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EX-32.1 - EXHIBIT 32.1 - Xenia Hotels & Resorts, Inc.xeniaq3201710qexhibit321.htm
EX-31.2 - EXHIBIT 31.2 - Xenia Hotels & Resorts, Inc.xeniaq3201710qexhibit312.htm
EX-31.1 - EXHIBIT 31.1 - Xenia Hotels & Resorts, Inc.xeniaq3201710qexhibit311.htm
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________
FORM 10-Q
____________________________
(Mark One)
þ 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
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period ended ______ to ______
Commission file number 001-36594
___________________________

Xenia Hotels & Resorts, Inc.

(Exact Name of Registrant as Specified in Its Charter)
_______________________
Maryland
 
20-0141677
(State of Incorporation)
 
(I.R.S. Employer Identification No.)
 
 
 
200 S. Orange Avenue
Suite 2700, Orlando, Florida
 
32801
(Address of Principal Executive Offices)
 
(Zip Code)
(407) 246-8100
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes o 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). þ Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
þ
 
 
Accelerated filer
o
Non-accelerated filer
o
(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). o Yes þ No
As of November 3, 2017, there were 106,729,984 shares of the registrant’s common stock outstanding.
 



XENIA HOTELS & RESORTS, INC.
TABLE OF CONTENTS


Part I - Financial Information
 
Page
 
 
 
 
Item 1.
Financial Statements (unaudited)
 
 
 
Condensed Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016
 
 
Condensed Consolidated Statements of Operations and Comprehensive Income for the Three and Nine Months Ended September 30, 2017 and 2016
 
 
Condensed Consolidated Statement of Changes in Equity for the Nine Months Ended September 30, 2017
 
 
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2017 and 2016
 
 
Notes to the Condensed Consolidated Financial Statements
 
 
 
 
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
Item 4.
Controls and Procedures
 
 
 
 
 
 
 
 
 
Part II - Other Information
 
 
 
 
 
 
Item 1.
Legal Proceedings
 
Item 1A.
Risk Factors
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
Item 3.
Defaults Upon Senior Securities
 
Item 4.
Mine Safety Disclosures
 
Item 5.
Other Information
 
Item 6.
Exhibits
 
 
 
 
 
Signatures
 



PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
XENIA HOTELS & RESORTS, INC.
Condensed Consolidated Balance Sheets
As of September 30, 2017 and December 31, 2016
(Dollar amounts in thousands, except per share data)
 
September 30, 2017
 
December 31, 2016
Assets
(Unaudited)
 
 
Investment properties:
 
 
 
Land
$
335,805

 
$
331,502

Buildings and other improvements
2,728,321

 
2,732,062

Total
$
3,064,126

 
$
3,063,564

Less: accumulated depreciation
(629,920
)
 
(619,975
)
Net investment properties
$
2,434,206

 
$
2,443,589

Cash and cash equivalents
450,441

 
216,054

Restricted cash and escrows
62,877

 
70,973

Accounts and rents receivable, net of allowance for doubtful accounts
34,542

 
22,998

Intangible assets, net of accumulated amortization of $5,891 and $4,324, respectively
74,655

 
76,912

Other assets
31,911

 
29,819

Total assets (including $71,500 and $74,440, respectively, related to consolidated variable interest entities - Note 5)
$
3,088,632

 
$
2,860,345

Liabilities
 
 
 
Debt, net of loan discounts and unamortized deferred financing costs
$
1,285,891

 
$
1,077,132

Accounts payable and accrued expenses
79,862

 
71,955

Distributions payable
29,901

 
29,881

Other liabilities
36,060

 
29,810

Total liabilities (including $47,169 and $47,828, respectively, related to consolidated variable interest entities - Note 5)
$
1,431,714

 
$
1,208,778

Commitments and contingencies


 


Stockholders' equity
 
 
 
Common stock, $0.01 par value, 500,000,000 shares authorized, 106,728,578 and 106,794,788 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively
$
1,068


$
1,068

Additional paid in capital
1,923,540

 
1,925,554

Accumulated other comprehensive income
4,995

 
5,009

Accumulated distributions in excess of net earnings
(301,217
)
 
(302,034
)
Total Company stockholders' equity
$
1,628,386

 
$
1,629,597

Non-controlling interests
28,532

 
21,970

Total equity
$
1,656,918

 
$
1,651,567

Total liabilities and equity
$
3,088,632

 
$
2,860,345

See accompanying notes to the condensed consolidated financial statements.

1


XENIA HOTELS & RESORTS, INC.
Condensed Consolidated Statements of Operations and Comprehensive Income
For the Three and Nine Months Ended September 30, 2017 and 2016
(unaudited)
(Dollar amounts in thousands, except per share data)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Revenues:
 
 
 
 
 
 
 
Rooms revenues
$
152,942

 
$
167,066

 
$
462,261

 
$
507,361

Food and beverage revenues
56,653

 
55,687

 
185,030

 
185,484

Other revenues
13,694

 
11,193

 
38,851

 
37,515

Total revenues
$
223,289

 
$
233,946

 
$
686,142

 
$
730,360

Expenses:
 
 
 
 
 
 
 
Rooms expenses
35,427

 
36,854

 
104,406

 
111,812

Food and beverage expenses
40,507

 
38,233

 
121,489

 
122,475

Other direct expenses
3,441

 
1,520

 
9,750

 
9,571

Other indirect expenses
54,737

 
55,076

 
163,067

 
170,957

Management and franchise fees
9,393

 
11,459

 
32,493

 
37,486

Total hotel operating expenses
$
143,505

 
$
143,142

 
$
431,205

 
$
452,301

Depreciation and amortization
37,492

 
37,796

 
110,596

 
115,066

Real estate taxes, personal property taxes and insurance
10,152

 
12,300

 
32,208

 
34,875

Ground lease expense
1,393

 
1,356

 
4,178

 
4,112

General and administrative expenses
7,380

 
7,211

 
23,985

 
25,508

Acquisition transaction costs
210

 
2

 
1,476

 
147

Impairment and other losses
2,174

 
15

 
2,174

 
10,006

Total expenses
$
202,306

 
$
201,822

 
$
605,822

 
$
642,015

Operating income
$
20,983

 
$
32,124

 
$
80,320

 
$
88,345

Gain (loss) on sale of investment properties
1,570

 
(1
)
 
50,747

 
792

Other income
428

 
738

 
766

 
916

Interest expense
(11,599
)
 
(12,373
)
 
(32,896
)
 
(38,014
)
Loss on extinguishment of debt

 
(244
)
 
(274
)
 
(5,023
)
Net income before income taxes
$
11,382

 
$
20,244

 
$
98,663

 
$
47,016

Income tax benefit (expense)
385

 
187

 
(7,670
)
 
(9,613
)
Net income
$
11,767

 
$
20,431

 
$
90,993

 
$
37,403

Non-controlling interests in consolidated real estate entities (Note 5)
130

 
84

 
75

 
205

Non-controlling interests of Common Units in Operating Partnership (Note 1)
(259
)
 
(273
)
 
(1,899
)
 
(512
)
Net income attributable to non-controlling interests
$
(129
)
 
$
(189
)
 
$
(1,824
)
 
$
(307
)
Net income attributable to common stockholders
$
11,638

 
$
20,242

 
$
89,169

 
$
37,096



2


XENIA HOTELS & RESORTS, INC.
Condensed Consolidated Statements of Operations and Comprehensive Income, Continued
For the Three and Nine Months Ended September 30, 2017 and 2016
(unaudited)
(Dollar amounts in thousands, except per share data)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Basic and diluted earnings per share
 
 
 
 
 
 
 
Net income per share available to common stockholders
$
0.11

 
$
0.19

 
$
0.83

 
$
0.34

Weighted average number of common shares (basic)
106,727,330

 
107,538,601

 
106,779,824

 
108,384,241

Weighted average number of common shares (diluted)
106,995,887

 
107,677,749

 
107,020,675

 
108,495,365

 
 
 
 
 
 
 
 
Comprehensive Income:
 
 
 
 
 
 
 
Net income
$
11,767

 
$
20,431

 
$
90,993

 
$
37,403

Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized (loss) gain on interest rate derivative instruments
(258
)
 
1,362

 
(1,932
)
 
(14,283
)
Reclassification adjustment for amounts recognized in net income (interest expense)
412

 
972

 
1,916

 
2,869

 
$
11,921

 
$
22,765

 
$
90,977

 
$
25,989

Comprehensive (income) loss attributable to non-controlling interests:
 
 
 
 
 
 
 
Non-controlling interests in consolidated real estate entities (Note 5)
130

 
84

 
75

 
205

Non-controlling interests of Common Units in Operating Partnership (Note 1)
(262
)
 
(303
)
 
(1,897
)
 
(362
)
Comprehensive income attributable to non-controlling interests
$
(132
)
 
$
(219
)
 
$
(1,822
)
 
$
(157
)
Comprehensive income attributable to the Company
$
11,789

 
$
22,546

 
$
89,155

 
$
25,832

See accompanying notes to the condensed consolidated financial statements.

3


XENIA HOTELS & RESORTS, INC.
Condensed Consolidated Statements of Changes in Equity
For the Nine Months Ended September 30, 2017
(unaudited)
(Dollar amounts in thousands, except per share data)
 
Common Stock
 
 
 
 
 
 
 
Non-controlling Interests
 
 
 
Shares
 
Amount
 
Additional paid in capital
 
Accumulated other comprehensive income
 
Distributions in excess of retained earnings
 
Operating Partnership
 
Consolidated Real Estate Entities
 
Total Non-controlling Interests
 
Total
Balance at December 31, 2016
106,794,788

 
$
1,068

 
$
1,925,554

 
$
5,009

 
$
(302,034
)
 
$
8,877

 
$
13,093

 
$
21,970

 
$
1,651,567

Net income

 

 

 

 
89,169

 
1,899

 
(75
)
 
1,824

 
90,993

Repurchase of common shares
(240,352
)
 
(2
)
 
(4,101
)
 

 

 

 

 

 
(4,103
)
Dividends, common shares / units ($0.825)

 

 

 

 
(88,352
)
 
(430
)
 

 
(430
)
 
(88,782
)
Share-based compensation
276,134

 
3

 
3,936

 

 

 
5,529

 

 
5,529

 
9,468

Shares redeemed to satisfy tax withholding on vested share based compensation
(101,992
)
 
(1
)
 
(1,849
)
 

 

 

 

 

 
(1,850
)
Distributions to non-controlling interests

 

 

 

 

 

 
(359
)
 
(359
)
 
(359
)
Other comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized loss on interest rate derivative instruments

 

 

 
(1,892
)
 

 
(40
)
 

 
(40
)
 
(1,932
)
Reclassification adjustment for amounts recognized in net income

 

 

 
1,878

 

 
38

 

 
38

 
1,916

Balance at September 30, 2017
106,728,578

 
$
1,068

 
$
1,923,540

 
$
4,995

 
$
(301,217
)
 
$
15,873

 
$
12,659

 
$
28,532

 
$
1,656,918

See accompanying notes to the condensed consolidated financial statements.

4


XENIA HOTELS & RESORTS, INC.
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2017 and 2016
(unaudited)
(Dollar amounts in thousands)
 
Nine Months Ended September 30,
 
2017
 
2016
Cash flows from operating activities:
 
 
 
Net income
$
90,993

 
$
37,403

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
108,988

 
112,897

Amortization of above and below market leases and other lease intangibles
1,963

 
2,547

Amortization of debt premiums, discounts, and financing costs
2,099

 
3,009

Loss on extinguishment of debt
274

 
5,023

Gain on sale of investment property
(50,747
)
 
(792
)
Impairment and other losses
950

 
10,006

Share-based compensation expense
7,587

 
7,049

Prepayment penalties and defeasance

 
(4,813
)
Changes in assets and liabilities:
 
 
 
Accounts and rents receivable
(5,676
)
 
(8,814
)
Deferred costs and other assets
4,557

 
4,858

Accounts payable and accrued expenses
2,454

 
1,795

Other liabilities
7,750

 
2,708

Net cash provided by operating activities
$
171,192

 
$
172,876

Cash flows from investing activities:
 
 
 
Purchase of investment properties
(202,881
)
 
(116,000
)
Capital expenditures and tenant improvements
(52,113
)
 
(38,091
)
Proceeds from sale of investment properties
204,353

 
160,095

Deposits for acquisition of hotel properties
(6,000
)
 

Net cash (used in) provided by investing activities
$
(56,641
)
 
$
6,004

Cash flows from financing activities:
 
 
 
Proceeds from mortgage debt and notes payable
215,000

 
71,258

Payoffs of mortgage debt
(127,876
)
 
(147,042
)
Principal payments of mortgage debt
(1,938
)
 
(4,377
)
Proceeds from unsecured term loan
125,000

 
125,000

Payment of loan fees and deposits
(3,241
)
 
(646
)
Proceeds from revolving line of credit draws
80,000

 

Payments on revolving line of credit
(80,000
)
 

Contributions from non-controlling interests

 
341

Repurchase of common shares
(4,103
)
 
(66,261
)
Shares redeemed to satisfy tax withholding on vested share based compensation
(1,850
)
 
(561
)
Dividends, common shares/units
(88,893
)
 
(85,271
)
Distributions paid to non-controlling interests
(359
)
 
(179
)
Net cash provided by (used in) financing activities
$
111,740

 
$
(107,738
)
Net increase in cash and cash equivalents and restricted cash
226,291

 
71,142

Cash and cash equivalents and restricted cash, at beginning of period
287,027

 
199,751

Cash and cash equivalents and restricted cash, at end of period
$
513,318

 
$
270,893

 
 
 
 


5


XENIA HOTELS & RESORTS, INC.
Condensed Consolidated Statements of Cash Flows, Continued
For the Nine Months Ended September 30, 2017 and 2016
(unaudited)
(Dollar amounts in thousands)
 
Nine Months Ended September 30,
 
2017
 
2016
Supplemental disclosure of cash flow information:
 
 
 
The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the condensed consolidated balance sheets to the amount shown in the statements of cash flows:
 
 
 
Cash and cash equivalents
$
450,441

 
$
185,311

Restricted cash
62,877

 
85,582

Total cash and cash equivalents and restricted cash shown in the statements of cash flows
$
513,318

 
$
270,893

 
 
 
 
The following represent cash paid during the periods presented for the following:
 
 
 
Cash paid for taxes
$
3,930

 
$
6,650

Cash paid for interest
30,467

 
31,027

 
 
 
 
Supplemental schedule of non-cash investing and financing activities:
 
 
 
Accrued capital expenditures
$
1,170

 
$
1,246

Change in fair value of designated interest rate swaps
(16
)
 
(11,414
)
Deposit applied to purchase price of hotel property upon acquisition

 
20,000

See accompanying notes to the condensed consolidated financial statements.

6


XENIA HOTELS & RESORTS, INC.
Notes to Condensed Consolidated Financial Statements (unaudited)
September 30, 2017


1. Organization
Xenia Hotels & Resorts, Inc. (the "Company" or "Xenia") is a Maryland corporation that invests primarily in premium full service and lifestyle hotels, with a focus on the top 25 lodging markets as well as key leisure destinations in the United States ("U.S.").
Substantially all of the Company's assets are held by, and all the operations are conducted through XHR LP (the "Operating Partnership"). XHR GP, Inc. is the sole general partner of XHR LP and is wholly owned by the Company. As of September 30, 2017, the Company collectively owned 98% of the common limited partnership units issued by the Operating Partnership ("Common Units"). The remaining 2% of the Common Units are owned by the other limited partners. To qualify as a real estate investment trust ("REIT"), the Company cannot operate or manage its hotels. Therefore, the Operating Partnership and its subsidiaries lease the hotel properties to XHR Holding, Inc. and its subsidiaries (collectively with its subsidiaries, "XHR Holding"), the Company's taxable REIT subsidiary ("TRS"), which engages third-party eligible independent contractors to manage the hotels.
As of September 30, 2017, the Company owned 36 lodging properties, 34 of which were wholly owned. The remaining two hotels are owned through individual investments in real estate entities, in which the Company has a 75% ownership interest in each investment.
2. Summary of Significant Accounting Policies
The unaudited interim condensed consolidated financial statements and related notes have been prepared on an accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP" or "GAAP") and in conformity with the rules and regulations of the Securities and Exchange Commission ("SEC") applicable to financial information. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been omitted in accordance with the rules and regulations of the SEC. The unaudited financial statements include normal recurring adjustments, which management considers necessary for the fair presentation of the condensed consolidated balance sheets, condensed consolidated statements of operations and comprehensive income, condensed consolidated statements of changes in equity and condensed consolidated statements of cash flows for the periods presented. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto as of and for the year ended December 31, 2016, included in the Company's Annual Report on Form 10-K filed with the SEC on February 28, 2017. Operating results for the three and nine months ended September 30, 2017 are not necessarily indicative of actual operating results for the entire year.
Basis of Presentation
The accompanying condensed consolidated financial statements include the accounts of the Company, the Operating Partnership, XHR Holding, and its consolidated investments in real estate entities. The Company's subsidiaries and consolidated investments in real estate entities generally consist of limited liability companies, limited partnerships and the TRS. The effects of all inter-company transactions have been eliminated.
Certain prior year amounts in these financial statements have been reclassified to conform to the presentation for the three and nine months ended September 30, 2017.
Use of Estimates
The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and revenues and expenses. These estimates are prepared using management's best judgment, after considering past, current and expected economic conditions. Actual results could differ from these estimates.

7


Risks and Uncertainties
The Company had a geographical concentration risk for the three and nine months ended September 30, 2017 and 2016, which was related to revenues generated from hotels located in the following markets:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Market
 
2017
 
2016
 
2017
 
2016
Houston, TX(1)
 
9
%
 
9
%
 
10
%
 
11
%
Orlando, FL(2)
 
10
%
 
3
%
 
7
%
 
4
%
(1)
For the three and nine months ended September 30, 2017 and 2016, the Company owned three and four hotels in the Houston, TX market, respectively.
(2)
For the three and nine months ended September 30, 2017 and 2016, the Company owned three and two hotels in the Orlando, FL market, respectively.
To the extent that there are adverse changes in these markets, or the industry sectors that operate in these markets, our business and operating results could be negatively impacted. The state of the overall economy can significantly impact hotel operational performance and thus, impact the Company's financial position. Should any of our hotels experience a significant decline in operational performance, it may affect the Company's ability to make distributions to our stockholders and service debt or meet other financial obligations.
Consolidation
The Company evaluates its investments in partially owned entities to determine whether such entities may be a variable interest entity ("VIE"). If the entity is a VIE, the determination of whether the Company is the primary beneficiary must be made. The primary beneficiary determination is based on a qualitative assessment as to whether the entity has (i) power to direct significant activities of the VIE and (ii) an obligation to absorb losses or the right to receive benefits that could be potentially significant to the VIE. The Company will consolidate a VIE if it is deemed to be the primary beneficiary. The equity method of accounting is applied to entities in which the Company is not the primary beneficiary, or the entity is not a VIE and the Company does not have effective control, but can exercise influence over the entity with respect to its operations and major decisions.
Cash and Cash Equivalents
The Company considers all demand deposits, money market accounts and investments in certificates of deposit and repurchase agreements purchased with a maturity of three months or less, at the date of purchase, to be cash equivalents. The Company maintains its cash and cash equivalents at financial institutions. The combined account balances at one or more institutions periodically exceed the Federal Depository Insurance Corporation ("FDIC") insurance coverage and, as a result, there is a concentration of credit risk related to amounts on deposit in excess of FDIC insurance coverage. The Company believes that the risk is not significant as the Company does not anticipate the financial institutions’ non-performance.
Restricted Cash and Escrows
Restricted cash primarily relates to lodging furniture, fixtures and equipment reserves as required per the terms of our management and franchise agreements, cash held in restricted escrows for real estate taxes and insurance escrows, and capital spending reserves.
Acquisition of Real Estate
The Company allocates the purchase price of each acquired business (as defined in the accounting guidance related to business combinations, Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 805, Business Combinations) between tangible and intangible assets at fair value on the acquisition date. Such tangible and intangible assets include land, building and improvements, furniture and fixtures, inventory, acquired above market and below market leases, in-place lease value (if applicable), advanced bookings, customer relationships, and any assumed financing that is determined to be above or below market terms. Any additional amounts are allocated to goodwill as required, based on the remaining purchase price in excess of the fair value of the tangible and intangible assets acquired and liabilities assumed. Acquisition-date fair values of assets and assumed liabilities are determined based on replacement costs, appraised values, and estimated fair values using methods similar to those used by independent appraisers and that use appropriate discount and/or capitalization

8


rates and available market information. The allocation of the purchase price is an area that requires judgment and significant estimates.
The Company determines whether any financing assumed is above or below market based upon comparison to similar financing terms for similar investment properties. The Company allocates a portion of the purchase price to the estimated acquired in-place lease costs, based on estimated lease execution costs for similar leases as well as lost rent payments during assumed lease up period when calculating as if vacant fair values for properties acquired with space leases to third party tenants, which is typically retail or restaurant space. The Company also evaluates each acquired lease, including ground leases, based upon current market rates at the acquisition date and considers various factors including geographical location, size and location of leased land or retail space in determining whether the acquired lease is above or below market. After an acquired lease is determined to be above or below market, the Company allocates a portion of the purchase price to such above or below market lease intangible based upon the present value of the difference between the contractual lease rate and the estimated market rate. For leases with fixed rate renewals, renewal periods are included in the calculation of above or below market in-place lease values. The determination of the discount rate used in the present value calculation is based upon the "risk free rate" and current interest rates. This discount rate is a significant factor in determining the market valuation which requires judgment of subjective factors such as market knowledge, economics, demographics, location, visibility, age and physical condition of the property.
The Company expenses acquisition costs of all acquired businesses as incurred. This includes all costs related to finding, analyzing and negotiating a transaction, whether or not the acquisition is completed.
Impairment
The Company assesses the carrying values of the respective long-lived assets, whenever events or changes in circumstances indicate that the carrying amounts of these assets may not be fully recoverable, such as a reduction in the expected holding period of the asset or a change in demand for lodging at the Company's hotels. If it is determined that the carrying value is not recoverable because the undiscounted cash flows do not exceed the carrying value, the Company records an impairment loss to the extent that the carrying value exceeds fair value. The valuation and possible subsequent impairment of investment properties is a significant estimate that can and does change based on the Company's continuous process of analyzing each property and reviewing assumptions about uncertain inherent factors, as well as the economic condition of the property at a particular point in time.
The use of projected future cash flows and related holding period is based on assumptions that are consistent with the estimates of future expectations and the strategic plan the Company uses to manage its underlying business. However, assumptions and estimates about future cash flows and capitalization rates are complex and subjective. Changes in economic and operating conditions and the Company’s ultimate investment intent that occur subsequent to the impairment analyses could impact these assumptions and result in future impairment charges of the real estate properties.
Involuntary Conversion
In the third quarter of 2017, two major hurricanes impacted several of the Company's lodging properties. The Company recorded a loss of $950 thousand, net of insurance recoveries, for the three and nine months ended September 30, 2017, which represented the historical cost net of accumulated depreciation of the properties and equipment written off for damage sustained during the hurricanes. Any amount expected to be received above the recorded loss will be treated as a gain and will not be recorded until contingencies are resolved. Additionally, the Company expensed an estimated $1.2 million of hurricane-related repairs and cleanup costs across all impacted properties for the three and nine months ended September 30, 2017, which is included in impairment and other losses on the condensed consolidated statements of operations for the periods then ended.
The Company may be entitled to business interruption proceeds for certain properties, however, it will not record an insurance recovery receivable for these losses until a final settlement has been reached with the insurance company. Any insurances proceeds received in excess of insurance deductibles will be accounted for as a gain. No business interruption insurance recovery receivables were accrued as of September 30, 2017.
Disposition of Real Estate
The Company accounts for dispositions in accordance with FASB ASC 360-20, Real Estate Sales. The Company recognizes a gain in full when real estate is sold, provided (a) the profit is determinable, that is, the collectability of the sales price is reasonably assured or the amount that will not be collectible, if any, can be estimated, and (b) the earnings process is virtually

9


complete, that is, the seller is not obliged to perform significant activities after the sale to earn the profit and the buyer has paid a significant non-refundable deposit.
Share-Based Compensation
The Company has adopted a share-based incentive plan that provides for the grant of stock options, stock awards, restricted stock units, Operating Partnership Units and other equity-based awards. Share-based compensation is measured at the estimated fair value of the award on the date of grant, adjusted for forfeitures, and recognized as an expense on a straight-line basis over the longest vesting period for each grant for the entire award. The determination of fair value of these awards is subjective and involves significant estimates and assumptions including expected volatility of the Company's shares, expected dividend yield, expected term and assumptions of whether certain of these awards will achieve performance thresholds. Share-based compensation is included in general and administrative expenses in the accompanying condensed consolidated statements of operations and comprehensive income and capitalized in building and other improvements in the condensed consolidated balance sheets for certain employees that manage property developments, renovations and capital improvements.
Recently Issued Accounting Pronouncements
In May 2014, the FASB issued Accounting Standard Update ("ASU") 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective, although it will not affect the accounting for lease related revenues. The new standard is effective for the Company on January 1, 2018. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is finalizing its analysis, but does not expect a significant change to our current revenue recognition policies or the amount or timing of recognition, and is currently in the process of developing the related disclosures required under the standard. The Company plans to adopt ASU 2014-09 using the modified retrospective transition method. Additionally, the Company continues to evaluate the sale of non-financial assets to entities that are not customers, such as the disposition of real estate assets. Historically, hotel dispositions have been cash sales that required no contingencies for future involvement in the hotel's operations and, therefore, the Company does not expect ASU 2014-09 to have a material impact on its recognition of hotel sales.
In February 2016, the FASB issued ASU 2016-02, Leases, which replaces ASC Topic 840, Leases, and requires most lessee leases to be recorded on the Company's balance sheet as either operating or financing leases with a right of use asset and a corresponding lease liability measured at present value. Operating leases will be recognized on the income statement on a straight-line basis as lease expense and financing leases will be accounted for similar to the accounting for amortizing debt. Leases with terms of less than 12 months will continue to be accounted for as they are under the current standard. The new standard is effective for the Company on January 1, 2019, with early adoption permitted. The Company is still evaluating the effect that ASU 2016-02 will have on its consolidated financial statements and related disclosures, but expects potentially significant lease-related right of use assets and liabilities to be recorded on the balance sheet for both equipment and ground leases for which the Company is the lessee. The Company is currently evaluating its population of leases and developing processes to account for such leases under the new standard. The Company anticipates adopting the standard on January 1, 2019 using the modified retrospective method.
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Award Payment Accounting, which simplifies various aspects of how share-based payments are accounted for and presented in the financial statements. This standard requires companies to record all of the tax effects related to share-based payments through the income statement, allows companies to elect an accounting policy to either estimate the share-based award forfeitures (and expense) or account for forfeitures (and expense) as they occur, and allows companies to withhold up to the maximum individual statutory tax rate of the shares upon settlement of an award without causing the award to be classified as liability. The Company adopted this standard on January 1, 2017 and it did not have a material impact on the Company's financial position, results of operations or cash flows.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which changes the way certain cash receipts and cash payments are presented and classified on the statement of cash flows in order to reduce diversity in practice across all industries. The standard clarifies classification for debt prepayment or debt extinguishment costs, proceeds from the settlement of insurance claims, and contingent consideration payments made after business combination among other things. The new standard is effective for the Company on January 1, 2018, however, early adoption is permitted. The Company does not expect ASU 2016-15 will have a significant impact on its

10


consolidated financial statements and related disclosures. However, the Company does expect that certain amounts will be reclassed retrospectively to conform historical presentation to the new standard.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which enhances the presentation requirements of restricted cash. The standard aims to unify presentation and minimize the diversity in practice. These presentation changes include increased disclosures surrounding the restrictions on cash and the inclusion of the restricted cash balance in the reconciliation completed at the end of the statement of cash flows. The new standard is effective for the Company on January 1, 2018, however, early adoption is permitted. The Company early adopted ASU 2016-18 as of September 30, 2017. As a result, amounts included in restricted cash on our condensed consolidated balance sheet are included with cash and cash equivalents on the condensed consolidated statement of cash flows for the nine months ended September 30, 2017, and the Company reclassified the statement of cash flows for the nine months ended September 30, 2016 to reflect the adoption of ASU 2016-18. The adoption of ASU 2016-18 had no impact on our condensed consolidated balance sheet.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business ("ASU 2017-01"). The guidance is intended to assist entities with evaluating whether 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 is not a business. If the threshold 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. The new standard is effective for the Company on January 1, 2018, however, early adoption is permitted. The Company is evaluating the effect that ASU 2017-01 will have on its consolidated financial statements and related disclosures, but anticipates that future acquisitions could be accounted for as asset acquisitions rather than business combinations.
Also in January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment. The guidance is intended to simplify the accounting for goodwill impairment and removes Step 2 of the goodwill impairment test under the current guidance, which requires a hypothetical purchase price allocation. A goodwill impairment under ASU 2017-04 will be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance will remain largely unchanged. Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. The same one-step impairment test will be applied to goodwill at all reporting units, even those with zero or negative carrying amounts. Entities will be required to disclose the amount of goodwill at reporting units with zero or negative carrying amounts. The new standard is effective for the Company on January 1, 2020, however, early adoption is permitted. The Company does not expect the adoption of ASU 2017-04 to have a significant effect on its consolidated financial statements and related disclosures.
In February 2017, the FASB issued ASU 2017-05, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets. The guidance aims at better clarifying the scope of asset derecognition and adds further guidance for recognizing gains and losses from the transfer of nonfinancial assets in contracts with non-customers. The new standard is effective for the Company on January 1, 2018. The Company is currently evaluating the effect that ASU 2017-05 will have on its consolidated financial statements and related disclosures, but anticipates upon adoption some dispositions of real estate assets will be accounted for under ASU 2017-05 if these real estate assets do not meet the definition of a business under ASU 2017-01.
In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting. The guidance is intended to clarify when certain changes to terms or conditions of share-based payment awards must be accounted for as modifications but does not change the accounting for modifications. The new standard is to be applied prospectively to awards modified on or after the adoption date and will be effective for the Company on January 1, 2018, however, early adoption is permitted. The Company does not expect the adoption of ASU 2017-09 to have a significant effect on its consolidated financial statements and related disclosures.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities. The purpose of this updated guidance is to better align a company’s financial reporting for hedging activities with the economic objectives of those activities. The transition guidance provides companies with the option of early adopting the new standard using a modified retrospective transition method in any interim period after issuance of the update, or alternatively requires adoption for fiscal years beginning after December 15, 2018. This adoption method will require the Company to recognize the cumulative effect of initially applying the ASU 2017-12 as an adjustment to accumulated other comprehensive income with a corresponding adjustment to the opening balance of retained earnings as of the beginning of the

11


fiscal year that an entity adopts the update. The Company continues to assess all potential impacts of the standard, but does not anticipate adoption will have a material impact on its consolidated financial statements and related disclosures.
3. Investment Properties
In May 2017, the Company acquired the 815-room Hyatt Regency Grand Cypress located in Orlando, Florida for a purchase price of $205.5 million, excluding closing costs, that was funded with cash. The revenues and net loss attributable to the Hyatt Regency Grand Cypress for the three months ended September 30, 2017 were approximately $15.2 million and $1.2 million, respectively, and for the nine months ended September 30, 2017 were approximately $22.4 million and $0.5 million, respectively, all of which were included in the Company's condensed consolidated statements of operations and comprehensive income from the date of acquisition to the periods then ended.
The Company recorded the identifiable assets and liabilities, including intangibles, acquired in the business combination at the acquisition date fair value using significant other observable inputs (Level 2). The following reflects the purchase price allocation for the Hyatt Regency Grand Cypress:
Land
$
17,866

Building and improvements
165,807

Furniture, fixtures, and equipment
17,656

Intangibles and other assets(1)
4,171

Total purchase price
$
205,500

(1)
As part of the purchase price allocation, the Company allocated $3.5 million to advanced bookings that will be amortized over approximately 3.5 years and allocated $0.1 million to lease intangibles that will be amortized over a weighted average of seven years.
In January 2016, the Company acquired the Hotel Commonwealth located in Boston, Massachusetts for a purchase price of $136 million, excluding closing costs. The hotel has a total of 245 rooms, which includes a 96-room hotel expansion that was completed in December 2015. The Hotel Commonwealth is subject to a long-term ground lease, which expires in 2087, and was assumed by the Company as part of the acquisition.
The following pro forma financial information presents the Company's consolidated results of operations as if the 2017 and 2016 acquisitions had taken place on January 1, 2016. The consolidated unaudited pro forma financial information is not necessarily indicative of what actual results of operations of the Company would have been assuming the acquisitions had taken place on January 1, 2016, nor does it purport to represent the results of operations for future periods. The consolidated pro forma financial information is as follows (in thousands, except per share and per share data) for the three and nine months ended September 30, 2017 and 2016:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
Revenue
 
$
223,289

 
$
249,914

 
$
723,402

 
$
787,804

Net income attributable to common stockholders(1)
 
$
11,767

 
$
19,127

 
$
99,495

 
$
40,856

Net income per share available to common stockholders - basic and diluted
 
$
0.11

 
$
0.18

 
$
0.93

 
$
0.38

Weighted average number of common shares - basic
 
106,727,330

 
107,538,601

 
106,779,824

 
108,384,241

Weighted average number of common shares - diluted
 
106,995,887

 
107,677,749

 
107,020,675

 
108,495,365

(1)
The pro forma results above exclude acquisition costs.

12


4. Disposed Properties
The following represents the disposition details for the hotels sold during the nine months ended September 30, 2017 and 2016, respectively (in thousands):
Property
 
Date
 
Gross Sale Price
 
Net Proceeds
 
Gain on Sale/ (Impairment)
Courtyard Birmingham Downtown at UAB(1)(2)
 
04/2017
 
$
30,000

 
$
29,176

 
$
12,972

Courtyard Fort Worth Downtown/Blackstone, Courtyard Kansas City Country Club Plaza, Courtyard Pittsburgh Downtown, Hampton Inn & Suites Baltimore Inner Harbor, and Residence Inn Baltimore Inner Harbor(1)
 
06/2017
 
163,000

 
157,675

 
36,121

Marriott West Des Moines(1)
 
07/2017
 
19,000

 
18,014

 
1,654

Total for the nine months ended September 30, 2017(4)
 
 
 
$
212,000

 
$
204,865

 
$
50,747

 
 
 
 
 
 
 
 
 
Hilton University of Florida Conference Center Gainesville(1)(3)
 
02/2016
 
$
36,000

 
$
32,055

 
$
649

DoubleTree by Hilton Washington DC(1)
 
04/2016
 
65,000

 
63,550

 
(96
)
Embassy Suites Baltimore North/Hunt Valley(1)
 
05/2016
 
20,000

 
19,459

 
(8,036
)
Marriott Atlanta Century Center/Emory Area & Hilton Phoenix Suites(1)
 
06/2016
 
50,750

 
50,048

 
(1,874
)
Total for the nine months ended September 30, 2016(4)
 
 
 
$
171,750

 
$
165,112

 
$
(9,357
)
(1)
Included in net income from continuing operations in the condensed consolidated statements of operations and comprehensive income for the periods of ownership through the date of disposition, as the sale did not represent a strategic shift or have a major effect on the Company's results of operations.
(2)
As part of the disposition in April 2017, the Company derecognized $2.3 million of goodwill related to Courtyard Birmingham at UAB that was included in intangible assets, net of accumulated amortization on the consolidated balance sheet as of December 31, 2016. As of September 30, 2017, there was $0.5 million of the sales proceeds related to escrows held back at closing that were outstanding.
(3)
The Company was entitled to net proceeds at closing of $32.1 million, and in conjunction with the sale repaid the $27.8 million outstanding property level mortgage.
(4)
As of September 30, 2017 and 2016, there was $0.5 million and $4.0 million, respectively, of the sales proceeds related to escrows held back at closing that were outstanding.
5. Investment in Real Estate Entities
The Company has a 75% interest in two investments in real estate entities that own and operate the Grand Bohemian Hotel Charleston and the Grand Bohemian Hotel Mountain Brook. These entities are considered VIE's because the entities do not have enough equity to finance their activities without additional subordinated financial support. The Company determined that it has the power to direct the activities of the VIE's that most significantly impact the VIE's economic performance, as well as the obligation to absorb losses of the VIE's that could potentially be significant to the VIE, or the right to receive benefits from the VIE's that could potentially be significant to the VIE. As such, the Company has a controlling financial interest and is considered the primary beneficiary of each of these entities. Therefore, these entities are consolidated by the Company.
The following are the liabilities of the consolidated VIE's, which are non-recourse to the Company, and the assets that can be used to settle those obligations (in thousands):
 
September 30, 2017
 
December 31, 2016
Net investment properties
$
68,499

 
$
71,157

Other assets
3,001

 
3,283

Total assets
$
71,500

 
$
74,440

Mortgages, notes and margins payable
(44,374
)
 
(45,287
)
Other liabilities
(2,795
)
 
(2,541
)
Total liabilities
$
(47,169
)
 
$
(47,828
)
Net assets
$
24,331

 
$
26,612


13


6. Debt
Mortgages Payable
Debt as of September 30, 2017 and December 31, 2016 consisted of the following (dollar amounts in thousands):
 
 
 
 
 
 
 
Balance Outstanding as of
 
Rate Type
 
Rate(1)
 
Maturity Date
 
September 30, 2017
 
December 31, 2016
Mortgage Loans
 
 
 
 
 
 
 
 
 
Fairmont Dallas
 Variable
 

 
4/10/2018
 
$

 
$
55,498

Residence Inn Denver City Center
 Variable
 

 
4/17/2018
 

 
45,210

Bohemian Hotel Savannah Riverfront
 Variable
 

 
12/17/2018
 

 
27,480

Andaz Savannah
 Variable
 
3.24
%
 
1/14/2019
 
21,500

 
21,500

Hotel Monaco Denver
Fixed(2)
 
2.98
%
 
1/17/2019
 
41,000

 
41,000

Hotel Monaco Chicago
 Variable
 
3.49
%
 
1/17/2019
 
21,344

 
21,644

Loews New Orleans Hotel
 Variable
 
3.59
%
 
2/22/2019
 
37,500

 
37,500

Andaz Napa
Fixed(2)
 
2.99
%
 
3/21/2019
 
38,000

 
38,000

Westin Galleria Houston & Westin Oaks Houston at The Galleria
 Variable
 
3.74
%
 
5/1/2019
 
110,000

 
110,000

Marriott Charleston Town Center
 Fixed
 
3.85
%
 
7/1/2020
 
16,033

 
16,403

Grand Bohemian Hotel Charleston (VIE)
 Variable
 
3.74
%
 
11/10/2020
 
19,175

 
19,628

Grand Bohemian Hotel Mountain Brook (VIE)
 Variable
 
3.74
%
 
12/27/2020
 
25,395

 
25,899

Marriott Dallas City Center
 Fixed(2)
 
4.05
%
 
1/3/2022
 
51,000

 
51,000

Hyatt Regency Santa Clara
 Fixed(2)
 
3.81
%
 
1/3/2022
 
90,000

 
90,000

Hotel Palomar Philadelphia
 Fixed(2)
 
4.14
%
 
1/13/2023
 
60,000

 
60,000

Renaissance Atlanta Waverly Hotel & Convention Center
Variable
 
3.34
%
 
8/14/2024
 
100,000

 

Residence Inn Boston Cambridge
 Fixed
 
4.48
%
 
11/1/2025
 
63,000

 
63,000

Grand Bohemian Hotel Orlando
 Fixed
 
4.53
%
 
3/1/2026
 
60,000

 
60,000

Marriott San Francisco Airport Waterfront
 Fixed
 
4.63
%
 
5/1/2027
 
115,000

 

Total Mortgage Loans
 
 
3.88
%
(3) 
 
 
$
868,947

 
$
783,762

Mortgage Loan Discounts, net(4)
 

 
 
(271
)
 
(319
)
Unamortized Deferred Financing Costs, net
 

 
 
(7,785
)
 
(6,311
)
Senior Unsecured Credit Facility(6)
 Variable
 
2.74
%
 
2/3/2019
 

 

Unsecured Term Loan $175M
Partially Fixed(5)
 
2.74
%
 
2/15/2021
 
175,000

 
175,000

Unsecured Term Loan $125M
Partially Fixed(5)
 
3.53
%
 
10/22/2022
 
125,000

 
125,000

Unsecured Term Loan $125M(7)
 Variable
 
2.94
%
 
9/13/2024
 
125,000

 

Total Debt, net of loan discounts and unamortized deferred financing costs
 
 
3.60
%
(3) 
 
 
$
1,285,891

 
$
1,077,132

(1)
Variable index is one month LIBOR as of September 30, 2017.
(2)
The Company entered into interest rate swap agreements to fix the interest rate of the variable rate mortgage loans through maturity.
(3)
Represents the weighted average interest rate as of September 30, 2017.
(4)
Loan discounts recognized upon loan modifications, net of the accumulated amortization.
(5)
LIBOR has been fixed for the entire term of the loan. The spread may vary, as it is determined by the Company's leverage ratio.
(6)
In October 2017, the Company drew down $40 million for the acquisition disclosed in Note 14.
(7)
In September 2017, the Operating Partnership entered into a $125 million senior unsecured term loan agreement with a variable interest rate. In October 2017, the Operating Partnership entered into a series of swap agreements with four third-party financial institutions to fix LIBOR at 1.9161% through September 2022. Based on the Company’s current leverage ratio, including the newly executed swaps, the effective interest rate will be 3.62%. The term loan also includes an accordion option that allows the Company to request additional lender commitments of up to $125 million.

14


In connection with repaying mortgage loans during 2017, the Company incurred $0.3 million of loss on extinguishment of debt during the nine months ended September 30, 2017, which is included in the condensed consolidated statements of operations and comprehensive income. The loss represents the write off of unamortized deferred financing costs.
In connection with repaying and refinancing mortgage loans during the three and nine months ended September 30, 2016, the Company incurred prepayment and extinguishment fees of approximately $0.2 million and $5.0 million, which was included in the loss on extinguishment of debt in the accompanying condensed consolidated statements of operations and comprehensive income for the period ended September 30, 2016. The loss on extinguishment of debt represented the write off of unamortized deferred financing costs incurred when the original agreements were executed, as well as unamortized loan premiums and discounts, and early repayment penalty fees.
Debt outstanding as of September 30, 2017 and December 31, 2016 was $1,294 million and $1,084 million and had a weighted average interest rate of 3.60% and 3.24% per annum, respectively. The remaining unamortized mortgage discounts as of both September 30, 2017 and December 31, 2016 were $0.3 million and $0.3 million, respectively. The following table shows scheduled principal payments and debt maturities for the next five years and thereafter (in thousands):
 
 
As of
September 30, 2017
 
Weighted 
average
interest rate
2017
 
$
579

 
3.98%
2018
 
3,471

 
4.16%
2019
 
273,093

 
3.45%
2020
 
60,447

 
3.82%
2021
 
179,219

 
2.78%
Thereafter
 
777,138

 
3.82%
Total Debt
 
$
1,293,947

 
3.60%
Total Loan Discounts, net
 
(271
)
 
Unamortized Deferred Financing Costs, net
 
(7,785
)
 
Debt, net of loan discounts and unamortized deferred financing costs
 
$
1,285,891

 
3.60%
Of the total outstanding debt at September 30, 2017none of the mortgage loans were recourse to the Company. Certain loans have options to extend the maturity dates if exercised by the Company, subject to being compliant with certain covenants and the payment of an extension fee. Some of the mortgage loans require compliance with certain covenants, such as debt service coverage ratios, loan-to-value tests, investment restrictions and distribution limitations. As of September 30, 2017, the Company was in compliance with all such covenants.
Senior Unsecured Credit Facility
As of September 30, 2017, there was no outstanding balance on the senior unsecured facility. During the three and nine months ended September 30, 2017, the Company incurred unused commitment fees of approximately $0.3 million and $0.9 million, respectively, and interest expense of $0 and $0.2 million, respectively. During the three and nine months ended September 30, 2016, the Company incurred unused commitment fees of approximately $0.3 million and $0.9 million, respectively and no interest expense.
7. Derivatives
The Company primarily uses interest rate swaps as part of its interest rate risk management strategy. For derivative instruments designated as cash flow hedges, unrealized gains and losses on the effective portion are reported in accumulated other comprehensive income, a component of stockholders’ equity. Unrealized gains and losses on the ineffective portion of all designated hedges are recognized in earnings in the current period. As of September 30, 2017, all derivative instruments were designated as cash flow hedges. 
As of September 30, 2017 and December 31, 2016, the aggregate fair value of interest rate swap assets of $5.0 million and $5.1 million, respectively, was included in other assets in the accompanying condensed consolidated balance sheets. For the three and nine months ended September 30, 2017, the Company had an unrealized loss of $0.3 million and $1.9 million, respectively, that is included in the condensed consolidated statements of operations and comprehensive income. For the three and nine

15


months ended September 30, 2016, the Company had an unrealized gain of $1.4 million and an unrealized loss of $14.3 million, respectively, that is included in the condensed consolidated statements of operations and comprehensive income.
The following table summarizes the terms of the derivative financial instruments held by the Company as of September 30, 2017 and December 31, 2016, respectively (in thousands)(1):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Estimated Fair Value
Hedged Debt
 
Type
 
Fixed Rate
 
Index
 
Effective Date
 
Maturity
 
Notional Amounts
 
September 30, 2017
 
December 31, 2016
$175M Term Loan
 
Swap
 
1.30%
 
1-Month LIBOR + 1.50%
 
10/22/2015
 
2/15/2021
 
$
50,000

 
$
766

 
$
767

$175M Term Loan
 
Swap
 
1.29%
 
1-Month LIBOR + 1.50%
 
10/22/2015
 
2/15/2021
 
65,000

 
1,020

 
1,022

$175M Term Loan
 
Swap
 
1.29%
 
1-Month LIBOR + 1.50%
 
10/22/2015
 
2/15/2021
 
60,000

 
940

 
940

$125M Term Loan
 
Swap
 
1.83%
 
1-Month LIBOR + 1.80%
 
1/15/2016
 
10/22/2022
 
50,000

 
154

 
193

$125M Term Loan
 
Swap
 
1.83%
 
1-Month LIBOR + 1.80%
 
1/15/2016
 
10/22/2022
 
25,000

 
59

 
88

$125M Term Loan
 
Swap
 
1.84%
 
1-Month LIBOR + 1.80%
 
1/15/2016
 
10/22/2022
 
25,000

 
63

 
84

$125M Term Loan
 
Swap
 
1.83%
 
1-Month LIBOR + 1.80%
 
1/15/2016
 
10/22/2022
 
25,000

 
68

 
80

Mortgage Debt
 
Swap
 
1.54%
 
1-Month LIBOR + 2.60%
 
1/13/2016
 
1/13/2023
 
60,000

 
1,062

 
1,200

Mortgage Debt
 
Swap
 
0.88%
 
1-Month LIBOR + 2.10%
 
9/1/2016
 
1/17/2019
 
41,000

 
340

 
327

Mortgage Debt
 
Swap
 
0.89%
 
1-Month LIBOR + 2.10%
 
9/1/2016
 
3/21/2019
 
38,000

 
366

 
354

Mortgage Debt
 
Swap
 
1.80%
 
1-Month LIBOR + 2.25%
 
3/1/2017
 
1/3/2022
 
51,000

 
71

 

Mortgage Debt
 
Swap
 
1.81%
 
1-Month LIBOR + 2.00%
 
3/1/2017
 
1/3/2022
 
45,000

 
50

 

Mortgage Debt
 
Swap
 
1.80%
 
1-Month LIBOR + 2.00%
 
3/1/2017
 
1/3/2022
 
45,000

 
80

 

 
 
 
 
 
 
 
 
 
 
 
 
$
580,000

 
$
5,039

 
$
5,055

(1)
There were no amounts recognized in earnings related to hedge ineffectiveness or amounts excluded from hedge ineffectiveness testing during the three and nine months ended September 30, 2017 and 2016.
For the three and nine months ended September 30, 2017, the Company reclassified $0.4 million and $1.9 million, respectively, from accumulated other comprehensive income to interest expense. The Company expects approximately $0.1 million will be reclassified from accumulated other comprehensive loss to interest expense in the next 12 months.
8. Fair Value Measurements
The Company defines fair value based on the price that would be received upon sale of an asset or the exit price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company uses a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value. The fair value hierarchy consists of three broad levels, which are described below:
Level 1 - Quoted prices for identical assets or liabilities in active markets that the entity has the ability to access.
Level 2 - Observable inputs, other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
The Company has estimated the fair value of its financial and non-financial instruments using widely accepted valuation techniques and available market information. Considerable judgment and a high degree of subjectivity are involved in developing these estimates and, accordingly, they are not necessarily indicative of amounts that would be realized upon disposition.

16


Recurring Measurements
For assets and liabilities measured at fair value on a recurring basis, quantitative disclosure of their fair value is as follows, which are netted as applicable per the terms of the respective master netting agreements (in thousands):
 
 
Fair Value Measurement Date
 
 
September 30, 2017
 
December 31, 2016
Location / Description
 
Significant Unobservable Inputs (Level 2)
 
Significant Unobservable Inputs (Level 2)
Other assets
 
 
 
 
Interest rate swap assets
 
$
5,039

 
$
5,055

Total
 
$
5,039

 
$
5,055

The fair value of each derivative instrument is based on a discounted cash flow analysis of the expected cash flows under each arrangement. This analysis reflects the contractual terms of the derivative instrument, including the period to maturity, and utilizes observable market-based inputs, including interest rate curves and implied volatilities, which are classified within Level 2 of the fair value hierarchy. The Company also incorporates credit value adjustments to appropriately reflect each parties’ nonperformance risk in the fair value measurement, which utilizes Level 3 inputs such as estimates of current credit spreads. However, the Company has assessed that the credit valuation adjustments are not significant to the overall valuation of the derivatives. As a result, the Company has determined that its derivative valuations in their entirety are classified within Level 2 of the fair value hierarchy.
Non-Recurring Measurements
Investment Properties
During the nine months ended September 30, 2016, the Company identified two hotel properties that had a reduction in their expected holding period and reviewed the probability of the assets' disposition. The Company recorded an impairment charge of $10.0 million for the nine months ended September 30, 2016, based on the estimated fair value using purchase contracts and average selling costs. The properties were subsequently sold in May 2016 and June 2016, respectively.
Financial Instruments Not Measured at Fair Value
The table below represents the fair value of financial instruments presented at carrying values in the condensed consolidated balance sheets as of September 30, 2017 and December 31, 2016 (in thousands):
 
 
September 30, 2017
 
December 31, 2016
 
 
Carrying Value
 
Estimated Fair Value
 
Carrying Value
 
Estimated Fair Value
Debt, net of discounts
 
$
1,293,676

 
$
1,311,915

 
$
1,083,443

 
$
1,074,820

Total
 
$
1,293,676

 
$
1,311,915

 
$
1,083,443

 
$
1,074,820

The Company estimates the fair value of its mortgages payable using a weighted average effective interest rate of 3.72% and 4.14% per annum as of September 30, 2017 and December 31, 2016, respectively. The Company has determined that its debt instrument valuations are classified in Level 2 of the fair value hierarchy.
9. Income Taxes
The Company estimated the TRS income tax benefit for the three months ended and the income tax expense for the nine months ended September 30, 2017, using an estimated federal and state statutory combined rate of 42.98% and recognized income tax benefit of $0.4 million and income tax expense of $7.7 million, respectively.
The Company estimated the TRS income tax benefit for the three months ended and the income tax expense for the nine months ended September 30, 2016, using an estimated federal and state statutory combined rate of 39.37% and recognized income tax benefit of $0.2 million and income tax expense of $9.6 million, respectively.

17


10. Stockholders' Equity
Stock Repurchase Program
In December 2015, the Company’s Board of Directors authorized a stock repurchase program pursuant to which the Company is authorized to purchase up to $100 million of the Company’s outstanding Common Stock, in the open market, in privately negotiated transactions or otherwise, including pursuant to Rule 10b5-1 plans. In November 2016, the Company's Board of Directors authorized the repurchase of up to an additional $75 million of the Company's outstanding Common Stock (such repurchase authorizations collectively referred to as the "Repurchase Program"). The Repurchase Program does not have an expiration date. This Repurchase Program may be suspended or discontinued at any time, and does not obligate the Company to acquire any particular amount of shares.
For the nine months ended September 30, 2017, 240,352 shares were repurchased under the Repurchase Program, at a weighted average price of $17.07 per share for an aggregate purchase price of $4.1 million. As of September 30, 2017, the Company had approximately $97 million remaining under its Repurchase Program.
Distributions
Common Stock
The Company declared the following dividends during the nine months ended September 30, 2017:
Dividend per Share/Unit
 
For the Quarter Ended
 
Record Date
 
Payable Date
$0.275
 
March 31, 2017
 
March 31, 2017
 
April 14, 2017
$0.275
 
June 30, 2017
 
June 30, 2017
 
July 14, 2017
$0.275
 
September 30, 2017
 
September 29, 2017
 
October 14, 2017
Non-Controlling Interest of Common Units in Operating Partnership
As of September 30, 2017, the Operating Partnership had 2,213,140 long-term incentive partnership units (“LTIP Units”) outstanding, representing a 2% partnership interest held by the limited partners. Of the 2,213,140 LTIP units outstanding at September 30, 2017, 206,791 units had vested. Only vested LTIP Units may be converted to Common Units of the Operating Partnership, which in turn can be tendered for redemption per the terms of the LTIP Unit award agreements.
As of September 30, 2017, the Company had accrued $146 thousand in dividends related to the LTIP Units, which were paid in October 2017.
11. Earnings Per Share
Basic earnings per common share is calculated by dividing income or loss available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per common share is calculated by dividing income or loss available to common stockholders by the weighted-average number of common shares outstanding during the period, plus any shares that could potentially be outstanding during the period. Any anti-dilutive shares have been excluded from the diluted earnings per share calculation.
Unvested share-based awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and are included in the computation of earnings per share pursuant to the two-class method. Accordingly, distributed and undistributed earnings attributable to unvested share-based compensation (participating securities) have been excluded, as applicable, from net income or loss available to common stockholders used in the basic and diluted earnings per share calculations.
Income allocated to non-controlling interest in the Operating Partnership has been excluded from the numerator and Common Units and vested LTIP Units in the Operating Partnership, which may be converted to common shares, have been omitted from the denominator for the purpose of computing diluted earnings per share since including these amounts in the numerator and denominator would have no impact.

18


The following table reconciles net income attributable to common stockholders to basic and diluted earnings per share (in thousands, except share and per share data):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Numerator:
 
 
 
 
 
 
 
Net income attributable to common stockholders
$
11,638

 
$
20,242

 
$
89,169

 
$
37,096

Dividends paid on unvested share-based compensation
(160
)
 
(127
)
 
(463
)
 
(340
)
Undistributed earnings attributable to unvested share based compensation

 

 
(1
)
 

Net income available to common stockholders
$
11,478

 
$
20,115

 
$
88,705

 
$
36,756

 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Weighted average shares outstanding - Basic
106,727,330

 
107,538,601

 
106,779,824

 
108,384,241

Effect of dilutive share-based compensation
268,557

 
139,148

 
240,851

 
111,124

Weighted average shares outstanding - Diluted
106,995,887

 
107,677,749

 
107,020,675

 
108,495,365

 
 
 
 
 
 
 
 
Basic and diluted earnings per share:
 
 
 
 
 
 
 
Net income per share available to common stockholders
$
0.11

 
$
0.19

 
$
0.83

 
$
0.34

12. Share Based Compensation
Restricted Stock Units
In February 2017, the Compensation Committee (the "Compensation Committee") of the Board of Directors of the Company approved the grant of share units to certain company employees (the "2017 Restricted Stock Units"). The 2017 Restricted Stock Units include 82,829 restricted stock units that are time-based and vest over a three-year period and 44,858 restricted stock units that are performance-based and may vest after a three-year performance period. Both the time-based and performance-based are subject to continued employment and have weighted average grant date fair value of $15.18 per share.
Each time-based 2017 Restricted Stock Unit will vest as follows, subject to the employee’s continued service through each applicable vesting date: 33% on February 4, 2018, which is the first anniversary of the vesting commencement date of the award (February 4, 2017), 33% on the second anniversary of the vesting commencement date, and 34% on the third anniversary of the vesting commencement date.
Of the performance-based 2017 Restricted Stock Units, twenty-five percent (25%) are designated as absolute total stockholder return ("TSR") units (the "Absolute TSR Share Units"), and vest based on varying levels of the Company’s TSR over the three-year performance period. The other seventy-five percent (75%) of the performance-based 2017 Restricted Stock Units are designated as relative TSR share units (the "Relative TSR Share Units") and vest based on the ranking of the Company’s TSR as compared to a defined peer group over the three-year performance period.
LTIP Unit Grants
In February 2017, the Compensation Committee approved the issuance of 715,001 performance-based LTIP Units (the "2017 Class A LTIP Units") and 86,210 time-based LTIP Units (the "2017 Time-Based LTIP Units") of the Operating Partnership under the 2015 Incentive Award Plan that had a weighted average grant date fair value of $8.97 per unit.
Each award of Time-Based LTIP Units will vest as follows, subject to the executive’s continued service through each applicable vesting date: 33% on February 4, 2018, which is the first anniversary of the vesting commencement date of the award (February 4, 2017), 33% on the second anniversary of the vesting commencement date, and 34% on the third anniversary of the vesting commencement date.
A portion of each award of Class A LTIP Units is designated as a number of “base units.” Twenty-five percent (25%) of the base units are designated as absolute TSR base units, and vest based on varying levels of the Company’s TSR over the three-

19


year performance period. The other seventy-five percent (75%) of the base units are designated as relative TSR base units and vest based on the ranking of the Company’s TSR as compared to a defined peer group over the three-year performance period.
LTIP Units (other than Class A LTIP Units that have not vested), whether vested or not, receive the same quarterly per-unit distributions as Common Units, which equal the per-share distributions on the Common Stock of the Company. Class A LTIP Units that have not vested receive a quarterly per-unit distribution equal to 10% of the distribution paid on Common Units.
In May 2017, pursuant to the Director Compensation Program, as amended and restated as of February 24, 2017, the Company approved the issuance of 33,355 fully vested LTIP Units to the Company's seven non-employee directors with a weighted average grant date fair value of $17.84 per unit.
The following is a summary of the non-vested incentive awards under the 2014 Share Unit Plan and the 2015 Incentive Award Plan as of September 30, 2017:
 
2014 Share Unit Plan Share Units
 
2015 Incentive Award Plan Restricted Stock Units(1)
 
2015 Incentive Award Plan LTIP Units(1)
 
Total
Non-vested as of December 31, 2016
243,769

 
238,152

 
1,259,613

 
1,741,534

Granted

 
127,687

 
834,566

 
962,253

Vested(2)
(193,151
)
 
(82,984
)
 
(87,830
)
 
(363,965
)
Expired

 
(5,901
)
 

 
(5,901
)
Forfeited

 

 

 

Non-vested as of September 30, 2017
50,618

 
276,954

 
2,006,349

 
2,333,921

Vested as of September 30, 2017
300,578

 
112,132

 
206,791

 
619,501

Weighted average fair value of non-vested shares/units
$
20.25

 
$
14.59

 
$
9.15

 
$
10.04

(1)
Includes time-based and performance-based units.

(2)
During the nine months ended September 30, 2017, the Company redeemed 101,992 shares of common stock to satisfy minimum federal and state tax withholding requirements on the vesting of Share Units and Restricted Stock Units under the 2014 Share Unit Plan and the 2015 Incentive Award Plan.

The fair value of the time-based Restricted Stock Units and Time-Based LTIP Units are determined based on the closing price of the Company’s Common Stock on the grant date and compensation expense is recognized on a straight-line basis over the vesting period. The grant date fair values of performance awards for the 2017 Restricted Stock Units and the 2017 Class A LTIP Units were determined based on a Monte Carlo simulation method with the following assumptions, and compensation expense is recognized on a straight-line basis over the performance period:
Performance Award Grant Date
 
Percentage of Total Award
 
Grant Date Fair Value by Component
(in dollars)
 
Volatility
 
Interest Rate
 
Dividend Yield
Absolute TSR Restricted Stock Units
 
25%
 
$6.57
 
26.83%
 
0.68% - 1.55%
 
6.021%
Relative TSR Restricted Stock Units
 
75%
 
$10.44
 
26.83%
 
0.68% - 1.55%
 
6.021%
Absolute TSR Class A LTIPs
 
25%
 
$6.64
 
26.83%
 
0.68% - 1.55%
 
6.021%
Relative TSR Class A LTIPs
 
75%
 
$10.18
 
26.83%
 
0.68% - 1.55%
 
6.021%
The absolute and relative stockholder returns are market conditions as defined by ASC 718, Compensation - Stock Compensation. Market conditions include provisions wherein the vesting condition is met through the achievement of a specific value of the Company’s Common Stock, which is total stockholder return in this case. Market conditions differ from other performance awards under ASC 718 in that the probability of attaining the condition (and thus vesting in the shares) is reflected in the initial grant date fair value of the award. Accordingly, it is not appropriate to reconsider the probability of vesting in the award subsequent to the initial measurement of the award, nor is it appropriate to reverse any of the expense if the condition is not met.

20


Therefore, once the expense for these awards is measured, the expense must be recognized over the service period regardless of whether the target is met, or at what level the target is met. Expense may only be reversed if the holder of the instrument forfeits the award by leaving the employment of the Company prior to vesting.
For the three and nine months ended September 30, 2017 the Company recognized approximately $2.4 million and $7.0 million, respectively, of share-based compensation expense (net of forfeitures) related to share units, restricted stock units, and LTIP Units provided to certain of its executive officers, and other members of management. In addition, during the nine months ended September 30, 2017 we recognized $595 thousand that was provided to the Company's Board of Directors and capitalized approximately $154 thousand and $460 thousand for the three and nine months ended September 30, 2017, respectively, related to restricted stock units provided to certain members of management that oversee development and capital projects on behalf of the Company. As of September 30, 2017, there was $12.2 million of total unrecognized compensation costs related to non-vested restricted stock units, Class A LTIP Units and Time-Based LTIP Units issued under the 2014 Share Unit Plan and the 2015 Incentive Award Plan, as applicable, which are expected to be recognized over a remaining weighted-average period of 1.78 additional years.
For the three and nine months ended September 30, 2016, the Company recognized approximately $2.0 million and $6.5 million, respectively, of share-based compensation expense (net of forfeitures) related to share units, restricted stock units, and LTIP Units provided to certain of its executive officers, and other members of management, which included $1.2 million of accelerated share-based compensation expense related to management transition and severance agreements incurred during the nine months ended September 30, 2016. In addition, during the nine months ended September 30, 2016 we recognized $525 thousand that was provided to the Company's Board of Directors and capitalized approximately $148 thousand and $403 thousand for the three and nine months ended September 30, 2016, respectively, related to restricted stock units provided to certain members of management that oversee development and capital projects on behalf of the Company.
13. Commitments and Contingencies
Certain leases and management agreements require the Company to reserve funds relating to replacements and renewals of the hotels' furniture, fixtures and equipment. As of September 30, 2017 and December 31, 2016, the Company had a balance of $49.9 million and $58.6 million, respectively, in reserves for such future improvements. This amount is included in restricted cash and escrows on the condensed consolidated balance sheets as of September 30, 2017 and December 31, 2016, respectively.
The Company is subject, from time to time, to various legal proceedings and claims that arise in the ordinary course of business. While the resolution of these matters cannot be predicted with certainty, management believes, based on currently available information, that the final outcome of such matters will not have a material adverse effect on the financial condition of the Company.
14. Subsequent Events
In October 2017, the Company acquired the 493-room Hyatt Regency Scottsdale Resort and Spa at Gainey Ranch and the 119-room Royal Palms Resort and Spa affiliated with The Unbound Collection by Hyatt, from affiliates of Hyatt Hotels Corporation ("Hyatt") for cash consideration of $305 million, plus customary pro-rated amounts and closing costs. The acquisition was funded with cash on hand and proceeds from the term and mortgage loans that were entered into during the third quarter. In connection with the closing of the transaction, wholly owned subsidiaries of the Company entered into two individual management agreements with Hyatt to continue to manage the hotels.
Also in October 2017, the Company acquired the 365-room Ritz-Carlton Pentagon City in Arlington, Virginia for a purchase price of $105 million, plus customary pro-rated amounts and closing costs. The acquisition was funded with cash available on the balance sheet and proceeds drawn from the senior unsecured credit facility. In connection with the closing of the transaction, a wholly owned subsidiary of the Company entered into a management agreement with an affiliate of Marriott International, Inc.

21


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Certain statements in this Quarterly Report on Form 10-Q, other than purely historical information, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements include statements about Xenia’s plans, objectives, strategies, financial performance and outlook, trends, the amount and timing of future cash distributions, prospects or future events and involve known and unknown risks that are difficult to predict. As a result, our actual financial results, performance, achievements or prospects may differ materially from those expressed or implied by these forward-looking statements. In some cases, you can identify forward-looking statements by the use of words such as “may,” “could,” “expect,” “intend,” “plan,” “seek,” “anticipate,” “believe,” “estimate,” “guidance,” “predict,” “potential,” “continue,” “likely,” “will,” “would,” “illustrative” and variations of these terms and similar expressions, or the negative of these terms or similar expressions. Such forward-looking statements are necessarily based upon estimates and assumptions that, while considered reasonable by Xenia and its management based on their knowledge and understanding of the business and industry, are inherently uncertain. These statements are not guarantees of future performance, and stockholders should not place undue reliance on forward-looking statements. There are a number of risks, uncertainties and other important factors, many of which are beyond our control, that could cause our actual results to differ materially from the forward-looking statements contained in this Quarterly Report on Form 10-Q. Such risks, uncertainties and other important factors include, among others: the risks, uncertainties and factors set forth in our filings with the U.S. Securities and Exchange Commission, including our Annual Report on Form 10-K, as may be updated elsewhere in this report; and other Quarterly Reports on Form 10-Q that we have filed or will file with the SEC; business, financial and operating risks inherent to real estate investments and the lodging industry; seasonal and cyclical volatility in the lodging industry; macroeconomic and other factors beyond our control that can adversely affect and reduce demand for hotel rooms; contraction in the global economy or low levels of economic growth; levels of spending in business and leisure segments as well as consumer confidence; declines in occupancy and average daily rate; fluctuations in the supply and demand for hotel rooms; changes in the competitive environment in lodging industry and the markets where we own hotels; events beyond our control, such as war, terrorist attacks, travel-related health concerns and natural disasters; our reliance on third-party hotel management companies to operate and manage our hotels; our ability to maintain good relationships with our third-party hotel management companies and franchisers; our failure to maintain brand operating standards; our ability to maintain our brand licenses at our hotels; relationships with labor unions and changes in labor laws; loss of our senior management team or key personnel; our ability to identify and consummate acquisitions of additional hotels; our ability to integrate and successfully operate any hotel properties acquired in the future and the risks associated with these hotel properties; the impact of hotel renovations, repositioning, redevelopments and re-branding activities; our ability to access capital for renovations and acquisitions on terms and at times that are acceptable to us; the fixed cost nature of hotel ownership; our ability to service our debt; changes in interest rates and operating costs; compliance with regulatory regimes and local laws; uninsured or under insured losses, including those relating to natural disasters or terrorism; changes in distribution channels, such as through internet travel intermediaries; the amount of debt that we currently have or may incur in the future; provisions in our debt agreements that may restrict the operation of our business; our organizational and governance structure; our status as a real estate investment trust (a “REIT”); our taxable REIT subsidiary (“TRS”) lessee structure; the cost of compliance with and liabilities under environmental, health and safety laws; adverse litigation judgments or settlements; changes in real estate and zoning laws and increase in real property tax rates; changes in federal, state or local tax law, including legislative, administrative, regulatory or other actions affecting REITs; changes in governmental regulations or interpretations thereof; and estimates relating to our ability to make distributions to our stockholders in the future.
These factors are not necessarily all of the important factors that could cause our actual financial results, performance, achievements or prospects to differ materially from those expressed in or implied by any of our forward-looking statements. Other unknown or unpredictable factors also could harm our results. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements set forth above. Forward-looking statements speak only as of the date they are made, and we do not undertake or assume any obligation to update publicly any of these forward-looking statements to reflect actual results, new information or future events, changes in assumptions or changes in other factors affecting forward-looking statements, except to the extent required by applicable laws. If we update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements. 
The following discussion and analysis should be read in conjunction with the Company’s Unaudited Condensed Consolidated Financial Statements and accompanying notes, which appear elsewhere in this Quarterly Report on Form 10-Q.

22


Overview
Xenia Hotels & Resorts, Inc. ("we", "us", "our", "Xenia" or the "Company") is a self-advised and self-administered REIT that invests primarily in premium full service and lifestyle hotels, with a focus on the top 25 lodging markets as well as key leisure destinations in the United States ("U.S."). A premium full service hotel refers to a hotel defined as "upper upscale" or "luxury" by STR Inc. ("STR"), but excluding hotels referred to as "lifestyle" hotels. A lifestyle hotel refers to an innovative hotel with a focus on providing a unique and individualized guest experience in a smaller footprint by combining traditional hotel services with modern technologies and placing an emphasis on local influence. As of September 30, 2017, we owned 36 hotels, 34 of which are wholly owned, comprising 10,556 rooms, across 17 states and the District of Columbia, and had a 75% ownership interest in two hotels owned through two consolidated investments in real estate entities. Our hotels are operated and/or licensed by industry leaders such as Marriott ®, Kimpton ®, Hyatt ®, Aston ®, Fairmont ®, Hilton ®, and Loews ®, as well as leading independent management companies.
Basis of Presentation
The accompanying condensed consolidated financial statements include the accounts of the Company, the Operating Partnership, XHR Holding, and its consolidated investments in real estate entities. The Company's subsidiaries and consolidated investments in real estate entities generally consist of limited liability companies, limited partnerships and the TRS. The effects of all inter-company transactions have been eliminated. Corporate costs directly associated with our principal executive offices, personnel and other administrative costs are reflected as general and administrative expenses on the condensed consolidated statements of operations and comprehensive income.
Our Revenues and Expenses
Our revenue is primarily derived from hotel operations, including room revenue, food and beverage revenue and other operating department revenue, which consists of parking, other guest services and tenant leases.
Our operating costs and expenses consist of the costs to provide hotel services, including room expense, food and beverage expense, management fees and other direct and indirect operating expenses. Room expense includes housekeeping wages and associated payroll taxes, room supplies, laundry services and front desk costs. Food and beverage expense primarily includes the cost of food, beverages and associated labor. Other direct and indirect hotel expenses include labor and other costs associated with the other operating department revenue, as well as labor and other costs associated with general and administrative departments, sales and marketing, information technology and telecommunications, repairs and maintenance and utility costs. Our hotels are managed by independent, third-party management companies under long-term agreements under which the management companies typically earn base and incentive management fees based on the levels of revenues and profitability of each individual hotel.
Key Indicators of Operating Performance
We measure hotel results of operations and the operating performance of our business by evaluating financial and non-financial metrics such as Revenue Per Available Room ("RevPAR"); average daily rate ("ADR"); occupancy rate ("occupancy"); earnings before interest, income taxes, depreciation and amortization ("EBITDA") and Adjusted EBITDA ("Adjusted EBITDA"); and funds from operations ("FFO") and Adjusted FFO ("Adjusted FFO"). We evaluate individual hotel and company-wide performance with comparisons to budgets, prior periods and competing properties. ADR, occupancy and RevPAR may be impacted by macroeconomic factors as well as regional and local economies and events. See "Non-GAAP Financial Measures" for further discussion of the Company's use, definitions and limitations of EBITDA, Adjusted EBITDA, FFO and Adjusted FFO and why management believes these financial measures are useful to investors.

23


Results of Operations
Overview
The U.S. lodging industry continued growing at a moderate pace during the third quarter of 2017, which benefited from favorable macroeconomic factors. Lodging demand has historically exhibited a strong correlation to U.S. GDP growth, which grew 3.0% during the third quarter per the U.S. Department of Commerce. This growth was driven by an increase in consumer spending on goods and services, business investments and federal government spending coupled with a stable unemployment rate below 5%. This favorable macroeconomic environment was offset by the impact of new supply, which increased 1.9% during the quarter, and is expected to continue to hamper RevPAR growth for the remainder of 2017 and continue into 2018. These factors combined led to a moderate increase in industry RevPAR of 1.9% for the third quarter of 2017 compared to 2016, which was primarily driven by ADR growth of 1.4% and an increase in occupancy of 0.5% per industry reports.
Our total portfolio RevPAR, which includes the results of hotels that were sold or acquired during the respective periods presented, increased 0.3% to $157.13 for the quarter ended September 30, 2017 and increased 2.4% to $156.18 for the nine months ended September 30, 2017 compared to $156.63 and $152.49 for the quarter and nine months ended September 30, 2016, respectively. The relatively flat RevPAR in the third quarter was partially driven by the shift of the Jewish holidays from from the fourth quarter of 2016 to third quarter of 2017, but was also impacted by the natural disasters that occurred, which is discussed in further detail below. The increase in our total portfolio RevPAR year to date was partially driven by the moderate pricing increase in the overall U.S. lodging industry but was also attributable to changes in our portfolio composition. Since the first quarter of 2016, we have acquired two hotels and completed the disposition of 16 hotels with an average RevPAR significantly below that of the remainder of our portfolio, which contributed to increases in the overall portfolio metrics during 2017.
During the third quarter of 2017, several of our hotels were impacted by Hurricanes Harvey and Irma. The Hyatt Centric Key West Resort & Spa closed on September 6, 2017 following the mandatory evacuation order in connection with Hurricane Irma.  The property sustained limited wind damage and water intrusion from the storm and was able to re-open 91 of its 120 rooms by the end of September, with the remainder of rooms re-opened in October. All of our other hotels remained open and operating during the storms. As a result of property damage incurred during the storms, we recorded a loss of $950 thousand, net of estimated insurance recoveries, related to several of our properties and expensed an estimated $1.2 million of hurricane-related repairs and cleanup costs across all impacted properties during the quarter. The Company maintains property and business interruption insurance at its hotels, and is currently assessing claims under such agreements.
Subsequent to quarter end, a series of wildfires in Northern California impacted the Company's two Napa hotels. Andaz Napa remained open throughout the month of October, while Marriott Napa Valley Resort & Spa was closed to guests from October 9 through October 15, 2017. While neither hotel experienced direct fire damage, Xenia is currently evaluating the extent of smoke and other consequential damage at the properties, as well as business lost as a result of these fires, which could be covered by our business interruption insurance. As a result of the wildfires, the Company expects operating performance at the hotels to be impacted in the fourth quarter of 2017 and into 2018.
While our three Houston-area hotels still face headwinds driven by soft corporate demand and the addition of new supply in the market, operations have improved during 2017, in large part due to Super Bowl LI in February 2017 and a strong third quarter. The third quarter of 2017 had favorable group demand prior to Hurricane Harvey, which impacted Texas in late August. Our three Houston-area hotels remained open during and after the hurricane, and sustained limited property damage. These hotels benefited from increased demand driven by recovery and cleanup efforts coupled with less supply due to storm related hotel closures. On average our Houston-area hotels had an 8.6% increase in RevPAR for the quarter ended September 30, 2017 compared to 2016, which was driven by a 1,032 basis point increase in in occupancy offset by a decline in ADR of 6.6%. These gains were partially offset year to date by disruption in revenues due to guest room renovations at the Westin Galleria Houston during 2017 and weak corporate demand in the first half of the year. For the nine months ended September 30, 2017 compared to 2016, RevPAR decreased 3.5%, which was driven by a 3.3% decrease in ADR and 16 basis point decrease in occupancy. We expect RevPAR to remain steady for our Houston-area hotels during the remainder of 2017 due to the lift in operations following Hurricane Harvey, offset by the ongoing renovations at Westin Galleria Houston, which are expected to be completed later in early 2018, as well as the renovations beginning at Westin Oaks Houston at the Galleria during the fourth quarter.
Net income decreased 42.4% and increased 143.3% for the quarter and nine months ended September 30, 2017, respectively, compared to 2016, primarily due to the 16 dispositions since the first quarter of 2016. The dispositions resulted in a net increase in income of $52.2 million, which was driven by the gain on sale net of the provision for asset impairment offset by the reduction in net operating income compared to prior year. Excluding the impact of disposed and acquired properties, net income increased approximately $4.0 million primarily as a result of a $3.9 million decrease in interest expense, a reduction in loss on debt extinguishment of $1.5 million and a reduction in income tax expense of $1.9 million. These decreases were offset by the $2.2 million of impairment and other losses related to the hurricanes, as described above, during the third quarter.

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Adjusted EBITDA attributable to common stock and unit holders for the quarter and nine months ended September 30, 2017 decreased 12.8% and 9.5%, respectively, compared to 2016, and Adjusted FFO attributable to common stock and unit holders decreased 13.9% and 8.4% for the quarter and nine months ended September 30, 2017, respectively, compared to the same period in 2016. These decreases were primarily attributable to net asset sales in 2016 and 2017. Adjusted FFO benefited from the reduction in interest expense and income tax expense in 2017. Refer to "Non-GAAP Financial Measures" for the definition of these financial measures, a description of how they are useful to investors as key supplemental measures of our operating performance and the reconciliation of these non-GAAP financial measures to net income attributable to common stock and unit holders.
Operating Information Comparison
The following table sets forth certain operating information for the nine months ended September 30, 2017 and 2016:
 
Nine Months Ended September 30,
 
 
 
2017
 
2016
 
Variance
Number of properties at January 1 
42
 
50
 
(8)
Properties acquired
1
 
1
 
Properties disposed
(7)
 
(5)
 
(2)
Number of properties at September 30
36