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EX-32.1 - EX-32.1 - Sunstone Hotel Investors, Inc.sho-20170930ex321c03eeb.htm
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EX-31.1 - EX-31.1 - Sunstone Hotel Investors, Inc.sho-20170930ex311b0dc28.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 September 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.

225,321,660 shares of Common Stock, $0.01 par value, as of October 31, 2017

 

 


 

 

SUNSTONE HOTEL INVESTORS, INC.

QUARTERLY REPORT ON

FORM 10-Q

 

For the Quarterly Period Ended September 30, 2017

 

TABLE OF CONTENTS

 

 

 

 

 

 

Page

PART I—FINANCIAL INFORMATION 

 

 

 

Item 1. 

Financial Statements

2

 

 

 

 

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

2

 

 

 

 

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

3

 

 

 

 

Unaudited Consolidated Statement of Equity for the Nine Months Ended September 30, 2017

4

 

 

 

 

Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended September 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

24

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures about Market Risk

46

 

 

 

Item 4. 

Controls and Procedures

46

 

 

 

PART II—OTHER INFORMATION 

 

 

 

Item 1. 

Legal Proceedings

47

 

 

 

Item 1A. 

Risk Factors

47

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

47

 

 

 

Item 3. 

Defaults Upon Senior Securities

47

 

 

 

Item 4. 

Mine Safety Disclosures

47

 

 

 

Item 5. 

Other Information

47

 

 

 

Item 6. 

Exhibits

48

 

 

 

SIGNATURES 

49

 

 

 

i

 


 

PART I—FINANCIAL INFORMATION

Item 1.Financial Statements

 

SUNSTONE HOTEL INVESTORS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

    

2017

    

2016

 

 

(unaudited)

 

 

 

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

466,519

 

$

369,537

Restricted cash

 

 

71,546

 

 

67,923

Accounts receivable, net

 

 

44,838

 

 

39,337

Inventories

 

 

1,236

 

 

1,225

Prepaid expenses

 

 

10,518

 

 

10,489

Assets held for sale, net

 

 

 —

 

 

79,113

Total current assets

 

 

594,657

 

 

567,624

Investment in hotel properties, net

 

 

3,235,053

 

 

3,158,219

Deferred financing fees, net

 

 

1,566

 

 

4,002

Other assets, net

 

 

23,221

 

 

9,389

Total assets

 

$

3,854,497

 

$

3,739,234

LIABILITIES AND EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

30,730

 

$

36,110

Accrued payroll and employee benefits

 

 

23,020

 

 

24,896

Dividends and distributions payable

 

 

14,474

 

 

119,847

Other current liabilities

 

 

47,601

 

 

39,869

Current portion of notes payable, net

 

 

9,161

 

 

184,929

Liabilities of assets held for sale

 

 

 —

 

 

3,153

Total current liabilities

 

 

124,986

 

 

408,804

Notes payable, less current portion, net

 

 

977,634

 

 

746,374

Capital lease obligations, less current portion

 

 

26,756

 

 

15,574

Other liabilities

 

 

29,774

 

 

36,650

Total liabilities

 

 

1,159,150

 

 

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 September 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 September 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, 225,321,660 shares issued and outstanding at September 30, 2017 and 220,073,140 shares issued and outstanding at December 31, 2016

 

 

2,253

 

 

2,201

Additional paid in capital

 

 

2,677,251

 

 

2,596,620

Retained earnings

 

 

912,881

 

 

786,901

Cumulative dividends and distributions

 

 

(1,136,119)

 

 

(1,092,952)

Total stockholders’ equity

 

 

2,646,266

 

 

2,482,770

Noncontrolling interest in consolidated joint venture

 

 

49,081

 

 

49,062

Total equity

 

 

2,695,347

 

 

2,531,832

Total liabilities and equity

 

$

3,854,497

 

$

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 September 30,

 

Nine Months Ended September 30,

 

    

2017

    

2016

   

2017

    

2016

REVENUES

 

 

 

 

 

 

 

 

 

 

 

 

Room

 

$

215,768

 

$

217,672

 

$

629,788

 

$

629,145

Food and beverage

 

 

68,821

 

 

68,899

 

 

222,943

 

 

221,431

Other operating

 

 

19,320

 

 

16,733

 

 

50,717

 

 

49,180

Total revenues

 

 

303,909

 

 

303,304

 

 

903,448

 

 

899,756

OPERATING EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

Room

 

 

54,433

 

 

54,624

 

 

160,282

 

 

160,185

Food and beverage

 

 

49,262

 

 

49,174

 

 

150,768

 

 

154,042

Other operating

 

 

4,256

 

 

4,328

 

 

12,120

 

 

12,516

Advertising and promotion

 

 

14,953

 

 

15,015

 

 

44,810

 

 

45,285

Repairs and maintenance

 

 

12,882

 

 

10,876

 

 

34,645

 

 

33,139

Utilities

 

 

8,331

 

 

8,252

 

 

22,844

 

 

23,114

Franchise costs

 

 

9,431

 

 

9,408

 

 

27,367

 

 

27,402

Property tax, ground lease and insurance

 

 

21,399

 

 

20,944

 

 

63,477

 

 

61,941

Other property-level expenses

 

 

34,511

 

 

35,003

 

 

105,015

 

 

107,698

Corporate overhead

 

 

7,233

 

 

6,392

 

 

21,585

 

 

19,918

Depreciation and amortization

 

 

39,719

 

 

40,442

 

 

120,051

 

 

121,169

Impairment loss

 

 

34,427

 

 

 —

 

 

34,427

 

 

 —

Total operating expenses

 

 

290,837

 

 

254,458

 

 

797,391

 

 

766,409

Operating income

 

 

13,072

 

 

48,846

 

 

106,057

 

 

133,347

Interest and other income

 

 

1,027

 

 

283

 

 

2,597

 

 

1,127

Interest expense

 

 

(17,008)

 

 

(11,136)

 

 

(41,341)

 

 

(47,018)

Loss on extinguishment of debt

 

 

 —

 

 

 —

 

 

(4)

 

 

(259)

Gain on sale of assets

 

 

 —

 

 

 —

 

 

45,474

 

 

18,223

(Loss) income before income taxes and discontinued operations

 

 

(2,909)

 

 

37,993

 

 

112,783

 

 

105,420

Income tax benefit

 

 

12,991

 

 

1,434

 

 

12,541

 

 

959

Income from continuing operations

 

 

10,082

 

 

39,427

 

 

125,324

 

 

106,379

Income from discontinued operations

 

 

7,000

 

 

 —

 

 

7,000

 

 

 —

NET INCOME

 

 

17,082

 

 

39,427

 

 

132,324

 

 

106,379

Income from consolidated joint venture attributable to noncontrolling interest

 

 

(2,169)

 

 

(2,053)

 

 

(6,344)

 

 

(5,358)

Preferred stock dividends and redemption charge

 

 

(3,208)

 

 

(3,207)

 

 

(9,622)

 

 

(12,756)

INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS

 

$

11,705

 

$

34,167

 

$

116,358

 

$

88,265

 

 

 

 

 

 

 

 

 

 

 

 

 

COMPREHENSIVE INCOME

 

$

17,082

 

$

39,427

 

$

132,324

 

$

106,379

COMPREHENSIVE INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS

 

$

11,705

 

$

34,167

 

$

116,358

 

$

88,265

Basic and diluted per share amounts:

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations attributable to common stockholders

 

$

0.02

 

$

0.16

 

$

0.49

 

$

0.41

Income from discontinued operations

 

 

0.03

 

 

 —

 

 

0.03

 

 

 —

Basic and diluted income attributable to common stockholders per common share

 

$

0.05

 

$

0.16

 

$

0.52

 

$

0.41

Basic and diluted weighted average common shares outstanding

 

 

224,142

 

 

215,413

 

 

221,140

 

 

214,565

 

 

 

 

 

 

 

 

 

 

 

 

 

Distributions declared per common share

 

$

0.05

 

$

0.05

 

$

0.15

 

$

0.15

 

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

 

 —

 

 

 —

 

 —

 

 

 —

 

4,876,855

 

 

48

 

 

77,884

 

 

 —

 

 

 —

 

 

 —

 

 

77,932

Deferred stock compensation, net

 

 —

 

 

 —

 

 —

 

 

 —

 

371,665

 

 

 4

 

 

2,747

 

 

 —

 

 

 —

 

 

 —

 

 

2,751

Common stock distributions and distributions payable at $0.15 per share year to date

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(33,545)

 

 

 —

 

 

(33,545)

Series E preferred stock dividends and dividends payable at $1.303125 per share year to date

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(5,994)

 

 

 —

 

 

(5,994)

Series F preferred stock dividends and dividends payable at $1.209375 per share year to date

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(3,628)

 

 

 —

 

 

(3,628)

Distributions to noncontrolling interest

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(6,325)

 

 

(6,325)

Net income

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

125,980

 

 

 —

 

 

6,344

 

 

132,324

Balance at September 30, 2017

 

4,600,000

 

$

115,000

 

3,000,000

 

$

75,000

 

225,321,660

 

$

2,253

 

$

2,677,251

 

$

912,881

 

$

(1,136,119)

 

$

49,081

 

$

2,695,347

 

 

See accompanying notes to consolidated financial statements.

 

4

 


 

SUNSTONE HOTEL INVESTORS, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

    

2017

    

2016

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

Net income

 

$

132,324

 

$

106,379

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

 

 

 

 

 

 

Bad debt expense

 

 

503

 

 

493

Gain on sale of assets, net

 

 

(52,736)

 

 

(18,226)

Loss on extinguishment of debt

 

 

 4

 

 

259

Noncash interest on derivatives and capital lease obligations, net

 

 

4,883

 

 

7,810

Depreciation

 

 

118,069

 

 

118,764

Amortization of franchise fees and other intangibles

 

 

2,386

 

 

2,936

Amortization of deferred financing fees

 

 

1,734

 

 

1,648

Amortization of deferred stock compensation

 

 

6,188

 

 

5,616

Impairment loss

 

 

34,427

 

 

 —

Hurricane-related loss

 

 

201

 

 

 —

Deferred income taxes

 

 

(13,628)

 

 

 —

Changes in operating assets and liabilities:

 

 

 

 

 

 

Restricted cash

 

 

3,873

 

 

17,846

Accounts receivable

 

 

(5,541)

 

 

(14,747)

Inventories

 

 

71

 

 

26

Prepaid expenses and other assets

 

 

(13)

 

 

(72)

Accounts payable and other liabilities

 

 

4,387

 

 

3,002

Accrued payroll and employee benefits

 

 

(2,883)

 

 

(3,215)

Net cash provided by operating activities

 

 

234,249

 

 

228,519

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

Proceeds from sales of assets

 

 

150,171

 

 

41,202

Restricted cash — replacement reserve

 

 

(7,496)

 

 

(8,914)

Acquisition of hotel property and other assets

 

 

(173,917)

 

 

(2,447)

Renovations and additions to hotel properties

 

 

(81,470)

 

 

(139,846)

Payment for interest rate derivative

 

 

(19)

 

 

 —

Net cash used in investing activities

 

 

(112,731)

 

 

(110,005)

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

 

 

79,407

 

 

 —

Payment of common stock offering costs

 

 

(1,475)

 

 

 —

Repurchase of common stock for employee withholding obligations

 

 

(3,793)

 

 

(2,641)

Proceeds from notes payable

 

 

240,000

 

 

100,000

Payments on notes payable

 

 

(183,796)

 

 

(196,504)

Payments of costs related to extinguishment of notes payable

 

 

(1)

 

 

(153)

Payments of deferred financing costs

 

 

(13)

 

 

(85)

Dividends and distributions paid

 

 

(148,540)

 

 

(213,453)

Distributions to noncontrolling interest

 

 

(6,325)

 

 

(5,988)

Net cash used in financing activities

 

 

(24,536)

 

 

(250,464)

Net increase (decrease) in cash and cash equivalents

 

 

96,982

 

 

(131,950)

Cash and cash equivalents, beginning of period

 

 

369,537

 

 

499,067

Cash and cash equivalents, end of period

 

$

466,519

 

$

367,117

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

 

 

 

 

 

 

Cash paid for interest

 

$

32,587

 

$

37,545

Cash paid for income taxes, net

 

$

864

 

$

1,103

NONCASH INVESTING ACTIVITY

 

 

 

 

 

 

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

 

$

(5,891)

 

$

7,165

Amortization of deferred stock compensation — construction activities

 

$

356

 

$

450

NONCASH FINANCING ACTIVITY

 

 

 

 

 

 

Preferred stock redemption charge

 

$

 —

 

$

4,052

Issuance of common stock distributions

 

$

 —

 

$

78,823

Dividends and distributions payable

 

$

14,474

 

$

14,033

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 September 30, 2017, the Company had interests in 27 hotels (the “27 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

Singh Hospitality, LLC

 

 1

 

 

 

Total hotels held for investment

 

27

 

 

2. Summary of Significant Accounting Policies

 

Basis of Presentation

 

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

 

Noncontrolling interest at both September 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

 

Nine Months Ended

 

    

September 30, 2017

    

September 30, 2016

    

September 30, 2017

    

September 30, 2016

 

 

(unaudited)

 

(unaudited)

 

(unaudited)

 

(unaudited)

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

17,082

 

$

39,427

 

$

132,324

 

$

106,379

Income from consolidated joint venture attributable to noncontrolling interest

 

 

(2,169)

 

 

(2,053)

 

 

(6,344)

 

 

(5,358)

Preferred stock dividends and redemption charge

 

 

(3,208)

 

 

(3,207)

 

 

(9,622)

 

 

(12,756)

Distributions paid on unvested restricted stock compensation

 

 

(59)

 

 

(55)

 

 

(179)

 

 

(173)

Undistributed income allocated to unvested restricted stock compensation

 

 

(2)

 

 

(123)

 

 

(440)

 

 

(293)

Numerator for basic and diluted income attributable to common stockholders

 

$

11,644

 

$

33,989

 

$

115,739

 

$

87,799

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average basic and diluted common shares outstanding

 

 

224,142

 

 

215,413

 

 

221,140

 

 

214,565

Basic and diluted income attributable to common stockholders per common share

 

$

0.05

 

$

0.16

 

$

0.52

 

$

0.41

 

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 nine months ended September 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 $71.5 million and $67.9 million at September 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 September 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.

 

Property and Equipment

 

The Company follows the requirements of the Property, Plant and Equipment Topic of the FASB ASC, which requires impairment losses to be recorded on long-lived assets to be held and used by the Company when indicators of impairment are present and the future undiscounted net cash flows expected to be generated by those assets are less than the assets’ carrying amount. If such assets are considered to be impaired, the related assets are adjusted to their estimated fair value and an impairment is recognized. The impairment recognized is measured by the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets. In computing fair value, the Company uses a discounted cash flow analysis to estimate the fair value of its hotel properties, taking into account each property’s expected cash flow from operations and estimated proceeds from the disposition of the property. The factors addressed in determining estimated proceeds from disposition include anticipated operating cash flow in the year of disposition and terminal capitalization rate.

 

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):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

    

2017

    

2016

 

 

(unaudited)

 

 

 

Land

 

$

623,493

 

$

531,660

Buildings and improvements

 

 

3,195,726

 

 

3,135,806

Furniture, fixtures and equipment

 

 

502,775

 

 

512,372

Intangible assets

 

 

48,560

 

 

49,015

Franchise fees

 

 

980

 

 

1,021

Construction in process

 

 

39,481

 

 

65,449

Investment in hotel properties, gross

 

 

4,411,015

 

 

4,295,323

Accumulated depreciation and amortization

 

 

(1,175,962)

 

 

(1,137,104)

Investment in hotel properties, net

 

$

3,235,053

 

$

3,158,219

 

In July 2017, the Company purchased the newly-developed 175-room Oceans Edge Hotel & Marina in Key West, Florida for a net purchase price of $173.9 million, including prorations. The purchase of the hotel included a marina, wet and dry boat slips and other customary marina amenities. The Company recorded the acquisition at fair value using an independent third-party analysis, with the purchase price allocated to investment in hotel properties and hotel working capital assets. The Company recognized acquisition related costs of $0.4 million and $0.7 million for the three and nine months ended September 30, 2017, respectively, which are included in corporate overhead on the Company’s consolidated statements of operations and comprehensive income. The results of operations for the Oceans Edge Hotel & Marina have been included in the Company’s consolidated statements of operations and comprehensive income from the acquisition date of July 25, 2017 through the third quarter ended September 30, 2017.

 

10


 

The fair values of the assets acquired and liabilities assumed at the Oceans Edge Hotel & Marina’s acquisition date were allocated as follows (in thousands):

 

 

 

 

Assets:

 

 

 

Investment in hotel properties

 

$

174,971

Accounts receivable

 

 

15

Inventories

 

 

50

Prepaid expenses

 

 

41

Other assets

 

 

84

Total assets acquired

 

 

175,161

 

 

 

 

Liabilities:

 

 

 

Accounts payable and accrued expenses

 

 

210

Accrued payroll and employee benefits

 

 

256

Other current liabilities

 

 

752

Other liabilities

 

 

26

Total liabilities assumed

 

 

1,244

 

 

 

 

Total cash paid for acquisition

 

$

173,917

 

Investment in hotel properties was allocated to land ($92.5 million), buildings and improvements ($74.4 million), furniture, fixtures and equipment ($6.4 million), and intangibles ($1.7 million) related to air rights and in-place lease agreements. The air rights have a value of $1.6 million and an indefinite life. The in-place lease agreements, which are related to the wet and dry boat slips, have a value of $0.1 million and a weighted average life of nine months.

 

Acquired properties are included in the Company’s results of operations from the date of acquisition. The following unaudited pro forma results of operations reflect the Company’s results as if the acquisition of the Oceans Edge Hotel & Marina had occurred on January 1, 2017. The information is not necessarily indicative of the results that actually would have occurred, nor does it indicate future operating results. Since the newly-developed hotel opened mid-January 2017, the year-to-date results are slightly less than a full nine months, and there are no prior year results. In the Company’s opinion, all significant adjustments necessary to reflect the effects of the acquisition have been made (in thousands, except per share data):

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

    

September 30, 2017

    

September 30, 2017

 

 

(unaudited)

 

(unaudited)

Revenues

 

$

305,052

 

$

912,697

Income attributable to common stockholders

 

$

12,083

 

$

117,751

Income per diluted share attributable to common stockholders

 

$

0.02

 

$

0.50

 

For both the three and nine months ended September 30, 2017, the Company has included $1.8 million of revenue and a net loss of $1.2 million, which includes $0.7 million in hurricane-related restoration expenses, in its consolidated statements of operations and comprehensive income related to the Company’s acquisition of the Oceans Edge Hotel & Marina.

 

During the third quarter of 2017, four of the Company’s 27 hotels were impacted to varying degrees by Hurricanes Harvey and Irma: the Hilton North Houston; the Marriott Houston; the Oceans Edge Hotel & Marina; and the Renaissance Orlando at SeaWorld®. For more information regarding the impact of the hurricanes on the Company’s hotels, please see the Hurricanes Harvey and Irma discussion in Note 11.

 

In the aftermath of Hurricane Harvey, combined with continued operational declines due to weakness in the Houston market, and in accordance with the Property, Plant and Equipment Topic of the FASB ASC, the Company identified indicators of impairment and reviewed its Houston hotels for possible impairment. During the third quarter of 2017, the Company recorded a total impairment charge of $34.4 million, including $27.1 million for the Hilton North Houston and $7.3 million for the Marriott Houston, which is included in impairment loss on the Company’s consolidated statements of operations for both the three and nine months ended September 30, 2017 (see Note 5). No impairment was necessary for either the three or nine months ended September 30, 2016.

 

 

11


 

 

4. Disposals and Discontinued Operations

 

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.

 

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 September 30,

 

Nine Months Ended September 30,

 

    

2017

    

2016

    

2017

    

2016

 

 

(unaudited)

 

(unaudited)

 

(unaudited)

 

(unaudited)

Revenues

 

$

 —

 

$

11,210

 

$

9,980

 

$

38,650

Income before income taxes

 

$

 —

 

$

1,332

 

$

2,466

 

$

4,981

Gain on sale of assets

 

$

 —

 

$

 —

 

$

45,474

 

$