the acquisition (See Note 3 - Business Combinations).
The Company has concluded it is not the primary beneficiary with the power to direct activities that most significantly impact economic performance of the Westin Virginia Beach JV, and has therefore not consolidated the entity. The Company has accounted for the entity under the equity method of accounting and included it in investments in unconsolidated entities in the accompanying condensed consolidated balance sheets.
Revenue Recognition
Hotel revenue is recognized as earned, which is generally defined as the date upon which a guest occupies a room or utilizes the hotel services.
Income Taxes
The Company qualified to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, commencing with its tax year ended December 31, 2014. In order to qualify as a REIT, the Company must annually distribute to its stockholders 90% of its REIT taxable income (which does not equal net income as calculated in accordance with GAAP), determined without regard to the deduction for dividends paid and excluding net capital gain, and must comply with various other organizational and operational requirements. The Company will generally not be subject to federal corporate income tax on the portion of its REIT taxable income that it distributes to its stockholders. The Company may be subject to certain state and local taxes on its income, property tax and federal income and excise taxes on its undistributed income. The Company's hotels are leased to taxable REIT subsidiaries ("TRSs") which are wholly owned subsidiaries of the OP. The TRSs are subject to federal, state and local income taxes.
Earnings/Loss per Share
The Company calculates basic income or loss per share by dividing net income or loss for the period by the weighted-average shares of its common stock outstanding for a respective period. Diluted income per share takes into account the effect of dilutive instruments, such as stock options and unvested stock awards, except when doing so would be anti-dilutive.
Fair Value Measurements
9
AMERICAN REALTY CAPITAL HOSPITALITY TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
September 30, 2015
(Unaudited)
In accordance with ASC 820, Fair Value Measurement, certain assets and liabilities are recorded at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability between market participants in an orderly transaction on the measurement date. The market in which the reporting entity would sell the asset or transfer the liability with the greatest volume and level of activity for the asset or liability is known as the principal market. When no principal market exists, the most advantageous market is used. This is the market in which the reporting entity would sell the asset or transfer the liability with the price that maximizes the amount that would be received or minimizes the amount that would be paid. Fair value is based on assumptions market participants would make in pricing the asset or liability. Generally, fair value is based on observable quoted market prices or derived from observable market data when such market prices or data are available. When such prices or inputs are not available, the reporting entity should use valuation models.
The Company’s financial instruments recorded at fair value on a recurring basis are categorized based on the priority of the inputs used to measure fair value. The inputs used in measuring fair value are categorized into three levels, as follows:
• | Level 1 - Inputs that are based upon quoted prices for identical instruments traded in active markets. |
• | Level 2 - Inputs that are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar investments in markets that are not active, or models based on valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the investment. |
• | Level 3 - Inputs that are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models, and similar techniques. |
The determination of where an asset or liability falls in the hierarchy requires significant judgment and considers factors specific to the asset or liability. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety.
Advertising Costs
Advertising costs for hotel operations are expensed as incurred, and are reflected in other property-level operating expenses in the condensed consolidated statements of operations and comprehensive income (loss). Advertising expense was $3.8 million for the three months ended September 30, 2015, and $0.1 million for the three months ended September 30, 2014. Advertising expense was $9.1 million for the nine months ended September 30, 2015, and $0.3 million combined between the Predecessor and the Company for the nine months ended September 30, 2014.
Allowance for Doubtful Accounts
Receivables consist principally of trade receivables from customers and are generally unsecured and are due within 30 to 90 days. The Company records a provision for uncollectible accounts using the allowance method. Expected credit losses associated with trade receivables are recorded as an allowance for doubtful accounts. The allowance for doubtful accounts is estimated based upon historical patterns of credit losses for aged receivables as well as specific provisions for certain identifiable, potentially uncollectible balances. When internal collection efforts on accounts have been exhausted, the accounts are written off and the associated allowance for doubtful accounts is reduced. Trade receivable balances, net of the allowance for doubtful accounts, are included in prepaid expenses and other assets in the accompanying condensed consolidated balance sheets, and are as follows (in thousands):
September 30, 2015 | December 31, 2014 | ||||||
Trade receivables | $ | 6,356 | $ | 1,388 | |||
Allowance for doubtful accounts | (822 | ) | (45 | ) | |||
Trade receivables, net of allowance | $ | 5,534 | $ | 1,343 | |||
Reportable Segments
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AMERICAN REALTY CAPITAL HOSPITALITY TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
September 30, 2015
(Unaudited)
The Company's assets are all located in the United States. The Company has determined that it has one reportable segment, with activities related to investing in real estate. The Company’s investments in real estate generate room revenue and other income through the operation of the properties, which comprise 100% of the total consolidated revenues. Management evaluates the operating performance of the Company’s investments in real estate on an individual property level, none of which represent a reportable segment.
Derivative Transactions
The Company at certain times enters into derivative instruments to hedge exposure to changes in interest rates. The Company’s derivatives as of September 30, 2015, consist of two interest rate cap agreements entered into in connection with the closing of the acquisition of the Grace Portfolio, which help to mitigate the Company’s exposure to increasing borrowing costs under floating rate indebtedness. The Company has elected not to designate its interest rate cap agreements as cash flow hedges. The impact of the interest rate caps for the three and nine month periods ended September 30, 2015, to the condensed consolidated financial statements was immaterial.
Recently Issued Accounting Pronouncements
In August 2014, the FASB issued ASU 2014-15 Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”), which describes how an entity should assess its ability to meet obligations and sets rules for how this information should be disclosed in the financial statements. The standard provides accounting guidance that will be used along with existing auditing standards. The adoption of ASU 2014-15 becomes effective for the Company on its fiscal year ending December 31, 2016, and all subsequent annual and interim periods. Early adoption is permitted. The adoption of ASU 2014-15 is not expected to have a material effect on the Company's consolidated financial statements.
In January, 2015, the FASB issued ASU 2015-01 Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items (“ASU 2015-01”), this Update eliminates from GAAP the concept of extraordinary items. Subtopic 225-20, Income Statement-Extraordinary and Unusual Items, required that an entity separately classify, present, and disclose extraordinary events and transactions. The adoption of ASU 2015-01 becomes effective for the Company on its fiscal year ending December 31, 2016, and all subsequent annual and interim periods. Early adoption is permitted. The adoption of ASU 2015-01 is not expected to have a material effect on the Company’s consolidated financial statements.
In February, 2015, the FASB issued ASU 2015-02 Amendments to the Consolidation Analysis (“ASU 2015-02”), the amendments in this Update reduce the application of the related party guidance for VIEs on the basis of the following three changes:
1) | For single decision makers, related party relationships must be considered indirectly on a proportionate basis, rather than in their entirety. Except in the following two instances, the consolidation analysis would end after this indirect assessment. |
2) | After the assessment above is performed, related party relationships should be considered in their entirety for entities that are under common control only if that common control group has the characteristics of a primary beneficiary. That is, the common control group collectively has a controlling financial interest. |
3) | If the second assessment is not applicable, but substantially all of the activities of the VIE are conducted on behalf of a single variable interest holder (excluding the decision maker) in a related party group that has the characteristics of a primary beneficiary, that single variable interest holder must consolidate the VIE as the primary beneficiary. |
The new standard is effective for the Company on January 1, 2016. Early application is permitted. The adoption of ASU 2015-02 is not expected to have a material effect on the Company’s consolidated financial statements.
In April 2015, the FASB proposed an accounting standards update for ASU 2014-09 for the deferral of the effective date of ASU 2014-09 Revenue from Contracts with Customers. This proposal defers the effective date of ASU 2014-09 from annual reporting periods beginning after December 15, 2016, back one year, to December 15, 2017 for all public business entities, certain not-for-profit entities, and certain employee benefit plans. Early application of ASU 2014-09 is permitted as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures.
11
AMERICAN REALTY CAPITAL HOSPITALITY TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
September 30, 2015
(Unaudited)
The Company has not yet selected a transition method and has not determined the effect of the standard on its ongoing financial reporting.
In April, 2015, the FASB issued ASU 2015-03 Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”), which is designed to simplify the presentation of debt issuance costs. The amendments in this Update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this Update. The new standard is effective for the Company on January 1, 2016. Early application is permitted. The adoption of ASU 2015-03 is not expected to have a material effect on the Company’s consolidated financial statements.
In September 2015, the FASB issued ASU 2015-16 Business Combinations ("ASU 2015-16"), which require that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. ASU 2015-16 also requires the acquirer to record in the same period's financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects as a result of the change to the acquisition date. Finally, this ASU 2015-16 requires an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. The new standard is effective for the Company on January 1, 2016, including interim periods within that fiscal year. Early application is permitted. The adoption of ASU 2015-16 is not expected to have a material effect on the Company’s consolidated financial statements.
Note 3 - Business Combinations
Barceló Portfolio: On March 21, 2014, the Company acquired the Barceló Portfolio through fee simple, leasehold and joint venture interests. The aggregate purchase price of the Barceló Portfolio was approximately $110.1 million, exclusive of closing costs. The Barceló Portfolio consists of (i) three wholly owned hotel assets, the Baltimore Courtyard Inner Harbor Hotel (the "Baltimore Courtyard"), the Courtyard Providence Downtown Hotel (the "Providence Courtyard") and the Homewood Suites by Hilton Stratford (the "Stratford Homewood Suites"); (ii) one leased asset, the Georgia Tech Hotel & Conference Center and (iii) equity interests in two joint ventures that each own one hotel, the Westin Virginia Beach and the Hilton Garden Inn Blacksburg.
Grace Acquisition: On February 27, 2015, the Company acquired the Grace Portfolio through fee simple or leasehold interests in 116 hotels from certain subsidiaries of Whitehall Real Estate Funds, an investment arm controlled by The Goldman Sachs Group, Inc.
The aggregate purchase price under the purchase agreement was $1.808 billion, exclusive of closing costs and subject to certain adjustments at closing. After adjustments, the net purchase price was $1.800 billion. Approximately $220.7 million of the purchase price was satisfied with cash on hand, approximately $904.2 million (fair value on the acquisition date) through the assumption of existing mortgage and mezzanine indebtedness (comprising the "Assumed Grace Mortgage Loan" and the "Assumed Grace Mezzanine Loan", collectively, the "Assumed Grace Indebtedness") and approximately $227.0 million through additional mortgage financing (the "Original Additional Grace Mortgage Loan" and, together with the Assumed Grace Indebtedness, the "Grace Indebtedness"). The Assumed Grace Mortgage Loan had a fair value on the acquisition date of $802.3 million, and carries an interest rate of London Interbank Offered Rate ("LIBOR") plus 3.29%, and the Assumed Grace Mezzanine Loan had a fair value on the acquisition date of $101.9 million and carries an interest rate of LIBOR plus 4.77%, for a combined weighted average interest rate of LIBOR plus 3.46%. The Assumed Grace Indebtedness is secured by 96 of the 116 hotels in the Grace Portfolio and is scheduled to mature on May 1, 2016, subject to three (one-year) extension rights which, if all three are exercised, would result in an outside maturity date of May 1, 2019. The Original Additional Grace Mortgage Loan is secured by 20 of the 116 hotels in the Grace Portfolio and an additional hotel property in the Barceló Portfolio. The Original Additional Grace Mortgage Loan is scheduled to mature on March 6, 2017, subject to a one-year extension right, which, if exercised, would result in an outside maturity date of March 6, 2018 and carries an interest rate equal to the greater of (i) a floating rate of interest equal to LIBOR plus 6.00% and (ii) 6.25%. In October 2015, the Company refinanced the Original Additional Grace Mortgage Loan (See Note 13 - Subsequent Events).
In addition, the remaining $447.1 million of the contract purchase price was satisfied by the issuance of the preferred equity interests (the "Grace Preferred Equity Interests") in two newly-formed Delaware limited liability companies, ARC
12
AMERICAN REALTY CAPITAL HOSPITALITY TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
September 30, 2015
(Unaudited)
Hospitality Portfolio I Holdco, LLC and ARC Hospitality Portfolio II Holdco, LLC, (the "Holdco entities") each of which is an indirect subsidiary of the Company and an indirect owner of the Grace Portfolio. The holders of the Grace Preferred Equity Interests are entitled to monthly distributions at a rate of 7.50% per annum for the first 18 months following closing and 8.00% per annum thereafter. On liquidation of the Holdco entities, the holders of the Grace Preferred Equity Interests are entitled to receive their original value (as reduced by redemptions) prior to any distributions being made to the Company or the Company's shareholders. Beginning in April 2015, the Company became obligated to use 35% of any IPO proceeds to redeem the Grace Preferred Equity Interests at par, up to a maximum of $350.0 million in redemptions for any 12-month period. As of September 30, 2015, the Company has redeemed $90.8 million of the Grace Preferred Equity Interests, resulting in $356.3 million of liquidation value remaining outstanding under the Grace Preferred Equity Interests.
The Company is also required, in certain circumstances, to apply debt proceeds to redeem the Grace Preferred Equity Interests at par. As of February 27, 2018, the Company is required to have redeemed 50.0% of the Grace Preferred Equity Interests, and the Company is required to redeem 100.0% of the Grace Preferred Equity Interests remaining outstanding at the earlier of (i) 90 days following the stated maturity date (including extension options) under the Grace Indebtedness, and (ii) February 27, 2019. In addition, the Company has the right, at its option, to redeem the Grace Preferred Equity Interests, in whole or in part, at any time at par. The holders of the Grace Preferred Equity Interests have certain consent rights over major actions by the Company relating to the Grace Portfolio. In connection with the issuance of the Grace Preferred Equity Interests, the Company, the OP, and certain individual members of the parent of the Sponsor, entered into three agreements making guarantees to the sellers and their affiliates or indemnifying the sellers and their affiliates related to the Grace Portfolio. If the Company is unable to satisfy the redemption, distribution or other requirements of the Grace Preferred Equity Interests (including if there is a default under the related guarantees provided by the Company, the OP and the individual members of the parent of the Sponsor), the holders of the Grace Preferred Equity Interests have certain rights, including the ability to assume control of the operations of the Grace Portfolio through the assumption of control of the Holdco entities. Due to the fact that the Grace Preferred Equity Interests are mandatorily redeemable and certain of their other characteristics, the Grace Preferred Equity Interests are treated as debt in accordance with GAAP.
The following table presents the preliminary allocation of the assets acquired and liabilities assumed by the Company as of February 27, 2015 (in thousands):
Assets acquired and liabilities assumed | February 27, 2015 | |||
Land | $ | 274,479 | ||
Buildings and improvements | 1,391,506 | |||
Below-market lease obligation | 2,605 | |||
Furniture, fixtures and equipment | 127,935 | |||
Prepaid expenses and other assets | 8,133 | |||
Accounts payable and accrued expenses | (4,517 | ) | ||
Total operating assets acquired, net | 1,800,141 | |||
Financing of real estate investments | (1,351,282 | ) | ||
Total assets acquired, net | $ | 448,859 | ||
The Company is finalizing the fair value of certain tangible and intangible assets acquired and adjustments may be made to the preliminary purchase price allocation shown above.
The following table below presents pro-forma financial information as if the Grace Acquisition had occurred on January 1, 2014 (in thousands). The unaudited pro-forma financial information is not necessarily indicative of what the actual results of operations would have been, assuming the acquisition had occurred on January 1, 2014, nor does it purport to represent our future results of operations.
13
AMERICAN REALTY CAPITAL HOSPITALITY TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
September 30, 2015
(Unaudited)
Pro-forma | Three Months Ended September 30, 2015 | Three Months Ended September 30, 2014 | Nine Months Ended September 30, 2015 | Nine Months Ended September 30, 2014 | ||||||||||||
Revenues | $ | 132,852 | $ | 122,080 | $ | 385,080 | $ | 356,061 | ||||||||
Net income (loss) | $ | (5,082 | ) | $ | (2,078 | ) | $ | (13,322 | ) | $ | (7,686 | ) | ||||
Included in the pro-forma table above are the following expense adjustments to account for differences between the Company's estimates and amounts actually incurred by the seller: a reduction in management fees of $1.2 million and $5.8 million, a reduction in depreciation and amortization of $3.4 million and $15.5 million, and additional interest expense of $5.5 million and $24.6 million, for the nine months ended September 30, 2015 and September 30, 2014, respectively. Additionally, in the first quarter ended March 31, 2015, there was an adjustment to reduce acquisition and transaction related costs for $37.3 million. Revenue and net loss attributable to the Grace Portfolio included in our condensed consolidated statement of operations since the date of acquisition was $284.9 million and $2.5 million, respectively.
HGI Blacksburg JV: On May 20, 2015, the Company acquired an additional equity interest in the HGI Blacksburg JV, increasing its percentage ownership to 56.5% from 24.0%. As a result of this transaction, the Company concluded that it was the primary beneficiary, with the power to direct activities that most significantly impact economic performance of the HGI Blacksburg JV, and therefore consolidated the entity in its condensed consolidated financial statements subsequent to the acquisition. The purchase price of the additional equity interest was approximately $2.2 million, exclusive of closing costs. The joint venture asset holds one hotel, the Hilton Garden Inn Blacksburg. The impact of the acquisition on the consolidated financial statements was immaterial as of September 30, 2015.
SWN Acquisitions: In June 2015, the Company entered into the SWN Acquisitions, a series of agreements to acquire an aggregate of 44 hotels from three different independent parties for an aggregate contract purchase price of $739.8 million. On October 15, 2015, the Company completed the acquisition of 10 hotels from affiliates of Summit Hotel Properties, Inc. (the "First Summit Closing") for $150.1 million, and on November 2, 2015, the Company completed the acquisition of two hotels from affiliates of Noble Investment Group, LLC (the "First Noble Closing") for $48.6 million. The Company expects to complete the acquisitions of the remaining 32 hotels pursuant to the SWN Acquisitions in six separate closings, which are scheduled to occur during the fourth quarter of 2015 and the first quarter of 2016. The Company has certain rights to postpone various of the closings. Following the completion of the First Summit Closing and the First Noble Closing, the Company has approximately $61.9 million in deposits with respect to the remaining acquisitions that will be used to pay a portion of the consideration due at closing. The remaining consideration due at the closings is expected to be funded, similar to the First Summit Closing and the First Noble Closing by a combination of proceeds from the Company's ongoing Offering and mortgage debt financing pursuant to advances under the Term Loan. (See Note 5 - Mortgage Notes Payable). Although the Company has entered into agreements relating to the acquisition of the remaining 32 hotels, these agreements and the acquisitions thereunder are subject to conditions, and there can be no assurance that the Company will be able to consummate the acquisition of any or all of the hotels in these portfolios on the currently contemplated terms or at all. (See Note 13 - Subsequent Events).
Note 4 - Leases
In connection with its acquisitions the Company has assumed various lease agreements. These lease agreements primarily comprise one operating lease and nine ground leases. The following table summarizes the Company's future minimum rental commitments under these leases (in thousands).
14
AMERICAN REALTY CAPITAL HOSPITALITY TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
September 30, 2015
(Unaudited)
Minimum Rental Commitments | Amortization of Below Market Lease Intangible to Rent Expense | |||||||
For the three months ended December 31, 2015 | $ | 1,296 | $ | 100 | ||||
Year ended December 31, 2016 | 5,191 | 399 | ||||||
Year ended December 31, 2017 | 5,209 | 399 | ||||||
Year ended December 31, 2018 | 5,216 | 399 | ||||||
Year ended December 31, 2019 | 5,225 | 399 | ||||||
Thereafter | 92,232 | 8,631 | ||||||
Total | $ | 114,369 | $ | 10,327 | ||||
The Company has allocated values to certain above and below-market lease intangibles based on the difference between market rents and rental commitments under the leases. During the three months ended September 30, 2015 and September 30, 2014, and the nine months ended September 30, 2015 and September 30, 2014, amortization of below-market lease intangibles, net, to rent expense was $0.1 million and $0.1 million, and $0.3 million and $0.2 million respectively. Rent expense for the three months ended September 30, 2015 and September 30, 2014 was $1.8 million and $1.3 million, respectively. Rent expense for the nine months ended September 30, 2015 and September 30, 2014 was $4.4 million and $3.6 million, respectively. Included in the prior year period is rent expense recognized by the Predecessor.
Note 5 - Mortgage Notes Payable
The Company’s mortgage notes payable as of September 30, 2015 and December 31, 2014 consist of the following, respectively (in thousands):
Outstanding Mortgage Note Payable | ||||||||||||||
Encumbered Properties | September 30, 2015 | December 31, 2014 | Interest Rate | Payment | Maturity | |||||||||
Baltimore Courtyard & Providence Courtyard | $ | 45,500 | $ | 45,500 | 4.30% | Interest Only, Principal paid at Maturity | April 2019 | |||||||
Hilton Garden Inn Blacksburg Joint Venture | $ | 10,500 | — | 4.31% | Interest Only, Principal paid at Maturity | June 2020 | ||||||||
Assumed Grace Mortgage Loan - 96 properties in Grace Portfolio | $ | 801,676 | — | LIBOR plus 3.29% | Interest Only, Principal paid at Maturity | May 2016, subject to three, one year extension rights | ||||||||
Assumed Grace Mezzanine Loan - 96 properties in Grace Portfolio | $ | 102,364 | — | LIBOR plus 4.77% | Interest Only, Principal paid at Maturity | May 2016, subject to three, one year extension rights | ||||||||
Original Additional Grace Mortgage Loan - 20 properties in Grace Portfolio and the Stratford Homewood Suites (1) | $ | 227,000 | — | The greater of (i) 6.00% plus LIBOR or (ii) 6.25% | Interest Only, Principal paid at Maturity | March 2017, subject to a one year extension right | ||||||||
Total | $ | 1,187,040 | $ | 45,500 | ||||||||||
_____________
(1)The Original Additional Grace Mortgage Loan was refinanced to reduce and fix the interest rate and extend the maturity in October 2015. (See Note 13 - Subsequent Events)
15
AMERICAN REALTY CAPITAL HOSPITALITY TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
September 30, 2015
(Unaudited)
The Assumed Grace Mortgage Loan and the Assumed Grace Mezzanine Loan mature on May 1, 2016, subject to three (one-year) extension rights. The extensions on the Assumed Grace Mortgage Loan and the Assumed Grace Mezzanine Loan can only occur if certain conditions are met, including a condition with respect to the second and third extension terms that a minimum ratio of net operating income to debt outstanding be satisfied. There can be no assurance that we will be able to meet these conditions and extend these loans pursuant to their terms. The suspension of the Offering (see Note 13 - Subsequent Events) is not expected to have a negative impact on the ability of the Company to extend these loans. Interest expense related to the Company's mortgage notes payable for the nine months ended September 30, 2015 was $29.3 million. Interest expense related to the Company's mortgage notes payable for the three months ended September 30, 2015 was $12.7 million.
Interest expense related to the mortgage note payable attributable to the Successor for the three months ended September 30, 2014 and for the period from March 21 to September 30, 2014 was $0.5 million and $1.1 million, respectively. Interest expense attributable to the Predecessor, for the period from January 1 to March 20, 2014 was $0.5 million.
Deutsche Bank Term Loan Agreement
On August 21, 2015, the Company and the OP, as guarantors, and certain wholly owned subsidiaries of the OP (the "Borrowers"), as borrowers, entered into a Term Loan Agreement with Deutsche Bank AG New York Branch, as administrative agent and Deutsche Bank Securities Inc., as sole lead arranger and book-running manager. On October 15, 2015, the Company amended and restated the Term Loan Agreement (as so amended, the “Term Loan”) and made the initial draw down of borrowings of $96.9 million in connection with the First Summit Closing. On November 2, 2015, the Company drew down borrowings of $26.0 million in connection with the First Noble Closing. (See Note 13 - Subsequent Events).
The Term Loan provides for up to $450 million in financing (the “Loans”) at a rate equal to a base rate plus a spread of between 3.25% and 3.75% for Eurodollar rate Loans and between 2.25% and 2.75% for base rate Loans, depending on the aggregate debt yield and aggregate loan-to-value of the properties securing the Loans measured periodically. Prior to November 1, 2015, all spreads were 0.5% less than they will be during the rest of the term. The Loans have been, and will continue to be, funded on a delayed draw basis in up to eleven advances, which may be used to fund closing consideration required to complete the SWN Acquisitions, or for general working capital purposes. Each advance is subject to customary funding conditions and there can be no assurance that all, or any, of the advances will be funded.
The Term Loan has a term of three years, with two one-year extension options, and is secured by the fee interest in the hotels as and when they are acquired. No advance may exceed the least of (i) 65% of the aggregate appraised value of the hotels pledged as collateral, (ii) 65% of the aggregate purchase price of the hotels pledged as collateral, and (iii) the adjusted net operating income for the hotels pledged as collateral divided by 11.5%, and no advances may be made after June 30, 2016.
Pursuant to the Term Loan, the Borrowers agreed to make periodic payments into an escrow account with the administrative agent under the Term Loan (on behalf of the lenders) for future property improvements at the hotels expected to serve as collateral.
Certain limited recourse obligations of the Borrowers under the Term Loan are guaranteed by the OP and the Company. The Company and the OP have also agreed to guarantee the first half of property improvement escrows required to be funded pursuant to the Term Loan.
The Term Loan includes the following financial covenants: minimum debt service coverage ratio applicable to the Borrowers, minimum consolidated net worth applicable to the Company, and minimum consolidated liquidity applicable to the Company.
Note 6 - Promissory Notes Payable
The Company’s promissory notes payable as of September 30, 2015 and December 31, 2014 were as follows (in thousands):
16
AMERICAN REALTY CAPITAL HOSPITALITY TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
September 30, 2015
(Unaudited)
Outstanding Promissory Notes Payable | |||||||||||||||
Note Payable and Use of Proceeds | September 30, 2015 | December 31, 2014 | Interest Rate | Payment | Maturity | ||||||||||
Barceló Promissory Note for acquisition of Barceló Portfolio | $ | — | $ | 63,074 | 6.8 | % | Interest Only | See below | |||||||
Property Improvement Plan Promissory Note | $ | — | $ | 1,775 | 4.5 | % | Interest Only | March 2019 | |||||||
The promissory note the Company executed in favor of BCC in connection with the acquisition of the Barceló Portfolio (as amended, the "Barceló Promissory Note"), which had a maturity date of within 10 business days after the date the Company raised $70.0 million in common equity from the Offering after the closing of the Grace Acquisition, and payment of all acquisition related expenses which include payments to the Advisor and affiliates, matured and was repaid in full during the second quarter ended June 30, 2015. Also during the second quarter ended June 30, 2015, the Company repaid in full the Property Improvement Plan Promissory Note of $1.8 million. The Property Improvement Plan Promissory Note was payable to Crestline (see Note 11 - Related Party Transactions and Arrangements).
There was no interest expense related to the Company's promissory notes payable for the three months ended September 30, 2015. For the three months ended September 30, 2014, there was $1.3 million in interest expense. Interest expense related to the Company's promissory notes payable for the nine months ended September 30, 2015 and the nine months ended September 30, 2014 were $1.4 million and $2.5 million, respectively.
Note 7 - Accounts Payable and Accrued Expenses
The following is a summary of the components of accounts payable and accrued expenses (in thousands):
September 30, 2015 | December 31, 2014 | ||||||
Trade accounts payable and accrued expenses | $ | 52,893 | $ | 7,412 | |||
Contingent consideration from Barceló Portfolio (see Note 10) | 663 | 2,384 | |||||
Deferred payment for Barceló Portfolio (see Note 10) | — | 3,471 | |||||
Hotel accrued salaries and related liabilities | 7,571 | 952 | |||||
Total | $ | 61,127 | $ | 14,219 | |||
Note 8 - Common Stock
The Company had 30,668,065 shares and 10,163,206 shares of common stock outstanding and had received total gross proceeds of $762.6 million and $252.9 million as of September 30, 2015 and December 31, 2014, respectively, including shares issued under the DRIP.
On February 3, 2014, the Company's board of directors authorized, and the Company declared, distributions payable to stockholders of record each day during the applicable month equal to $0.00465753425 per day, or $1.70 per annum, per share of common stock. The first distribution was paid in May 2014 to holders of record in April 2014. The distributions are payable by the fifth day following each month end to stockholders of record at the close of business each day during the prior month.
Share Repurchase Program
The Company has a Share Repurchase Program (the "SRP") that enables stockholders to sell their shares of common stock originally purchased from the Company back to the Company. Under the SRP, stockholders may request that the Company redeem all or any portion, subject to certain minimum conditions described below, if such repurchase does not impair the Company’s capital or operations.
Except in connection with a stockholder’s death, disability, bankruptcy or other involuntary exigent circumstance, prior to the time that the shares of common stock are listed on a national securities exchange and until the Company begins to calculate its NAV, the repurchase price per share will depend on the length of time investors have held such shares as follows: after one
17
AMERICAN REALTY CAPITAL HOSPITALITY TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
September 30, 2015
(Unaudited)
year from the purchase date — the lower of $23.13 or 92.5% of the amount they actually paid for each share; after two years from the purchase date — the lower of $23.75 or 95.0% of the amount they actually paid for each share; after three years from the purchase date — the lower of $24.38 or 97.5% of the amount they actually paid for each share; and after four years from the purchase date — the lower of $25.00 or 100.0% of the amount they actually paid for each share (in each case, as adjusted for any stock distributions, combinations, splits and recapitalizations).
Once the Company begins to calculate its NAV, the price per share that the Company will pay to repurchase the Company’s shares of common stock on the last day of each quarter, will be the Company’s per share NAV of common stock for the quarter, calculated after the close of business on each day the Company makes its quarterly financial filing. Subject to limited exceptions, stockholders whose shares of common stock are repurchased within the first four months from the date of purchase will be subject to a short-term trading fee of 2.0% of the aggregate per share NAV of the shares of common stock repurchased.
The board of directors may reject a request for repurchase, at any time. Purchases under the SRP by the Company will be limited in any calendar year to 5.0% of the weighted average number of shares outstanding during the prior calendar year. In addition, funds available for the Company's SRP are limited and may not be sufficient to accommodate all requests. Due to these limitations, the Company cannot guarantee that it will be able to accommodate all repurchase requests.
When a stockholder requests a repurchase and the repurchase is approved, the Company will reclassify such obligation from equity to a liability based on the settlement value of the obligation. Shares purchased under the SRP will have the status of authorized but unissued shares. As of September 30, 2015, there had been redemptions of $0.9 million. As of December 31, 2014, there had been no redemptions.
Distribution Reinvestment Plan (DRIP)
Pursuant to the DRIP, stockholders may elect to reinvest distributions by purchasing shares of common stock in lieu of receiving cash. No dealer manager fees or selling commissions are paid with respect to shares purchased pursuant to the DRIP. Participants purchasing shares pursuant to the DRIP have the same rights and are treated in the same manner as if such shares were issued pursuant to the primary Offering. The board of directors may designate that certain cash or other distributions be excluded from the DRIP. The Company has the right to amend or suspend any aspect of the DRIP or terminate the DRIP with ten days’ notice to participants. Shares issued under the DRIP are recorded to equity in the accompanying balance sheets in the period distributions are paid. There were 544,748 shares issued under the DRIP as of September 30, 2015 and 63,998 shares issued under the DRIP as of December 31, 2014.
Note 9 - Fair Value Measurements
The Company is required to disclose the fair value of financial instruments which it is practicable to estimate. The fair value of cash and cash equivalents, accounts receivable and accounts payable and accrued expenses approximate their carrying amounts due to the relatively short maturity of these items. The following table shows the carrying values and the fair values of material non-current liabilities that qualify as financial instruments, determined in accordance with the authoritative guidance for disclosures about fair value of financial instruments (in thousands):
September 30, 2015 | |||||||
Carrying Amount | Fair Value | ||||||
Mortgage notes payable | $ | 1,187,040 | $ | 1,197,487 | |||
The fair value of the mortgage notes payable were determined using the discounted cash flow method and applying current market rates and is classified as level 3 under the fair value hierarchy. As described in Note 10 - Commitments and Contingencies, the carrying amount of the contingent consideration was remeasured to fair value as of September 30, 2015.
Note 10 - Commitments and Contingencies
Litigation
In the ordinary course of business, the Company may become subject to litigation, claims and regulatory matters. There are no material legal or regulatory proceedings pending or known to be contemplated against the Company.
18
AMERICAN REALTY CAPITAL HOSPITALITY TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
September 30, 2015
(Unaudited)
Environmental Matters
In connection with the ownership and operation of real estate, the Company may potentially be liable for costs and damages related to environmental matters. The Company has not been notified by any governmental authority of any non-compliance, liability or other claim and is not aware of any other environmental condition that it believes will have a material adverse effect on its results of operations or financial condition.
Contingent Consideration
Included as part of the acquisition of the Barceló Portfolio is a contingent consideration payable to BCC based on the operating results of the Baltimore Courtyard, Providence Courtyard and Stratford Homewood Suites. The amount payable is calculated by applying a contractual capitalization rate to the excess earnings before interest, taxes, depreciation and amortization earned in the second year after the acquisition over an agreed upon target. In the second quarter ended June 30, 2015, the Company revised its forecast due to civil unrest in Baltimore, which impacted the results of the Baltimore Courtyard, resulting in a decrease in the contingent consideration payable of $1.9 million. In the third quarter ended September 30, 2015, the Company further revised its forecast resulting in a increase in the contingent consideration payable of $0.2 million. The change in the contingent consideration payable is reflected in other income in the condensed consolidated statements of operations and comprehensive income (loss) for the three and nine month periods ended September 30, 2015. The contingent consideration payable as of September 30, 2015 is $0.7 million.
Deferred Consideration
Included as part of the acquisition of the Barceló Portfolio was deferred consideration payable to BCC of $3.5 million, which was payable within 10 business days after the date the Company raises $70.0 million in common equity from the Offering after the closing of the Grace Acquisition and payment of all acquisition related expenses which include payments to the Advisor and affiliates. In the second quarter ended June 30, 2015, the Company repaid the deferred consideration payable of $3.5 million.
Note 11 - Related Party Transactions and Arrangements
As of September 30, 2015, the Special Limited Partner owned 8,888 shares of the Company’s outstanding common stock. Additionally, as of September 30, 2015, AR Capital, LLC ("ARC"), the parent of the Sponsor, owned 22,222 shares of the Company's outstanding common stock.
The Advisor and its affiliates are entitled to a variety of fees, and may incur and pay costs and fees on behalf of the Company for which they are entitled to reimbursement. The Company had a payable due to affiliates related to operating, acquisition, financing and offering costs of $4.2 million and $7.0 million as of September 30, 2015 and December 31, 2014, respectively.
Fees Paid in Connection with the Offering
The Dealer Manager is paid fees and compensation in connection with the sale of the Company's common stock in the Offering. The Dealer Manager is paid a selling commission of up to 7.0% of the per share purchase price of the Company’s Offering proceeds before reallowance of commissions earned by participating broker-dealers. In addition, the Dealer Manager is paid up to 3.0% of the gross proceeds from the sale of shares, before reallowance to participating broker-dealers, as a dealer-manager fee. The Dealer Manager may reallow its dealer-manager fee to participating broker-dealers. A participating broker dealer may elect to receive a fee equal to 7.5% of the gross proceeds from the sale of shares by such participating broker dealer, with 2.5% thereof paid at the time of such sale and 1.0% thereof paid on each anniversary of the closing of such sale up to and including the fifth anniversary of the closing of such sale. If this option is elected, the dealer manager fee will be reduced to 2.5% of gross proceeds.
The table below shows the commissions and fees incurred from and payable to the Dealer Manager for the Offering during the three months ended September 30, 2015 and 2014, the nine months ended September 30, 2015 and 2014, and the associated payable as of September 30, 2015 and December 31, 2014, which is recorded in due to affiliates on the Company's condensed consolidated balance sheets (in thousands):
19
AMERICAN REALTY CAPITAL HOSPITALITY TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
September 30, 2015
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | Payable as of | ||||||||||||||||||||||
2015 | 2014 | 2015 | 2014 | September 30, 2015 | December 31, 2014 | |||||||||||||||||||
Total commissions and fees incurred from the Dealer Manager | $ | 13,289 | $ | 9,926 | $ | 47,914 | $ | 11,763 | $ | 241 | $ | 153 | ||||||||||||
The Advisor and its affiliates are paid compensation and/or receive reimbursement for services relating to the Offering, including transfer agency services provided by American National Stock Transfer, LLC, an affiliate of the Dealer Manager. The Company is responsible for the Offering and related costs (excluding selling commissions and dealer manager fees) up to a maximum of 2.0% of gross proceeds received from the Offering, measured at the end of the Offering. Offering costs in excess of the 2.0% cap as of the end of the Offering are the Advisor’s responsibility. As of September 30, 2015, Offering and related costs (excluding selling commissions and dealer manager fees) exceeded 2.0% of gross proceeds received from the Offering by $6.1 million. As of December 31, 2014, Offering and related costs (excluding selling commissions and dealer manager fees) exceeded 2.0% of gross proceeds received from the Offering by $2.4 million.
All Offering costs incurred by the Company or its affiliated entities on behalf of the Company have been recorded as a reduction to additional paid-in-capital on the accompanying condensed consolidated balance sheets. The table below shows compensation and reimbursements incurred and payable to the Advisor and its affiliates for services relating to the Offering during the three months ended September 30, 2015, and the three months ended September 30, 2014, the nine months ended September 30, 2015 and the nine months ended September 30, 2014, and the associated amounts payable as of September 30, 2015 and December 31, 2014, which is recorded in due to affiliates on the Company’s consolidated balance sheets (in thousands).
Three Months Ended September 30, | Nine Months Ended September 30, | Payable as of | ||||||||||||||||||||||
2015 | 2014 | 2015 | 2014 | September 30, 2015 | December 31, 2014 | |||||||||||||||||||
Total compensation and reimbursement for services provided by the Advisor and its affiliates related to the Offering | $ | 4,045 | $ | 541 | $ | 13,979 | $ | 1,652 | $ | 436 | $ | 1,885 | ||||||||||||
Fees Paid in Connection With the Operations of the Company
Fees Paid to the Advisor
The Advisor receives an acquisition fee of 1.5% of (A) the contract purchase price of each acquired property and (B) the amount advanced for a loan or other investment. The Advisor may also be reimbursed for expenses incurred in the process of acquiring properties, in addition to third-party costs the Company may pay directly to, or reimburse the Advisor for. Additionally, the Company may reimburse the Advisor for legal expenses it or its affiliates directly incur in the process of acquiring properties in an amount not to exceed 0.1% of the contract purchase price of the Company’s assets acquired. Once the proceeds from the Offering have been fully invested, the aggregate amount of acquisition fees and financing coordination fees (as described below) may not exceed 1.9% of the contract purchase price, for any new investments, including reinvested proceeds, and the amount advanced for a loan or other investment, for all the assets acquired. In no event will the total of all acquisition fees, acquisition expenses and any financing coordination fees (as described below) payable with respect to the Company's total portfolio of investments, calculated after the close of the Offering and once the Company has invested substantially all the proceeds of the Offering, exceed 4.5% of (A) the contract purchase price of all of the Company's properties and (B) the amount advanced for all of the Company's loans or other investments. Fees paid to the Advisor related to acquisitions are reported as a component of net income (loss) in the period incurred.
If the Advisor provides services in connection with the origination or refinancing of any debt that the Company obtains and uses to acquire properties or to make other permitted investments, or that is assumed, directly or indirectly, in connection with the acquisition of properties, the Company will pay the Advisor or its assignees a financing coordination fee equal to 0.75% of
20
AMERICAN REALTY CAPITAL HOSPITALITY TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
September 30, 2015
(Unaudited)
the amount available and/or outstanding under such financing, subject to certain limitations. Fees paid to the Advisor related to debt financings are deferred and amortized over the term of the related debt instrument.
The table below presents the acquisition and financing coordination fees charged by the Advisor in connection with the operations of the Company for the three months ended September 30, 2015 and 2014, the nine months ended September 30, 2015 and 2014, and the associated payable as of September 30, 2015 and December 31, 2014, which is recorded in due to affiliates on the Company's condensed consolidated balance sheets (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | Payable as of | ||||||||||||||||||||||
2015 | 2014 | 2015 | 2014 | September 30, 2015 | December 31, 2014 | |||||||||||||||||||
Acquisition fees | $ | — | $ | — | $ | 27,203 | $ | 1,598 | $ | — | $ | — | ||||||||||||
Acquisition cost reimbursements | $ | — | $ | — | $ | 1,808 | $ | — | $ | — | $ | — | ||||||||||||
Financing coordination fees | $ | 3,375 | $ | — | $ | 15,254 | $ | 815 | $ | — | $ | — | ||||||||||||
$ | 3,375 | $ | — | $ | 44,265 | $ | 2,413 | $ | — | $ | — | |||||||||||||
For asset management services provided by the Advisor, the Company issues an asset management subordinated participation to the Advisor by causing the OP to issue (subject to periodic approval by the board of directors) to the Advisor a number of performance-based restricted, forfeitable partnership units of the OP (designated as “Class B Units”) on a quarterly basis in an amount equal to:
• | The cost of the Company’s assets, (until the NAV pricing date, then the lower of the cost of the Company's assets and the fair value of the Company's assets), multiplied by |
• | 0.1875%, divided by |
• | The value of one share of common stock as of the last day of such calendar quarter, which is equal initially to $22.50 (the Offering price minus selling commissions and dealer manager fees) and, at such time as the Company estimates NAV, to per-share NAV. |
The Advisor is entitled to receive distributions on the vested and unvested Class B Units it receives in connection with its asset management subordinated participation at the same rate as distributions received on the Company’s common stock. Such distributions are in addition to the incentive fees and other distributions the Advisor and its affiliates may receive from the Company and the OP, including without limitation, the annual subordinated performance fee and the subordinated participation in net sales proceeds, the subordinated incentive listing distribution or the subordinated distribution upon termination of the advisory agreement, each as described below.
The restricted Class B Units do not become unrestricted Class B Units until certain performance conditions are satisfied, including until the adjusted market value of the OP’s assets plus applicable distributions equals or exceeds the aggregate capital contributed by investors plus an amount equal to a 6.0% cumulative, pre-tax, non-compounded annual return to investors, and the occurrence of a sale of all or substantially all of the OP’s assets, a listing of the Company’s common stock, or a termination of the advisory agreement without cause. Asset management services were performed by the Advisor for the nine months ended September 30, 2015, and 361,226 Class B Units have been issued as of September 30, 2015.
Following amendments to the Company's agreement with the Advisor and the limited partnership agreement of the OP on November 11, 2015, the Company is now required to pay asset management fees, which may be in cash (subject to certain coverage limitations during the pendency of the Offering), shares of the Company's common stock or a combination of both, at the Advisor’s election, on a monthly basis effective October 1, 2015, and Class B Units will no longer be issued to the Advisor with respect to periods commencing on or after September 30, 2015 . (See Note 13 - Subsequent Events).
Fees Paid to the Property Manager
The Company pays a property management fee of up to 4.0% of the monthly gross receipts from the Company's properties to the Property Manager. The Property Manager, in turn, pays a portion of the property management fees to Crestline or a third-
21
AMERICAN REALTY CAPITAL HOSPITALITY TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
September 30, 2015
(Unaudited)
party sub-property manager, as applicable. The Company also reimburses Crestline or a third-party sub-property manager, as applicable, for property level expenses, as well as fees and expenses of such sub-property manager. However, the Company will not reimburse such sub-property managers for general overhead costs or for the wages and salaries and other employee-related expenses of employees of such sub-property managers, other than employees or subcontractors who are engaged in the on-site operation, management, maintenance or access control of the Company’s properties, and, in certain circumstances, who are engaged in off-site activities.
The Company also will pay to Crestline an annual incentive fee equal to 15% of the amount by which the operating profit from the properties managed by Crestline for such fiscal year (or partial fiscal year) exceeds 8.5% of the total investment of such properties. The Company may, in the future, pay similar fees to third-party sub-property managers. No incentive fee was payable by the Company during either of the three months ended or nine months ended September 30, 2015 or 2014.
For these purposes, “total investment” means the sum of (i) the price paid to acquire the property, including closing costs, conversion costs, and transaction costs; (ii) additional invested capital; and (iii) any other costs paid in connection with the acquisition of the property, whether incurred pre- or post-acquisition.
The table below shows the management fees and reimbursable expenses incurred by the Company from Crestline or the Property Manager (and not payable to a third party sub-property manager) during the three and nine months ended September 30, 2015 and 2014, respectively, and the associated payable as of September 30, 2015 and December 31, 2014 (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | Payable as of | ||||||||||||||||||||||
2015 | 2014 | 2015 | 2014 | September 30, 2015 | December 31, 2014 | |||||||||||||||||||
Total management fees and reimbursable expenses incurred from Crestline | $ | 2,631 | $ | 587 | $ | 6,564 | $ | 1,979 | $ | 896 | $ | 228 | ||||||||||||
Total management fees incurred from Property Manager | $ | 2,055 | $ | 85 | $ | 5,000 | $ | 181 | $ | 2,631 | $ | 20 | ||||||||||||
Total | $ | 4,686 | $ | 672 | $ | 11,564 | $ | 2,160 | $ | 3,527 | $ | 248 | ||||||||||||
The Company paid Crestline interest on the Property Improvement Plan Promissory Note. In the second quarter ended June 30, 2015, the Company repaid in full the Property Improvement Plan Promissory Note of $1.8 million (see Note 6 - Promissory Notes Payable). The table below shows the interest expense incurred by the Company during the three and nine months ended September 30, 2015 and 2014, respectively, and the associated payable as of September 30, 2015 and December 31, 2014, which is recorded in due to affiliates on the condensed consolidated balances sheets (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | Payable as of | ||||||||||||||||||||||
2015 | 2014 | 2015 | 2014 | September 30, 2015 | December 31, 2014 | |||||||||||||||||||
Interest related to the Property Improvement Plan Promissory Note | $ | — | $ | 20 | $ | 21 | $ | 43 | $ | — | $ | 20 | ||||||||||||
Fees Paid to Other Affiliates of the Advisor
The Company entered into an agreement with the Dealer Manager to provide strategic advisory services and investment banking services required in the ordinary course of the Company's business, such as performing financial analysis, evaluating publicly traded comparable companies and assisting in developing a portfolio composition strategy, a capitalization structure to optimize future liquidity options and structuring operations. The Company has recorded the payment of the costs associated with this agreement of $0.9 million in prepaid expenses and other assets on the Company's condensed consolidated balance sheets and amortizes the costs associated with this agreement over the estimated remaining life of the Offering.
22
AMERICAN REALTY CAPITAL HOSPITALITY TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
September 30, 2015
(Unaudited)
RCS Advisory Services, LLC ("RCS Advisory") is paid compensation for services provided to the Company on behalf of the Advisor based on time and expenses incurred. Additionally, the Company entered into a $0.8 million agreement with RCS Advisory to provide transaction management services in connection with the Grace Acquisition, the full amount of which was accrued for at December 31, 2014, and was paid in full as of September 30, 2015.
The Company entered into an agreement with the Dealer Manager to provide strategic financial advice and assistance in connection with the Grace Acquisition, such as performing financial advisory and analysis services, due diligence and negotiation of the financial aspects of the acquisition. The Company was charged 0.25% of the total transaction value for these services and accrued $4.5 million as of December 31, 2014, and was paid in full as of September 30, 2015.
The table below presents related party fees and reimbursements charged by the Dealer Manager and RCS Advisory in connection with the operations of the Company for the nine months ended September 30, 2015 and 2014, respectively, and the associated payable as of September 30, 2015 and December 31, 2014 (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | Payable as of | ||||||||||||||||||||||
2015 | 2014 | 2015 | 2014 | September 30, 2015 | December 31, 2014 | |||||||||||||||||||
Transaction fees and expenses | $ | — | $ | 2,160 | $ | — | $ | 3,170 | $ | — | $ | 4,645 | ||||||||||||
Advisory and investment banking fee | $ | 115 | $ | 115 | $ | 345 | $ | 345 | $ | — | $ | — | ||||||||||||
Total related party fees and reimbursements | $ | 115 | $ | 2,275 | $ | 345 | $ | 3,515 | $ | — | $ | 4,645 | ||||||||||||
In order to increase operating cash flows and the ability to pay distributions from operating cash flows, the Advisor may elect to waive certain fees. Because the Advisor may waive certain fees, cash flow from operations that would have been paid to the Advisor may be available to pay distributions to stockholders. The fees that may be forgiven are not deferrals and accordingly, will not be paid to the Advisor. In certain instances, to improve the Company’s working capital, the Advisor may elect to absorb a portion of the Company’s general and administrative costs. No expenses were absorbed by the Advisor during the nine months ended September 30, 2015 and 2014, respectively.
The Company reimburses the Advisor’s costs for providing administrative services, subject to the limitation that the Company will not reimburse the Advisor for any amount by which the Company’s operating expenses at the end of the four preceding fiscal quarters exceeds the greater of (a) 2.0% of average invested assets and (b) 25.0% of net income other than any additions to reserves for depreciation, bad debt, impairment or other similar non-cash reserves and excluding any gain from the sale of assets for that period, unless the Company’s independent directors determine that such excess was justified based on
unusual and nonrecurring factors which they deem sufficient, in which case the excess amount may be reimbursed to the
Advisor in subsequent periods. Additionally, the Company reimburses the Advisor for personnel costs in connection with other services; however, the Company will not reimburse the Advisor for personnel costs, including executive salaries, in connection with services for which the Advisor receives acquisition fees, acquisition expenses or real estate commissions.
The Advisor at its election may also contribute capital to enhance the Company’s cash position for working capital and distribution purposes. Any contributed capital amounts are not reimbursable to the Advisor. Further, any capital contributions are made without any corresponding issuance of common or preferred shares. There were no contributions to capital from the Advisor for the nine months ended September 30, 2015 and 2014, respectively.
Fees Paid in Connection with the Liquidation or Listing
The Company is required to pay the Advisor an annual subordinated performance fee calculated on the basis of the Company’s total return to stockholders, payable monthly in arrears, such that for any year in which the Company’s total return on stockholders’ capital exceeds 6.0% per annum, the Advisor will be entitled to 15.0% of the excess total return but not to exceed 10.0% of the aggregate total return for such year. This fee will be payable only upon the sale of assets, other disposition or refinancing of such assets, which results in the return on stockholders’ capital exceeding 6.0% per annum. No subordinated performance fees were incurred during the nine months ended September 30, 2015 and 2014, respectively.
The Company may pay a brokerage commission to the Advisor on the sale of property, not to exceed the lesser of 2.0% of the contract sale price of the property and 50.0% of the total brokerage commission paid if a third-party broker is also involved;
23
AMERICAN REALTY CAPITAL HOSPITALITY TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
September 30, 2015
(Unaudited)
provided, however, that in no event may the real estate commissions paid to the Advisor, its affiliates and unaffiliated third parties exceed the lesser of 6.0% of the contract sales price and a reasonable, customary and competitive real estate commission, in each case, payable to the Advisor if the Advisor or its affiliates, as determined by a majority of the independent directors, provided a substantial amount of services in connection with the sale. No such fees were incurred during the nine months ended September 30, 2015 and 2014, respectively.
The Special Limited Partner will be entitled to receive a subordinated participation in the net sales proceeds of the sale of real estate assets of 15.0% of the remaining net sale proceeds after return of capital contributions to investors plus payment to investors of a 6.0% cumulative, pre-tax, non-compounded annual return on the capital contributed by investors. The Special Limited Partner will not be entitled to the subordinated participation in net sale proceeds unless the Company’s investors have received a 6.0% cumulative non-compounded return on their capital contributions plus the return of their capital. No such participation became due and payable during the nine months ended September 30, 2015 and 2014, respectively.
If the common stock of the Company is listed on a national exchange, the Special Limited Partner will be entitled to receive a subordinated incentive listing distribution of 15.0% of the amount by which the Company’s market value plus distributions exceeds the aggregate capital contributed by investors plus an amount equal to a 6.0% cumulative, pre-tax, non-compounded annual return on their capital contributions. The Special Limited Partner will not be entitled to the subordinated incentive listing distribution unless investors have received a 6.0% cumulative, pre-tax non-compounded annual return on their capital contributions. No such distributions were incurred during the nine months ended September 30, 2015 and 2014, respectively. Neither the Special Limited Partner nor any of its affiliates can earn both the subordinated participation in the net sale proceeds and the subordinated incentive listing distribution.
Upon termination or non-renewal of the advisory agreement with the Advisor, with or without cause, the Special Limited Partner, through its controlling interest in the Advisor, will be entitled to receive distributions from the OP equal to 15.0% of the amount by which the sum of the Company’s market value plus distributions exceeds the sum of the aggregate capital contributed by investors plus an amount equal to a 6.0% cumulative, pre-tax, non-compounded annual return to investors. The Special Limited Partner may elect to defer its right to receive a subordinated distribution upon termination until either a listing on a national securities exchange or other liquidity event occurs. No such distributions were incurred during the nine months ended September 30, 2015 and 2014, respectively.
Note 12 - Economic Dependency
Under various agreements, the Company has engaged or will engage the Advisor and its affiliates to provide certain services that are essential to the Company, including asset management services, supervision of the management, asset acquisition and disposition decisions, the sale of shares of common stock available for issue, transfer agency services, as well as other administrative responsibilities for the Company including accounting services and investor relations.
As a result of these relationships, the Company is dependent upon the Advisor and its affiliates. In the event that these companies are unable to provide the Company with the respective services, the Company will be required to find alternative providers of these services.
Note 13 - Subsequent Events
The Company has evaluated subsequent events through the filing of this Quarterly Report on Form 10-Q, and determined that there have not been any events that have occurred that would require adjustments to disclosures in the accompanying condensed consolidated financial statements except for the following transactions:
Sales of Common Stock
Subsequent to the quarter ended September 30, 2015, and through October 1, 2015, the Company raised additional gross proceeds, including proceeds from shares issued under the DRIP, of $81.4 million, and issued common stock, including unvested restricted shares and shares issued under the DRIP, of 3.2 million.
SWN Acquisitions
In June 2015, the Company entered into the SWN Acquisitions, a series of agreements to acquire an aggregate of 44 hotels from three different independent parties for an aggregate contract purchase price of $739.8 million. On October 15, 2015, the Company completed the First Summit Closing and acquired 10 hotels for $150.1 million, and on November 2, 2015, the Company completed the First Noble Closing and acquired two hotels for $48.6 million. The Company expects to complete the
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AMERICAN REALTY CAPITAL HOSPITALITY TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
September 30, 2015
(Unaudited)
acquisitions of the remaining 32 hotels in six separate closings, which are scheduled to occur during the fourth quarter of 2015 and the first quarter of 2016. Following the completion of the First Summit Closing and the First Noble Closing, the Company has approximately $61.9 million in deposits with respect to the remaining acquisitions that will be used to pay a portion of the consideration due at closing. The remaining consideration due at the closings is expected to be funded, similar to the First Summit Closing and the First Noble Closing, by a combination of proceeds from the Company's ongoing Offering and mortgage debt financing pursuant to advances under the Term Loan. (See Note 5 - Mortgage Notes Payable). Although the Company has entered into agreements relating to the acquisition of the remaining 32 hotels, these agreements and the acquisitions thereunder are subject to conditions, and there can be no assurance that the Company will be able to consummate the acquisition of any or all of the hotels in these portfolios on the currently contemplated terms or at all.
Summit Portfolio:
On June 2, 2015, the Company through a wholly owned subsidiary of the OP, entered into two separate agreements to purchase fee simple interests in an aggregate portfolio of 26 hotels containing an aggregate of 2,793 guest rooms, from affiliates of Summit Hotel Properties, Inc. (the "Summit Portfolio").
On October 15, 2015, the Company completed the First Summit Closing and acquired 10 hotels for an aggregate purchase price of $150.1 million, which was funded with $7.6 million previously paid as a deposit, $45.6 million from the proceeds of the Company's ongoing IPO, and $96.9 million from an advance under the Term Loan.
The aggregate cash purchase price for the remaining 16 hotels is approximately $197.3 million, subject to closing prorations and other adjustments. The remaining 16 hotels are expected to be purchased in two separate closings which are scheduled to occur by March 31, 2016. The acquisition of the hotels that are the subject of any particular closing are not conditioned on the acquisition of the other hotels at that closing, or any other closing. In addition, the Company has the right to terminate the applicable agreement with respect to a particular hotel under certain circumstances, including if there are title issues or material casualties or condemnations involving a particular hotel. Upon the completion of the First Summit Closing, the Company has approximately $27.5 million remaining in deposits with respect to the remaining Summit Portfolio acquisitions.
Wheelock Portfolio:
On June 2, 2015, the Company through a wholly owned subsidiary of the OP, entered into an agreement to purchase the fee simple interests in a portfolio of five hotels containing 565 guestrooms, from affiliates of Wheelock Real Estate Fund, L.P. (the "Wheelock Portfolio"). The five hotels are expected to be purchased in the fourth quarter of 2015.
The aggregate cash purchase price for the Wheelock Portfolio is approximately $92.4 million, subject to closing prorations and other adjustments. As of September 30, 2015 the Company has made deposits of $8.0 million with respect to the Wheelock Portfolio.
Noble Portfolio:
On June 15, 2015, the Company, through a wholly owned subsidiary of the OP, entered into 13 separate but substantially identical agreements to purchase the fee simple interests in an aggregate portfolio of 13 hotels containing an aggregate of 1,913 guest rooms from affiliates of Noble Investment Group, LLC (the "Noble Portfolio").
On November 2, 2015, the Company completed the acquisition of the First Noble Closing for an aggregate purchase price of $48.6 million, which was funded with $3.6 million previously paid as a deposit, $19.0 million from the proceeds of the Company's ongoing IPO, and $26.0 million from an advance under the Term Loan. The remaining 11 hotels in the Noble Portfolio are scheduled to close in three separate closings, which are expected to occur by March 31, 2016. The Company has certain rights to postpone the third and fourth Noble closings.
The aggregate cash purchase price for the remaining 11 hotels is approximately $251.4 million, subject to closing prorations and other adjustments. Upon the completion of the First Noble Closing, the Company has approximately $26.4 million remaining in deposits with respect to the remaining Noble Portfolio acquisitions.
Refinancing of Original Additional Grace Mortgage Loan
On October 6, 2015, the Company, through indirect wholly owned subsidiaries, entered into a Loan Agreement (the “Loan Agreement”) with Ladder Capital Finance LLC and German American Capital Corporation (together, the “Lenders”). Pursuant to the Loan Agreement, the Company borrowed $232 million from the Lenders (the “New Additional Grace Mortgage Loan”) at a fixed annual interest rate of 4.96% per annum with a maturity date in October 2020. The New Additional Grace Mortgage Loan provides for monthly payments of interest only with all principal outstanding due on the maturity date. The New
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AMERICAN REALTY CAPITAL HOSPITALITY TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
September 30, 2015
(Unaudited)
Additional Grace Mortgage Loan is secured by first mortgages on the Company’s fee interest in 21 hotel properties, including 20 hotels that were part of the Grace Portfolio and one additional hotel was part of the Barceló Portfolio. Proceeds from the New Additional Grace Mortgage Loan were used to repay the Original Additional Grace Mortgage Loan, which was secured by first mortgages on the same 21 hotels, bore a floating interest rate that could be no less than 6.25% per annum and had a maturity date in March 2017. (See Note 5 - Mortgage Notes Payable).
Sponsor Transactions
On November 9, 2015, ARC advised the Company that ARC and Apollo Global Management, LLC (NYSE: APO) (together with its consolidated subsidiaries, “Apollo”) have mutually agreed to terminate an agreement, dated as of August 6, 2015, pursuant to which Apollo would have purchased a controlling interest in a newly formed company that would have owned a majority of the ongoing asset management business of AR Capital, including the Advisor and the Sponsor. The termination has no effect on the Company’s current management team.
Also on November 9, 2015, RCS Capital Corporation (“RCS Capital”), the parent of the Dealer Manager and a company under common control with ARC, and Apollo announced that they have mutually agreed to amend an agreement dated as of August 6, 2015, pursuant to which RCS Capital will sell its wholesale distribution business, including the Dealer Manager, to an affiliate of Apollo. This transaction is subject to customary closing conditions and regulatory approvals and is expected to close early in the first quarter of 2016. American National Stock Transfer, LLC and RCS Advisory will remain as subsidiaries of RCS Capital.
Asset Management Fees
Following amendments to the Company's agreement with the Advisor and the limited partnership agreement of the OP on November 11, 2015, the Company is now required to pay asset management fees on a monthly basis effective October 1, 2015, and Class B Units will no longer be issued to the Advisor with respect to periods commencing on or after September 30, 2015. The asset management fee is payable on the first business day of each month in the amount of 0.0625% multiplied by the cost of assets (until the NAV pricing date, then the lower of the cost of the Company's assets and the fair value of the Company's assets). The asset management fee is payable to the Advisor or its assignees in cash, in shares of the Company's common stock, or a combination of both, the form of payment to be determined in the sole discretion of the Advisor. However, until the Offering is completed, cash payment of the asset management fee will be deferred if the Company’s forecast of MFFO coverage (where the coverage is calculated as MFFO divided by the distribution payout) for the applicable period does not exceed 110% (the “Threshold Coverage”). The MFFO forecast coverage will be calculated on a monthly basis through December 2015 and will be calculated quarterly thereafter. Any deferred asset management fee will accrue and become payable in full as soon as the MFFO coverage exceeds the Threshold Coverage in the then current or subsequent period.
Once the Offering is completed, cash payment of the asset management fee will no longer be subject to the Threshold Coverage requirement although the Advisor will still be able to defer cash payment of the asset management fee to future periods at its election.
Massachusetts Complaint
On November 12, 2015, the Enforcement Section of the Massachusetts Securities Division filed an administrative complaint against Realty Capital Securities, LLC (“RCS”), an entity under common control with the parent of the Advisor and Sponsor. Neither the Company nor the Advisor is a named party in the administrative complaint. RCS serves as the dealer manager of the Offering and, together with its affiliates, provides certain services to the Company and the Advisor. The administrative complaint alleges fraudulent behavior in connection with proxy services provided by RCS to another program sponsored by the parent of the Sponsor. RCS has previously solicited proxies on behalf of the Company, although the Advisor has determined at this time that RCS will no longer provide such services to the Company. The administrative complaint alleges that employees of RCS fabricated numerous shareholder proxy votes across multiple entities sponsored by the parent of the Sponsor but does not specifically refer to any actions taken in connection with any of the Company’s proxy solicitations.
Offering Suspension
On November 15, 2015, the Company’s board of directors, on the advice of the Advisor, authorized the suspension of the Offering effective December 31, 2015. There can be no assurance as to when, or if, the Company will resume the Offering, if at all.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read in conjunction with the accompanying condensed consolidated financial statements of American Realty Capital Hospitality Trust, Inc. and the notes thereto. As used herein, the terms "we," "our" and "us" refer to American Realty Capital Hospitality Trust, Inc., a Maryland corporation, including, as required by context, to American Realty Capital Hospitality Operating Partnership, L.P., a Delaware limited partnership, which we refer to as the "OP," and to its subsidiaries. We are externally managed by American Realty Capital Hospitality Advisors, LLC (our "Advisor"), a Delaware limited liability company.
Forward-Looking Statements
Certain statements included in this Quarterly Report on Form 10-Q are forward-looking statements. Those statements include statements regarding the intent, belief or current expectations we and members of our management team, as well as the assumptions on which such statements are based, and generally are identified by the use of words such as "may," "will," "seeks," "anticipates," "believes," "estimates," "expects," "plans," "intends," "should" or similar expressions. Actual results may differ materially from those contemplated by such forward-looking statements. Further, forward-looking statements speak only as of the date they are made, and we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time, unless required by law.
The following are some of the risks and uncertainties, although not all risks and uncertainties, that could cause our actual results to differ materially from those presented in our forward-looking statements:
• | We have a limited operating history. This inexperience makes our future performance difficult to predict. |
• | All of our executive officers are also officers, managers and/or holders of a direct or indirect controlling interest in our Advisor, the dealer manager, Realty Capital Securities, LLC (the "Dealer Manager"), or other entities affiliated with AR Capital, LLC ("ARC"). As a result, our executive officers, our Advisor and its affiliates face conflicts of interest, including significant conflicts created by our Advisor's compensation arrangements with us and other investment programs advised by American Realty Capital affiliates and conflicts in allocating time among these investment programs and us. These conflicts could result in unanticipated actions. |
• | Because investment opportunities that are suitable for us may also be suitable for other American Realty Capital advised investment programs, our Advisor and its affiliates face conflicts of interest relating to the purchase of properties and other investments and such conflicts may not be resolved in our favor, meaning that we could invest in less attractive assets, which could reduce the investment return to our stockholders. |
• | In June 2015, we entered into a series of agreements to acquire an aggregate of 44 hotels from three different independent parties for an aggregate contract purchase price of $739.8 million (the "SWN Acquisitions"). During October and November, we acquired 12 of the 44 hotels, and our acquisition of the remaining 32 hotels remains pending. We may not, in whole or in part, complete the SWN Acquisitions that remain pending on the currently contemplated terms or at all. |
• | We intend to use substantial available proceeds from our initial public offering of common stock (our “IPO” or our “Offering”) to reduce our borrowings, including borrowings made and preferred equity interests issued in connection with the acquisition of a portfolio of 116 hotel assets (the "Grace Portfolio"), to pay closing consideration in connection with 32 hotel assets of the SWN Acquisitions that remain pending, and to make capital expenditures, which may limit our ability to pay distributions from Offering proceeds or acquire additional properties. |
• | We focus on acquiring a diversified portfolio of hospitality assets located in the United States and are subject to risks inherent in concentrating investments in the hospitality industry. |
• | We may purchase real estate assets located in Canada, which may subject us to additional risks. |
• | No public market currently exists, or may ever exist, for shares of our common stock and our shares are, and may continue to be, illiquid. |
• | Increases in interest rates could increase the amount of our debt payments and limit our ability to pay distributions to our stockholders. |
• | There can be no assurance that we will be able to obtain the funds required to complete the SWN Acquisitions, or any future acquisitions, through draws under our existing mortgage loan agreements, which are subject to conditions and limitations in amount, proceeds from the Offering, which are dependent in part on the ability of the Dealer Manager to conduct the Offering, or another financing source, which may not be available on favorable terms or at all. |
• | We incurred substantial indebtedness, which may have a material adverse effect on our financial condition and results of operations. |
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• | We may not generate cash flows sufficient to pay our distributions to stockholders, and, as such, we may be forced to borrow at higher rates or depend on our Advisor and its affiliates to waive reimbursements of certain expenses and fees to fund our operations and pay distributions. |
• | We are obligated to pay fees to our Advisor and its affiliates, which may be substantial. |
• | We may be unable to pay cash distributions or maintain or increase distributions over time. |
• | Our organizational documents permit us to pay distributions from unlimited amounts of any source. Since our inception, all of our distributions have been paid from Offering proceeds. We may continue in the future to pay distributions from sources other than from our cash flows from operations, including the net proceeds from the Offering. There are no established limits on the amounts of net proceeds and borrowings that we may use to fund such distribution payments. |
• | Distributions paid will reduce the amount of capital we ultimately invest in properties and other permitted investments and may negatively impact the value of our stockholders' investment. |
• | Failure to realize the expected benefits of the acquisition of the Grace Portfolio and the SWN Acquisitions, within the anticipated timeframe or at all, or the incurrence of unexpected costs, could have a material adverse effect on our financial condition and results of operations and our ability to pay distributions from cash flow from operations. |
• | We are subject to risks associated with any dislocations or liquidity disruptions that may exist or occur in the credit markets of the United States from time to time. |
• | Our failure to continue to qualify to be treated as a real estate investment trust ("REIT") for U.S. federal income tax purposes which would result in higher taxes, may adversely affect operations and would reduce our net asset value ("NAV") and cash available for distributions. |
All forward-looking statements should also be read in light of the risks identified in Item 1A of our Annual Report on Form 10-K.
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Overview
American Realty Capital Hospitality Trust, Inc. was incorporated on July 25, 2013 as a Maryland corporation and qualified as a REIT beginning with the taxable year ended December 31, 2014. We were formed primarily to acquire lodging properties in the midscale limited service, extended stay, select service, upscale select service, and upper upscale full service segments within the hospitality sector. We have no limitation as to the number of franchise or license brands with which our hotels will be associated. All such properties may be acquired by us alone or jointly with another party. We may also originate or acquire first mortgage loans secured by real estate and invest in other real estate-related debt. In March 2014, we completed our first acquisition comprising investments in six hotels (the "Barceló Portfolio"), and in February 2015, we completed our second acquisition of the Grace Portfolio, comprising investments in 116 hotels. As of September 30, 2015, we had acquired or had an interest in a total of 122 properties. In June 2015, we entered into the SWN Acquisitions to acquire an aggregate of 44 hotels from three different independent parties for an aggregate contract purchase price of $739.8 million. In October and November 2015, we completed the acquisition of 12 of these hotels for an aggregate purchase price of $198.7 million, exclusive of closing costs.
On January 7, 2014, we commenced our IPO on a "reasonable best efforts" basis of up to 80,000,000 shares of common stock, $0.01 par value per share, at a price of $25.00 per share, subject to certain volume and other discounts, pursuant to a registration statement on Form S-11 (File No. 333-190698), as amended (the "Registration Statement"), filed with the U.S. Securities and Exchange Commission (the "SEC") under the Securities Act of 1933, as amended (the "Securities Act"). The Registration Statement also covers up to 21,052,631 shares of common stock available pursuant to the Distribution Reinvestment Plan (the "DRIP") under which our common stockholders may elect to have their distributions reinvested in additional shares of common stock.
Until the filing of our second quarterly financial filing with the SEC, pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"), following the earlier to occur of (i) our acquisition of at least $2.0 billion in total investment portfolio assets or (ii) January 7, 2016 (the "NAV pricing date"), the per share purchase price in the IPO will be up to $25.00 per share (including the maximum allowed to be charged for commissions and fees) and shares issued under the DRIP will initially be equal to $23.75 per share, which is 95% of the initial per share offering price in the IPO. Thereafter, the per share purchase price will vary quarterly and will be equal to our NAV per share plus applicable commissions and fees in the case of the primary offering and the per share purchase price in the DRIP will be equal to the NAV per share. On February 3, 2014, we received and accepted subscriptions in excess of the minimum offering amount of $2.0 million in Offering proceeds, broke escrow and issued shares of common stock to the initial investors who were admitted as stockholders. As of September 30, 2015, we had 30.7 million shares of stock outstanding and had received total gross proceeds from the IPO of approximately $762.6 million, including shares issued under the DRIP.
Substantially all of our business is conducted through the OP. We are the sole general partner and hold substantially all of the units of limited partner interests in the OP ("OP Units"). Additionally, the Advisor contributed $2,020 to the OP in exchange for 90 OP Units, which represents a nominal percentage of the aggregate OP ownership. The holders of OP Units have the right to convert OP Units for the cash value of a corresponding number of shares of our common stock or, at the option of the OP, a corresponding number of shares of common stock in accordance with the limited partnership agreement of the OP. The remaining rights of the limited partner interests are limited, however, and do not include the ability to replace the general partner or to approve the sale, purchase or refinancing of the OP's assets.
We have no direct employees. We have retained the Advisor to manage certain aspects of our affairs on a day-to-day basis. American Realty Capital Hospitality Properties, LLC or one of its subsidiaries (collectively, the "Property Manager"), serves as our property manager and the Property Manager has retained Crestline Hotels & Resorts, LLC ("Crestline"), an entity under common control with the parent of American Realty Capital IX, LLC (the "Sponsor") to provide services, including locating investments, negotiating financing and operating certain hotel assets in our portfolio. Our Dealer Manager, an entity under common control with the parent of the Sponsor, serves as the dealer manager of the Offering, and certain of its affiliates provide other services to us. The Advisor, American Realty Capital Hospitality Special Limited Partner, LLC, the Property Manager, Crestline and the Dealer Manager and its affiliates are related parties and receive fees, distributions and other compensation for services related to the Offering and the investment and management of our assets.
We, directly or indirectly through our taxable REIT subsidiaries ("TRSs"), enter into agreements with our Property Manager, which, in turn, engages Crestline or a third-party sub-property manager to manage our hotel properties. Crestline is a leading hospitality management company in the United States, and as of September 30, 2015, has 87 hotels and 13,523 rooms under management in 25 states and the District of Columbia. As of September 30, 2015, 53 of our hotels are managed by Crestline, and 69 of our hotels are managed by third-party sub-property managers.
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The results of operations for the period ended September 30, 2015 are not necessarily indicative of results for the entire year or any subsequent interim period. Certain prior period amounts have been reclassified to conform to current period presentation.
Significant Accounting Estimates and Critical Accounting Policies
Real Estate Investments
We allocate the purchase price of properties acquired in real estate investments to tangible and identifiable intangible assets acquired based on their respective fair values at the date of acquisition. Tangible assets include land, land improvements, buildings and fixtures. We utilize various estimates, processes and information to determine the fair value. Estimates of value are made using customary methods, including data from appraisals, comparable sales, discounted cash flow analysis and other methods. Amounts allocated to land, land improvements, buildings and fixtures are based on purchase price allocation studies performed by independent third parties or on our analysis of comparable properties in our portfolio. Identifiable intangible assets and liabilities, as applicable, are typically related to contracts, including operating lease agreements, ground lease agreements and hotel management agreements, which will be recorded at fair value. We also consider information obtained about each property as a result of our pre-acquisition due diligence in estimating the fair value of the tangible and intangible assets acquired and intangible liabilities assumed.
Investments in real estate that are not considered to be business combinations under GAAP are recorded at cost. Improvements and replacements are capitalized when they extend the useful life of the asset. Costs of repairs and maintenance are expensed as incurred. Depreciation of our assets is computed using the straight-line method over the estimated useful lives of up to 40 years for buildings, 15 years for land improvements, five years for fixtures and the shorter of the useful life or the remaining lease term for leasehold interests.
We are required to make subjective assessments as to the useful lives of our assets for purposes of determining the amount of depreciation to record on an annual basis with respect to our investments in real estate. These assessments have a direct impact on our net income because if we were to shorten the expected useful lives of our investments in real estate, we would depreciate these investments over fewer years, resulting in more depreciation expense and lower net income on an annual basis.
Below-Market Lease
The below-market lease intangibles are based on the difference between the market rent and the contractual rent as of the date we assumed the obligations and are discounted to a present value using an interest rate reflecting our current assessment of the risk associated with the leases assumed. Acquired lease intangible assets are amortized over the remaining lease term. The amortization of below-market leases is recorded as an increase to rent expense on the condensed consolidated statements of operations.
Impairment of Long Lived Assets and Investments in Unconsolidated Entities
When circumstances indicate the carrying value of a property may not be recoverable, we review the asset for impairment. This review is based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property’s use and eventual disposition. The estimates consider factors such as expected future operating income, market and other applicable trends and residual value, as well as the effects of demand, competition and other factors. If impairment exists, due to the inability to recover the carrying value of a property, an impairment loss will be recorded to the extent that the carrying value exceeds the estimated fair value of the property for properties to be held and used. For properties held for sale, the impairment loss is the adjustment to fair value less the estimated cost to dispose of the asset. These assessments have a direct impact on net income because recording an impairment loss results in an immediate negative adjustment to net income. No such impairment losses were recorded in the periods presented.
Variable Interest Entities
Accounting Standards Codification ("ASC") 810, Consolidation contains the guidance surrounding the definition of variable interest entities ("VIE"), the definition of variable interests and the consolidation rules surrounding VIEs. In general, VIEs are entities in which equity investors lack the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. We have variable interests in VIEs through its investments in entities which own the Westin Virginia Beach Town Center (the "Westin Virginia Beach") and the Hilton Garden Inn Blacksburg.
Once it is determined that we hold a variable interest in an entity, GAAP requires that we perform a qualitative analysis to determine (i) which entity has the power to direct the matters that most significantly impact the VIE’s financial performance;
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and (ii) if we have the obligation to absorb the losses of the VIE that could potentially be significant to the VIE or the right to receive the benefits of the VIE that could potentially be significant to the VIE. The entity that has both of these characteristics is deemed to be the primary beneficiary and is required to consolidate the VIE.
We hold an interest in BSE/AH Blacksburg Hotel, LLC (the "HGI Blacksburg JV"), an entity that owns the assets of the Hilton Garden Inn Blacksburg, and an interest in TCA Block 7 Hotel, LLC (the "Westin Virginia Beach JV"), an entity that owns the assets of the Westin Virginia Beach.
In the quarter ended June 30, 2015, upon the acquisition of an additional equity interest in the HGI Blacksburg JV, we concluded that we were the primary beneficiary, with the power to direct activities that most significantly impact its economic performance, and therefore consolidated the entity in our condensed consolidated financial statements subsequent to the acquisition (See Note 3 - Business Combinations to our accompanying condensed consolidated financial statements included in this Quarterly Report on Form 10-Q).
We concluded that we are not the primary beneficiary with the power to direct activities that most significantly impact economic performance of the Westin Virginia Beach JV, and has therefore not consolidated the entity. We have accounted for the entity under the equity method of accounting and included it in investments in unconsolidated entities in the accompanying condensed consolidated balance sheets.
Fair Value Measurements
In accordance with ASC 820, certain assets and liabilities are recorded at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability between market participants in an orderly transaction on the measurement date. The market in which the reporting entity would sell the asset or transfer the liability with the greatest volume and level of activity for the asset or liability is known as the principal market. When no principal market exists, the most advantageous market is used. This is the market in which the reporting entity would sell the asset or transfer the liability with the price that maximizes the amount that would be received or minimizes the amount that would be paid. Fair value is based on assumptions market participants would make in pricing the asset or liability. Generally, fair value is based on observable quoted market prices or derived from observable market data when such market prices or data are available. When such prices or inputs are not available, the reporting entity should use valuation models.
Our financial instruments that are recorded at fair value on a recurring basis are categorized based on the priority of the inputs used to measure fair value. The inputs used in measuring fair value are categorized into three levels, as follows:
• | Level 1 - Inputs that are based upon quoted prices for identical instruments traded in active markets. |
• | Level 2 - Inputs that are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar investments in markets that are not active, or models based on valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the investment. |
• | Level 3 - Inputs that are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models, and similar techniques. |
The determination of where an asset or liability falls in the hierarchy requires significant judgment and considers factors specific to the asset or liability. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety.
Revenue Performance Metrics
We measure hotel revenue performance by evaluating revenue metrics such as:
• | Occupancy percentage ("Occ") |
• | Average Daily Rate ("ADR") |
• | Revenue Per Available Room ("RevPAR") |
Occ, ADR, and RevPAR are commonly used, non-GAAP, measures within the hotel industry to evaluate hotel performance. RevPAR is defined as the product of the ADR and Occ (and also as the quotient of room revenue and available rooms). RevPAR does not include food and beverage or other revenues generated by the hotels. We evaluate individual hotel
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RevPAR performance on an absolute basis with comparisons to budget, to prior periods and to the competitive set in the market, as well as on a company-wide and regional basis.
Results of Operations
On February 27, 2015, we completed the acquisition of a portfolio of 116 hotel assets, the Grace Portfolio, which increased our hotel portfolio to a total 122 hotel assets. We completed our first acquisition of interests in six hotels, the Barceló Portfolio, on March 21, 2014. In June 2015, we entered into the SWN Acquisitions to acquire an aggregate of 44 hotels from three different independent parties. In October and November 2015, we completed the acquisition of 12 of these hotels, and we are scheduled to acquire the remaining 32 hotels in six separate closings over the next two quarters. See Note 3 - Business Combinations and Note 13 - Subsequent Events to our accompanying condensed consolidated financial statements included in this Quarterly Report on Form 10-Q, for additional discussion of these transactions.
Following amendments to our agreement with the Advisor and the limited partnership agreement of the OP on November 11, 2015, we are now required to pay asset management fees, which may be in cash (subject to certain coverage limitations during the pendency of the Offering), shares of our common stock or a combination of both, at the Advisor’s election, on a monthly basis effective October 1, 2015, and Class B Units will no longer be issued to the Advisor with respect to periods commencing on or after September 30, 2015. Historically, the issuance of Class B Units was not reflected as an expense in our Condensed Consolidated/Combined Statements of Operations, except for the distributions made on the associated Class B Units. Beginning in the fourth quarter of 2015, our Condensed Consolidated/Combined Statements of Operations will include an expense for the asset management fee payable in cash, shares of our common stock or a combination thereof.
The following discussion compares our operating results for the three months ended September 30, 2015 and nine months ended September 30, 2015 to the comparable periods in 2014. Results for the nine months ended September 30, 2014 include results from the Barceló Portfolio (in such capacity, the "Predecessor") from January 1, 2014 to March 20, 2014.
Comparison of the Three Months Ended September 30, 2015 to the Three Months Ended September 30, 2014
Room revenues were $126.2 million for the three months ended September 30, 2015, compared to room revenues of $9.0 million for the three months ended September 30, 2014. The increase in room revenues was primarily due to the acquisition of the Grace Portfolio in February 2015. We generally expect that room revenues will make up a significant majority of our total revenues, therefore our revenue results will be highly dependent on maintaining and improving Occ and ADR, which drive RevPAR.
The following table presents operating information of the Barceló Portfolio and the Grace Portfolio for the periods in which we owned each.
Three Months Ended | ||||||||
Total Portfolio | September 30, 2015 | September 30, 2014 | ||||||
Number of rooms | 14,924 | 1,181 | ||||||
Occ | 79.3 | % | 82.2 | % | ||||
ADR | $ | 118.75 | $ | 148.03 | ||||
RevPAR | $ | 94.14 | $ | 121.66 | ||||
The following table presents pro-forma operating information of the Barceló Portfolio and the Grace Portfolio as if we had owned each portfolio for the full periods presented.
Three Months Ended | ||||||||
Pro forma | September 30, 2015 | September 30, 2014 | ||||||
Number of rooms | 14,924 | 14,922 | ||||||
Occ | 79.3 | % | 77.6 | % | ||||
ADR | $ | 118.75 | $ | 113.15 | ||||
RevPAR | $ | 94.14 | $ | 87.79 | ||||
RevPAR growth rate | 7.2 | % | ||||||
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The pro-forma RevPAR growth rate for the three months ended September 30, 2015, compared to the three months ended September 30, 2014 was 7.2%, driven by growth in occupancy and ADR. Other non-room operating revenues for the portfolio include food and beverage, and other ancillary revenues such as conference center, market, parking, telephone and cancellation fees. Other non-room operating revenues, including the results of the Barceló Portfolio and the Grace Portfolio as if we had owned each portfolio for the full quarters ended September 30, 2015, and 2014, increased approximately 4.1%, over the prior year period.
Our hotel operating expenses consist primarily of labor expenses incurred in the day-to-day operation of our hotels. Our hotels have a variety of fixed expenses, such as essential hotel staff, real estate taxes and insurance, and these expenses do not change materially even if the revenues at the hotels fluctuate. Our primary hotel operating expenses are described below:
• | Rooms expense: These costs include labor (housekeeping and rooms operation), reservation systems, room supplies, linen and laundry services. Occupancy is the major driver of rooms expense, due to the cost of cleaning the rooms, with additional expenses that vary with the level of service and amenities provided. |
• | Food and beverage expense: These expenses primarily include labor and the cost of food and beverage. Occupancy and the type of customer staying at the hotel (for example, catered functions generally are more profitable than outlet sales) are the major drivers of food and beverage expense, which correlates closely with food and beverage revenue. |
• | Management fees: Base management fees paid are computed as a percentage of gross revenue. Incentive management fees may be paid when operating profit or other performance metrics exceed certain threshold levels. |
• | Other property-level operating costs: These expenses include labor and other costs associated with other ancillary revenue, such as conference center, parking, market and other guest services, as well as labor and other costs associated with administrative and general, sales and marketing, brand related fees, repairs, maintenance and utility costs. In addition, these expenses include real and personal property taxes and insurance, which are relatively inflexible and do not necessarily change based on changes in revenue or performance at the hotels. |
Total hotel operating expenses, including the results of the Barceló Portfolio and the Grace Portfolio as if we had owned each portfolio for the full quarters ended September 30, 2015, and 2014, increased approximately 13.4%, over the prior year period.
Depreciation and amortization increased approximately $18.9 million for the third quarter of 2015, compared to the prior year, due primarily to the acquisition of the Grace Portfolio.
Interest expense increased approximately $21.0 million for the third quarter of 2015, compared to the prior year, due primarily to additional mortgage debt and the issuance of mandatorily redeemable preferred securities related to the acquisition of the Grace Portfolio.
Other income (expense) changed by approximately $0.2 million for the third quarter of 2015, compared to the prior year, due to the loss recorded related to the change in the fair value associated with the contingent consideration payable due in connection with the acquisition of the Barceló Portfolio.
Comparison of the Nine Months Ended 2015 to the Nine Months Ended 2014
Room revenues were $302.7 million for the nine months ended September 30, 2015, compared to room revenues of $24.5 million for the nine months ended September 30, 2014, including results from the Predecessor period. The increase in room revenues was primarily due to the acquisition of the Grace Portfolio in February 2015.
The following table presents operating information of the Barceló Portfolio (including Predecessor results), and the Grace Portfolio for the periods in which we owned each.
Nine Months Ended | ||||||||
Total Portfolio | September 30, 2015 | September 30, 2014 | ||||||
Number of rooms | 14,924 | 1,181 | ||||||
Occ | 79.0 | % | 77.6 | % | ||||
ADR | $ | 119.88 | $ | 142.00 | ||||
RevPAR | $ | 94.70 | $ | 110.18 | ||||
The following table presents pro-forma operating information of the Barceló Portfolio and the Grace Portfolio as if we had owned each portfolio for the full periods presented.
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Nine Months Ended | ||||||||
Pro-forma | September 30, 2015 | September 30, 2014 | ||||||
Number of rooms | 14,924 | 14,922 | ||||||
Occ | 77.0 | % | 75.8 | % | ||||
ADR | $ | 118.83 | $ | 112.71 | ||||
RevPAR | $ | 91.54 | $ | 85.40 | ||||
RevPAR growth rate | 7.2 | % | ||||||
The pro-forma RevPAR growth rate for the nine months ended September 30, 2015, compared to the nine months ended September 30, 2014, was 7.2%, driven by growth in occupancy and ADR. Other non-room operating revenues for the portfolio include food and beverage, and other ancillary revenues such as conference center, market, parking, telephone and cancellation fees. Other non-room operating revenues, including the results of the Barceló Portfolio and the Grace Portfolio as if we had owned each portfolio for the full years ended September 30, 2015, and 2014, increased approximately 8.1%, over the prior year period.
Total hotel operating expenses, including the results of the Barceló Portfolio and the Grace Portfolio as if we had owned each portfolio for the full years ended September 30, 2015, and 2014, increased approximately 11.0%, over the prior year period.
Depreciation and amortization increased approximately $43.5 million year-to-date 2015, compared to the prior year, due primarily to the acquisition of the Grace Portfolio.
Interest expense increased approximately $51.9 million year-to-date 2015, compared to the prior year, due primarily to additional mortgage debt and the issuance of mandatorily redeemable preferred securities related to the acquisition of the Grace Portfolio.
Other income (expense) changed by approximately $2.0 million year-to-date 2015, compared to the prior year, primarily due to the net gain recorded related to the change in the fair value associated with the contingent consideration payable due in connection with the acquisition of the Barceló Portfolio. The decrease in fair value was driven by the recent civil unrest in Baltimore, which impacted the results of the Baltimore Courtyard.
Funds from Operations and Modified Funds from Operations
The historical accounting convention used for real estate assets requires straight-line depreciation of buildings, improvements, and straight-line amortization of intangibles, which implies that the value of a real estate asset diminishes predictably over time. We believe that, because real estate values historically rise and fall with market conditions, including, but not limited to, inflation, interest rates, the business cycle, unemployment and consumer spending, presentations of operating results for a REIT using the historical accounting convention for depreciation and certain other items may not be fully informative.
Because of these factors, the National Association of Real Estate Investment Trusts (“NAREIT”), an industry trade group, has published a standardized measure of performance known as funds from operations (“FFO”), which is used in the REIT industry as a supplemental performance measure. We believe FFO, which excludes certain items such as real estate-related depreciation and amortization, is an appropriate supplemental measure of a REIT’s operating performance. FFO is not equivalent to our net income or loss as determined under GAAP.
We define FFO, a non-GAAP measure, consistent with the standards set forth in the White Paper on FFO approved by the Board of Governors of NAREIT, as revised in February 2004 (the “White Paper”). The White Paper defines FFO as net income or loss computed in accordance with GAAP, but excluding gains or losses from sales of property and real estate related impairments, plus real estate related depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures.
We believe that the use of FFO provides a more complete understanding of our performance to investors and to management, and, when compared year over year, reflects the impact on our operations from trends in occupancy rates, ADR, operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income.
Changes in the accounting and reporting promulgations under GAAP that were put into effect in 2009 subsequent to the establishment of NAREIT’s definition of FFO, such as the change to expense as incurred rather than capitalize and depreciate acquisition fees and expenses incurred for business combinations, have prompted an increase in cash-settled expenses,
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specifically acquisition fees and expenses, as items that are expensed under GAAP across all industries. These changes had a particularly significant impact on publicly registered, non-listed REITs, which typically have a significant amount of acquisition activity in the early part of their existence, particularly during the period when they are raising capital through ongoing initial public offerings.
Because of these factors, the Investment Program Association (the “IPA”), an industry trade group, has published a standardized measure of performance known as modified funds from operations (“MFFO”), which the IPA has recommended as a supplemental measure for publicly registered, non-listed REITs. MFFO is designed to be reflective of the ongoing operating performance of publicly registered, non-listed REITs by adjusting for those costs that are more reflective of acquisitions and investment activity, along with other items the IPA believes are not indicative of the ongoing operating performance of a publicly registered, non-listed REIT, such as straight-lining of rents as required by GAAP. We believe it is appropriate to use MFFO as a supplemental measure of operating performance because we believe that, when compared year over year, both before and after we have deployed all of our Offering proceeds and are no longer incurring a significant amount acquisitions fees or other related costs, it reflects the impact on our operations from trends in occupancy rates, ADR, operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income. MFFO is not equivalent to our net income or loss as determined under GAAP.
We define MFFO, a non-GAAP measure, consistent with the IPA’s Guideline 2010-01, Supplemental Performance Measure for Publicly Registered, Non-Listed REITs: Modified Funds from Operations (the “Practice Guideline”) issued by the IPA in November 2010. The Practice Guideline defines MFFO as FFO further adjusted for acquisition and transaction related fees and expenses and other items. In calculating MFFO, we follow the Practice Guideline and exclude acquisition and transaction-related fees and expenses, amounts relating to deferred rent receivables and amortization of above and below market leases and liabilities (which are adjusted in order to reflect such payments from a GAAP accrual basis to a cash basis of disclosing the rent and lease payments), accretion of discounts and amortization of premiums on debt investments, mark-to-market adjustments included in net income, gains or losses included in net income from the extinguishment or sale of debt, hedges, foreign exchange, derivatives or securities holdings where trading of such holdings is not a fundamental attribute of the business plan, unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting, and after adjustments for consolidated and unconsolidated partnerships and joint ventures, with such adjustments calculated to reflect MFFO on the same basis.
We believe that, because MFFO excludes costs that we consider more reflective of acquisition activities and other non-operating items, MFFO can provide, on a going-forward basis, an indication of the sustainability (that is, the capacity to continue to be maintained) of our operating performance after the period in which we are acquiring properties and once our portfolio is stabilized. We also believe that MFFO is a recognized measure of sustainable operating performance by the non-listed REIT industry and allows for an evaluation of our performance against other publicly registered, non-listed REITs.
Not all REITs, including publicly registered, non-listed REITs, calculate FFO and MFFO the same way. Accordingly, comparisons with other REITs, including publicly registered, non-listed REITs, may not be meaningful. Furthermore, FFO and MFFO are not indicative of cash flow available to fund cash needs and should not be considered as an alternative to net income (loss) or income (loss) from continuing operations as determined under GAAP as an indication of our performance, as an alternative to cash flows from operations, as an indication of our liquidity, or indicative of funds available to fund our cash needs including our ability to make distributions to our stockholders. FFO and MFFO should be reviewed in conjunction with other GAAP measurements as an indication of our performance. FFO and MFFO should not be construed to be more relevant or accurate than the current GAAP methodology in calculating net income or in its applicability in evaluating our operating performance. The methods utilized to evaluate the performance of a publicly registered, non-listed REIT under GAAP should be construed as more relevant measures of operational performance and considered more prominently than the non-GAAP measures, FFO and MFFO, and the adjustments to GAAP in calculating FFO and MFFO.
Neither the SEC, NAREIT, the IPA nor any other regulatory body or industry trade group has passed judgment on the acceptability of the adjustments that we use to calculate FFO or MFFO. In the future, NAREIT, the IPA or another industry trade group may publish updates to the White Paper or the Practice Guideline or the SEC or another regulatory body could standardize the allowable adjustments across the a publicly registered, non-listed REIT industry and we would have to adjust our calculation and characterization of FFO or MFFO accordingly.
The table below reflects the items deducted or added to net loss in our calculation of FFO and MFFO for the three months and nine months ended September 30, 2015 and for the three months and nine months ended September 30, 2014, excluding the results of the Predecessor (in thousands):
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For the Three Months Ended September 30, 2015 | For the Three Months Ended September 30, 2014 | For the Nine Months Ended September 30, 2015 | For the Period From March 21 to September 30, 2014 | ||||||||||
Net income (loss) attributable to American Realty Capital Hospitality Trust, Inc. | $ | (5,082 | ) | $ | (3,549 | ) | $ | (44,620 | ) | $ | (8,913 | ) | |
Depreciation and amortization | 19,817 | 907 | 46,438 | 1,919 | |||||||||
Adjustment to Company's share of depreciation and amortization for variable interest entities | (14 | ) | 112 | 161 | 238 | ||||||||
FFO attributable to common stockholders | $ | 14,721 | $ | (2,530 | ) | $ | 1,979 | $ | (6,756 | ) | |||
Acquisition fees and expenses | 698 | 2,965 | 39,129 | 7,610 | |||||||||
Change in fair value of contingent consideration | 207 | — | (1,720 | ) | — | ||||||||
Change in fair value of equity interest | — | — | (219 | ) | — | ||||||||
Amortization of below-market lease intangible asset, net | 100 | 110 | 305 | 234 | |||||||||
MFFO attributable to common stockholders | $ | 15,726 | $ | 545 | $ | 39,474 | $ | 1,088 | |||||
Cash Flows
Net cash provided by operating activities was $3.3 million for the nine months ended September 30, 3015. Cash provided by operating activities was positively impacted primarily by increases in accounts payable and accrued expenses, partially offset by acquisition and transaction related costs incurred in the acquisition of the Grace Portfolio, increases in restricted cash, and increases in prepaids and other assets. Net cash used in investing activities was $506 million for the nine months ended September 30, 2015, primarily attributable to the acquisition of the Grace Portfolio and acquisition deposits on the SWN Acquisitions. Net cash flow provided by financing activities was $460.5 million for the nine months ended September 30, 2015. Cash provided by financing activities was primarily impacted by proceeds from the issuance of common stock and proceeds from the Original Additional Grace Mortgage Loan (as defined below) incurred in connection with the acquisition of the Grace Portfolio, partially offset by redemptions of mandatorily redeemable preferred securities and repayments of notes payable.
Election as a REIT
We qualified to be taxed as a REIT commencing with our taxable year ended December 31, 2014. In order to qualify as a REIT, we must annually distribute to our stockholders 90% of our REIT taxable income (which does not equal net income as calculated in accordance with GAAP), determined without regard to the deduction for dividends paid and excluding net capital gain, and must comply with a number of other organizational and operational requirements. We generally will not be subject to U.S. federal income tax on that portion of our REIT taxable income which is distributed to our stockholders. Our hotels are leased to TRSs which are owned by the OP. A TRS is subject to federal, state and local income taxes. If we fail to remain qualified as a REIT in any subsequent year after electing REIT status and do not qualify for certain statutory relief provisions, our income for that year will be taxed at regular corporate rates, and we may be precluded from qualifying for treatment as a REIT for the four-year period following our failure to qualify as a REIT. Such an event could materially and adversely affect our net income and cash available for distribution.
Liquidity and Capital Resources
We are offering and selling to the public in our primary offering up to 80,000,000 shares of our common stock at up to $25.00 per share (subject to certain volume discounts). We also are offering up to 21,052,631 shares of common stock under our DRIP, initially at $23.75 per share, which is 95.0% of the primary offering price. Beginning with the NAV pricing date, we will calculate NAV and if we extend our primary offering past the NAV pricing date, will offer shares in our primary offering and under our DRIP at per share NAV (plus applicable selling commissions and dealer manager fees for shares sold in our primary offering), subject to certain limitations. We reserve the right to reallocate the shares of common stock we are offering between our primary offering and the DRIP.
On February 3, 2014, we had raised proceeds sufficient to break escrow in connection with our Offering. We received and accepted aggregate subscriptions in excess of the $2.0 million minimum and issued shares of common stock to our initial investors who were simultaneously admitted as stockholders. We purchased our first properties and commenced our real estate operation on March 21, 2014. As of September 30, 2015, we owned the Barceló Portfolio and the Grace Portfolio which collectively had an aggregate purchase price of approximately $1.9 billion. As of September 30, 2015, we had 30.7
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million shares of common stock outstanding, including share issued under the DRIP, for cumulative gross proceeds of $762.6 million. Our Offering will be suspended effective December 31, 2015.
As of September 30, 2015, we had cash of $89.7 million. Our principal demands for cash are for the purchase price of any properties, loans and securities we acquire, capital improvement costs, the payment of our operating and administrative expenses, including the payment of asset management fees to our Advisor, continuing debt service obligations and distributions to our stockholders. Our principal sources of cash are Offering proceeds, cash from operations and mortgage or other indebtedness to finance or refinance our investments. Potential future sources of cash include secured or unsecured financings from banks or other lenders, establishing additional lines of credit and proceeds from the sale of properties.
We continue to rely significantly on proceeds from our Offering to fund our operations. As of September 30, 2015, all of the cash distributions paid since the commencement of the Offering have been funded from Offering proceeds, including Offering proceeds which were realized upon the issuance of common stock pursuant to the DRIP. We anticipate that as we realize the expected economic benefits of recent and pending acquisitions, we will be able to generate adequate cash from operations to fund our operating and administrative expenses, including the payment of asset management fees to our Advisor, continuing debt service obligations and the payment of distributions, but there is no assurance we will be able to do so.
On November 15, 2015, our board of directors, on the advice of our Advisor, authorized the suspension of the Offering effective December 31, 2015. There can be no assurance as to when, or if, we will resume the Offering, if at all. There also can be no assurance that we will be able to generate capital from alternative sources, including from the sale of shares of common stock through the DRIP, to fund our operating and capital needs, including cash required to fund repurchases under our SRP. We have also funded all of the distributions to our stockholders from proceeds from the Offering. There is no assurance will be able to generate sufficient cash flows from alternative sources to continue paying distributions at the current rate, if at all. Moreover, if we are required to sell assets to generate needed cash, our ability to generate future cash flow from operations will be adversely impacted.
Failure to fund closing consideration could cause us to be in default under the agreements governing the SWN Acquisitions and, as a result, to forfeit all or a part of the $61.9 million in aggregate deposits made but not yet used. Furthermore, failure to fund capital expenditures required under our indebtedness and pursuant to our franchise agreements could cause us to default under the related agreements, and failure to fund interest and principal under our mortgage indebtedness or make mandatory redemptions of the Grace Preferred Equity Interests could cause us to lose control of our properties. In addition, our failure to raise adequate capital to successfully implement our investment strategy or achieve portfolio diversification, due to the suspension of the Offering or for any other reason, could adversely impact the value of an investment in our common stock. (See Note 13 - Subsequent Events to our accompanying condensed consolidated financial statements included in this Quarterly Report on Form 10-Q).
In February 2015, we acquired the Grace Portfolio for a purchase price of $1.8 billion. Approximately $220.7 million of the purchase price was satisfied with proceeds from our IPO, approximately $904.2 million through the assumption of existing mortgage and mezzanine indebtedness (the "Assumed Grace Indebtedness") and approximately $227.0 million through additional mortgage financing (the "Original Additional Grace Mortgage Loan" and, together with the Assumed Grace Indebtedness, the "Grace Indebtedness"). The Grace Indebtedness is secured by the hotels in the Grace Portfolio and one hotel from the Barceló Portfolio. The Original Additional Grace Mortgage Loan was refinanced to reduce and fix the interest rate and extend the maturity in October 2015. In addition, the remaining $447.1 million of the contract purchase price was satisfied by the issuance of the preferred equity interests (the "Grace Preferred Equity Interests") in two newly-formed Delaware limited liability companies, each of which is an indirect subsidiary of ours and an indirect owner of the Grace Portfolio. Due to the fact that the Grace Preferred Equity Interests are mandatorily redeemable and certain of their other characteristics, the Grace Preferred Equity Interests are treated as debt in accordance with GAAP.
In June 2015, we entered into a series of agreements to acquire an aggregate of 44 hotels comprising the SWN Acquisitions for an aggregate contract purchase price of $739.8 million.
In August 2015, we entered into a Term Loan Agreement with Deutsche Bank AG New York Branch, as administrative agent and Deutsche Bank Securities Inc., as sole lead arranger and book-running manager, and we amended and restated the Term Loan Agreement during October 2015 (as so amended, the “Term Loan”). The Term Loan provides for up to $450 million in financing (the “Loans”) at a rate equal to a base rate plus a spread of between 3.25% and 3.75% for Eurodollar rate Loans and between 2.25% and 2.75% for base rate Loans, depending on the aggregate debt yield and aggregate loan-to-value of the properties securing the Loans measured periodically. The Term Loan has a term of three years, with two one-year extension options, and will be secured by the fee interest in the hotels serving as collateral as and when they are acquired.
In October and November 2015, we acquired 12 of the 44 hotels for an aggregate purchase price of $198.7 million, which was funded with $11.2 million previously paid as a deposit, $64.7 million from the proceeds of our ongoing IPO, and $122.9 million from an advance under the Term Loan.
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Our acquisition of the remaining 32 hotels to be acquired in the SWN Acquisitions for an aggregate contract purchase price of $541.1 million remains pending. We are scheduled to complete the SWN Acquisitions that remain pending in six separate closings, which are scheduled for the fourth quarter of 2015 and the first quarter of 2016. We have made $61.9 million in deposits with respect to the remaining acquisitions that will be used to pay a portion of the consideration due at closing. The remaining consideration due at the closings is expected to be funded, similar to the closings that have already occurred, by a combination of proceeds from the Company's ongoing Offering and mortgage debt financing pursuant to advances under the Term Loan.
Although we have entered into agreements relating to the a