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EX-32 - EXHIBIT 32 - Carey Watermark Investors Inccwi2017q210-qexh32.htm
EX-31.2 - EXHIBIT 31.2 - Carey Watermark Investors Inccwi2017q210-qexh312.htm
EX-31.1 - EXHIBIT 31.1 - Carey Watermark Investors Inccwi2017q210-qexh311.htm


 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ
 
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
 
 
 
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
For the transition period from                     to                       
Commission File Number: 000-54263
cwihighreslogoa01.jpg
CAREY WATERMARK INVESTORS INCORPORATED
(Exact name of registrant as specified in its charter)
Maryland
 
26-2145060
(State of incorporation)
 
(I.R.S. Employer Identification No.)
 
 
 
50 Rockefeller Plaza
 
 
New York, New York
 
10020
(Address of principal executive office)
 
(Zip Code)
Investor Relations (212) 492-8920
(212) 492-1100
(Registrant’s telephone numbers, 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 þ No o

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

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 o
Accelerated filer o
Non-accelerated filer þ
 
 
(Do not check if a smaller reporting company)
 
 
 
Smaller reporting company o
Emerging growth company o
 

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. o

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

Registrant has 137,459,005 shares of common stock, $0.001 par value, outstanding at August 4, 2017.
 




INDEX

Forward-Looking Statements

This Quarterly Report on Form 10-Q, or this Report, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, in Item 2 of Part I of this Report, contains forward-looking statements within the meaning of the federal securities laws. These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result” and similar expressions. These statements are based on the current expectations of our management. It is important to note that our actual results could be materially different from those projected in such forward-looking statements. You should exercise caution in relying on forward-looking statements, as they involve known and unknown risks, uncertainties, and other factors that may materially affect our future results, performance, achievements or transactions. Information on factors that could impact actual results and cause them to differ from what is anticipated in the forward-looking statements contained herein is included in this Report as well as in our other filings with the Securities and Exchange Commission, or the SEC, including but not limited to those described in Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2016, as filed with the SEC on March 16, 2017, or the 2016 Annual Report. Except as required by federal securities laws and the rules and regulations of the SEC, we do not undertake to revise or update any forward-looking statements.

All references to “Notes” throughout the document refer to the footnotes to the consolidated financial statements of the registrant in Part I, Item 1. Financial Statements (Unaudited).



CWI 6/30/2017 10-Q 1




PART I — FINANCIAL INFORMATION
Item 1. Financial Statements.

CAREY WATERMARK INVESTORS INCORPORATED
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except share and per share amounts)
 
June 30, 2017
 
December 31, 2016
Assets
 
 
 
Investments in real estate:
 
 
 
Hotels, at cost
$
2,293,363

 
$
2,290,542

Accumulated depreciation
(206,588
)
 
(176,423
)
Net investments in hotels
2,086,775

 
2,114,119

Assets held for sale (Note 4)

 
35,023

Equity investments in real estate
74,811

 
75,928

Cash
67,836

 
61,762

Intangible assets, net
79,248

 
80,117

Accounts receivable
20,971

 
23,879

Restricted cash
64,550

 
56,496

Other assets
28,975

 
29,620

Total assets
$
2,423,166

 
$
2,476,944

Liabilities and Equity
 
 
 
Non-recourse debt, net, including debt attributable to Assets held for sale (Note 4)
$
1,426,125

 
$
1,456,152

Senior Credit Facility

 
22,785

Accounts payable, accrued expenses and other liabilities
113,119

 
112,033

Due to related parties and affiliates
25,632

 
2,628

Distributions payable
19,423

 
19,292

Other liabilities held for sale (Note 4)

 
797

Total liabilities
1,584,299

 
1,613,687

Commitments and contingencies (Note 10)

 


Common stock, $0.001 par value; 300,000,000 shares authorized; 136,302,878 and 135,379,038 shares, respectively, issued and outstanding
136

 
135

Additional paid-in capital
1,136,420

 
1,125,835

Distributions and accumulated losses
(360,678
)
 
(326,748
)
Accumulated other comprehensive loss
(795
)
 
(1,128
)
Total stockholders’ equity
775,083

 
798,094

Noncontrolling interests
63,784

 
65,163

Total equity
838,867

 
863,257

Total liabilities and equity
$
2,423,166

 
$
2,476,944


See Notes to Consolidated Financial Statements.


CWI 6/30/2017 10-Q 2




CAREY WATERMARK INVESTORS INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except share and per share amounts)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Revenues
 
 
 
 
 
 
 
Hotel Revenues
 
 
 
 
 
 
 
Rooms
$
112,901

 
$
115,065

 
$
217,252

 
$
221,174

Food and beverage
43,924

 
43,915

 
86,110

 
80,915

Other operating revenue
14,529

 
14,596

 
27,696

 
26,847

Total Hotel Revenues
171,354

 
173,576

 
331,058

 
328,936

Operating Expenses
 
 
 
 
 
 
 
Hotel Expenses
 
 
 
 
 
 
 
Rooms
24,302

 
23,992

 
47,819

 
46,570

Food and beverage
30,310

 
29,765

 
59,591

 
56,455

Other hotel operating expenses
7,784

 
7,638

 
14,927

 
14,658

Property taxes, insurance, rent and other
16,790

 
16,676

 
33,154

 
34,185

Sales and marketing
15,651

 
16,091

 
30,804

 
31,039

General and administrative
14,189

 
13,568

 
28,172

 
27,113

Repairs and maintenance
5,343

 
5,338

 
10,575

 
10,458

Management fees
4,704

 
5,198

 
10,269

 
10,723

Utilities
4,018

 
3,879

 
8,117

 
7,752

Depreciation and amortization
20,789

 
20,134

 
41,032

 
39,734

Total Hotel Expenses
143,880

 
142,279

 
284,460

 
278,687

 
 
 
 
 
 
 
 
Other Operating Expenses
 
 
 
 
 
 
 
Asset management fees to affiliate and other expenses
3,972

 
3,939

 
8,018

 
7,711

Corporate general and administrative expenses
2,811

 
2,944

 
5,320

 
6,338

Impairment charges

 
3,660

 

 
3,660

Acquisition-related expenses

 

 

 
3,727

Total Other Operating Expenses
6,783

 
10,543

 
13,338

 
21,436

Operating Income
20,691

 
20,754

 
33,260

 
28,813

Other Income and (Expenses)
 
 
 
 
 
 
 
Interest expense
(16,557
)
 
(16,162
)
 
(32,863
)
 
(32,179
)
   Equity in earnings of equity method investments in real estate
1,551

 
2,813

 
4,536

 
5,115

Net loss on extinguishment of debt (Note 9)
(84
)
 

 
(225
)
 
(1,064
)
Other income
34

 
8

 
60

 
13

Total Other Income and (Expenses)
(15,056
)
 
(13,341
)
 
(28,492
)
 
(28,115
)
Income from Operations Before Income Taxes and Net Gain on Sale of Real Estate
5,635

 
7,413

 
4,768

 
698

Provision for income taxes
(1,078
)
 
(3,176
)
 
(792
)
 
(2,004
)
Income (Loss) from Operations Before Net Gain on Sale of Real Estate
4,557

 
4,237

 
3,976

 
(1,306
)
Net gain on sale of real estate, net of tax
5,516

 

 
5,164

 

Net Income (Loss)
10,073

 
4,237

 
9,140

 
(1,306
)
Loss (income) attributable to noncontrolling interests (inclusive of Available Cash Distributions to a related party of $1,544, $1,586, $3,245 and $4,093, respectively)
310

 
293

 
(4,170
)
 
(5,079
)
Net Income (Loss) Attributable to CWI Stockholders
$
10,383

 
$
4,530

 
$
4,970

 
$
(6,385
)
Basic and Diluted Income (Loss) Per Share
$
0.08

 
$
0.03

 
$
0.04

 
$
(0.05
)
Basic and Diluted Weighted-Average Shares Outstanding
136,621,135

 
134,402,469

 
136,471,543

 
134,012,328

 
 
 
 
 
 
 
 
Distributions Declared Per Share
$
0.1425

 
$
0.1425

 
$
0.2850

 
$
0.2850


See Notes to Consolidated Financial Statements.


CWI 6/30/2017 10-Q 3




CAREY WATERMARK INVESTORS INCORPORATED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
(in thousands)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Net Income (Loss)
$
10,073

 
$
4,237

 
$
9,140

 
$
(1,306
)
Other Comprehensive Income (Loss)
 
 
 
 
 
 
 
Unrealized gain (loss) on derivative instruments
232

 
(145
)
 
337

 
(1,058
)
Comprehensive Income (Loss)
10,305

 
4,092

 
9,477

 
(2,364
)
 
 
 
 
 
 
 
 
Amounts Attributable to Noncontrolling Interests
 
 
 
 
 
 
 
Net loss (income)
310

 
293

 
(4,170
)
 
(5,079
)
Unrealized (gain) loss on derivative instruments
(3
)
 
3

 
(4
)
 
372

Comprehensive loss (income) attributable to noncontrolling interests
307

 
296

 
(4,174
)
 
(4,707
)
Comprehensive Income (Loss) Attributable to CWI Stockholders
$
10,612

 
$
4,388

 
$
5,303

 
$
(7,071
)

See Notes to Consolidated Financial Statements.


CWI 6/30/2017 10-Q 4




CAREY WATERMARK INVESTORS INCORPORATED
CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)
Six Months Ended June 30, 2017 and 2016
(in thousands, except share and per share amounts)
 
CWI Stockholders
 
 
 
 
 
Shares
 
Common
Stock
 
Additional
Paid-In
Capital
 
Distributions
and Accumulated
Losses
 
Accumulated
Other
Comprehensive
Loss
 
Total CWI
Stockholders
 
Noncontrolling
Interests
 
Total
Balance at January 1, 2017
135,379,038

 
$
135

 
$
1,125,835

 
$
(326,748
)
 
$
(1,128
)
 
$
798,094

 
$
65,163

 
$
863,257

Net income
 
 
 
 
 
 
4,970

 
 
 
4,970

 
4,170

 
9,140

Shares issued, net of offering costs
2,131,969

 
2

 
22,872

 
 
 
 
 
22,874

 
 
 
22,874

Shares issued to affiliates
556,213

 
1

 
5,976

 
 
 
 
 
5,977

 
 
 
5,977

Distributions to noncontrolling interests
 
 
 
 
 
 
 
 
 
 

 
(5,553
)
 
(5,553
)
Shares issued under share incentive plans
23,710

 

 
72

 
 
 
 
 
72

 
 
 
72

Stock-based compensation to directors
16,667

 

 
180

 
 
 
 
 
180

 
 
 
180

Distributions declared ($0.2850 per share)
 
 
 
 
 
 
(38,900
)
 
 
 
(38,900
)
 
 
 
(38,900
)
Other comprehensive income:
 
 
 
 
 
 
 
 
 
 

 
 
 

   Net unrealized gain on derivative instruments
 
 
 
 
 
 
 
 
333

 
333

 
4

 
337

Repurchase of shares
(1,804,719
)
 
(2
)
 
(18,515
)
 
 
 
 
 
(18,517
)
 
 
 
(18,517
)
Balance at June 30, 2017
136,302,878

 
$
136

 
$
1,136,420

 
$
(360,678
)
 
$
(795
)
 
$
775,083

 
$
63,784

 
$
838,867

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2016
132,686,254

 
$
134

 
$
1,112,640

 
$
(241,379
)
 
$
(885
)
 
$
870,510

 
$
84,937

 
$
955,447

Net (loss) income
 
 
 
 
 
 
(6,385
)
 
 
 
(6,385
)
 
5,079

 
(1,306
)
Shares issued, net of offering costs
2,211,709

 
2

 
23,168

 
 
 
 
 
23,170

 
 
 
23,170

Distributions to noncontrolling interests
 
 
 
 
 
 
 
 
 
 

 
(6,074
)
 
(6,074
)
Shares issued under share incentive plans
24,664

 

 
81

 
 
 
 
 
81

 
 
 
81

Stock-based compensation to directors
16,886

 

 
180

 
 
 
 
 
180

 
 
 
180

Purchase of membership interest from noncontrolling interest
 
 
 
 
(16,024
)
 
 
 
(923
)
 
(16,947
)
 
(4,174
)
 
(21,121
)
Distributions declared ($0.2850 per share)
 
 
 
 
 
 
(38,127
)
 
 
 
(38,127
)
 
 
 
(38,127
)
Other comprehensive loss:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   Net unrealized loss on derivative instruments
 
 
 
 
 
 
 
 
(686
)
 
(686
)
 
(372
)
 
(1,058
)
Repurchase of shares
(889,183
)
 
(2
)
 
(8,999
)
 
 
 
 
 
(9,001
)
 
 
 
(9,001
)
Balance at June 30, 2016
134,050,330

 
$
134

 
$
1,111,046

 
$
(285,891
)
 
$
(2,494
)
 
$
822,795

 
$
79,396

 
$
902,191


See Notes to Consolidated Financial Statements.


CWI 6/30/2017 10-Q 5




CAREY WATERMARK INVESTORS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
 
Six Months Ended June 30,
 
2017
 
2016
Cash Flows — Operating Activities
 
 
 
Net income (loss)
$
9,140

 
$
(1,306
)
Adjustments to net income (loss):
 
 
 
Depreciation and amortization
41,032

 
39,734

Asset management fees to affiliates settled in shares
7,198

 

Net gain on sale of real estate (Note 4)
(5,164
)
 

Straight-line rent adjustments
2,632

 
2,657

Amortization of deferred financing costs, fair market value of debt, ground lease intangible and other
1,535

 
(89
)
Equity in earnings of equity method investments in real estate in excess of distributions received
(1,097
)
 
(1,974
)
Amortization of stock-based compensation expense
377

 
377

Net loss on extinguishment of debt (Note 9)
222

 
668

Impairment charges

 
3,660

Decrease in due to related parties and affiliates
(679
)
 
(267
)
Net changes in other operating assets and liabilities
618

 
(535
)
Receipt of key money and other deferred incentive payments
66

 
1,075

Net Cash Provided by Operating Activities
55,880

 
44,000

 
 
 
 
Cash Flows — Investing Activities
 
 
 
Funds placed in escrow
(71,250
)
 
(65,573
)
Funds released from escrow
62,623

 
74,933

Proceeds from the sale of investments (Note 4)
25,743

 

Capital expenditures
(24,141
)
 
(36,816
)
Distributions received from equity investments in excess of equity income
2,193

 
949

Repayments of loan receivable
134

 

Acquisitions of hotels

 
(74,224
)
Deposits released for hotel investments

 
5,718

Net Cash Used in Investing Activities
(4,698
)
 
(95,013
)
 
 
 
 
Cash Flows — Financing Activities
 
 
 
Scheduled payments and prepayments of mortgage principal
(87,199
)
 
(126,123
)
Proceeds from mortgage financing
83,500

 
213,500

Distributions paid
(38,769
)
 
(37,934
)
Proceeds from issuance of shares, net of offering costs
22,874

 
23,170

Proceeds from note payable to affiliate
22,835

 

Repayment of Senior Credit Facility
(22,785
)
 
(17,914
)
Repurchase of shares
(18,523
)
 
(9,001
)
Distributions to noncontrolling interests
(5,553
)
 
(6,074
)
Deposits released for mortgage financing
1,610

 
1,850

Deposits for mortgage financing
(1,510
)
 
(1,970
)
Deferred financing costs
(1,296
)
 
(2,776
)
Scheduled payments of loan
(155
)
 

Withholding on restricted stock units
(126
)
 
(116
)
Purchase of interest rate caps
(11
)
 
(74
)
Proceeds from Senior Credit Facility

 
30,000

Purchase of membership interest from noncontrolling interest (Note 11)

 
(21,121
)
Termination of interest rate swap

 
(1,221
)
Net Cash (Used in) Provided by Financing Activities
(45,108
)
 
44,196

 
 
 
 
Change in Cash During the Period
 
 
 
Net increase (decrease) in cash
6,074

 
(6,817
)
Cash, beginning of period
61,762

 
83,112

Cash, end of period
$
67,836

 
$
76,295

See Notes to Consolidated Financial Statements.


CWI 6/30/2017 10-Q 6




CAREY WATERMARK INVESTORS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1. Business

Organization

Carey Watermark Investors Incorporated, or CWI, together with its consolidated subsidiaries, is a publicly-owned, non-listed real estate investment trust, or REIT, that invests in, and through our advisor, manages and seeks to enhance the value of, interests in lodging and lodging-related properties primarily in the United States. We conduct substantially all of our investment activities and own all of our assets through CWI OP, LP, or the Operating Partnership. We are a general partner and a limited partner of, and own a 99.985% capital interest in, the Operating Partnership. Carey Watermark Holdings, LLC, or Carey Watermark Holdings, which is owned indirectly by both W. P. Carey Inc., or WPC, and Watermark Capital Partners, LLC, or Watermark Capital Partners, holds a special general partner interest in the Operating Partnership.

We are managed by Carey Lodging Advisors, LLC, or our Advisor, an indirect subsidiary of WPC. Our Advisor manages our overall portfolio, including providing oversight and strategic guidance to the independent hotel operators that manage our hotels. CWA, LLC, a subsidiary of Watermark Capital Partners, or the Subadvisor, provides services to our Advisor primarily relating to acquiring, managing, financing and disposing of our hotels and overseeing the independent operators that manage the day-to-day operations of our hotels. In addition, the Subadvisor provides us with the services of Mr. Michael G. Medzigian, our Chief Executive Officer, subject to the approval of our independent directors.

We held ownership interests in 31 hotels at June 30, 2017. See Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 2 — Portfolio Overview for a complete listing of the hotels that we consolidate, or our Consolidated Hotels, and the hotels that we record as equity investments, or our Unconsolidated Hotels, at June 30, 2017.

Public Offerings

We raised $575.8 million through our initial public offering, which ran from September 15, 2010 through September 15, 2013, and $577.4 million through our follow-on offering, which ran from December 20, 2013 through December 31, 2014. In addition, from inception through June 30, 2017, $147.4 million of distributions were reinvested in our common stock as a result of our distribution reinvestment plan, or DRIP. We have fully invested the proceeds from both our initial public offering and follow-on offering.

Note 2. Basis of Presentation

Basis of Presentation

Our interim consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not necessarily include all information and footnotes necessary for a fair statement of our consolidated financial position, results of operations and cash flows in accordance with generally accepted accounting principles in the United States, or GAAP.

In the opinion of management, the unaudited financial information for the interim periods presented in this Report reflects all normal and recurring adjustments necessary for a fair statement of financial position, results of operations and cash flows. Our interim consolidated financial statements should be read in conjunction with our audited consolidated financial statements and accompanying notes for the year ended December 31, 2016, which are included in our 2016 Annual Report, as certain disclosures that would substantially duplicate those contained in the audited consolidated financial statements have not been included in this Report. Operating results for interim periods are not necessarily indicative of operating results for an entire year.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts and the disclosure of contingent amounts in our consolidated financial statements and the accompanying notes. Actual results could differ from those estimates.



CWI 6/30/2017 10-Q 7



Notes to Consolidated Financial Statements (Unaudited)

Basis of Consolidation

Our consolidated financial statements reflect all of our accounts, including those of our controlled subsidiaries. The portions of equity in consolidated subsidiaries that are not attributable, directly or indirectly, to us are presented as noncontrolling interests. All significant intercompany accounts and transactions have been eliminated.

When we obtain an economic interest in an entity, we evaluate the entity to determine if it should be deemed a variable interest entity, or VIE, and, if so, whether we are the primary beneficiary and are therefore required to consolidate the entity. We apply accounting guidance for consolidation of VIEs to certain entities in which the equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. Certain decision-making rights within a loan or joint-venture agreement can cause us to consider an entity a VIE. Limited partnerships and other similar entities which operate as a partnership will be considered a VIE unless the limited partners hold substantive kick-out rights or participation rights. Significant judgment is required to determine whether a VIE should be consolidated. We review the contractual arrangements provided for in the partnership agreement or other related contracts to determine whether the entity is considered a VIE, and to establish whether we have any variable interests in the VIE. We then compare our variable interests, if any, to those of the other variable interest holders to determine which party is the primary beneficiary of the VIE based on whether the entity (i) has the power to direct the activities that most significantly impact the economic performance of the VIE and (ii) has the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. The liabilities of these VIEs are non-recourse to us and can only be satisfied from each VIE’s respective assets.

At both June 30, 2017 and December 31, 2016, we considered five entities to be VIEs, four of which we consolidated as we are considered the primary beneficiary. The following table presents a summary of selected financial data of consolidated VIEs included in the consolidated balance sheets (in thousands):
 
June 30, 2017
 
December 31, 2016
Net investments in hotels
$
513,037

 
$
518,335

Intangible assets, net
39,050

 
39,451

Total assets
580,183

 
587,608

 
 
 
 
Non-recourse debt, net
$
341,325

 
$
341,082

Total liabilities
366,854

 
372,991


Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 supersedes or replaces nearly all GAAP revenue recognition guidance. The new guidance establishes a new control-based revenue recognition model that changes the basis for deciding when revenue is recognized over time or at a point in time and expands the disclosures about revenue. The new guidance also applies to sales of real estate and the new principles-based approach is largely based on the transfer of control of the real estate to the buyer. The guidance is effective for annual reporting periods beginning after December 15, 2017, and the interim periods within those annual periods. Early adoption is permitted for annual reporting periods beginning after December 15, 2016. We expect to adopt this new standard on January 1, 2018 using the modified retrospective transition method, which requires a cumulative effect adjustment upon the date of adoption. We are in the process of evaluating the impact of the new standard and do not believe the adoption of this standard will have a material impact on our consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 outlines a new model for accounting by lessees, whereby their rights and obligations under substantially all leases, existing and new, would be capitalized and recorded on the balance sheet. For lessors, however, the accounting remains largely unchanged from the current model, with the distinction between operating and financing leases retained, but updated to align with certain changes to the lessee model and the new revenue recognition standard. Additionally, the new standard requires extensive quantitative and qualitative disclosures. ASU 2016-02 is effective for GAAP public companies for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application will be permitted for all entities. The new standard must be adopted using a modified retrospective transition of the new guidance and provides for certain practical expedients. Transition will require application of the new model at the beginning of the earliest comparative period presented. We have not yet completed our


CWI 6/30/2017 10-Q 8



Notes to Consolidated Financial Statements (Unaudited)

analysis on this new standard, but we believe the application of the new standard will result in the recording of a right-of-use asset and a lease liability on the consolidated balance sheet for each of our ground leases.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 intends to reduce diversity in practice for certain cash flow classifications, including, but not limited to (i) debt prepayment or debt extinguishment costs, (ii) contingent consideration payments made after a business combination, (iii) proceeds from the settlement of insurance claims, (iv) distributions received from equity method investees and (v) separately identifiable cash flows and application of the predominance principle. ASU 2016-15 will be effective for public business entities in fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early application of the guidance permitted. We are in the process of evaluating the impact of adopting ASU 2016-15 on our consolidated financial statements and will adopt the standard for the fiscal year beginning January 1, 2018.

In October 2016, the FASB issued ASU 2016-17, Consolidation (Topic 810): Interests Held through Related Parties That Are under Common Control. ASU 2016-17 changes how a reporting entity that is a decision maker should consider indirect interests in a VIE held through an entity under common control. If a decision maker must evaluate whether it is the primary beneficiary of a VIE, it will only need to consider its proportionate indirect interest in the VIE held through a common control party. ASU 2016-17 amends ASU 2015-02, which we adopted on January 1, 2016, and which currently directs the decision maker to treat the common control party’s interest in the VIE as if the decision maker held the interest itself. ASU 2016-17 is effective for public business entities in fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. We adopted ASU 2016-17 as of January 1, 2017 on a prospective basis. The adoption of this standard did not have a material impact on our consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. ASU 2016-18 intends to reduce diversity in practice for the classification and presentation of changes in restricted cash on the statement of cash flows. ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 will be effective for public business entities in fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. We are in the process of evaluating the impact of adopting ASU 2016-18 on our consolidated financial statements and will adopt the standard for the fiscal year beginning January 1, 2018.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. ASU 2017-01 clarifies the definition of a business with the objective of adding guidance to assist companies and other reporting organizations with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The changes to the definition of a business will likely result in more acquisitions being accounted for as asset acquisitions across all industries. The guidance is effective for annual reporting periods beginning after December 15, 2017, and the interim periods within those annual periods. We expect to adopt this new guidance on January 1, 2018. While we are evaluating the potential impact of the standard, we currently expect that certain future hotel acquisitions may be considered asset acquisitions rather than business combinations, which would affect the capitalization of acquisition costs (such costs are expensed for business combinations and capitalized for asset acquisitions).

In February 2017, the FASB issued ASU 2017-05, Other Income — Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20). ASU 2017-05 clarifies that a financial asset is within the scope of Subtopic 610-20 if it meets the definition of an in substance nonfinancial asset. The amendments define the term “in substance nonfinancial asset,” in part, as a financial asset promised to a counterparty in a contract if substantially all of the fair value of the assets (recognized and unrecognized) that are promised to the counterparty in the contract is concentrated in nonfinancial assets. If substantially all of the fair value of the assets that are promised to the counterparty in a contract is concentrated in nonfinancial assets, then all of the financial assets promised to the counterparty are in substance nonfinancial assets within the scope of Subtopic 610-20. This amendment also clarifies that nonfinancial assets within the scope of Subtopic 610-20 may include nonfinancial assets transferred within a legal entity to a counterparty. For example, a parent company may transfer control of nonfinancial assets by transferring ownership interests in a consolidated subsidiary. ASU 2017-05 is effective for periods beginning after December 15, 2017, with early application permitted for fiscal years beginning after December 15, 2016. We are currently evaluating the impact of ASU 2017-05 on our consolidated financial statements.



CWI 6/30/2017 10-Q 9



Notes to Consolidated Financial Statements (Unaudited)

Note 3. Agreements and Transactions with Related Parties

Agreements with Our Advisor and Affiliates

We have an advisory agreement with our Advisor to perform certain services for us under a fee arrangement, including managing our overall business; the identification, evaluation, negotiation, purchase and disposition of lodging and lodging-related properties; and the performance of certain administrative duties. The advisory agreement has a term of one year and may be renewed for successive one-year periods. Our Advisor has entered into a subadvisory agreement with the Subadvisor, whereby our Advisor pays 20% of the fees earned under the advisory agreement to the Subadvisor and the Subadvisor provides certain personnel services to us, as discussed below.

The following tables present a summary of fees we paid, expenses we reimbursed and distributions we made to our Advisor, the Subadvisor and other affiliates, as described below, in accordance with the terms of those agreements (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Amounts Included in the Consolidated Statements of Operations
 
 
 
 
 
 
 
Asset management fees
$
3,585

 
$
3,538

 
$
7,198

 
$
7,008

Available Cash Distributions
1,544

 
1,586

 
3,245

 
4,093

Personnel and overhead reimbursements
1,486

 
1,604

 
2,909

 
3,579

Disposition fees (Note 4)
143

 

 
225

 

Interest expense
117

 

 
128

 

Acquisition fees

 

 

 
2,158

 
$
6,875

 
$
6,728

 
$
13,705

 
$
16,838

 
 
 
 
 
 
 
 
Other Transaction Fees Incurred
 
 
 
 
 
 
 
Capitalized loan refinancing fees
$
340

 
$

 
$
340

 
$
500

Advisor fee for purchase of membership interest (Note 11)

 

 

 
527

 
$
340

 
$

 
$
340

 
$
1,027


The following table presents a summary of the amounts included in Due to related parties and affiliates in the consolidated financial statements (in thousands):
 
June 30, 2017
 
December 31, 2016
Amounts Due to Related Parties and Affiliates
 
 
 
Note payable to WPC
$
22,964

 
$

Reimbursable costs
1,298

 
1,311

Other amounts due to our Advisor
1,222

 
1,202

Due to joint venture partners and other
148

 
115

 
$
25,632

 
$
2,628


Asset Management Fees, Dispositions Fees and Loan Refinancing Fees

We pay our Advisor an annual asset management fee equal to 0.5% of the aggregate Average Market Value of our Investments, both as defined in our advisory agreement with our Advisor. Our Advisor is also entitled to receive disposition fees of up to 1.5% of the contract sales price of a property, as well as a loan refinancing fee of up to 1.0% of the principal amount of a refinanced loan, if certain conditions described in the advisory agreement are met. If our Advisor elects to receive all or a portion of its fees in shares, the number of shares issued is determined by dividing the dollar amount of fees by our most recently published estimated net asset value per share, or NAV. At our Advisor’s election, we paid our asset management fees in shares of our common stock for the three and six months ended June 30, 2017 and in cash for the three and six months ended June 30, 2016. For the six months ended June 30, 2017, $6.0 million in asset management fees were settled in shares of our common stock. No such fees were settled in shares during the six months ended June 30, 2016. At June 30, 2017, our Advisor


CWI 6/30/2017 10-Q 10



Notes to Consolidated Financial Statements (Unaudited)

owned 2,057,241 shares (1.5%) of our outstanding common stock. Asset management fees are included in Asset management fees to affiliate and other expenses in the consolidated financial statements.

Available Cash Distributions

Carey Watermark Holdings’ special general partner interest entitles it to receive distributions of 10% of Available Cash, as defined in the limited partnership agreement of the Operating Partnership, or Available Cash Distributions, generated by the Operating Partnership, subject to certain limitations. In addition, in the event of the dissolution of the Operating Partnership, Carey Watermark Holdings will be entitled to receive distributions of up to 15% of any net proceeds, provided certain return thresholds are met for the initial investors in the Operating Partnership. Available Cash Distributions are included in Loss (income) attributable to noncontrolling interests in the consolidated financial statements.

Personnel and Overhead Reimbursements/Reimbursable Costs

Under the terms of the advisory agreement, our Advisor generally allocates expenses of dedicated and shared resources, including the cost of personnel, rent and related office expenses, between us and our affiliate, Carey Watermark Investors 2 Incorporated, or CWI 2, based on total pro rata hotel revenues on a quarterly basis. Pursuant to the subadvisory agreement, after we reimburse our Advisor, it will subsequently reimburse the Subadvisor for personnel costs and other charges, including the services of our Chief Executive Officer, subject to the approval of our board of directors. We have also granted restricted stock units to employees of the Subadvisor pursuant to our 2010 Equity Incentive Plan. These reimbursements are included in Corporate general and administrative expenses and Due to related parties and affiliates in the consolidated financial statements.

Acquisition Fees to our Advisor

We pay our Advisor acquisition fees of 2.5% of the total investment cost of the properties acquired, as defined in our advisory agreement, described above, including on our proportionate share of equity method investments and loans originated by us. The total fees to be paid may not exceed 6% of the aggregate contract purchase price of all investments and loans, as measured over a period specified in our advisory agreement.

Note Payable to WPC and Other Transactions with Affiliates

During the first quarter of 2017, our board of directors and the board of directors of WPC approved unsecured loans from WPC to us of up to $25.0 million, at an interest rate equal to the rate at which WPC is able to borrow funds under its senior unsecured credit facility, which we refer to as the WPC Line of Credit, for the purpose of replacing our Senior Credit Facility (Note 9). All loans under the WPC Line of Credit are made solely at the discretion of WPC’s management. On March 23, 2017, we borrowed $22.8 million from WPC at the London Interbank Offered Rate, or LIBOR, plus 1.0% and a maturity date of March 22, 2018 and simultaneously repaid and terminated our Senior Credit Facility. At June 30, 2017, the amount due to WPC was $23.0 million, including accrued interest. The interest expense on these notes payable to our affiliate is included in Interest expense on the consolidated statements of operations.

Other Amounts Due to Our Advisor

This balance primarily represents asset management fees payable.

Jointly Owned Investments and Other Transactions with Affiliates

At June 30, 2017, we owned interests in two jointly-owned investments with CWI 2: the Ritz-Carlton Key Biscayne, a Consolidated Hotel, and the Marriott Sawgrass Golf Resort & Spa, an Unconsolidated Hotel. CWI 2 is a publicly owned, non-listed REIT that is also advised by our Advisor and invests in lodging and lodging-related properties.



CWI 6/30/2017 10-Q 11



Notes to Consolidated Financial Statements (Unaudited)

Note 4. Net Investments in Hotels

Net investments in hotels are summarized as follows (in thousands):
 
June 30, 2017
 
December 31, 2016
Buildings
$
1,654,760

 
$
1,670,895

Land
379,453

 
380,970

Furniture, fixtures and equipment
129,229

 
122,155

Building and site improvements
118,257

 
89,667

Construction in progress
11,664

 
26,855

Hotels, at cost
2,293,363

 
2,290,542

Less: Accumulated depreciation
(206,588
)
 
(176,423
)
Net investments in hotels
$
2,086,775

 
$
2,114,119


During the six months ended June 30, 2017, we retired fully depreciated furniture, fixtures and equipment aggregating $7.8 million.

Property Dispositions and Assets and Liabilities Held for Sale

On February 1, 2017, we sold our 100% ownership interests in each of the Hampton Inn Frisco Legacy Park, the Hampton Inn Birmingham Colonnade and the Hilton Garden Inn Baton Rouge Airport to an unaffiliated third party for a contractual sales price of $33.0 million and net proceeds of approximately $7.4 million. The seller assumed the outstanding non-recourse debt on the three properties totaling $26.5 million. We recognized a loss on sale of $0.4 million during the first quarter of 2017. These three properties comprised the held for sale balance at December 31, 2016.

On May 11, 2017, we sold our 100% ownership interest in the Hampton Inn Boston Braintree to an unaffiliated third party for a contractual sales price of $19.0 million and net proceeds of approximately $6.6 million. During the second quarter of 2017, we recognized a gain on sale of $5.5 million, which is net of a $0.6 million participation management fee that was incurred as a result of the disposition and paid to StepStone Hospitality, the hotel management company, pursuant to the management agreement.

At June 30, 2017, no properties were classified as held for sale.

Below is a summary of our assets and liabilities held for sale (in thousands):
 
June 30, 2017
 
December 31, 2016
Net investments in hotels
$

 
$
32,300

Restricted cash

 
2,089

Accounts receivable

 
169

Other assets

 
465

Assets held for sale
$

 
$
35,023

 
 
 
 
Non-recourse debt, net attributable to Assets held for sale
$

 
$
26,560

 
 
 
 
Accounts payable, accrued expenses and other liabilities
$

 
$
789

Due to related parties and affiliates

 
8

Other liabilities held for sale
$

 
$
797




CWI 6/30/2017 10-Q 12



Notes to Consolidated Financial Statements (Unaudited)

Construction in Progress

At June 30, 2017 and December 31, 2016, construction in progress, recorded at cost, was $11.7 million and $26.9 million, respectively, and related primarily to renovations at the Hutton Hotel Nashville at June 30, 2017 and renovations at the Ritz-Carlton Key Biscayne and Westin Pasadena at December 31, 2016 (Note 10). We capitalize interest expense and certain other costs, such as property taxes, property insurance, utilities expense and hotel incremental labor costs, related to hotels undergoing major renovations. We capitalized $0.2 million and $0.9 million of such costs during the three months ended June 30, 2017 and 2016, respectively, and $0.7 million and $1.2 million during the six months ended June 30, 2017 and 2016, respectively. At June 30, 2017 and December 31, 2016, accrued capital expenditures were $3.2 million and $2.3 million, respectively, representing non-cash investing activity.

Note 5. Equity Investments in Real Estate

At June 30, 2017, we owned equity interests in four Unconsolidated Hotels, three with unrelated third parties and one with CWI 2. We do not control the ventures that own these hotels, but we exercise significant influence over them. We account for these investments under the equity method of accounting (i.e., at cost, increased or decreased by our share of earnings or losses, less distributions, plus contributions and other adjustments required by equity method accounting, such as basis differences from acquisition costs paid to our Advisor that we incur and other-than-temporary impairment charges, if any).

Under the conventional approach of accounting for equity method investments, an investor applies its percentage ownership interest to the venture’s net income to determine the investor’s share of the earnings or losses of the venture. This approach is inappropriate if the venture’s capital structure gives different rights and priorities to its investors. We have priority returns on several of our equity method investments. Therefore, we follow the hypothetical liquidation at book value method in determining our share of these ventures’ earnings or losses for the reporting period as this method better reflects our claim on the ventures’ book value at the end of each reporting period. Earnings for our equity method investments are recognized in accordance with each respective investment agreement and, where applicable, based upon the allocation of the investment’s net assets at book value as if the investment were hypothetically liquidated at the end of each reporting period.

The following table sets forth our ownership interests in our equity investments in real estate and their respective carrying values. The carrying values of these ventures are affected by the timing and nature of distributions (dollars in thousands):
Unconsolidated Hotels
 
State
 
Number
of Rooms
 
% Owned
 
Acquisition Date
 
Hotel Type
 
Carrying Value at
 
 
 
 
 
 
June 30, 2017
 
December 31, 2016
Hyatt Centric French Quarter Venture (a)
 
LA
 
254

 
80%
 
9/6/2011
 
Full-service
 
$
711

 
$
664

Westin Atlanta Venture (b)
 
GA
 
372

 
57%
 
10/3/2012
 
Full-service
 
4,935

 
5,795

Marriott Sawgrass Golf Resort & Spa Venture (c) (d)
 
FL
 
514

 
50%
 
4/1/2015
 
Resort
 
29,880

 
31,208

Ritz-Carlton Philadelphia Venture (e)
 
PA
 
301

 
60%
 
5/15/2015
 
Full-service
 
39,285

 
38,261

 
 
 
 
1,441

 
 
 
 
 
 
 
$
74,811

 
$
75,928

___________
(a)
We received cash distributions of $0.3 million and $0.7 million from this investment during the three and six months ended June 30, 2017, respectively.
(b)
We received cash distributions of $0.7 million and $1.3 million from this investment during the three and six months ended June 30, 2017, respectively.
(c)
We received cash distributions of $1.3 million and $3.0 million from this investment during the three and six months ended June 30, 2017, respectively.
(d)
This investment is considered a VIE (Note 2). We do not consolidate this entity because we are not the primary beneficiary and the nature of our involvement in the activities of the entity allows us to exercise significant influence but does not give us power over decisions that significantly affect the economic performance of the entity.
(e)
We received cash distributions of less than $0.1 million and $0.6 million from this investment during the three and six months ended June 30, 2017, respectively.



CWI 6/30/2017 10-Q 13



Notes to Consolidated Financial Statements (Unaudited)

The following table sets forth our share of equity in earnings from our Unconsolidated Hotels, which are based on the hypothetical liquidation at book value model, as well as certain amortization adjustments related to basis differentials from acquisitions of investments (in thousands):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
Venture
 
2017
 
2016
 
2017
 
2016
Marriott Sawgrass Golf Resort & Spa Venture
 
$
320

 
$
1,097

 
$
1,706

 
$
2,222

Ritz-Carlton Philadelphia Venture
 
824

 
741

 
1,629

 
1,386

Hyatt Centric French Quarter Venture
 
254

 
743

 
729

 
983

Westin Atlanta Venture
 
153

 
232

 
472

 
524

Total equity in earnings of equity method investments in real estate
 
$
1,551

 
$
2,813

 
$
4,536

 
$
5,115


No other-than-temporary impairment charges related to our investments in these ventures were recognized during the three or six months ended June 30, 2017 or 2016.

At June 30, 2017 and December 31, 2016, the unamortized basis differences on our equity investments were $3.1 million and $3.3 million, respectively. Net amortization of the basis differences reduced the carrying values of our equity investments by less than $0.1 million during both the three months ended June 30, 2017 and 2016, and by $0.1 million for both the six months ended June 30, 2017 and 2016.

The following tables present combined summarized financial information of our Marriott Sawgrass Golf Resort & Spa Venture and Ritz-Carlton Philadelphia Venture. Amounts provided are the total amounts attributable to the ventures and does not represent our proportionate share (in thousands):
 
June 30, 2017
 
December 31, 2016
Real estate, net
$
239,584

 
$
244,106

Other assets
19,946

 
19,882

Total assets
259,530

 
263,988

Debt
136,517

 
136,575

Other liabilities
24,464

 
23,394

Total liabilities
160,981

 
159,969

Members’ equity
$
98,549

 
$
104,019

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Revenues
$
25,157

 
$
24,149

 
$
49,831

 
$
43,943

Expenses
(24,137
)
 
(22,169
)
 
(48,588
)
 
(41,373
)
Net income attributable to equity method investment
$
1,020

 
$
1,980

 
$
1,243

 
$
2,570




CWI 6/30/2017 10-Q 14



Notes to Consolidated Financial Statements (Unaudited)

Note 6. Intangible Assets and Liabilities

Intangible assets and liabilities, included in Intangible assets, net and Accounts payable, accrued expenses and other liabilities, respectively, in the consolidated financial statements, are summarized as follows (dollars in thousands):
 
 
 
June 30, 2017
 
December 31, 2016
 
Amortization Period (Years)
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
Finite-Lived Intangible Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
Villa/condo rental programs
45 – 55
 
$
72,400

 
$
(4,263
)
 
$
68,137

 
$
72,400

 
$
(3,510
)
 
$
68,890

Below-market hotel ground leases and parking garage lease
10 – 93
 
11,655

 
(628
)
 
11,027

 
11,655

 
(531
)
 
11,124

In-place leases
4 – 21
 
151

 
(67
)
 
84

 
235

 
(132
)
 
103

Total intangible assets, net
 
 
$
84,206

 
$
(4,958
)
 
$
79,248

 
$
84,290

 
$
(4,173
)
 
$
80,117

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Finite-Lived Intangible Liability
 
 
 
 
 
 
 
 
 
 
 
 
 
Above-market hotel ground lease
85
 
$
(2,100
)
 
$
77

 
$
(2,023
)
 
$
(2,100
)
 
$
64

 
$
(2,036
)

Net amortization of intangibles was $0.4 million for both the three months ended June 30, 2017 and 2016, and $0.9 million for both the six months ended June 30, 2017 and 2016. Amortization of the villa/condo rental programs and in-place lease intangibles are included in Depreciation and amortization, and amortization of below-market hotel ground lease, below-market hotel parking garage lease and above-market hotel ground lease intangibles are included in Property taxes, insurance, rent and other in the consolidated financial statements.

Note 7. Fair Value Measurements

The fair value of an asset is defined as the exit price, which is the amount that would either be received when an asset is sold or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The guidance establishes a three-tier fair value hierarchy based on the inputs used in measuring fair value. These tiers are: Level 1, for which quoted market prices for identical instruments are available in active markets, such as money market funds, equity securities and U.S. Treasury securities; Level 2, for which there are inputs other than quoted prices included within Level 1 that are observable for the instrument, such as certain derivative instruments, including interest rate caps and swaps; and Level 3, for securities that do not fall into Level 1 or Level 2 and for which little or no market data exists, therefore requiring us to develop our own assumptions.

Items Measured at Fair Value on a Recurring Basis

Derivative Assets and Liabilities — Our derivative assets and liabilities are comprised of interest rate swaps and caps that were measured at fair value using readily observable market inputs, such as quotations on interest rates. These derivative instruments were classified as Level 2 as these instruments are custom, over-the-counter contracts with various bank counterparties that are not traded in an active market (Note 8).

We did not have any transfers into or out of Level 1, Level 2 and Level 3 category of measurements during the three or six months ended June 30, 2017 or 2016. Gains and losses (realized and unrealized) included in earnings are reported in Other income in the consolidated financial statements.

Our non-recourse debt, net, which we have classified as Level 3, had a carrying value of $1.4 billion and $1.5 billion at June 30, 2017 and December 31, 2016, respectively, and an estimated fair value of $1.4 billion and $1.5 billion at June 30, 2017 and December 31, 2016, respectively. We determined the estimated fair value using a discounted cash flow model with rates that take into account the interest rate risk. We also considered the value of the underlying collateral, taking into account the quality of the collateral and the then-current interest rate.



CWI 6/30/2017 10-Q 15



Notes to Consolidated Financial Statements (Unaudited)

We estimated that our other financial assets and liabilities had fair values that approximated their carrying values at both June 30, 2017 and December 31, 2016.

Items Measured at Fair Value on a Non-Recurring Basis (Including Impairment Charges)

We periodically assess whether there are any indicators that the value of our real estate investments may be impaired or that their carrying value may not be recoverable.

For real estate assets held for investment and related intangible assets in which an impairment indicator is identified, we follow a two-step process to determine whether an asset is impaired and to determine the amount of the charge. First, we compare the carrying value of the property’s asset group to the estimated future undiscounted net cash flows that we expect the property’s asset group will generate, including any estimated proceeds from the eventual sale of the property’s asset group. If this amount is less than the carrying value, the property’s asset group is considered not recoverable. We then measure the impairment charge as the excess of the carrying value of the property’s asset group over the estimated fair value of the property’s asset group, which is primarily determined using market information from outside sources, such as broker quotes, recent comparable sales or third-party appraisals. If relevant market information is not available or is not deemed appropriate, we perform a future net cash flow analysis, discounted for inherent risk associated with each investment.

We classify real estate assets as held for sale when we have entered into a contract to sell the property, all material due diligence requirements have been satisfied or we believe it is probable that the disposition will occur within one year. When we classify an asset as held for sale, we compare the asset’s fair value less estimated cost to sell to its carrying value, and if the fair value less estimated cost to sell is less than the property’s carrying value, we reduce the carrying value to the fair value less estimated cost to sell. We base the fair value on the contract and the estimated cost to sell on information provided by brokers and legal counsel. We will continue to review the property for subsequent changes in the fair value and may recognize an additional impairment charge, if warranted.

We determined that the significant inputs used to value these investments fall within Level 3 for fair value reporting. As a result of our assessments, we calculated an impairment charge based on market conditions and assumptions that existed at the time. The valuation of real estate is subject to significant judgment and actual results may differ materially if market conditions or the underlying assumptions change. During the second quarter of 2016, we recognized impairment charges totaling $3.7 million on three properties with an aggregate fair value measurement of $33.0 million in order to reduce the carrying value of the properties to their estimated fair values. We did not recognize any impairment charges during the three or six months ended June 30, 2017.

Note 8. Risk Management and Use of Derivative Financial Instruments

Risk Management

In the normal course of our ongoing business operations, we encounter economic risk. There are two main components of economic risk that impact us: interest rate risk and market risk. We are primarily subject to interest rate risk on our interest-bearing assets and liabilities. Market risk includes changes in the value of our properties and related loans.

Derivative Financial Instruments

When we use derivative instruments, it is generally to reduce our exposure to fluctuations in interest rates. We have not entered into, and do not plan to enter into, financial instruments for trading or speculative purposes. In addition to entering into derivative instruments on our own behalf, we may also be a party to derivative instruments that are embedded in other contracts, which are considered to be derivative instruments. The primary risks related to our use of derivative instruments include a counterparty to a hedging arrangement defaulting on its obligation and a downgrade in the credit quality of a counterparty to such an extent that our ability to sell or assign our side of the hedging transaction is impaired. While we seek to mitigate these risks by entering into hedging arrangements with large financial institutions that we deem to be creditworthy, it is possible that our hedging transactions, which are intended to limit losses, could adversely affect our earnings. Furthermore, if we terminate a hedging arrangement, we may be obligated to pay certain costs, such as transaction or breakage fees. We have established policies and procedures for risk assessment and the approval, reporting and monitoring of derivative financial instrument activities.



CWI 6/30/2017 10-Q 16



Notes to Consolidated Financial Statements (Unaudited)

We measure derivative instruments at fair value and record them as assets or liabilities, depending on our rights or obligations under the applicable derivative contract. Derivatives that are not designated as hedges must be adjusted to fair value through earnings. For a derivative designated, and that qualified, as a cash flow hedge, the effective portion of the change in fair value of the derivative is recognized in Other comprehensive income (loss) until the hedged item is recognized in earnings. The ineffective portion of the change in fair value of any derivative is immediately recognized in earnings.

The following table sets forth certain information regarding our derivative instruments on our Consolidated Hotels (in thousands):
Derivatives Designated as Hedging Instruments 
 
 
 
Asset Derivatives Fair Value at
 
Liability Derivatives Fair Value at
 
Balance Sheet Location
 
June 30, 2017
 
December 31, 2016
 
June 30, 2017
 
December 31, 2016
Interest rate swaps
 
Other assets
 
$
85

 
$
48

 
$

 
$

Interest rate caps
 
Other assets
 
16

 
51

 

 

Interest rate swaps
 
Accounts payable, accrued expenses and other liabilities
 

 

 

 
(2
)
 
 
 
 
$
101

 
$
99

 
$

 
$
(2
)

All derivative transactions with an individual counterparty are governed by a master International Swap and Derivatives Association agreement, which can be considered as a master netting arrangement; however, we report all our derivative instruments on a gross basis in our consolidated financial statements. At both June 30, 2017 and December 31, 2016, no cash collateral had been posted nor received for any of our derivative positions.

We recognized unrealized losses of less than $0.1 million and $0.5 million in Other comprehensive income (loss) on derivatives in connection with our interest rate swaps and caps during the three months ended June 30, 2017 and 2016, respectively, and unrealized losses of $0.2 million and $1.8 million during the six months ended June 30, 2017 and 2016, respectively.

We reclassified $0.2 million from Other comprehensive income (loss) on derivatives into Interest expense during each of the three months ended June 30, 2017 and 2016, and $0.4 million and $0.5 million during the six months ended June 30, 2017 and 2016, respectively.

Amounts reported in Other comprehensive income (loss) related to interest rate swaps and caps will be reclassified to Interest expense as interest expense is incurred on our variable-rate debt. At June 30, 2017, we estimated that an additional $0.6 million, inclusive of amounts attributable to noncontrolling interests of less than $0.1 million, will be reclassified as Interest expense during the next 12 months related to our interest rate swaps and caps.

Interest Rate Swaps and Caps

We are exposed to the impact of interest rate changes primarily through our borrowing activities. To limit this exposure, we attempt to obtain mortgage financing on a long-term, fixed-rate basis. However, from time to time, we or our investment partners may obtain variable-rate non-recourse mortgage loans and, as a result, may enter into interest rate swap or cap agreements with counterparties. Interest rate swaps, which effectively convert the variable-rate debt service obligations of a loan to a fixed rate, are agreements in which one party exchanges a stream of interest payments for a counterparty’s stream of cash flow over a specific period. The face amount on which the swaps are based is not exchanged. An interest rate cap limits the effective borrowing rate of variable-rate debt obligations while allowing participants to share in downward shifts in interest rates. Our objective in using these derivatives is to limit our exposure to interest rate movements.

The interest rate swaps and caps that we had outstanding on our Consolidated Hotels at June 30, 2017 were designated as cash flow hedges and are summarized as follows (dollars in thousands): 
 
 
Number of
 
Notional
 
Fair Value at
Interest Rate Derivatives
 
Instruments
 
Amount
 
June 30, 2017
Interest rate swaps
 
1
 
$
47,720

 
$
85

Interest rate caps
 
8
 
303,080

 
16

 
 
 
 
 
 
$
101




CWI 6/30/2017 10-Q 17



Notes to Consolidated Financial Statements (Unaudited)

Credit Risk-Related Contingent Features

We measure our credit exposure on a counterparty basis as the net positive aggregate estimated fair value of our derivatives, net of any collateral received. No collateral was received as of June 30, 2017. At June 30, 2017, both our total credit exposure and the maximum exposure to any single counterparty were $0.1 million.

Some of the agreements we have with our derivative counterparties contain cross-default provisions that could trigger a declaration of default on our derivative obligations if we default, or are capable of being declared in default, on certain of our indebtedness. At June 30, 2017, we had not been declared in default on any of our derivative obligations. At June 30, 2017, we had no derivatives that were in a net liability position. At December 31, 2016, the estimated fair value of our derivatives in a net liability position was less than $0.1 million, which included accrued interest and any nonperformance risk adjustments. If we had breached any of these provisions at December 31, 2016, we could have been required to settle our obligations under these agreements at their aggregate termination value of less than $0.1 million.

Note 9. Debt

Non-Recourse Debt

Our non-recourse debt consists of mortgage notes payable, which are collateralized by the assignment of hotel properties. The following table presents the non-recourse debt, net on our Consolidated Hotel investments (dollars in thousands):
 
 
 
 
 
 
Carrying Amount at
 
 
Interest Rate Range
 
Current Maturity Date Range (a)
 
June 30, 2017
 
December 31, 2016
Fixed rate
 
3.6% – 6.5%
 
3/2018 – 4/2024
 
$
1,086,442

 
$
1,084,987

Variable rate (b)
 
3.4% – 8.3%
 
10/2017 – 12/2020
 
339,683

 
371,165

 
 
 
 
 
 
$
1,426,125

 
$
1,456,152

___________
(a)
Many of our mortgage loans have extension options, which are subject to certain conditions. The maturity dates in the table do not reflect the extension options.
(b)
These mortgage loans have variable interest rates, which have effectively been capped or converted to fixed rates through the use of interest rate caps or swaps (Note 8). The interest rate range presented for these mortgage loans reflect the rates in effect at June 30, 2017 through the use of an interest rate cap or swap, when applicable.

Most of our mortgage loan agreements contain “lock-box” provisions, which permit the lender to access or sweep a hotel’s excess cash flow and would be triggered under limited circumstances, including the failure to maintain minimum debt service coverage ratios. If a provision were triggered, we would generally be permitted to spend an amount equal to our budgeted hotel operating expenses, taxes, insurance and capital expenditure reserves for the relevant hotel. The lender would then hold all excess cash flow after the payment of debt service in an escrow account until certain performance hurdles are met. At December 31, 2016, the minimum debt service coverage ratio for the Holiday Inn Manhattan 6th Avenue Chelsea was not met; therefore, a cash management agreement was enacted that permits the lender to sweep the hotel’s excess cash flow. As of June 30, 2017, this ratio was still not met and the cash management agreement remained in effect. At June 30, 2017, the minimum debt service coverage ratio for the Lake Arrowhead Resort and Spa was not met; therefore we are required to fund $0.5 million into a lender held reserve account that will be released after a specified debt service coverage ratio is achieved for two consecutive quarters. We will fund the required $0.5 million into the lender held reserve account during the third quarter of 2017, which will be included in Restricted cash in our consolidated balance sheet.

Covenants

Pursuant to our mortgage loan agreements, our consolidated subsidiaries are subject to various operational and financial covenants, including minimum debt service coverage ratios. At June 30, 2017, we were in compliance with the applicable covenants for each of our mortgage loans.



CWI 6/30/2017 10-Q 18



Notes to Consolidated Financial Statements (Unaudited)

Senior Credit Facility

At December 31, 2016, we had a senior credit facility that provided for a $25.0 million senior unsecured revolving credit facility, or our Senior Credit Facility. The Senior Credit Facility bore interest at LIBOR plus 2.75%, was scheduled to mature on December 4, 2017 and had an outstanding balance of $22.8 million at December 31, 2016. On March 23, 2017, we repaid the $22.8 million outstanding balance using proceeds from the WPC Line of Credit (Note 3) and simultaneously terminated our Senior Credit Facility. We recognized a loss on extinguishment of debt of $0.1 million during the first quarter of 2017 on this termination, related primarily to the write-off of unamortized deferred financing costs.

Financing Activity During 2017

During the six months ended June 30, 2017, we refinanced two non-recourse mortgage loans totaling $70.6 million with new non-recourse mortgage loans totaling $83.5 million, which have a weighted-average interest rate of 5.1% and term of 5 years. We recognized a net loss on extinguishment of debt of less than $0.1 million on these refinancings.

Scheduled Debt Principal Payments

Scheduled debt principal payments during the remainder of 2017, each of the next four calendar years following December 31, 2017, and thereafter are as follows (in thousands):
Years Ending December 31,
 
Total
2017 (remainder) (a)
 
$
78,991

2018 (b)
 
130,888

2019
 
148,727

2020
 
196,362

2021
 
458,253

Thereafter through 2024
 
420,973

 
 
1,434,194

Unamortized deferred financing costs
 
(8,069
)
Total
 
$
1,426,125

___________
(a)
Balance includes $72.7 million of scheduled balloon payments on two consolidated mortgage loans. We currently intend to refinance these mortgage loans, although there can be no assurance that we will be able to do so on favorable terms, if at all.
(b)
Excludes $22.8 million of loan proceeds from the WPC Line of Credit used to repay our Senior Credit Facility (Note 3). The WPC Line of Credit has a maturity date of March 22, 2018.

Note 10. Commitments and Contingencies

At June 30, 2017, we were not involved in any material litigation. Various claims and lawsuits arising in the normal course of business are pending against us, but we do not expect the results of such proceedings to have a material adverse effect on our consolidated financial position or results of operations.

Hotel Management Agreements

As of June 30, 2017, our Consolidated Hotel properties were operated pursuant to long-term management agreements with 12 different management companies, with initial terms ranging from five to 30 years. For hotels operated with separate franchise agreements, each management company receives a base management fee, generally ranging from 1.0% to 3.5% of hotel revenues. Four of our management agreements contain the right and license to operate the hotels under specified brands; no separate franchise agreements exist and no separate franchise fee is required for these hotels. The management agreements that include the benefit of a franchise agreement incur a base management fee equal to 3.0% of hotel revenues. The management companies are generally also eligible to receive an incentive management fee, which is typically calculated as a percentage of operating profit, either (i) in excess of projections with a cap or (ii) after we have received a priority return on our investment in the hotel. For the three months ended June 30, 2017 and 2016, we incurred management fee expense, including amortization of


CWI 6/30/2017 10-Q 19



Notes to Consolidated Financial Statements (Unaudited)

deferred management fees, of $4.7 million and $5.2 million, respectively, and $10.3 million and $10.7 million for the six months ended June 30, 2017 and 2016, respectively.

Franchise Agreements

As of June 30, 2017, we had 12 franchise agreements with Marriott owned brands, five with Hilton owned brands, two with InterContinental Hotels owned brands and one with a Hyatt owned brand related to our Consolidated Hotels. The franchise agreements have initial terms ranging from 15 to 25 years. This number excludes four hotels that receive the benefits of a franchise agreement pursuant to management agreements, as discussed above. Also, three of our Consolidated Hotels are independent and not subject to franchise agreements. Our franchise agreements grant us the right to the use of the brand name, systems and marks with respect to specified hotels and establish various management, operational, record-keeping, accounting, reporting and marketing standards and procedures that the licensed hotel must comply with. In addition, the franchisor establishes requirements for the quality and condition of the hotel and its furniture, fixtures and equipment, and we are obligated to expend such funds as may be required to maintain the hotel in compliance with those requirements. Typically, our franchise agreements provide for a license fee, or royalty, of 3.0% to 7.0% of room revenues and, if applicable, 2.0% to 3.0% of food and beverage revenue. In addition, we generally pay 1.0% to 4.0% of room revenues as marketing and reservation system contributions for the system-wide benefit of brand hotels. Franchise fees are included in sales and marketing expense in our consolidated financial statements. For the three months ended June 30, 2017 and 2016, we incurred franchise fee expense, including amortization of deferred franchise fees, of $5.1 million and $5.4 million, respectively, and $9.8 million and $10.1 million for the six months ended June 30, 2017 and 2016, respectively.

Renovation Commitments

Certain of our hotel franchise and loan agreements require us to make planned renovations to our Consolidated Hotels (Note 4). We do not currently expect, and are not obligated, to fund any planned renovations on our Unconsolidated Hotels beyond our original investment.

At June 30, 2017, eight hotels were either undergoing renovation or in the planning stage of renovations, and we currently expect that three will be completed during the second half of 2017, three will be completed during the first half of 2018 and two will be completed during the second half of 2018. The following table summarizes our capital commitments related to our Consolidated Hotels (in thousands):
 
 
June 30, 2017
 
December 31, 2016
Capital commitments
 
$
75,312

 
$
84,325

Less: amounts paid
 
(36,001
)
 
(43,179
)
Unpaid commitments
 
39,311

 
41,146

Less: amounts in restricted cash designated for renovations
 
(23,395
)
 
(13,136
)
Unfunded commitments (a)
 
$
15,916

 
$
28,010

___________
(a)
Of our unfunded commitments at June 30, 2017 and December 31, 2016, approximately $1.2 million and $5.3 million, respectively, of unrestricted cash on our balance sheet was designated for renovations.

Capital Expenditures and Reserve Funds

With respect to our hotels that are operated under management or franchise agreements with major international hotel brands and for most of our hotels subject to mortgage loans, we are obligated to maintain furniture, fixtures and equipment reserve accounts for future capital expenditures at these hotels, sufficient to cover the cost of routine improvements and alterations at the hotels. The amount funded into each of these reserve accounts is generally determined pursuant to the management agreements, franchise agreements and/or mortgage loan documents for each of the respective hotels and typically ranges between 2% and 5% of the respective hotel’s total gross revenue. As of June 30, 2017 and December 31, 2016$27.4 million and $29.3 million, respectively, was held in furniture, fixtures and equipment reserve accounts for future capital expenditures, and is included in Restricted cash in the consolidated financial statements.



CWI 6/30/2017 10-Q 20



Notes to Consolidated Financial Statements (Unaudited)

Ground Lease Commitments

Three of our hotels are subject to ground leases. Scheduled future minimum ground lease payments during the remainder of 2017, each of the next four calendar years following December 31, 2017 and thereafter are as follows (in thousands):
Years Ending December 31,
 
Total
2017 (remainder)
 
$
1,598

2018
 
3,254

2019
 
3,328

2020
 
3,404

2021
 
3,482

Thereafter through 2106
 
651,117

Total
 
$
666,183


For each of the three months ended June 30, 2017 and 2016, we recorded rent expense of $1.0 million, inclusive of percentage rents of $0.2 million for each period, related to these ground leases, which are included in Property taxes, insurance, rent and other in the consolidated financial statements. For each of the six months ended June 30, 2017 and 2016, we recorded rent expense of $1.9 million, inclusive of percentage rents of $0.3 million for each period, related to these ground leases. Additionally, we recorded straight-line rent adjustment expense related to these ground leases of $1.3 million for each of the three months ended June 30, 2017 and 2016 and $2.6 million and $2.7 million for the six months ended June 30, 2017 and 2016, respectively.

Note 11. Equity

Transfers to Noncontrolling Interests

On February 12, 2016, we acquired the remaining 25% interest in the Fairmont Sonoma Mission Inn & Spa Venture from an unaffiliated third party for $20.6 million, bringing our ownership interest to 100%. In connection with this transaction, we also paid a fee to our Advisor of $0.5 million. Our acquisition of the additional interest in the venture is accounted for as an equity transaction and we recorded an adjustment of approximately $16.0 million to Additional paid-in capital in our consolidated statement of equity for the six months ended June 30, 2016 related to the difference between the carrying value and the purchase price. No gain or loss was recognized in the consolidated statement of operations, and the components of accumulated other comprehensive loss are proportionately reallocated to us from the noncontrolling interest as presented in the consolidated statement of equity.

Reclassifications Out of Accumulated Other Comprehensive Loss

The following tables present a reconciliation of changes in Accumulated other comprehensive loss by component for the periods presented (in thousands):
 
 
Three Months Ended June 30,
Gains and Losses on Derivative Instruments
 
2017
 
2016
Beginning balance
 
$
(1,024
)
 
$
(2,352
)
Other comprehensive loss before reclassifications
 
(14
)
 
(496
)
Amounts reclassified from accumulated other comprehensive loss to:
 
 
 
 
Interest expense
 
182

 
243

Equity in earnings of equity method investments in real estate
 
64

 
108

Total
 
246

 
351

Net current period other comprehensive income (loss)
 
232

 
(145
)
Net current period other comprehensive (income) loss attributable to noncontrolling interests
 
(3
)
 
3

Ending balance
 
$
(795
)
 
$
(2,494
)



CWI 6/30/2017 10-Q 21



Notes to Consolidated Financial Statements (Unaudited)

 
 
Six Months Ended June 30,
Gains and Losses on Derivative Instruments
 
2017
 
2016
Beginning balance
 
$
(1,128
)
 
$
(885
)
Other comprehensive loss before reclassifications
 
(163
)
 
(1,794
)
Amounts reclassified from accumulated other comprehensive loss to:
 
 
 
 
Interest expense
 
356

 
518

Equity in earnings of equity method investments in real estate
 
144

 
218

Total
 
500

 
736

Net current period other comprehensive income (loss)
 
337

 
(1,058
)
Net current period other comprehensive (income) loss attributable to noncontrolling interests
 
(4
)
 
372

Reclassification to additional-paid in capital relating to purchase of remaining 25% membership interest in Fairmont Sonoma Mission Inn & Spa venture
 

 
(923
)
Ending balance
 
$
(795
)
 
$
(2,494
)

Distributions Declared

During the second quarter of 2017, our board of directors declared a quarterly distribution of $0.1425 per share, which was paid on July 14, 2017 to stockholders of record on June 30, 2017, in the aggregate amount of $19.4 million.

For the six months ended June 30, 2017, our board of directors declared distributions of $38.9 million, including distributions of $19.5 million declared during the three months ended March 31, 2017. We paid distributions of $38.8 million during the six months ended June 30, 2017, comprised of $19.5 million declared during the three months ended March 31, 2017 and $19.3 million declared during the three months ended December 31, 2016.

Note 12. Income Taxes

We elected to be treated as a REIT and believe that we have been organized and have operated in such a manner to maintain our qualification as a REIT for federal and state income tax purposes. As a REIT, we are generally not subject to corporate level federal income taxes on earnings distributed to our stockholders. Since inception, we have distributed at least 100% of our taxable income annually and intend to do so for the tax year ending December 31, 2017. Accordingly, we have not included any provisions for federal income taxes related to the REIT in the accompanying consolidated financial statements for the three and six months ended June 30, 2017 and 2016. We conduct business in various states and municipalities within the United States, and, as a result, we or one or more of our subsidiaries file income tax returns in the U.S. federal jurisdiction and various state jurisdictions. As a result, we are subject to certain state and local taxes and a provision for such taxes is included in the consolidated financial statements.

Certain of our subsidiaries have elected taxable REIT subsidiary, or TRS, status. A TRS may provide certain services considered impermissible for REITs and may hold assets that REITs may not hold directly. The accompanying consolidated financial statements include an interim tax provision for our TRSs for the three and six months ended June 30, 2017 and 2016. Current income tax expense was $0.6 million and $2.0 million for the three months ended June 30, 2017 and 2016, respectively, and $1.7 million and $3.7 million for the six months ended June 30, 2017 and 2016, respectively.

Our TRSs are subject to U.S. federal and state income taxes. As such, deferred tax assets and liabilities are established for temporary differences between the financial reporting basis and the tax basis of assets and liabilities at the enacted tax rates expected to be in effect when the temporary differences reverse. A valuation allowance for deferred tax assets is provided if we believe that it is more likely than not that we will not realize the tax benefit of deferred tax assets based on available evidence at the time the determination is made. A change in circumstances may cause us to change our judgment about whether a deferred tax asset will more likely than not be realized. We generally report any change in the valuation allowance through our income statement in the period in which such changes in circumstances occur. Deferred tax assets (net of valuation allowance) and liabilities for our TRSs were recorded, as necessary, as of June 30, 2017 and December 31, 2016. Deferred tax assets (net of valuation allowance) totaled $3.1 million and $4.4 million at June 30, 2017 and December 31, 2016, respectively, and are included in Other assets in the consolidated financial statements. Deferred tax liabilities totaled $5.6 million and $7.5 million at June 30, 2017 and December 31, 2016, respectively, and are included in Accounts payable, accrued expenses and other liabilities in the consolidated financial statements. The majority of our deferred tax assets relate to net operating losses, accrued


CWI 6/30/2017 10-Q 22



Notes to Consolidated Financial Statements (Unaudited)

expenses and deferred key money liabilities. The majority of our deferred tax liabilities relate to differences between the tax basis and financial reporting basis of the villa/condo rental management agreements. Provision for income taxes included deferred income tax expense of $0.5 million and $1.2 million for the three months ended June 30, 2017 and 2016, respectively, and deferred income tax benefit of $0.9 million and $1.7 million for the six months ended June 30, 2017 and 2016, respectively.



CWI 6/30/2017 10-Q 23




Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to provide the reader with information that will assist in understanding our financial statements and the reasons for changes in certain key components of our financial statements from period to period. Management’s Discussion and Analysis of Financial Condition and Results of Operations also provides the reader with our perspective on our financial position and liquidity, as well as certain other factors that may affect our future results. Our Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the 2016 Annual Report and subsequent reports filed under the Securities Exchange Act of 1934.

Business Overview

As described in more detail in Item 1 of the 2016 Annual Report, we are a publicly-owned, non-listed REIT that invests in, and through our Advisor, manages and seeks to enhance the value of, our interests in lodging and lodging-related properties. At June 30, 2017, we held ownership interests in 31 hotels, with a total of 8,357 rooms.

We have invested the proceeds from our initial public offering and follow-on offering in a diversified lodging portfolio, including full-service, select-service and resort hotels. Our results of operations are significantly impacted by seasonality, acquisition-related expenses and by hotel renovations. We often invest in hotels and then initiate significant renovations. Generally, during the renovation period, a portion of total rooms are unavailable and hotel operations are often disrupted, negatively impacting our results of operations.

Significant Developments

Financings

During the six months ended June 30, 2017, we refinanced two non-recourse mortgage loans totaling $70.6 million with new non-recourse mortgage loans totaling $83.5 million, which have a weighted-average interest rate of 5.1% and a term of 5 years. We recognized a net loss on extinguishment of debt of less than $0.1 million on these refinancings (Note 9).

Senior Credit Facility

At December 31, 2016, we had a senior credit facility that provided for a $25.0 million senior unsecured revolving credit facility, or our Senior Credit Facility. The Senior Credit Facility bore interest at LIBOR plus 2.75%, was scheduled to mature on December 4, 2017 and had an outstanding balance of $22.8 million at December 31, 2016. On March 23, 2017, we repaid the $22.8 million outstanding balance using proceeds from the WPC Line of Credit (Note 3, Note 9) and simultaneously terminated our Senior Credit Facility. We recognized a loss on extinguishment of debt of $0.1 million during the first quarter of 2017 on this termination.



CWI 6/30/2017 10-Q 24




Financial and Operating Highlights

(Dollars in thousands, except ADR and RevPAR)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
Hotel revenues
 
$
171,354

 
$
173,576

 
$
331,058

 
$
328,936

Acquisition-related expenses
 

 

 

 
3,727

Net income (loss) attributable to CWI stockholders
 
10,383

 
4,530

 
4,970

 
(6,385
)
 
 
 
 
 
 
 
 
 
Cash distributions paid
 
19,477

 
19,025

 
38,769

 
37,934

 
 
 
 
 
 
 
 
 
Net cash provided by operating activities
 
 
 
 
 
55,880

 
44,000

Net cash used in investing activities
 
 
 
 
 
(4,698
)
 
(95,013
)
Net cash (used in) provided by financing activities
 
 
 
 
 
(45,108
)
 
44,196

 
 
 
 
 
 
 
 
 
Supplemental financial measures: (a)
 
 
 
 
 
 
 
 
FFO attributable to CWI stockholders
 
24,766

 
27,491

 
39,256

 
35,368

MFFO attributable to CWI stockholders
 
26,216

 
28,867

 
42,174

 
42,946

 
 
 
 
 
 
 
 
 
Consolidated Hotel Operating Statistics
 
 
 
 
 
 
 
 
Occupancy
 
80.1
%
 
79.1
%
 
76.9
%
 
76.1
%
ADR
 
$
224.65

 
$
218.29

 
$
223.24

 
$
219.73

RevPAR
 
179.90

 
172.74

 
171.77

 
167.17

___________
(a)
We consider the performance metrics listed above, including funds from operations, or FFO, and modified funds from operations, or MFFO, which are supplemental measures that are not defined by GAAP, or non-GAAP measures, to be important measures in the evaluation of our results of operations and capital resources. We evaluate our results of operations with a primary focus on the ability to generate cash flow necessary to meet our objective of funding distributions to stockholders. See Supplemental Financial Measures below for our definitions of these non-GAAP measures and reconciliations to their most directly comparable GAAP measures.

The comparison of our results period over period is influenced by both the number and size of the hotels consolidated in each of the respective periods. At June 30, 2017, we owned 27 Consolidated Hotels, compared to 31 Consolidated Hotels at June 30, 2016.



CWI 6/30/2017 10-Q 25




Portfolio Overview

The following table sets forth certain information for each of our Consolidated Hotels and our Unconsolidated Hotels at June 30, 2017:
Hotels
 
State
 
Number
of Rooms
 
% Owned
 
Acquisition Date
 
Hotel Type
 
Renovation Status at June 30, 2017
Consolidated Hotels
 
 
 
 
 
 
 
 
 
 
 
 
2012 Acquisitions
 
 
 
 
 
 
 
 
 
 
 
 
Hilton Garden Inn New Orleans French Quarter/CBD
 
LA
 
155

 
88
%
 
6/8/2012
 
Select-service
 
Completed
Lake Arrowhead Resort and Spa
 
CA
 
173

 
97
%