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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 March 31, 2017

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: 001-36412

 

La Quinta Holdings Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

90-1032961

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

909 Hidden Ridge, Suite 600

Irving, Texas 75038

(Address of principal executive offices) (Zip Code)

(214) 492-6600

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    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, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

 

Accelerated filer

 

 

 

 

 

 

Non-accelerated filer

 

  (Do not check if a smaller reporting company)

 

Smaller reporting company

 

 

 

 

 

 

 

 

 

 

Emerging growth Company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

 

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.

The registrant had outstanding 117,483,251 shares of Common Stock, par value $0.01 per share as of April 28, 2017.

 

 

 

 


LA QUINTA HOLDINGS INC.

FORM 10-Q TABLE OF CONTENTS

FOR THE PERIOD ENDED MARCH 31, 2017

 

 

2


SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

In addition to historical information, this Quarterly Report on Form 10-Q may contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which are subject to the “safe harbor” created by those sections. All statements, other than statements of historical facts included in this Quarterly Report on Form 10-Q, including statements concerning our plans, objectives, goals, beliefs, business strategies, future events, business conditions, results of operations, financial position, business outlook, business trends and other information, may be forward-looking statements. Words such as “estimates,” “expects,” “contemplates,” “will,” “anticipates,” “projects,” “plans,” “intends,” “believes,” “forecasts,” “may,” “should” and variations of such words or similar expressions are intended to identify forward-looking statements. The forward-looking statements are not historical facts, and are based upon our current expectations, beliefs, estimates and projections, and various assumptions, many of which, by their nature, are inherently uncertain and beyond our control. Our expectations, beliefs, estimates and projections are expressed in good faith and we believe there is a reasonable basis for them. However, there can be no assurance that management’s expectations, beliefs, estimates and projections will result or be achieved and actual results may vary materially from what is expressed in or indicated by the forward-looking statements.

There are a number of risks, uncertainties and other important factors, many of which are beyond our control, that could cause our actual results to differ materially from the forward-looking statements contained in this Quarterly Report on Form 10-Q. Such risks, uncertainties and other important factors that could cause actual results to differ include, among others, the risks, uncertainties and factors set forth under “Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016, as filed with the Securities and Exchange Commission (the “SEC”), as such risk factors may be updated from time to time in our periodic filings with the SEC, and are accessible on the SEC’s website at www.sec.gov, and also include the following:

 

business, financial, and operating risks inherent to the hospitality industry;

 

macroeconomic and other factors beyond our control can adversely affect and reduce demand for hotel rooms;

 

contraction in the global economy or low levels of economic growth;

 

inability to compete effectively;

 

any deterioration in the quality or reputation of our brand;

 

inability to develop our pipeline;

 

the geographic concentration of our hotels;

 

delays or increased expense relating to our efforts to develop, redevelop, sell or renovate our hotels;

 

inability by us or our franchisees to make necessary investments to maintain the quality and reputation of our brand;

 

inability to access capital necessary for growth;

 

seasonal and cyclical volatility in the hotel industry;

 

inability to maintain good relationships with our franchisees;

 

inability to protect our brand standards;

 

risks resulting from significant investments in owned real estate;

 

failure to keep pace with developments in technology;

 

failures or interruptions in, material damage to, or difficulties in updating, our information technology systems, software or websites;

 

inability to protect our guests’ personal information;

 

failure to comply with marketing and advertising laws;

 

disruptions to our reservation system;

 

failure to protect our trademarks and other intellectual property;

 

risks of doing business internationally;

 

the loss of senior executives or key field personnel;

 

the results of the audits by the Internal Revenue Service;

3


 

our substantial indebtedness;

 

risks related to pursuing the separation of our businesses; and

 

Blackstone’s significant influence over us.

We caution you that the risks, uncertainties and other factors referenced above may not contain all of the risks, uncertainties and other factors that are important to you. In addition, we cannot assure you that we will realize the results, benefits or developments that we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our business in the way expected. There can be no assurance that (i) we have correctly measured or identified all of the factors affecting our business or the extent of these factors’ likely impact, (ii) the available information with respect to these factors on which such analysis is based is complete or accurate, (iii) such analysis is correct or (iv) our strategy, which is based in part on this analysis, will be successful. All forward-looking statements in this report apply only as of the date of this report or as of the date they were made and are expressly qualified in their entirety by the cautionary statements included in this report. Except as required by applicable law, we undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise.

All references to “we”, “us”, “our”, the “Company” or “La Quinta” in this Quarterly Report on Form 10-Q mean La Quinta Holdings Inc. and its subsidiaries, unless the context otherwise requires.

 

 

4


PART I—FINANCIAL INFORMATION

 

 

Item 1.

Financial Statements

La Quinta Holdings Inc.

Condensed Consolidated Balance Sheets (Unaudited)

As of March 31, 2017 and December 31, 2016

 

 

 

March 31, 2017

 

 

December 31, 2016

 

 

 

(in thousands, except share data)

 

ASSETS

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

161,495

 

 

$

160,596

 

Accounts receivable, net of allowance for doubtful accounts of $4,038 and $4,022

 

 

42,723

 

 

 

45,337

 

Assets held for sale

 

 

9,048

 

 

 

29,544

 

Other current assets

 

 

13,126

 

 

 

9,943

 

Total Current Assets

 

 

226,392

 

 

 

245,420

 

Property and equipment, net of accumulated depreciation

 

 

2,471,413

 

 

 

2,456,780

 

Intangible assets, net of accumulated amortization

 

 

176,747

 

 

 

177,002

 

Other non-current assets

 

 

13,702

 

 

 

13,321

 

Total Non-Current Assets

 

 

2,661,862

 

 

 

2,647,103

 

Total Assets

 

$

2,888,254

 

 

$

2,892,523

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

17,514

 

 

$

17,514

 

Accounts payable

 

 

38,114

 

 

 

38,130

 

Accrued expenses and other liabilities

 

 

68,061

 

 

 

64,581

 

Accrued payroll and employee benefits

 

 

32,905

 

 

 

38,467

 

Accrued real estate taxes

 

 

12,977

 

 

 

21,400

 

Total Current Liabilities

 

 

169,571

 

 

 

180,092

 

Long-term debt

 

 

1,679,423

 

 

 

1,682,436

 

Other long-term liabilities

 

 

27,525

 

 

 

29,130

 

Deferred tax liabilities

 

 

346,636

 

 

 

343,028

 

Total Liabilities

 

 

2,223,155

 

 

 

2,234,686

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

 

 

Preferred Stock, $0.01 par value; 100,000,000 shares authorized and none outstanding

   as of March 31, 2017 and December 31, 2016

 

 

 

 

 

 

Common Stock, $0.01 par value; 2,000,000,000 shares authorized at March 31, 2017

     and December 31, 2016, 132,450,118 shares issued and 117,488,784 shares

     outstanding as of March 31, 2017 and 131,750,715 shares issued

     and 116,790,470 shares outstanding as of December 31, 2016

 

 

1,325

 

 

 

1,318

 

Additional paid-in-capital

 

 

1,169,583

 

 

 

1,165,651

 

Accumulated deficit

 

 

(294,417

)

 

 

(296,006

)

Treasury stock at cost, 14,961,334 shares at March 31, 2017 and 14,960,245 shares at

    December 31, 2016

 

 

(209,539

)

 

 

(209,523

)

Accumulated other comprehensive loss

 

 

(4,594

)

 

 

(6,372

)

Noncontrolling interests

 

 

2,741

 

 

 

2,769

 

Total Equity

 

 

665,099

 

 

 

657,837

 

Total Liabilities and Equity

 

$

2,888,254

 

 

$

2,892,523

 

 

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

 

5


La Quinta Holdings Inc.

Condensed Consolidated Statements of Operations (Unaudited)

For the three months ended March 31, 2017 and 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 2017

 

 

March 31, 2016

 

 

 

(in thousands, except per share data)

 

REVENUES:

 

 

 

 

 

 

 

 

Room revenues

 

$

199,744

 

 

$

209,473

 

Franchise and other fee-based revenues

 

 

23,978

 

 

 

22,192

 

Other hotel revenues

 

 

4,796

 

 

 

4,831

 

 

 

 

228,518

 

 

 

236,496

 

Brand marketing fund revenues from franchise properties

 

 

5,754

 

 

 

5,275

 

Total Revenues

 

 

234,272

 

 

 

241,771

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

Direct lodging expenses

 

 

100,334

 

 

 

98,912

 

Depreciation and amortization

 

 

36,040

 

 

 

38,297

 

General and administrative expenses

 

 

35,438

 

 

 

25,998

 

Other lodging and operating expenses

 

 

14,060

 

 

 

15,682

 

Marketing, promotional and other advertising expenses

 

 

18,536

 

 

 

19,784

 

Impairment loss

 

 

 

 

 

83,343

 

Loss on sales

 

 

138

 

 

 

 

 

 

 

204,546

 

 

 

282,016

 

Brand marketing fund expenses from franchise properties

 

 

5,754

 

 

 

5,275

 

Total Operating Expenses

 

 

210,300

 

 

 

287,291

 

Operating Income (Loss)

 

 

23,972

 

 

 

(45,520

)

OTHER INCOME (EXPENSES):

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(19,980

)

 

 

(20,306

)

Other (expense) income

 

 

(24

)

 

 

983

 

Total Other (Expenses) Income, net

 

 

(20,004

)

 

 

(19,323

)

Income (Loss) Before Income Taxes

 

 

3,968

 

 

 

(64,843

)

Income tax (expense) benefit

 

 

(2,290

)

 

 

26,119

 

NET INCOME (LOSS)

 

 

1,678

 

 

 

(38,724

)

Less: net income attributable to noncontrolling interest

 

 

(89

)

 

 

(51

)

Net Income (Loss) attributable to La Quinta Holdings’ stockholders

 

$

1,589

 

 

$

(38,775

)

Earnings (loss) per share:

 

 

 

 

 

 

 

 

Basic and diluted

 

$

0.01

 

 

$

(0.31

)

 

 

 

 

 

 

 

 

 

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

 

 

6


La Quinta Holdings Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

For the three months ended March 31, 2017 and 2016

 

 

 

Three months ended

 

 

 

March 31, 2017

 

 

March 31, 2016

 

 

 

(in thousands)

 

NET INCOME (LOSS)

 

$

1,678

 

 

$

(38,724

)

Cash flow hedge adjustment, net of tax

 

 

1,778

 

 

 

(4,924

)

COMPREHENSIVE NET INCOME (LOSS)

 

 

3,456

 

 

 

(43,648

)

Comprehensive net income attributable to noncontrolling interests

 

 

(89

)

 

 

(51

)

Comprehensive net income (loss) attributable to La Quinta

   Holdings’ Stockholders

 

$

3,367

 

 

$

(43,699

)

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7


La Quinta Holdings Inc.

Condensed Consolidated Statements of Equity (Unaudited)

For the three months ended March 31, 2017 and 2016

 

 

 

Equity Attributable to La Quinta Holdings Inc. Stockholders

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Treasury

Stock

 

 

Additional

Paid in

Capital

 

 

Accumulated

Deficit

 

 

Accumulated

Other

Comprehensive

Loss

 

 

Noncontrolling

Interests

 

 

Total

Equity

 

 

 

Shares

 

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands, except share data)

 

Balance as of January 1, 2016

 

 

124,302,318

 

 

$

1,310

 

 

$

(107,699

)

 

$

1,152,155

 

 

$

(294,718

)

 

$

(7,436

)

 

$

2,900

 

 

$

746,512

 

Net (loss) income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(38,775

)

 

 

 

 

 

51

 

 

 

(38,724

)

Distributions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(115

)

 

 

(115

)

Equity based compensation

 

 

608,893

 

 

 

6

 

 

 

 

 

 

2,480

 

 

 

 

 

 

 

 

 

 

 

 

2,486

 

Cash deficit related to equity comp (APIC Pool)

 

 

 

 

 

 

 

 

 

 

 

(13

)

 

 

 

 

 

 

 

 

 

 

 

(13

)

Repurchase of common stock

 

 

(2,031,743

)

 

 

 

 

 

(24,762

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(24,762

)

Cash flow hedge adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,924

)

 

 

 

 

 

(4,924

)

Balance as of March 31, 2016

 

 

122,879,468

 

 

$

1,316

 

 

$

(132,461

)

 

$

1,154,622

 

 

$

(333,493

)

 

$

(12,360

)

 

$

2,836

 

 

$

680,460

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of January 1, 2017

 

 

116,790,470

 

 

$

1,318

 

 

$

(209,523

)

 

$

1,165,651

 

 

$

(296,006

)

 

$

(6,372

)

 

$

2,769

 

 

$

657,837

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,589

 

 

 

 

 

 

89

 

 

 

1,678

 

Distributions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(117

)

 

 

(117

)

Equity based compensation

 

 

705,409

 

 

 

7

 

 

 

 

 

 

3,932

 

 

 

 

 

 

 

 

 

 

 

 

3,939

 

Repurchase of common stock

 

 

(7,095

)

 

 

 

 

 

(16

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(16

)

Cash flow hedge adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,778

 

 

 

 

 

 

1,778

 

Balance as of March 31, 2017

 

 

117,488,784

 

 

$

1,325

 

 

 

(209,539

)

 

$

1,169,583

 

 

$

(294,417

)

 

$

(4,594

)

 

$

2,741

 

 

$

665,099

 

 

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

 

 

8


La Quinta Holdings Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

For the three months ended March 31, 2017 and 2016

 

 

 

March 31, 2017

 

 

March 31, 2016

 

 

 

(in thousands)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

1,678

 

 

$

(38,724

)

Adjustment to reconcile net income (loss) to net cash provided

   by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

36,004

 

 

 

38,269

 

Amortization of other non-current assets

 

 

76

 

 

 

112

 

Amortization of intangible assets

 

 

167

 

 

 

193

 

Gain related to casualty disasters

 

 

(1,928

)

 

 

(669

)

Amortization of leasehold interests

 

 

(131

)

 

 

(165

)

Amortization of deferred costs

 

 

1,471

 

 

 

1,413

 

Impairment loss

 

 

 

 

 

83,343

 

Loss on sale or retirement of assets

 

 

138

 

 

 

 

Equity based compensation

 

 

3,939

 

 

 

2,486

 

Deferred taxes

 

 

2,651

 

 

 

(28,106

)

Provision for doubtful accounts

 

 

603

 

 

 

199

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

214

 

 

 

(2,850

)

Other current assets

 

 

(3,183

)

 

 

(8,690

)

Other non-current assets

 

 

(562

)

 

 

(70

)

Accounts payable

 

 

(6,925

)

 

 

1,012

 

Accrued payroll and employee benefits

 

 

(5,562

)

 

 

745

 

Accrued real estate taxes

 

 

(8,423

)

 

 

(8,253

)

Accrued expenses and other liabilities

 

 

3,445

 

 

 

2,394

 

Other long-term liabilities

 

 

1,349

 

 

 

503

 

Net cash provided by operating activities

 

 

25,021

 

 

 

43,142

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(46,178

)

 

 

(25,002

)

Insurance proceeds on casualty disasters

 

 

4,557

 

 

 

1,053

 

Proceeds from sale of assets

 

 

22,011

 

 

 

 

Payment of franchise incentives

 

 

 

 

 

(38

)

Decrease in other non-current assets

 

 

 

 

 

(20

)

Net cash used in investing activities

 

 

(19,610

)

 

 

(24,007

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Repayment of long-term debt

 

 

(4,379

)

 

 

(4,379

)

Purchase of treasury stock

 

 

(16

)

 

 

(18,012

)

Distributions to noncontrolling interests

 

 

(117

)

 

 

(115

)

Net cash used in financing activities

 

 

(4,512

)

 

 

(22,506

)

Increase (decrease) in cash and cash equivalents

 

 

899

 

 

 

(3,371

)

Cash and cash equivalents at the beginning of the period

 

 

160,596

 

 

 

86,709

 

Cash and cash equivalents at the end of the period

 

$

161,495

 

 

$

83,338

 

SUPPLEMENTAL CASH FLOW INFORMATION:

 

 

 

 

 

 

 

 

Interest paid during the period

 

$

19,713

 

 

$

18,490

 

Income taxes paid during the period, net of refunds

 

$

261

 

 

$

245

 

SUPPLEMENTAL NON-CASH DISCLOSURE:

 

 

 

 

 

 

 

 

Capital expenditures included in accounts payable

 

$

11,758

 

 

$

5,033

 

Cash flow hedge adjustment, net of tax

 

$

1,778

 

 

$

(4,924

)

Receivable for capital assets damaged by casualty disasters

 

$

2,725

 

 

$

98

 

 

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

 

9


La Quinta Holdings Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

As of and for the three months ended March 31, 2017

 

NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION

Organization

Effective April 14, 2014 (the “IPO Effective Date”), La Quinta Holdings Inc. (“Holdings”) completed its initial public offering (“IPO”) in which Holdings issued and sold 44.0 million shares of its common stock. Holdings was incorporated in the state of Delaware on December 9, 2013.  Holdings may also be referred to herein as “La Quinta”, “we”, “us”, “our”, or the “Company”.

We own and operate hotels, some of which are subject to a land lease, located in the United States under the La Quinta brand. We also franchise hotels under the La Quinta brand, with franchised hotels currently operating in the United States (“U.S.”), Canada, Mexico, Honduras and Colombia. All new franchised hotels are La Quinta Inn & Suites in the U.S. and Canada and LQ Hotel in Mexico and in Central and South America. Additionally, until the completion of our IPO, we managed hotels under the La Quinta brand in the U.S. As of March 31, 2017 and 2016, total owned and franchised hotels, and the approximate number of associated rooms were as follows:

 

 

 

March 31, 2017

 

 

March 31, 2016

 

 

 

# of hotels

 

 

# of rooms

 

 

# of hotels

 

 

# of rooms

 

Owned (1)

 

 

318

 

 

 

40,700

 

 

 

340

 

 

 

43,400

 

Joint Venture

 

 

1

 

 

 

200

 

 

 

1

 

 

 

200

 

Franchised

 

 

570

 

 

 

46,500

 

 

 

545

 

 

 

44,100

 

Totals

 

 

889

 

 

 

87,400

 

 

 

886

 

 

 

87,700

 

 

 

(1) At March 31, 2017 and 2016, Owned hotels includes three and 14 hotels, respectively, which have met the criteria to be classified as assets held for sale.

On January 18, 2017, we announced that we are pursuing the possibility of separating our real estate business from our franchise and management businesses, which could prove to be the most logical next step as we continue to execute on our key strategic initiatives and create value for our stockholders. This separation of our businesses could enable greater strategic clarity and allow us to take advantage of growth opportunities that naturally flow from each business model. This could also enable stockholders to own and value each business independently, allowing each company to attract the investor base most appropriate for its distinct investment profile. There is no assurance that the separation of our businesses will occur.

Basis of Presentation and Use of Estimates

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all information or footnotes required by GAAP for complete annual financial statements. Although we believe the disclosures made are adequate to prevent the information presented from being misleading, these financial statements should be read in conjunction with Holdings’ consolidated financial statements and notes thereto for the years ended December 31, 2016, 2015 and 2014, which are included in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on February 28, 2017. All intercompany transactions have been eliminated. In our opinion, the accompanying condensed consolidated financial statements reflect all adjustments, including normal recurring items, considered necessary for a fair presentation of the interim periods. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported and, accordingly, ultimate results could differ from those estimates. Interim results are not necessarily indicative of full year performance because of the impact of seasonal and short-term variations.

 

NOTE 2. SIGNIFICANT ACCOUNTING POLICIES AND RECENTLY ISSUED ACCOUNTING STANDARDS

Revenue Recognition — Revenues primarily consist of room rentals, franchise fees and other hotel revenues. We defer a portion of our revenue from franchisees at the time the franchise agreement is signed and recognize the remainder upon hotel opening.

Room revenues are derived from room rentals at our owned hotels. We recognize room revenue on a daily basis based on an agreed-upon daily rate after the guest has stayed at one of our hotels. Customer incentive discounts, cash rebates, and refunds are recognized

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as a reduction of room revenues. Occupancy, hotel, and sales taxes collected from customers and remitted to the taxing authorities are excluded from revenues in the accompanying condensed consolidated statements of operations.

Included in franchise and other fee-based revenues are franchise fee revenues, which primarily consist of revenues from franchisees for application and initial fees, transfer fees, royalty, reservations, and training, as well as fees related to our guest loyalty program (“Returns”). We recognize franchise fee revenue on a gross basis because we (1) are the primary obligor in these arrangements, (2) have latitude in establishing rates, (3) perform the services delivered, (4) have some discretion over supplier selection, and (5) determine the specification of services delivered. The different types of franchise fee revenues are described as follows:

 

Upon execution of a franchise agreement, a franchisee is required to pay us an initial fee. We recognize the initial fee as revenue when substantial performance of our obligations to the franchisee with respect to the initial fee has been achieved. In most cases, the vast majority of the initial fee is recognized as revenue when each franchise agreement is signed as, after that date, our remaining obligations to the franchisee are limited to (1) pre-opening inspections, for which we defer $2,500, and (2) if mandated by us or agreed to with the franchisee, preopening training and marketing support related to entry into the La Quinta brand, for which we defer $5,000. These amounts represent an estimate of the value provided to the franchisee related to the services provided, and are based on our experience with time, materials, and third-party costs necessary to provide these services. We recognize the remaining deferred initial fee as revenue when the franchised property opens or if the agreement is terminated as the remaining service obligations have been fulfilled.

 

For franchise agreements entered into prior to April 1, 2013, we collect a monthly royalty fee from franchisees generally equal to 4.0% of their room revenues until the franchisee has operated as a La Quinta hotel for twenty-four consecutive months. For U.S. franchise agreements entered into on or after April 1, 2013, the Company collects a monthly royalty fee equal to 4.5% of gross room revenues until the franchisee has operated as a La Quinta for twenty-four consecutive months. Beginning in the twenty-fifth month of operation, the franchisee monthly royalty fee increases by 0.5%. In these cases, the franchisee has the opportunity to earn the additional 0.5% back via rebate by achieving certain defined customer satisfaction results.  Royalty fees are recognized on a gross basis in the accompanying condensed consolidated statements of operations. Any rebates of royalty fees are recognized as a reduction of revenue. Pursuant to the franchise agreements with the owned hotels and franchise agreements entered into with franchisees outside of the U.S. on or after April 1, 2013, the Company generally collects a monthly royalty fee equal to 4.5% of gross room revenues throughout the term and does not offer a rebate.  

 

We receive reservation and technology fees, as well as fees related to Returns, in connection with franchising our La Quinta brand. Such fees are recognized based on a percentage of the franchisee’s eligible hotel room revenues or room count. We also perform certain other services for franchisees such as training and revenue management. Revenue for these services is recognized at the time the services are performed.

Other hotel revenues include revenues generated by the incidental support of hotel operations for owned hotels and other rental income. We record rental income from operating leases associated with leasing space for restaurants, billboards, and cell towers. Rental income is recognized on a straight-line basis over the life of the respective lease agreement.

Brand marketing fund revenues from franchise properties represent fees collected from third party franchise hotels related to maintaining our Brand Marketing Fund (“BMF”). We maintain the BMF on behalf of all La Quinta branded hotel properties, including our owned hotels, from which marketing and advertising campaign expenses are paid. Each La Quinta branded hotel is charged a percentage of its room revenue from which the expenses of the fund are covered. The corresponding expenditures of the BMF fees collected from franchised hotels are presented as brand marketing fund expenses from franchised hotels in our condensed consolidated statements of operations, resulting in no net impact to operating income (loss) or net income (loss).

Lodging operations are particularly sensitive to adverse economic and competitive conditions and trends, which could adversely affect the Company’s business, financial condition, and results of operations.

Assets held for sale—Long-lived assets are classified as held for sale when all of the following criteria are met:

Management, having the authority to approve the action, commits to a plan to sell the asset and does not expect significant changes to the plan or that the plan will be withdrawn;

The asset is available for immediate sale in its present condition, and management is actively seeking a buyer;

The asset is being actively marketed, at a price reasonable in relation to the current value; and

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The sale of the asset is probable within one year.

When we identify a long-lived asset as held for sale, depreciation of the asset is discontinued and the carrying value is reduced, if necessary, to the estimated sales price less costs to sell by recording a charge to current earnings. All assets held for sale are monitored through the date of sale for potential adjustments based on offers we are willing to take under serious consideration and continued review of facts and circumstances. Losses on sales are recorded to the extent that the amounts ultimately received for the sale of assets are less than the adjusted book values of the assets. Gains on sales are recognized at the time the assets are sold, provided there is reasonable assurance the sales price will be collected and any future activities to be performed by the Company relating to the assets sold are expected to be insignificant.

Derivative Instruments — We use derivative instruments as part of our overall strategy to manage our exposure to market risks associated with fluctuations in interest rates. We regularly monitor the financial stability and credit standing of the counterparties to our derivative instruments. We do not enter into derivative financial instruments for trading or speculative purposes.

We record all derivatives at fair value. On the date the derivative contract is entered, we designate the derivative as one of the following: a hedge of a forecasted transaction or the variability of cash flows to be paid (“cash flow hedge”), a hedge of the fair value of a recognized asset or liability (“fair value hedge”), or an undesignated hedge instrument. Changes in the fair value of a derivative that is qualified, designated and highly effective as a cash flow hedge or net investment hedge are recorded in the condensed consolidated statements of comprehensive income (loss) until they are reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Changes in the fair value of a derivative that is qualified, designated and highly effective as a fair value hedge, along with the gain or loss on the hedged asset or liability that is attributable to the hedged risk, are recorded in current period earnings. Changes in the fair value of undesignated derivative instruments and the ineffective portion of designated derivative instruments are reported in current period earnings. Cash flows from designated derivative financial instruments are classified within the same category as the item being hedged in the condensed consolidated statements of cash flows.

If we determine that we qualify for and will designate a derivative as a hedging instrument at the designation date, we formally document all relationships between hedging activities, including the risk management objective and strategy for undertaking various hedge transactions. This process includes matching all derivatives that are designated as cash flow hedges to specific forecasted transactions, linking all derivatives designated as fair value hedges to specific assets and liabilities in our condensed consolidated balance sheets, and determining the foreign currency exposure of net investment of the foreign operation for a net investment hedge.

On a quarterly basis, we assess the effectiveness of our designated hedges in offsetting the variability in the cash flows or fair values of the hedged assets or obligations via use of a statistical regression approach. Additionally, we measure ineffectiveness using the hypothetical derivative method. This method compares the cumulative change in fair value of each hedging instrument to the cumulative change in fair value of a hypothetical hedging instrument, which has terms that identically match the critical terms of the respective hedged transactions. Thus, the hypothetical hedging instrument is presumed to perfectly offset the hedged cash flows. Ineffectiveness results when the cumulative change in the fair value of the hedging instrument exceeds the cumulative change in the fair value of the hypothetical hedging instrument. We discontinue hedge accounting prospectively when the derivative is not highly effective as a hedge, the underlying hedged transaction is no longer probable, or the hedging instrument expires, is sold, terminated or exercised.

Equity Based Compensation — We recognize the cost of services received in an equity based payment transaction with an employee as services are received and record either a corresponding increase in equity or a liability, depending on whether the instruments granted satisfy the equity or liability classification criteria.

The measurement objective for these equity awards is the estimated fair value at the grant date of the equity instruments that we are obligated to issue when employees have rendered the requisite service and satisfied any other conditions necessary to earn the right to benefit from the instruments. The compensation cost for an award classified as an equity instrument is recognized ratably over the requisite service period. The requisite service period is the period during which an employee is required to provide service for an award to vest. We recognize forfeitures as they occur.

Compensation cost for awards with performance conditions is recognized over the requisite service period if it is probable that the performance condition will be satisfied. If such performance conditions are not considered probable until they occur, no compensation expense for these awards is recognized.

Income Taxes —We account for income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities from a change in tax rates is recognized in earnings during the period in which the new rate is enacted. For financial reporting

12


purposes, income tax expense or benefit is based on reported financial accounting income and income taxes related to our taxable subsidiaries.

We evaluate the probability of realizing the future benefits of deferred tax assets and provide a valuation allowance for the portion of any deferred tax assets where the likelihood of realizing an income tax benefit in the future does not meet the more-likely-than-not criteria for recognition.

We recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. We accrue interest and, if applicable, penalties for any uncertain tax positions. Our policy is to classify interest and penalties as a component of income tax expense. The Company has open tax years dating back to 2010.

Newly Issued Accounting Standards

 

In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which provides guidance for evaluating whether certain transactions are to be accounted for as an acquisition (or disposal) of either a business or an asset. This standard is applied on a prospective basis.  Early adoption is permitted for transactions occurring subsequent to the issuance of ASU 2017-01 and not reported in the financial statements. The guidance is effective for the interim and annual periods beginning after December 15, 2018, on a prospective basis, and earlier adoption is permitted for transactions occurring subsequent to the issuance of ASU 2017-01 and not reported in the financial statements. We are currently evaluating the impact of this guidance on our consolidated financial position, results of operations and related disclosures.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which changes the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. Early adoption is permitted for fiscal years, and interim periods within those years, beginning after December 15, 2018. We are currently evaluating the impact of this guidance on our consolidated financial position, results of operations and related disclosures. Historically credit losses have not been material to the Company. We do not expect the implementation of this to have a material impact on our financial position and results of operations.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires lessees to recognize on the balance sheet a right-of-use asset, representing its right to use the underlying asset for the lease term, and a lease liability for all leases with terms greater than 12 months. The guidance also requires qualitative and quantitative disclosures designed to assess the amount, timing, and uncertainty of cash flows arising from leases. The standard requires the use of a modified retrospective transition approach, which includes a number of optional practical expedients that entities may elect to apply. The guidance is effective for the interim and annual periods beginning after December 15, 2018. An early adoption is permitted. We are currently evaluating the magnitude of the impact of this guidance on our consolidated financial position, results of operations and related disclosures. The impact of this guidance will increase assets and liabilities on the Company’s consolidated balance sheet. Due to the size of our balance sheet and the relatively small number of leases the Company maintains, we do not expect the implementation of this to have a material impact on our financial position and results of operations.

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The new guidance on revenue from contracts with customers will supersede most current revenue recognition guidance, including industry-specific guidance. The guidance is effective for the interim and annual periods beginning on or after December 15, 2017; early adoption is permitted for annual reporting periods beginning after December 15, 2016. The underlying principle is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. The Company has formed a project team to evaluate and implement the standard and currently believes the most significant areas of impact of this ASU will be i) the deferral of initial fees paid by franchisees over their contract life; and ii) the deferral of costs to acquire a customer. We are continuing our assessment, which may identify other impacts of the adoption of ASU 2014-09.

The guidance also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. The guidance permits the use of either a retrospective or cumulative effect transition method. The Company currently anticipates utilizing the full retrospective method of adoption allowed by the standard, in order to provide for comparative results in all periods presented, and plans to adopt the standard as of January 1, 2018.

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Newly Adopted Accounting Standards

 

In January 2017, the FASB issued ASU 2017-03, Accounting Changes and Error Corrections (Topic 250) and Investments—Equity Method and Joint Ventures (Topic 323): Amendments to SEC Paragraphs Pursuant to Staff Announcements. Registrants are required to disclose the effect that recently issued accounting standards will have on their financial statements when adopted in a future period. In cases where a registrant cannot reasonably estimate the impact of the adoption, then additional qualitative disclosures should be considered. We adopted this standard on January 1, 2017 and it did not have a material effect on our financial statements.

 

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. The new guidance requires that entities recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The guidance is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods. Early adoption is permitted but should be in the first interim period. The new guidance should also be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. We adopted this standard on January 1, 2017 and it did not have a material effect on our financial statements.

 

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments: A Consensus of the FASB Emerging Issues Task Force. The amendments provide guidance on eight specific cash flow classification issues: debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate and bank-owned life insurance policies, distributions received from equity method investees, beneficial interests in securitization transactions and separately identifiable cash flows and application of the predominance principle. The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. Early adoption is permitted. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. We adopted this standard on January 1, 2017 on a retrospective basis. For the three months ended March 31, 2016, we reclassified $0.4 million from insurance proceeds on casualty disasters in cash flows from investing activities to the change in accounts receivable in cash flows from operating activities on the consolidated statement of cash flows.

 

In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects related to the accounting for share-based payment transactions. Per ASU 2016-09: (1) all excess tax benefits and tax deficiencies should be recognized as income tax expense or benefit in the income statement, rather than in additional paid-in capital under current guidance; (2) excess tax benefits should be classified along with other income tax cash flows as an operating activity on the statement of cash flows, rather than as a separate cash inflow from financing activities and cash outflow from operating activities under current guidance; (3) cash paid by an employer when directly withholding shares for tax-withholding purposes should be classified as a financing activity; and (4) an entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest, as under current guidance, or account for forfeitures when they occur. ASU 2016-09 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2016. Early adoption is permitted. We adopted this standard on January 1, 2017 and it did not have a material effect on our financial statements.

From time to time, new accounting standards are issued by FASB or other standards setting bodies, which we adopt as of the specified effective date. Unless otherwise discussed, we believe the impact of recently issued standards that are not yet effective will not have a material impact on our consolidated financial statements upon adoption.

 

NOTE 3. ASSETS HELD FOR SALE

As of December 31, 2016, five hotels and a restaurant parcel were classified as assets held for sale. The sale of these assets does not represent a major strategic shift and does not qualify for discontinued operations reporting. During the first quarter of 2017, three of these hotels were sold for $22.0 million, net of transaction costs. The remaining two hotels are expected to sell in 2017. Additionally, during the first quarter of 2017, one hotel in Waco, Texas met the criteria to be classified as an asset held for sale.

14


As of March 31, 2017 and December 31, 2016, the carrying amounts of the major classes of assets held for sale were as follows:

 

 

 

 

 

 

 

 

March 31, 2017

 

 

December 31, 2016

 

 

 

 

(in thousands)

Current assets

 

$

25

 

 

$

64

 

 

Property and equipment, net of accumulated depreciation

 

 

8,929

 

 

 

29,383

 

 

Other non-current assets

 

 

94

 

 

 

97

 

 

Total assets held for sale

 

$

9,048

 

 

$

29,544

 

 

 

 

NOTE 4. PROPERTY AND EQUIPMENT

The following is a summary of property and equipment as of March 31, 2017 and December 31, 2016:

 

 

 

March 31,

2017

 

 

December 31,

2016

 

 

 

(in thousands)

 

Land

 

$

740,690

 

 

$

740,996

 

Buildings and improvements

 

 

2,640,515

 

 

 

2,621,924

 

Furniture, fixtures, equipment and other

 

 

442,886

 

 

 

429,307

 

Total property and equipment

 

 

3,824,091

 

 

 

3,792,227

 

Less accumulated depreciation

 

 

(1,428,182

)

 

 

(1,397,514

)

Property and equipment, net

 

 

2,395,909

 

 

 

2,394,713

 

Construction in progress

 

 

75,504

 

 

 

62,067

 

Total property and equipment, net of accumulated

   depreciation

 

$

2,471,413

 

 

$

2,456,780

 

 

Depreciation and amortization expense related to property and equipment was $36.0 million and $38.3 million for the three months ended March 31, 2017 and 2016, respectively. Construction in progress includes capitalized costs for ongoing projects that have not yet been put into service.

 

NOTE 5. LONG-TERM DEBT

Long-term debt as of March 31, 2017 and December 31, 2016 was as follows:

 

 

 

March 31,

2017

 

 

December 31,

2016

 

 

 

(in thousands)

 

Current portion of long-term debt

 

$

17,514

 

 

$

17,514

 

Long-term debt

 

 

1,679,423

 

 

 

1,682,436

 

Total long-term debt (1)

 

$

1,696,937

 

 

$

1,699,950

 

 

(1) 

As of March 31, 2017 and December 31, 2016, the 30 day United States dollar London Interbank Offering Rate (“LIBOR”) was 0.93% and 0.72%, respectively. As of March 31, 2017, the interest rate, maturity date and principal payments on the Term Facility (as defined below) were as follows:

 

During the three months ended March 31, 2017, we made a quarterly scheduled principal payment of $4.4 million.

 

The interest rate for the Term Facility through July 31, 2015 was LIBOR with a floor of 1.0% plus a spread of 3.0%. As of July 31, 2015, we achieved a consolidated first lien net leverage ratio of less than 4.50 to 1.00, and as a result the rate decreased to LIBOR with a floor of 1.0% plus a spread of 2.75% for the period from August 1, 2015 to March 31, 2017. Included in the Term Facility as of March 31, 2017 and December 31, 2016 is an unamortized original issue discount of $6.4 million and $6.7 million, respectively. Included in the Term Facility, as of March 31, 2017 and December 31, 2016, is the deduction of debt issuance costs of $17.5 million and $18.5 million, respectively. As of March 31, 2017 and December 31, 2016, we had $15.2 million and $16.2 million, respectively, in accrued interest included within accrued expenses and other liabilities in the accompanying condensed consolidated balance sheets.

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Term Facility

On April 14, 2014, Holdings’ wholly owned subsidiary, La Quinta Intermediate Holdings L.L.C. (the “Borrower”), entered into a new credit agreement (the “Agreement”) with JPMorgan Chase Bank, N.A. (“JPM”), as administrative agent, collateral agent, swingline lender and L/C issuer, J.P. Morgan Securities LLC, Morgan Stanley Senior Funding, Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Citigroup Global Markets Inc., Credit Suisse Securities (USA) LLC, Deutsche Bank Securities Inc., Goldman Sachs Bank USA, and Wells Fargo Securities, LLC, as joint lead arrangers and joint book runners, and the other agents and lenders from time to time party thereto.

The credit agreement provides for senior secured credit facilities (collectively the “Senior Facilities”) consisting of:

 

$2.1 billion senior secured term loan facility (the “Term Facility”), which will mature in 2021; and

 

$250 million senior secured revolving credit facility (the “Revolving Facility”), $50 million of which is available in the form of letters of credit, which will mature in 2019.

Interest Rate and Fees—Borrowings under the Term Facility bear interest, at the Borrower’s option, at a rate equal to a margin over either (a) a base rate determined by reference to the highest of (1) the JPM prime lending rate, (2) the Federal Funds Effective Rate plus 1/2 of 1.00% and (3) the adjusted LIBOR rate for a one-month interest period plus 1.00% or (b) a LIBOR rate determined by reference to the Reuters LIBOR rate for the interest period relevant to such borrowing. The margin for the Term Facility is 2.00%, in the case of base rate loans, and 3.00%, in the case of LIBOR rate loans, subject to one step-down of 0.25% upon the achievement of a consolidated first lien net leverage ratio (as defined in the Agreement) of less than or equal to 4.50 to 1.00, subject to a base rate floor of 2.00% and a LIBOR floor of 1.00%.  As of July 31, 2015, we achieved a consolidated first lien net leverage ratio of less than 4.50 to 1.00, and, as a result we realized the step-down of 0.25% after that date.

Borrowings under the Revolving Facility bear interest, at the Borrower’s option, at a rate equal to a margin over either (a) a base rate determined by reference to the highest of (1) the JPM prime lending rate, (2) the Federal Funds Effective Rate plus 1/2 of 1.00% and (3) the adjusted LIBOR rate for a one-month interest period plus 1.00% or (b) a LIBOR rate determined by reference to the Reuters LIBOR rate for the interest period relevant to such borrowing. The margin for the Revolving Facility is 1.50%, in the case of base rate loans, and 2.50%, in the case of LIBOR rate loans, subject to three step-downs of 0.25% each upon the achievement of a consolidated first lien net leverage ratio of less than or equal to 5.00 to 1.00, 4.50 to 1.00 and 4.00 to 1.00, respectively. As of March 2, 2015, we achieved a consolidated first lien net leverage ratio of less than 5.00 to 1.00, and after March 2, 2015 we realized the first step-down in margin of 0.25%. As of July 31, 2015, we achieved a consolidated first lien net leverage ratio of less than 4.50 to 1.00, and, as a result we realized the second step-down of 0.25% after that date.

In addition, the Borrower is required to pay a commitment fee to the lenders under the Revolving Facility in respect of the unutilized commitments thereunder. The commitment fee rate is 0.50% per annum subject to a step-down to 0.375%, upon achievement of a consolidated first lien net leverage ratio less than or equal to 5.00 to 1.00. As of March 2, 2015, we achieved a consolidated first lien net leverage ratio of less than 5.00 to 1.00, and after March 2, 2015, the commitment fee rate is 0.375%. The Borrower is also required to pay customary letter of credit fees.

Amortization—Beginning September 2014, the Borrower is required to repay installments on the Term Facility in quarterly installments equal to 0.25% of the original principal amount less any voluntary prepayments on the Term Facility, with the remaining amount payable on the applicable maturity date with respect to the Term Facility.

The Senior Facilities contain certain representations and warranties, affirmative and negative covenants and events of default. If an event of default occurs, the lenders under the Senior Facilities will be entitled to take various actions, including the acceleration of amounts due under the Senior Facilities and actions permitted to be taken by a secured creditor. As of March 31, 2017, we were in compliance with all applicable covenants under the Senior Facilities.

Letters of Credit

As of March 31, 2017 and December 31, 2016, we had $14.1 million and $14.6 million, respectively, in letters of credit obtained through our Revolving Facility. In 2014, we were required to pay a fee of 2.63% per annum related to these letters of credit. As of March 2, 2015, we achieved a consolidated first lien net leverage ratio of less than 5.00 to 1.00, and after March 2, 2015 we realized the first step-down in rate of 0.25%, resulting in a reduction of the per annum fee to 2.38%. As of July 31, 2015, we achieved a consolidated first lien net leverage ratio of less than 4.50 to 1.00, and, as a result we realized the step-down of 0.25% after that date, for a margin of 2.13%.

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Interest Expense, Net

Net interest expense, including the impact of our interest rate swap (see Note 6), consisted of the following for the three months ended March 31, 2017 and 2016:

 

 

For the three months

ended March 31,

 

Description

 

2017

 

 

2016

 

 

 

 

 

Term Facility

 

$

18,739

 

 

$

19,031

 

Amortization of deferred financing costs

 

 

999

 

 

 

970

 

Amortization of original issue discount

 

 

367

 

 

 

356

 

Other interest

 

 

3

 

 

 

7

 

Interest income

 

 

(128

)

 

 

(58

)

Total interest expense, net

 

$

19,980

 

 

$

20,306

 

 

NOTE 6. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

During the three months ended March 31, 2017 and 2016, derivatives were used to hedge the interest rate risk associated with our variable-rate debt.

Term Facility Interest Rate Swap

On April 14, 2014, the Borrower entered into an interest rate swap agreement with an aggregate notional amount of $850.0 million that expires on April 14, 2019. This agreement swaps the LIBOR rate in effect under the new credit agreement for this portion of the loan to a fixed-rate of 2.0311%, which includes a 1.00% LIBOR floor. Management has elected to designate this interest rate swap as a cash flow hedge for accounting purposes.

Fair Value of Derivative Instruments

The effects of our derivative instruments on our condensed consolidated balance sheets were as follows:

 

 

 

March 31, 2017

 

 

December 31, 2016

 

 

 

Balance Sheet

Classification

 

Fair Value

 

 

Balance Sheet

Classification

 

Fair Value

 

 

 

(in thousands)

 

Cash Flow Hedges:

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swap

 

Other long-

term liabilities

 

$

7,068

 

 

Other long-

term liabilities

 

$

9,803

 

Earnings Effect of Derivative Instruments

The effects of our derivative instruments on our condensed consolidated statements of operations and condensed consolidated statements of comprehensive income (loss), net of the effect for income taxes, were as follows:

 

 

 

Classification of Gain

 

For the three months

ended March 31,

 

 

 

(Loss) Recognized