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EX-31.2 - EX-31.2 - Sunstone Hotel Investors, Inc.sho-20170630ex312b9ba3e.htm
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EX-31.1 - EX-31.1 - Sunstone Hotel Investors, Inc.sho-20170630ex3112fbce7.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, 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 001-32319

 


 

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, 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 ☐

 

Smaller reporting company ☐

(Do not check if a 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.

225,342,925 shares of Common Stock, $0.01 par value, as of July 31, 2017

 

 


 

 

SUNSTONE HOTEL INVESTORS, INC.

QUARTERLY REPORT ON

FORM 10-Q

 

For the Quarterly Period Ended June 30, 2017

 

TABLE OF CONTENTS

 

 

 

 

 

 

Page

PART I—FINANCIAL INFORMATION 

 

 

 

Item 1. 

2

 

 

 

 

Consolidated Balance Sheets as of June 30, 2017 (unaudited) and December 31, 2016

2

 

 

 

 

Unaudited Consolidated Statements of Operations and Comprehensive Income for the Three and Six Months Ended June 30, 2017 and 2016

3

 

 

 

 

Unaudited Consolidated Statement of Equity for the Six Months Ended June 30, 2017

4

 

 

 

 

Unaudited Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2017 and 2016

5

 

 

 

 

Notes to Unaudited Consolidated Financial Statements

6

 

 

 

Item 2. 

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

21

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures about Market Risk

40

 

 

 

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,

 

    

2017

    

2016

 

 

(unaudited)

 

 

 

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

597,318

 

$

369,537

Restricted cash

 

 

66,415

 

 

67,923

Accounts receivable, net

 

 

46,319

 

 

39,337

Inventories

 

 

1,235

 

 

1,225

Prepaid expenses

 

 

8,817

 

 

10,489

Assets held for sale, net

 

 

 —

 

 

79,113

Total current assets

 

 

720,104

 

 

567,624

Investment in hotel properties, net

 

 

3,104,969

 

 

3,158,219

Deferred financing fees, net

 

 

1,826

 

 

4,002

Other assets, net

 

 

15,050

 

 

9,389

Total assets

 

$

3,841,949

 

$

3,739,234

LIABILITIES AND EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

29,182

 

$

36,110

Accrued payroll and employee benefits

 

 

20,231

 

 

24,896

Dividends and distributions payable

 

 

14,465

 

 

119,847

Other current liabilities

 

 

46,111

 

 

39,869

Current portion of notes payable, net

 

 

9,023

 

 

184,929

Liabilities of assets held for sale

 

 

 —

 

 

3,153

Total current liabilities

 

 

119,012

 

 

408,804

Notes payable, less current portion, net

 

 

980,066

 

 

746,374

Capital lease obligations, less current portion

 

 

15,574

 

 

15,574

Other liabilities

 

 

36,631

 

 

36,650

Total liabilities

 

 

1,151,283

 

 

1,207,402

Commitments and contingencies (Note 11)

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

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

 

 

 

 

 

 

6.95% Series E Cumulative Redeemable Preferred Stock, 4,600,000 shares issued and outstanding at June 30, 2017 and December 31, 2016, stated at liquidation preference of $25.00 per share

 

 

115,000

 

 

115,000

6.45% Series F Cumulative Redeemable Preferred Stock, 3,000,000 shares issued and outstanding at June 30, 2017 and December 31, 2016, stated at liquidation preference of $25.00 per share

 

 

75,000

 

 

75,000

Common stock, $0.01 par value, 500,000,000 shares authorized, 225,152,175 shares issued and outstanding at June 30, 2017 and 220,073,140 shares issued and outstanding at December 31, 2016

 

 

2,252

 

 

2,201

Additional paid in capital

 

 

2,672,216

 

 

2,596,620

Retained earnings

 

 

897,968

 

 

786,901

Cumulative dividends and distributions

 

 

(1,121,645)

 

 

(1,092,952)

Total stockholders’ equity

 

 

2,640,791

 

 

2,482,770

Noncontrolling interest in consolidated joint venture

 

 

49,875

 

 

49,062

Total equity

 

 

2,690,666

 

 

2,531,832

Total liabilities and equity

 

$

3,841,949

 

$

3,739,234

 

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, 2017

   

June 30, 2016

   

June 30, 2017

   

June 30, 2016

REVENUES

 

 

 

 

 

 

 

 

 

 

 

 

Room

 

$

223,653

 

$

224,176

 

$

414,020

 

$

411,473

Food and beverage

 

 

78,621

 

 

81,298

 

 

154,122

 

 

152,532

Other operating

 

 

16,522

 

 

16,686

 

 

31,397

 

 

32,447

Total revenues

 

 

318,796

 

 

322,160

 

 

599,539

 

 

596,452

OPERATING EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

Room

 

 

54,557

 

 

54,517

 

 

105,849

 

 

105,561

Food and beverage

 

 

50,969

 

 

52,939

 

 

101,506

 

 

104,868

Other operating

 

 

4,033

 

 

4,132

 

 

7,864

 

 

8,188

Advertising and promotion

 

 

14,911

 

 

15,277

 

 

29,857

 

 

30,270

Repairs and maintenance

 

 

10,796

 

 

10,999

 

 

21,763

 

 

22,263

Utilities

 

 

7,291

 

 

7,348

 

 

14,513

 

 

14,862

Franchise costs

 

 

9,881

 

 

9,898

 

 

17,936

 

 

17,994

Property tax, ground lease and insurance

 

 

20,791

 

 

18,157

 

 

42,078

 

 

40,997

Other property-level expenses

 

 

35,766

 

 

37,982

 

 

70,504

 

 

72,695

Corporate overhead

 

 

7,573

 

 

6,809

 

 

14,352

 

 

13,526

Depreciation and amortization

 

 

39,525

 

 

40,680

 

 

80,332

 

 

80,727

Total operating expenses

 

 

256,093

 

 

258,738

 

 

506,554

 

 

511,951

Operating income

 

 

62,703

 

 

63,422

 

 

92,985

 

 

84,501

Interest and other income

 

 

849

 

 

355

 

 

1,570

 

 

844

Interest expense

 

 

(13,084)

 

 

(15,872)

 

 

(24,333)

 

 

(35,882)

Loss on extinguishment of debt

 

 

 —

 

 

(154)

 

 

(4)

 

 

(259)

Gain on sale of assets

 

 

1,189

 

 

18,223

 

 

45,474

 

 

18,223

Income before income taxes

 

 

51,657

 

 

65,974

 

 

115,692

 

 

67,427

Income tax provision

 

 

(242)

 

 

(238)

 

 

(450)

 

 

(475)

NET INCOME

 

 

51,415

 

 

65,736

 

 

115,242

 

 

66,952

Income from consolidated joint venture attributable to noncontrolling interest

 

 

(2,183)

 

 

(1,655)

 

 

(4,175)

 

 

(3,305)

Preferred stock dividends and redemption charge

 

 

(3,207)

 

 

(6,783)

 

 

(6,414)

 

 

(9,549)

INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS

 

$

46,025

 

$

57,298

 

$

104,653

 

$

54,098

 

 

 

 

 

 

 

 

 

 

 

 

 

COMPREHENSIVE INCOME

 

$

51,415

 

$

65,736

 

$

115,242

 

$

66,952

COMPREHENSIVE INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS

 

$

46,025

 

$

57,298

 

$

104,653

 

$

54,098

Basic and diluted per share amounts:

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted income attributable to common stockholders per common share

 

$

0.21

 

$

0.26

 

$

0.47

 

$

0.25

Basic and diluted weighted average common shares outstanding

 

 

220,130

 

 

215,385

 

 

219,614

 

 

214,136

 

 

 

 

 

 

 

 

 

 

 

 

 

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 E

 

Series F

 

Common Stock

 

 

 

 

 

 

 

Cumulative

 

Interest in

 

 

 

 

 

Number of

 

 

 

Number of

 

 

 

Number of

 

 

 

Additional

 

Retained

 

Dividends and

 

Consolidated

 

 

 

 

    

Shares

   

Amount

 

Shares

    

Amount

    

Shares

    

Amount

    

Paid in Capital

    

 Earnings

    

Distributions

    

    Joint Venture    

    

Total

Balance at December 31, 2016 (audited)

 

4,600,000

 

$

115,000

 

3,000,000

 

$

75,000

 

220,073,140

 

$

2,201

 

$

2,596,620

 

$

786,901

 

$

(1,092,952)

 

$

49,062

 

$

2,531,832

Net proceeds from sale of common stock

 

 —

 

 

 —

 

 —

 

 

 —

 

4,685,023

 

 

47

 

 

74,744

 

 

 —

 

 

 —

 

 

 —

 

 

74,791

Deferred stock compensation, net

 

 —

 

 

 —

 

 —

 

 

 —

 

394,012

 

 

 4

 

 

852

 

 

 —

 

 

 —

 

 

 —

 

 

856

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

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(22,279)

 

 

 —

 

 

(22,279)

Series E preferred stock dividends and dividends payable at $0.86875 per share year to date

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(3,996)

 

 

 —

 

 

(3,996)

Series F preferred stock dividends and dividends payable at $0.80625 per share year to date

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(2,418)

 

 

 —

 

 

(2,418)

Distributions to noncontrolling interest

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(3,362)

 

 

(3,362)

Net income

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

111,067

 

 

 —

 

 

4,175

 

 

115,242

Balance at June 30, 2017

 

4,600,000

 

$

115,000

 

3,000,000

 

$

75,000

 

225,152,175

 

$

2,252

 

$

2,672,216

 

$

897,968

 

$

(1,121,645)

 

$

49,875

 

$

2,690,666

 

 

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, 2017

    

June 30, 2016

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

Net income

 

$

115,242

 

$

66,952

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

 

 

 

 

 

 

Bad debt expense

 

 

310

 

 

309

Gain on sale of assets, net

 

 

(45,750)

 

 

(18,234)

Loss on extinguishment of debt

 

 

 4

 

 

259

Loss on derivatives, net

 

 

349

 

 

9,184

Depreciation

 

 

79,029

 

 

79,119

Amortization of franchise fees and other intangibles

 

 

1,624

 

 

1,750

Amortization of deferred financing fees

 

 

1,157

 

 

1,104

Amortization of deferred stock compensation

 

 

4,340

 

 

4,077

Changes in operating assets and liabilities:

 

 

 

 

 

 

Restricted cash

 

 

4,009

 

 

15,759

Accounts receivable

 

 

(6,844)

 

 

(14,831)

Inventories

 

 

22

 

 

84

Prepaid expenses and other assets

 

 

2,804

 

 

2,362

Accounts payable and other liabilities

 

 

3,403

 

 

6,016

Accrued payroll and employee benefits

 

 

(5,416)

 

 

(4,759)

Net cash provided by operating activities

 

 

154,283

 

 

149,151

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

Proceeds from sales of assets

 

 

150,155

 

 

41,171

Restricted cash — replacement reserve

 

 

(2,501)

 

 

(1,914)

Acquisition deposit

 

 

(7,000)

 

 

 —

Acquisition of air rights

 

 

 —

 

 

(2,447)

Renovations and additions to hotel properties

 

 

(59,499)

 

 

(100,034)

Payment for interest rate derivative

 

 

(19)

 

 

 —

Net cash provided by (used in) investing activities

 

 

81,136

 

 

(63,224)

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)

Proceeds from common stock offerings

 

 

76,218

 

 

 —

Payment of common stock offering costs

 

 

(1,427)

 

 

 —

Repurchase of common stock for employee withholding obligations

 

 

(3,793)

 

 

(2,641)

Proceeds from notes payable

 

 

240,000

 

 

100,000

Payments on notes payable

 

 

(181,186)

 

 

(193,446)

Payments of costs related to extinguishment of notes payable

 

 

 —

 

 

(153)

Payments of deferred financing costs

 

 

(13)

 

 

(77)

Dividends and distributions paid

 

 

(134,075)

 

 

(199,555)

Distributions to noncontrolling interest

 

 

(3,362)

 

 

(2,800)

Net cash used in financing activities

 

 

(7,638)

 

 

(230,312)

Net increase (decrease) in cash and cash equivalents

 

 

227,781

 

 

(144,385)

Cash and cash equivalents, beginning of period

 

 

369,537

 

 

499,067

Cash and cash equivalents, end of period

 

$

597,318

 

$

354,682

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

 

 

 

 

 

 

Cash paid for interest

 

$

17,686

 

$

25,809

Cash paid for income taxes

 

$

447

 

$

709

NONCASH INVESTING ACTIVITY

 

 

 

 

 

 

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

 

$

(6,776)

 

$

3,072

Amortization of deferred stock compensation — construction activities

 

$

309

 

$

486

NONCASH FINANCING ACTIVITY

 

 

 

 

 

 

Preferred stock redemption charge

 

$

 —

 

$

4,052

Issuance of common stock distributions

 

$

 —

 

$

78,823

Dividends and distributions payable

 

$

14,465

 

$

13,898

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, 2017, the Company had interests in 26 hotels (the “26 hotels”), 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.

 

 4

Highgate Hotels L.P. and an affiliate

 

 3

Crestline Hotels & Resorts

 

 2

Hilton Worldwide

 

 2

Hyatt Corporation

 

 2

Davidson Hotels & Resorts

 

 1

HEI Hotels & Resorts

 

 1

 

 

 

Total hotels held for investment

 

26

 

 

2. Summary of Significant Accounting Policies

 

Basis of Presentation

 

The accompanying consolidated financial statements as of June 30, 2017 and December 31, 2016, and for the three and six months ended June 30, 2017 and 2016, 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, 2017 and December 31, 2016, and for the three and six months ended June 30, 2017 and 2016.

 

Noncontrolling interest at both June 30, 2017 and December 31, 2016 represents the outside 25.0% equity interest in the Hilton San Diego Bayfront, which the Company includes in its financial statements on a consolidated basis.

 

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, 2016, filed with the Securities and Exchange Commission on February 23, 2017.

 

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

 

6


 

Use of Estimates

 

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

 

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

 

Six Months Ended

 

    

June 30, 2017

    

June 30, 2016

    

June 30, 2017

    

June 30, 2016

 

 

(unaudited)

 

(unaudited)

 

(unaudited)

 

(unaudited)

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

51,415

 

$

65,736

 

$

115,242

 

$

66,952

Income from consolidated joint venture attributable to noncontrolling interest

 

 

(2,183)

 

 

(1,655)

 

 

(4,175)

 

 

(3,305)

Preferred stock dividends and redemption charge

 

 

(3,207)

 

 

(6,783)

 

 

(6,414)

 

 

(9,549)

Distributions paid on unvested restricted stock compensation

 

 

(60)

 

 

(58)

 

 

(120)

 

 

(118)

Undistributed income allocated to unvested restricted stock compensation

 

 

(188)

 

 

(252)

 

 

(437)

 

 

(170)

Numerator for basic and diluted income attributable to common stockholders

 

$

45,777

 

$

56,988

 

$

104,096

 

$

53,810

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average basic and diluted common shares outstanding

 

 

220,130

 

 

215,385

 

 

219,614

 

 

214,136

Basic and diluted income attributable to common stockholders per common share

 

$

0.21

 

$

0.26

 

$

0.47

 

$

0.25

 

The Company’s unvested restricted shares associated with its long-term incentive plan and shares associated with common stock options have been excluded from the above calculation of earnings per share for the three and six months ended June 30, 2017 and 2016, 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

7


 

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 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 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.

 

In March 2016, the FASB clarified the principal versus agent guidance in ASU No. 2014-09 with its issuance of 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”). 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 No. 2016-08 will require either a full retrospective approach or a modified retrospective approach, with early adoption permitted as of the original effective date.

 

In May 2016, the FASB amended ASU No. 2014-09’s guidance on transition, collectability, noncash consideration and the presentation of sales and other similar taxes with its issuance of Accounting Standards Update No. 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients” (“ASU No. 2016-12”). 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 No. 2016-12 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 in the process of evaluating the impact that ASU No. 2014-09, along with the related clarifications and amendments in ASU No. 2016-08 and ASU No. 2016-12, will have on its recognition of revenue included in its consolidated financial statements. While the Company is still evaluating the impact that the ASUs will have on accounting for the gain recognized upon the sale of a hotel, there is a possibility that the adoption of ASU No. 2014-09 will affect the timing of any gain recognition in the consolidated financial statements. For example, under current guidance, a gain on the sale of hotel properties with contingencies and some future involvement is deferred until all contingencies have been removed. Under the new guidance, however, the entire gain on sale may be recognized upon the close of escrow. The Company expects to adopt the new ASUs under the modified retrospective approach. 

 

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 creating an inventory of its leases and is analyzing its current ground lease obligations. The Company is currently evaluating the impact that ASU No. 2016-02 will have on its consolidated financial statements, and, other than the inclusion of operating leases on the Company’s balance sheet, such effects have not yet been determined. 

 

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 will

8


 

become 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 does not believe that the adoption of ASU No. 2016-13 will have a material impact on its consolidated financial statements.

 

In September 2016, the FASB issued Accounting Standards Update No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force)” (“ASU No. 2016-15”), which clarifies how entities should classify certain cash receipts and cash payments on the statement of cash flows. ASU No. 2016-15 addresses certain issues where diversity in practice was identified. It amends existing guidance, which is principles based and often requires judgment to determine the appropriate classification of cash flows as operating, investing or financing activities. In addition, ASU No. 2016-15 clarifies how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. ASU No. 2016-15 will become effective during the first quarter of 2018, and will generally require a retrospective approach. Early adoption is permitted. The Company does not believe that the adoption of ASU No. 2016-15 will have a material effect on its consolidated financial statements.

 

In November 2016, the FASB issued Accounting Standards Update No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force)” (“ASU No. 2016-18”), which will require entities to show the changes in total cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. As a result, entities will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. When cash, cash equivalents, restricted cash and restricted cash equivalents are presented in more than one line item on the balance sheet, the new guidance requires a reconciliation of the totals in the statement of cash flows to the related caption in the balance sheet. This reconciliation can be presented either on the face of the statement of cash flows or in the notes to the financial statements. ASU No. 2016-18 will become effective in the first quarter of 2018, and will require a retrospective approach. Early adoption in an interim period is permitted, but any adjustments must be reflected as of the beginning of the fiscal year that includes the interim period. Upon adoption of this standard, amounts included in restricted cash on the Company’s consolidated balance sheets will be included with cash and cash equivalents on its consolidated statements of cash flows. These amounts totaled $66.4 million and $67.9 million at June 30, 2017 and December 31, 2016, respectively. The adoption of this standard will not change the Company’s balance sheet presentation.

 

In January 2017, the FASB issued Accounting Standards Update No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business” (“ASU No. 2017-01”), which changes the definition of a business to assist entities with evaluating when a set of transferred assets and activities is a business. Under the new guidance, an entity first determines whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. If this threshold is met, the set of transferred assets and activities is not a business. If it is not met, the entity then evaluates whether the set meets the requirement that a business include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs. ASU No. 2017-01 will become effective in the first quarter of 2018, and the guidance is to be applied prospectively. Early adoption is permitted. Once adopted, the Company will be required to analyze future hotel acquisitions to determine if the transaction qualifies as the purchase of a business or an asset. Transaction costs associated with asset acquisitions will be capitalized, while the same costs associated with a business combination will continue to be expensed as incurred. In addition, asset acquisitions will not be subject to a measurement period, as are business combinations. Depending on the Company’s conclusion, ASU No. 2017-01 may have an effect on its consolidated financial statements.

 

In January 2017, the FASB issued Accounting Standards Update No. 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” (“ASU No. 2017-04”), which eliminates the requirement to calculate the implied fair value of goodwill (i.e., Step 2 of today’s goodwill impairment test) to measure a goodwill impairment charge. Under the new guidance, if a reporting unit’s carrying amount exceeds its fair value, an entity will record an impairment charge based on that difference. The impairment charge will be limited to the amount of goodwill allocated to that reporting unit. The standard does not change the guidance on completing Step 1 of the goodwill impairment test. An entity will still be able to perform today’s optional qualitative goodwill impairment assessment before determining whether to proceed to Step 1. ASU No. 2017-04 will become effective in the first quarter of 2019, and the guidance is to be applied prospectively. Early adoption is permitted. The Company does not believe that the adoption of ASU No. 2017-04 will have a material impact on its consolidated financial statements.

 

In May 2017, the FASB issued Accounting Standards Update No. 2017-09, “Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting” (“ASU No. 2017-09”), which clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. The new guidance will allow companies to make certain changes to awards without accounting for them as modifications, but it does not change the accounting for modifications. Under ASU No. 2017-09, an entity will not apply modification accounting to a share-based payment award if all of the following are the same immediately before and after the change: the award’s fair value (or calculated or intrinsic value, if those measurement methods are used); the award’s vesting conditions; and the award’s classification as an equity or liability instrument. ASU No. 2017-09 will become effective in the first quarter of 2018, with early adoption permitted. The Company does not believe that the adoption of ASU No. 2017-09 will have an impact on its consolidated financial statements unless it changes the terms or conditions of its grants in the future.

9


 

 

Noncontrolling Interest

 

The Company’s consolidated financial statements include an entity 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 interest is 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 the less-than-wholly owned subsidiary is reported at the consolidated amount, including both the amounts attributable to the Company and the noncontrolling interest. Income or loss is allocated to the noncontrolling interest based on its 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 stockholders’ equity, noncontrolling interest and total equity.

 

At both June 30, 2017 and December 31, 2016, the noncontrolling interest reported in the Company’s financial statements included the 25.0% outside ownership in the Hilton San Diego Bayfront.

 

Segment Reporting

 

The Company considers each of its hotels to be an operating segment, none of which meets the threshold for a separate 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,

 

    

2017

    

2016

 

 

(unaudited)

 

 

 

Land

 

$

529,401

 

$

531,660

Buildings and improvements

 

 

3,163,757

 

 

3,135,806

Furniture, fixtures and equipment

 

 

522,623

 

 

512,372

Intangible assets

 

 

48,759

 

 

49,015

Franchise fees

 

 

980

 

 

1,021

Construction in process

 

 

34,805

 

 

65,449

Investment in hotel properties, gross

 

 

4,300,325

 

 

4,295,323

Accumulated depreciation and amortization

 

 

(1,195,356)

 

 

(1,137,104)

Investment in hotel properties, net

 

$

3,104,969

 

$

3,158,219

 

 

 

 

4. Disposals

 

In June 2017, the Company sold the 199-room Marriott Park City located in Park City, Utah for net proceeds of $27.0 million. The Company recognized a net gain on the sale of $1.2 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, the sale of the hotel did not qualify as a discontinued operation.

 

10


 

In February 2017, the Company sold the 444-room Fairmont Newport Beach located in Newport Beach, California for net proceeds of $122.8 million. The Company recognized a net gain on the sale of $44.3 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, the sale of the hotel did not qualify as a discontinued operation. The Company classified the assets and liabilities of the Fairmont Newport Beach as held for sale as of December 31, 2016 as follows (in thousands):

 

 

 

 

 

 

 

December 31,

 

 

2016

Accounts receivable, net

 

$

452

Inventories

 

 

126

Prepaid expenses

 

 

386

Investment in hotel property, net

 

 

77,971

Other assets, net

 

 

178

Assets held for sale, net

 

$

79,113

 

 

 

 

Accounts payable and accrued expenses

 

$

781

Accrued payroll and employee benefits

 

 

751

Other current liabilities

 

 

1,473

Other liabilities

 

 

148

Liabilities of assets held for sale

 

$

3,153

 

The following table provides summary results of operations for the Marriott Park City and the Fairmont Newport Beach, as well as the Sheraton Cerritos that was sold during 2016,  all of which are included in continuing operations (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

    

2017

    

2016

    

2017

    

2016

 

 

(unaudited)

 

(unaudited)

 

(unaudited)

 

(unaudited)

Revenues

 

$

1,243

 

$

11,667

 

$

9,980

 

$

27,440

Income (loss) before income taxes

 

$

(500)

 

$

791

 

$

2,466

 

$

3,649

Gain on sale of assets

 

$

1,189

 

$

18,223

 

$

45,474

 

$

18,223

 

 

5. Fair Value Measurements and Interest Rate Derivatives

 

Fair Value of Financial Instruments

 

As of June 30, 2017 and December 31, 2016, the carrying amount of certain financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued expenses were representative of their fair values due to the short-term maturity of these instruments.

 

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

 

 

 

Level 1

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

 

 

Level 2

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

 

 

Level 3

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

 

As of June 30, 2017 and December 31, 2016, 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

11


 

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.

 

The following table presents the Company’s assets measured at fair value on a recurring and nonrecurring basis at June 30, 2017 and December 31, 2016 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at Reporting Date

 

    

Total

    

Level 1

    

Level 2

    

Level 3

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2017 (unaudited):

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate cap derivative

 

$

 2

 

$

 

$

 2

 

$

Interest rate swap derivatives

 

 

1,417

 

 

 

 

1,417

 

 

Life insurance policy (1)

 

 

647

 

 

 

 

647

 

 

Total assets measured at fair value at June 30, 2017

 

$

2,066

 

$

 

$

2,066

 

$

December 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate cap derivative

 

$

 

$

 

$

 

$

Interest rate swap derivatives

 

 

1,749

 

 

 

 

1,749

 

 

Life insurance policy (1)

 

 

861

 

 

 

 

861

 

 

Total assets measured at fair value at December 31, 2016

 

$

2,610

 

$

 

$

2,610

 

$

 

(1)

Includes the split life insurance policy for a former Company associate. 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 nonrecurring basis at June 30, 2017 and December 31, 2016 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at Reporting Date

 

    

Total

    

Level 1

    

Level 2

    

Level 3

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2017 (unaudited):