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EX-32.1 - EX-32.1 - Sunstone Hotel Investors, Inc.sho-20160630ex321723352.htm
EX-31.2 - EX-31.2 - Sunstone Hotel Investors, Inc.sho-20160630ex312e26ab3.htm
EX-31.1 - EX-31.1 - Sunstone Hotel Investors, Inc.sho-20160630ex311ac2abb.htm
EX-10.3 - EX-10.3 - Sunstone Hotel Investors, Inc.sho-20160630ex103a13796.htm
EX-10.2 - EX-10.2 - Sunstone Hotel Investors, Inc.sho-20160630ex102df406b.htm

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

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

 

For the quarterly period ended June 30, 2016

 

OR

 

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

 

For the transition period from                to               

 

Commission file number 001-32319

 


 

Sunstone Hotel Investors, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 


 

 

 

 

Maryland

 

20-1296886

(State or Other Jurisdiction of
Incorporation or Organization)

 

(I.R.S. Employer
Identification Number)

 

 

 

120 Vantis, Suite 350
Aliso Viejo, California

 

92656

(Address of Principal Executive Offices)

 

(Zip Code)

 

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

 


 

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

 

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

 

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

 

 

 

 

Large accelerated filer 

 

Accelerated filer 

 

 

 

Non-accelerated filer 

 

Smaller reporting company 

(Do not check if a smaller reporting company)

 

 

 

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

 

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

216,575,534 shares of Common Stock, $0.01 par value, as of August 1, 2016

 

 


 

 

SUNSTONE HOTEL INVESTORS, INC.

QUARTERLY REPORT ON

FORM 10-Q

 

For the Quarterly Period Ended June 30, 2016

 

TABLE OF CONTENTS

 

 

 

 

 

 

Page

PART I—FINANCIAL INFORMATION 

 

 

 

Item 1. 

Financial Statements:

 

 

 

 

Consolidated Balance Sheets as of June 30, 2016 (unaudited) and December 31, 2015

 

 

 

 

Unaudited Consolidated Statements of Operations and Comprehensive Income for the Three and Six Months Ended June 30, 2016 and 2015

 

 

 

 

Unaudited Consolidated Statement of Equity for the Six Months Ended June 30, 2016

 

 

 

 

Unaudited Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2016 and 2015

 

 

 

 

Notes to Unaudited Consolidated Financial Statements

 

 

 

Item 2. 

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

21 

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures about Market Risk

39 

 

 

 

Item 4. 

Controls and Procedures

40 

 

 

 

PART II—OTHER INFORMATION 

 

 

 

Item 1. 

Legal Proceedings

41 

 

 

 

Item 1A. 

Risk Factors

41 

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

41 

 

 

 

Item 3. 

Defaults Upon Senior Securities

41 

 

 

 

Item 4. 

Mine Safety Disclosures

41 

 

 

 

Item 5. 

Other Information

41 

 

 

 

Item 6. 

Exhibits

42 

 

 

 

SIGNATURES 

43 

 

 

 

i

 


 

 

PART I—FINANCIAL INFORMATION

Item 1.Financial Statements

 

SUNSTONE HOTEL INVESTORS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

    

2016

    

2015

 

 

(unaudited)

 

 

 

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

354,682

 

$

499,067

Restricted cash

 

 

62,335

 

 

76,180

Accounts receivable, net

 

 

46,528

 

 

32,024

Inventories

 

 

1,307

 

 

1,395

Prepaid expenses

 

 

8,319

 

 

10,879

Total current assets

 

 

473,171

 

 

619,545

Investment in hotel properties, net

 

 

3,231,669

 

 

3,229,010

Deferred financing fees, net

 

 

2,843

 

 

4,310

Other assets, net

 

 

9,457

 

 

10,386

Total assets

 

$

3,717,140

 

$

3,863,251

LIABILITIES AND EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

35,017

 

$

30,193

Accrued payroll and employee benefits

 

 

20,942

 

 

28,023

Dividends and distributions payable

 

 

13,898

 

 

265,124

Other current liabilities

 

 

44,401

 

 

41,877

Current portion of notes payable, net

 

 

251,719

 

 

85,776

Total current liabilities

 

 

365,977

 

 

450,993

Notes payable, less current portion, net

 

 

751,096

 

 

1,010,819

Capital lease obligations, less current portion

 

 

15,575

 

 

15,575

Other liabilities

 

 

44,945

 

 

34,744

Total liabilities

 

 

1,177,593

 

 

1,512,131

Commitments and contingencies (Note 11)

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

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

 

 

 

 

 

 

8.0% Series D Cumulative Redeemable Preferred Stock, zero shares issued and outstanding at June 30, 2016 and 4,600,000 shares issued and outstanding at December 31, 2015, stated at liquidation preference of $25.00 per share

 

 

 —

 

 

115,000

6.95% Series E Cumulative Redeemable Preferred Stock, 4,600,000 shares issued and outstanding at June 30, 2016 and zero shares issued and outstanding at December 31, 2015, stated at liquidation preference of $25.00 per share

 

 

115,000

 

 

 —

6.45% Series F Cumulative Redeemable Preferred Stock, 3,000,000 shares issued and outstanding at June 30, 2016 and zero shares issued and outstanding at December 31, 2015, stated at liquidation preference of $25.00 per share

 

 

75,000

 

 

 —

Common stock, $0.01 par value, 500,000,000 shares authorized, 216,575,534 shares issued and outstanding at June 30, 2016 and 207,604,391 shares issued and outstanding at December 31, 2015

 

 

2,166

 

 

2,076

Additional paid in capital

 

 

2,539,278

 

 

2,458,889

Retained earnings

 

 

716,351

 

 

652,704

Cumulative dividends and distributions

 

 

(959,072)

 

 

(927,868)

Total stockholders’ equity

 

 

2,488,723

 

 

2,300,801

Noncontrolling interest in consolidated joint venture

 

 

50,824

 

 

50,319

Total equity

 

 

2,539,547

 

 

2,351,120

Total liabilities and equity

 

$

3,717,140

 

$

3,863,251

 

See accompanying notes to consolidated financial statements.

2

 


 

SUNSTONE HOTEL INVESTORS, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(In thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Three Months Ended

 

Six Months Ended

 

Six Months Ended

 

    

June 30, 2016

    

June 30, 2015

    

June 30, 2016

    

June 30, 2015

REVENUES

 

 

 

 

 

 

 

 

 

 

 

 

Room

 

$

224,176

 

$

239,678

 

$

411,473

 

$

432,969

Food and beverage

 

 

81,298

 

 

79,265

 

 

152,532

 

 

151,449

Other operating

 

 

16,686

 

 

20,324

 

 

32,447

 

 

39,234

Total revenues

 

 

322,160

 

 

339,267

 

 

596,452

 

 

623,652

OPERATING EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

Room

 

 

54,517

 

 

57,568

 

 

105,561

 

 

111,410

Food and beverage

 

 

52,939

 

 

52,812

 

 

104,868

 

 

103,031

Other operating

 

 

4,132

 

 

5,337

 

 

8,188

 

 

10,468

Advertising and promotion

 

 

15,277

 

 

15,567

 

 

30,270

 

 

30,927

Repairs and maintenance

 

 

10,999

 

 

11,381

 

 

22,263

 

 

22,939

Utilities

 

 

7,348

 

 

8,377

 

 

14,862

 

 

17,362

Franchise costs

 

 

9,898

 

 

10,818

 

 

17,994

 

 

19,418

Property tax, ground lease and insurance

 

 

18,157

 

 

23,151

 

 

40,997

 

 

46,764

Property general and administrative

 

 

37,982

 

 

37,107

 

 

72,695

 

 

71,556

Corporate overhead

 

 

6,809

 

 

6,923

 

 

13,526

 

 

21,176

Depreciation and amortization

 

 

40,680

 

 

40,873

 

 

80,727

 

 

81,580

Total operating expenses

 

 

258,738

 

 

269,914

 

 

511,951

 

 

536,631

Operating income

 

 

63,422

 

 

69,353

 

 

84,501

 

 

87,021

Interest and other income

 

 

355

 

 

1,828

 

 

844

 

 

2,774

Interest expense

 

 

(15,872)

 

 

(17,289)

 

 

(35,882)

 

 

(34,615)

Loss on extinguishment of debt

 

 

(154)

 

 

(2)

 

 

(259)

 

 

(2)

Gain on sale of assets

 

 

18,223

 

 

 —

 

 

18,223

 

 

 —

Income before income taxes

 

 

65,974

 

 

53,890

 

 

67,427

 

 

55,178

Income tax provision

 

 

(238)

 

 

(233)

 

 

(475)

 

 

(318)

NET INCOME

 

 

65,736

 

 

53,657

 

 

66,952

 

 

54,860

Income from consolidated joint ventures attributable to noncontrolling interests

 

 

(1,655)

 

 

(2,480)

 

 

(3,305)

 

 

(4,661)

Preferred stock dividends and redemption charge

 

 

(6,783)

 

 

(2,300)

 

 

(9,549)

 

 

(4,600)

INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS

 

$

57,298

 

$

48,877

 

$

54,098

 

$

45,599

 

 

 

 

 

 

 

 

 

 

 

 

 

COMPREHENSIVE INCOME

 

$

65,736

 

$

53,657

 

$

66,952

 

$

54,860

COMPREHENSIVE INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS

 

$

57,298

 

$

48,877

 

$

54,098

 

$

45,599

Basic and diluted per share amounts:

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted income attributable to common stockholders per common share

 

$

0.26

 

$

0.23

 

$

0.25

 

$

0.22

Basic and diluted weighted average common shares outstanding

 

 

215,385

 

 

207,577

 

 

214,136

 

 

207,091

 

 

 

 

 

 

 

 

 

 

 

 

 

Distributions declared per common share

 

$

0.05

 

$

0.05

 

$

0.10

 

$

0.10

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

 

3

 


 

 

SUNSTONE HOTEL INVESTORS, INC.

UNAUDITED CONSOLIDATED STATEMENT OF EQUITY

(In thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

Noncontrolling

 

 

 

 

 

Series D

 

Series E

 

Series F

 

Common Stock

 

 

 

 

 

 

 

Cumulative

 

Interest in

 

 

 

 

 

Number of

 

 

 

 

Number of

 

 

 

Number of

 

 

 

Number of

 

 

 

Additional

 

Retained

 

Dividends and

 

Consolidated

 

 

 

 

 

Shares

   

Amount

   

Shares

   

Amount

 

Shares

   

Amount

   

Shares

   

Amount

   

Paid in Capital

   

 Earnings

   

Distributions

   

   Joint Venture  

   

Total

Balance at December 31, 2015 (audited)

 

4,600,000

 

$

115,000

 

 —

 

$

 —

 

 —

 

$

 —

 

207,604,391

 

$

2,076

 

$

2,458,889

 

$

652,704

 

$

(927,868)

 

$

50,319

 

$

2,351,120

Redemption of preferred stock

 

(4,600,000)

 

 

(115,000)

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

4,052

 

 

 —

 

 

(4,052)

 

 

 —

 

 

(115,000)

Net proceeds from sales of preferred stock

 

 —

 

 

 —

 

4,600,000

 

 

115,000

 

3,000,000

 

 

75,000

 

 —

 

 

 —

 

 

(6,640)

 

 

 —

 

 

 —

 

 

 —

 

 

183,360

Deferred stock compensation, net

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

1,549,062

 

 

16

 

 

4,228

 

 

 —

 

 

 —

 

 

 —

 

 

4,244

Issuance of common stock distributions declared in 2015 at $1.26 per share

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

7,422,081

 

 

74

 

 

78,749

 

 

 —

 

 

 —

 

 

 —

 

 

78,823

Common stock distributions and distributions payable at $0.10 per share year to date

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(21,655)

 

 

 —

 

 

(21,655)

Series D preferred stock dividends at $0.527778 per share through redemption date

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(2,428)

 

 

 —

 

 

(2,428)

Series E preferred stock dividends and dividends payable at $0.5357 per share year to date

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(2,464)

 

 

 —

 

 

(2,464)

Series F preferred stock dividends and dividends payable at $0.2016 per share year to date

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(605)

 

 

 —

 

 

(605)

Distributions to noncontrolling interest

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(2,800)

 

 

(2,800)

Net income

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

63,647

 

 

 —

 

 

3,305

 

 

66,952

Balance at June 30, 2016

 

 —

 

$

 —

 

4,600,000

 

$

115,000

 

3,000,000

 

$

75,000

 

216,575,534

 

$

2,166

 

$

2,539,278

 

$

716,351

 

$

(959,072)

 

$

50,824

 

$

2,539,547

 

 

See accompanying notes to consolidated financial statements.

 

4

 


 

SUNSTONE HOTEL INVESTORS, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

Six Months Ended

 

    

June 30, 2016

    

June 30, 2015

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

Net income

 

$

66,952

 

$

54,860

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

 

 

 

 

 

 

Bad debt expense

 

 

309

 

 

54

Gain on sale of assets, net

 

 

(18,234)

 

 

(1)

Loss on extinguishment of debt

 

 

259

 

 

2

Gain on redemption of note receivable

 

 

 —

 

 

(939)

Loss on derivatives, net

 

 

9,184

 

 

10

Depreciation

 

 

79,119

 

 

79,406

Amortization of franchise fees and other intangibles

 

 

1,750

 

 

4,052

Amortization of deferred financing fees

 

 

1,104

 

 

1,780

Amortization of deferred stock compensation

 

 

4,077

 

 

6,844

Changes in operating assets and liabilities:

 

 

 

 

 

 

Restricted cash

 

 

15,759

 

 

2,811

Accounts receivable

 

 

(14,831)

 

 

(18,187)

Inventories

 

 

84

 

 

89

Prepaid expenses and other assets

 

 

2,362

 

 

631

Accounts payable and other liabilities

 

 

6,016

 

 

9,220

Accrued payroll and employee benefits

 

 

(4,759)

 

 

(3,201)

Net cash provided by operating activities

 

 

149,151

 

 

137,431

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

Proceeds from sales of assets

 

 

41,171

 

 

5

Proceeds from redemption of note receivable

 

 

 —

 

 

1,125

Restricted cash — replacement reserve

 

 

(1,914)

 

 

(9,193)

Acquisition of air rights lease

 

 

(2,447)

 

 

 —

Renovations and additions to hotel properties

 

 

(100,034)

 

 

(72,989)

Payment for interest rate derivative

 

 

 —

 

 

(13)

Net cash used in investing activities

 

 

(63,224)

 

 

(81,065)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

Proceeds from preferred stock offerings

 

 

190,000

 

 

 —

Payment of preferred stock offering costs

 

 

(6,640)

 

 

 —

Redemption of preferred stock

 

 

(115,000)

 

 

 —

Repurchase of common stock for employee withholding obligations

 

 

(2,641)

 

 

(9,264)

Proceeds from note payable and credit facility

 

 

100,000

 

 

38,000

Payments on notes payable and credit facility

 

 

(193,446)

 

 

(148,635)

Payments for costs related to extinguishment of notes payable

 

 

(153)

 

 

(2)

Payments of deferred financing costs

 

 

(77)

 

 

(4,131)

Dividends and distributions paid

 

 

(199,555)

 

 

(52,079)

Distributions to noncontrolling interests

 

 

(2,800)

 

 

(3,591)

Net cash used in financing activities

 

 

(230,312)

 

 

(179,702)

Net decrease in cash and cash equivalents

 

 

(144,385)

 

 

(123,336)

Cash and cash equivalents, beginning of period

 

 

499,067

 

 

222,096

Cash and cash equivalents, end of period

 

$

354,682

 

$

98,760

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

 

 

 

 

 

 

Cash paid for interest

 

$

25,809

 

$

31,999

Cash paid (refunds received) for income taxes, net

 

$

709

 

$

(207)

NONCASH INVESTING ACTIVITY

 

 

 

 

 

 

Increase in accounts payable related to renovations and additions to hotel properties and other assets

 

$

3,072

 

$

3,375

Amortization of deferred stock compensation — construction activities

 

$

486

 

$

304

NONCASH FINANCING ACTIVITY

 

 

 

 

 

 

Preferred stock redemption charge

 

$

4,052

 

$

 —

Issuance of common stock distributions

 

$

78,823

 

$

37,349

Dividends and distributions payable

 

$

13,898

 

$

12,735

See accompanying notes to consolidated financial statements.

5


 

SUNSTONE HOTEL INVESTORS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

1. Organization and Description of Business

 

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

 

As a REIT, certain tax laws limit the amount of “non-qualifying” income the Company can earn, including income derived directly from the operation of hotels. The Company leases all of its hotels to its TRS Lessee, which in turn enters into long-term management agreements with third parties to manage the operations of the Company’s hotels, in transactions that are intended to generate qualifying income. As of June 30, 2016, the Company had interests in 28 hotels (the “28 hotels”) held for investment, and the Company’s third-party managers included the following:

 

 

 

 

 

 

 

 

 

    

Number of Hotels

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

 

11

Interstate Hotels & Resorts, Inc.

 

5

Highgate Hotels L.P. and an affiliate

 

3

Crestline Hotels & Resorts

 

2

Hilton Worldwide

 

2

Hyatt Corporation

 

2

Davidson Hotels & Resorts

 

1

Fairmont Hotels & Resorts (U.S.)

 

1

HEI Hotels & Resorts

 

1

 

 

 

Total hotels held for investment

 

28

 

 

2. Summary of Significant Accounting Policies

 

Basis of Presentation

 

The accompanying consolidated financial statements as of June 30, 2016 and December 31, 2015, and for the three and six months ended June 30, 2016 and 2015, include the accounts of the Company, the Operating Partnership, the TRS Lessee and their subsidiaries. All significant intercompany balances and transactions have been eliminated. If the Company determines that it has an interest in a variable interest entity within the meaning of the Consolidation Topic of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”), the Company will consolidate the entity when it is determined to be the primary beneficiary of the entity. Based on its review, the Company determined that all of its subsidiaries were properly consolidated as of June 30, 2016 and December 31, 2015, and for the three and six months ended June 30, 2016 and 2015.

 

The accompanying interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and in conformity with the rules and regulations of the Securities and Exchange Commission. In the Company’s opinion, the interim financial statements presented herein reflect all adjustments, consisting solely of normal and recurring adjustments, which are necessary to fairly present the interim financial statements. These financial statements should be read in conjunction with the financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015, filed with the Securities and Exchange Commission on February 23, 2016.

 

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

 

Certain prior year amounts have been reclassified in the consolidated financial statements in order to conform to the current year presentation.

 

6


 

Use of Estimates

 

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

 

Earnings Per Share

 

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

 

The Company follows the requirements of the Earnings Per Share Topic of the FASB ASC. Unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are considered participating securities and shall be included in the computation of earnings per share pursuant to the two-class method.

 

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

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Three Months Ended

 

Six Months Ended

 

Six Months Ended

 

    

June 30, 2016

    

June 30, 2015

    

June 30, 2016

    

June 30, 2015

 

 

(unaudited)

 

(unaudited)

 

(unaudited)

 

(unaudited)

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

65,736

 

$

53,657

 

$

66,952

 

$

54,860

Income from consolidated joint ventures attributable to noncontrolling interests

 

 

(1,655)

 

 

(2,480)

 

 

(3,305)

 

 

(4,661)

Preferred stock dividends and redemption charge

 

 

(6,783)

 

 

(2,300)

 

 

(9,549)

 

 

(4,600)

Dividends paid on unvested restricted stock compensation

 

 

(58)

 

 

(55)

 

 

(118)

 

 

(113)

Undistributed income allocated to unvested restricted stock compensation

 

 

(252)

 

 

(133)

 

 

(170)

 

 

(96)

Numerator for basic and diluted income attributable to common stockholders

 

$

56,988

 

$

48,689

 

$

53,810

 

$

45,390

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average basic and diluted common shares outstanding

 

 

215,385

 

 

207,577

 

 

214,136

 

 

207,091

Basic and diluted income attributable to common stockholders per common share

 

$

0.26

 

$

0.23

 

$

0.25

 

$

0.22

 

The Company’s unvested restricted shares associated with its long-term incentive plan and shares associated with common stock options have been excluded from the above calculation of earnings per share for both the three and six months ended June 30, 2016 and 2015, as their inclusion would have been anti-dilutive.

 

New Accounting Standards and Accounting Changes

 

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU No. 2014-09”). The core principle of ASU No. 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity will need to apply a five-step model: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) the entity satisfies a

7


 

performance obligation. ASU No. 2014-09 was originally to be effective during the first quarter of 2017; however, the FASB issued a one-year deferral in July 2015 so that it now becomes effective during the first quarter of 2018. ASU No. 2014-09 will require either a full retrospective approach or a modified retrospective approach, with early adoption permitted as of the original effective date. The Company is currently evaluating the impact that ASU No. 2014-09 will have on its financial statements.

 

In June 2014, the FASB issued Accounting Standards Update No. 2014-12, “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period” (“ASU No. 2014-12”), which requires a reporting entity to treat a performance target that affects vesting and that could be achieved after the requisite service period as a performance condition. ASU 2014-12 became effective during the first quarter of 2016, requiring either a prospective or a modified retrospective approach. The Company’s adoption of ASU No. 2014-12 did not have an effect on its financial statements, and will not have an effect in the future unless the Company issues grants in the future that fall within its scope.

 

In February 2015, the FASB issued Accounting Standards Update No. 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis” (“ASU No. 2015-02”), which eliminates the option allowing entities with interests in certain investment funds to follow previous consolidation guidance and makes other changes to both the variable interest model and the voting model. While ASU No. 2015-02 is aimed at asset managers, it will affect all reporting entities involved with limited partnerships or similar entities. In some cases consolidation conclusions will change. In other cases, reporting entities will need to provide additional disclosures about entities that currently aren’t considered VIEs but will be considered VIEs under the new guidance when they have a variable interest in those VIEs. Regardless of whether conclusions change or additional disclosure requirements are triggered, reporting entities will need to re-evaluate limited partnerships or similar entities for consolidation and revise their documentation. ASU No. 2015-02 changes (1) the identification of variable interests (fees paid to a decision maker or service provider), (2) the VIE characteristics for a limited partnership or similar entity and (3) the primary beneficiary determination. ASU No. 2015-02 became effective during the first quarter of 2016, requiring a modified retrospective approach. The Company’s adoption of ASU No. 2015-02 did not have a material effect on its financial statements.

 

In September 2015, the FASB issued Accounting Standards Update No. 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments” (“ASU No. 2015-16”), which eliminates the requirement for an acquirer in a business combination to account for measurement-period adjustments retrospectively. In a business combination, if the initial accounting is incomplete as of the end of the reporting period in which the acquisition occurs, the acquirer records provisional amounts based on information available at the acquisition date. The acquirer then adjusts these amounts as it obtains more information about facts and circumstances that existed as of the acquisition date. This period is called the measurement period. It ends when the acquirer receives the information it was seeking about facts and circumstances that existed as of the acquisition date or when it determines that it cannot obtain more information. The measurement period cannot exceed one year from the date of the acquisition. Under the previous guidance, an acquirer must recognize adjustments to provisional amounts during the measurement period retrospectively (i.e., as if the accounting for the business combination had been completed at the acquisition date). That is, the acquirer was required to revise comparative information on the income statement and balance sheet for any prior periods affected. Under ASU No. 2015-16, an acquirer will now recognize measurement-period adjustments during the period in which it determines the amount of the adjustment. The acquirer still must disclose the amounts and reasons for adjustments to the provisional amounts. The acquirer also must disclose, by line item, the amount of the adjustment reflected in the current-period income statement that would have been recognized in previous periods if the adjustment to provisional amounts had been recognized as of the acquisition date. Alternatively, an acquirer may present those amounts separately on the face of the income statement. ASU No. 2015-16 became effective during the first quarter of 2016, requiring a prospective approach. The Company’s adoption of ASU No. 2015-16 will have an effect on its financial statements and related disclosures when and if the Company has a business combination that requires a measurement-period adjustment.

 

In January 2016, the FASB issued Accounting Standards Update No. 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU No. 2016-01”), which makes targeted amendments to guidance on classifying and measuring financial instruments. ASU No. 2016-01 provides disclosure relief for public companies by eliminating the requirement to disclose the method(s) and significant assumptions used to estimate the fair value of financial instruments measured at amortized cost. ASU No. 2016-01 will become effective during the first quarter of 2018, with early adoption permitted. The Company chose to early adopt ASU 2016-01 effective January 1, 2016, and eliminated the disclosure in its financial statements of the methods and significant assumptions the Company used to calculate the fair value of its debt.

 

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, “Leases (Topic 842)” (“ASU No. 2016-02”), which will require lessees to put most leases on their balance sheets but recognize expenses in the income statement in a manner similar to today’s accounting. The guidance also eliminates today’s real estate-specific provisions and changes the guidance on sale-leaseback transactions, initial direct costs and lease executory costs for all entities. For lessors, the standard modifies the classification criteria and the accounting for sales-type and direct financing leases. All entities will classify leases to determine how to recognize lease-related revenue and expense. Classification will continue to affect amounts that lessors record on the balance sheet. ASU No. 2016-02 will become effective during the first quarter of 2019, and will require a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. The Company is currently evaluating the impact that ASU No. 2016-02 will have on its financial statements.

8


 

 

In March 2016, the FASB issued Accounting Standards Update No. 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)” (“ASU No. 2016-08”), which clarifies the principal versus agent guidance in ASU 2014-09. In particular, ASU No. 2016-08 clarifies how an entity should identify the unit of accounting for the principal versus agent evaluation and how it should apply the control principle to certain types of arrangements, such as service transactions by explaining what a principal controls before the specified good or service is transferred to the customer. In addition, ASU No. 2016-08 reframes the indicators to focus on evidence that an entity is acting as a principal rather than as an agent. ASU No. 2016-08 will become effective, along with ASU No. 2014-09, during the first quarter of 2018. Similar to ASU No. 2014-09, ASU 2016-08 will require either a full retrospective approach or a modified retrospective approach, with early adoption permitted as of the original effective date. The Company is currently evaluating the impact that ASU No. 2016-08 will have on its financial statements.

 

In March 2016, the FASB issued Accounting Standards Update No. 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (“ASU No. 2016-09”), which changes certain aspects of accounting for share-based payments to employees. The new guidance will require all income tax effects of awards to be recognized in the income statement when the awards vest or are settled. It also will allow an employer to repurchase more of an employee’s shares for tax withholding purposes without triggering liability accounting and to make a policy election to account for forfeitures as they occur. ASU No. 2016-09 will become effective during the first quarter of 2017, with early adoption permitted, and will require a modified retrospective approach. As noted below, the Company chose to early adopt ASU No. 2016-09 effective January 1, 2016.

 

Upon adoption of ASU No. 2016-09, the Company elected to account for forfeitures as they occur. In addition, pursuant to employee statutory withholding obligations, the Company may repurchase more of an employee’s shares for tax withholding purposes up to the maximum statutory tax rate in the employee’s applicable jurisdictions.

 

In accordance with the transition provisions of the new guidance, the Company adjusted items on its consolidated balance sheet, consolidated statement of equity and consolidated statement of cash flows. The following financial statement line items have been adjusted on the Company’s consolidated balance sheet and consolidated statement of equity for the year ended December 31, 2015 in order to reverse the effects of forfeitures recognized in prior years, and on the consolidated statement of cash flows for the six months ended June 30, 2015 to reclassify the repurchase of employee common stock for employee withholding obligations from an operating activity to a financing activity (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effect of Change in

 

 

 

 

As Originally Reported

 

Accounting Principle

 

As Adjusted

 

 

 

 

 

(unaudited)

 

(unaudited)

Consolidated Balance Sheet and Consolidated Statement of Equity as of December 31, 2015 (audited):

 

 

 

 

 

 

 

 

 

Additional paid in capital

 

$

2,458,735

 

$

154

 

$

2,458,889

Retained earnings

 

$

652,858

 

$

(154)

 

$

652,704

 

 

 

 

 

 

 

 

 

 

Consolidated Statement of Cash Flows for the six months ended June 30, 2015 (unaudited):

 

 

 

 

 

 

 

 

 

Amortization of deferred stock compensation

 

$

4,681

 

$

2,163

 

 

6,844

Accrued payroll and employee benefits

 

$

(10,302)

 

$

7,101

 

$

(3,201)

Net cash provided by operating activities

 

$

128,167

 

$

9,264

 

$

137,431

Repurchase of common stock for employee withholding obligations

 

$

 —

 

$

(9,264)

 

$

(9,264)

Net cash used in financing activities

 

$

(170,438)

 

$

(9,264)

 

$

(179,702)

 

In May 2016, the FASB issued Accounting Standards Update No. 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients” (“ASU No. 2016-12”), which amends the FASB’s new revenue recognition guidance on transition, collectability, noncash consideration and the presentation of sales and other similar taxes. The amendments clarify that, for a contract to be considered completed at transition, all (or substantially all) of the revenue must have been recognized under legacy GAAP. This clarification is important because entities that use the modified retrospective transition approach need to apply the standard only to contracts that are not complete as of the date of initial application, and entities that use the full retrospective approach may apply certain practical expedients to completed contracts. In addition, ASU No. 2016-12 clarifies that an entity should consider the probability of collecting substantially all of the consideration to which it will be entitled in exchange for goods and services expected to be transferred to the customer rather than the total amount promised for all the goods or services in the contract. ASU No. 2016-12 also clarifies that an entity may consider its ability to manage its exposure to credit risk as part of the collectability assessment, as well as that the fair value of noncash consideration should be measured at contract inception when determining the transaction price. Finally, ASU No. 2016-12 allows an entity to make an accounting policy election to exclude from the transaction price certain types of taxes collected from a customer if it discloses that policy. ASU No. 2016-12 will become effective, along with ASU No. 2014-09, during the first quarter of 2018. Similar to ASU No. 2014-09, ASU 2016-12 will require

9


 

either a full retrospective approach or a modified retrospective approach, with early adoption permitted as of the original effective date. The Company is currently evaluating the impact that ASU No. 2016-12 will have on its financial statements.

 

In June 2016, the FASB issued Accounting Standards Update No. 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU No. 2016-13”), which will replace today’s “incurred loss” approach with an “expected loss” model for instruments measured at amortized cost. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, entities will be required to use a new forward looking “expected loss” model that generally will result in the earlier recognition of allowances for losses. In addition, entities will have to disclose significantly more information, including information they use to track credit quality by year of origination for most financing receivables. ASU No. 2016-13 is effective during the first quarter of 2020. ASU No. 2016-13 will require a modified retrospective approach, with early adoption permitted during the first quarter of 2019. The Company is currently evaluating the impact that ASU No. 2016-13 will have on its financial statements.

 

Noncontrolling Interests

 

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

 

At both June 30, 2016 and December 31, 2015, the noncontrolling interest reported in the Company’s financial statements included Hilton Worldwide’s 25.0% ownership in the Hilton San Diego Bayfront. During both the three and six months ended June 30, 2015, noncontrolling interests recorded in the Company’s financial statements also included preferred investors that owned a $0.1 million preferred equity interest in a subsidiary captive REIT that owned the Doubletree Guest Suites Times Square. The Company sold its interests in the Doubletree Guest Suites Times Square in December 2015.

 

Segment Reporting

 

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

 

3. Investment in Hotel Properties

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

    

2016

    

2015

 

 

(unaudited)

 

 

 

Land

 

$

542,660

 

$

542,660

Buildings and improvements

 

 

3,118,115

 

 

3,109,562

Furniture, fixtures and equipment

 

 

492,275

 

 

480,832

Intangibles

 

 

47,638

 

 

45,249

Franchise fees

 

 

1,021

 

 

1,082

Construction in process

 

 

141,699

 

 

97,974

Investment in hotel properties, gross

 

 

4,343,408

 

 

4,277,359

Accumulated depreciation and amortization

 

 

(1,111,739)

 

 

(1,048,349)

Investment in hotel properties, net

 

$

3,231,669

 

$

3,229,010

 

In June 2016, the Company purchased the air rights lease associated with its Renaissance Harborplace for $2.4 million, including closing costs. The air rights lease,  which has an indefinite useful life, and therefore, is not amortized, is included with intangibles in the Company’s investment in hotel properties on its consolidated balance sheet. This non-amortizable asset will be reviewed annually for impairment and more frequently if events or circumstances indicate that the asset may be impaired. If the non-amortizable intangible asset is subsequently determined to have a finite useful life, the intangible asset will be written down to the lower of its fair value or carrying amount, and then amortized prospectively, based on the remaining useful life of the intangible asset.

 

10


 

 

4. Disposals

 

In May 2016, the Company sold the 203-room Sheraton Cerritos located in Cerritos, California for net proceeds of $41.2 million. The Company recognized a net gain on the sale of $18.2 million. The sale did not represent a strategic shift that had a major impact on the Company’s business plan or its primary markets, and therefore, did not qualify as a discontinued operation.

 

The following table provides summary results of operations for the Sheraton Cerritos that was sold during 2016,  as well as for the Doubletree Guest Suites Times Square and an electronic purchasing platform (“BuyEfficient) that were sold during 2015, all of which are included in continuing operations (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Three Months Ended

 

Six Months Ended

 

Six Months Ended

 

    

June 30, 2016

    

June 30, 2015

    

June 30, 2016

    

June 30, 2015

 

 

(unaudited)

 

(unaudited)

 

(unaudited)

 

(unaudited)

Revenues

 

$

1,491

 

$

23,125

 

$

4,846

 

$

40,333

Income before income taxes

 

$

313

 

$

3,174

 

$

876

 

$

717

Gain on sale of assets

 

$

18,223

 

$

 —

 

$

18,223

 

$

 —

 

5. Fair Value Measurements and Interest Rate Derivatives

 

Fair Value of Financial Instruments

 

As of June 30, 2016 and December 31, 2015, the carrying amount of certain financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued expenses were representative of their fair values due to the short-term maturity of these instruments.

 

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

 

 

 

Level 1

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

 

 

Level 2

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

 

 

Level 3

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

 

On an annual basis and periodically when indicators of impairment exist, the Company analyzes the carrying values of its hotel properties and other assets using Level 3 measurements, including a discounted cash flow analysis to estimate the fair value of its hotel properties and other assets taking into account each property’s expected cash flow from operations, holding period and estimated proceeds from the disposition of the property. The factors addressed in determining estimated proceeds from disposition include anticipated operating cash flow in the year of disposition and terminal capitalization rate. The Company did not identify any properties or other assets with indicators of impairment during either the three or six months ended June 30, 2016 and 2015.

 

On an annual basis and periodically when indicators of impairment exist, the Company also analyzes the carrying value of its goodwill using Level 3 measurements, including a discounted cash flow analysis to estimate the fair value of its reporting units. As of both June 30, 2016 and December 31, 2015, the Company’s goodwill, which is included in other assets, net on the Company’s consolidated balance sheets, consists of $1.0 million associated with one of its hotels.  The Company did not identify any indicator of goodwill impairment during either the three or six months ended June 30, 2016 and 2015.

 

As of June 30, 2016 and December 31, 2015, the only financial instruments that the Company measures at fair value are its interest rate derivatives, along with a life insurance policy and a related retirement benefit agreement. In accordance with the Fair Value Measurement and Disclosure Topic of the FASB ASC, the Company estimates the fair value of its interest rate derivatives using Level 2 measurements based on quotes obtained from the counterparties, which are based upon the consideration that would be required to terminate the agreements. Both the life insurance policy and the related retirement benefit agreement, which are for a former Company associate, are valued using Level 2 measurements.

 

11


 

The following table presents the Company’s assets measured at fair value on a recurring and non-recurring basis at June 30, 2016 and December 31, 2015 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at Reporting Date

 

    

Total

    

Level 1

    

Level 2

    

Level 3

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2016 (unaudited):

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate cap derivatives

 

$

 —

 

$

 

$

 —

 

$

Life insurance policy (1)

 

 

1,022

 

 

 

 

1,022

 

 

Total assets measured at fair value at June 30, 2016

 

$

1,022

 

$

 

$

1,022

 

$

December 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate cap derivatives

 

$

1

 

$

 

$

1

 

$

Interest rate swap derivative

 

 

759

 

 

 

 

759

 

 

Life insurance policy (1)

 

 

964

 

 

 

 

964

 

 

Total assets measured at fair value at December 31, 2015

 

$

1,724

 

$

 

$

1,724

 

$

 

(1)

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

 

The following table presents the Company’s liabilities measured at fair value on a recurring and non-recurring basis at June 30, 2016 and December 31, 2015 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at Reporting Date

 

    

Total

    

Level 1

    

Level 2

    

Level 3

 

 

 

 

 

 

 

 

 

 

 

&