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EX-32 - EXHIBIT 32 - Carey Watermark Investors Inccwi2017q310-qexh32.htm
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EX-10.4 - EXHIBIT 10.4 - Carey Watermark Investors Inccwi2017q310-qexh104.htm
EX-10.3 - EXHIBIT 10.3 - Carey Watermark Investors Inccwi2017q310-qexh103.htm
EX-10.2 - EXHIBIT 10.2 - Carey Watermark Investors Inccwi2017q310-qexh102.htm
EX-10.1 - EXHIBIT 10.1 - Carey Watermark Investors Inccwi2017q310-qexh101.htm


 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
For the quarterly period ended 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 from                     to                       
Commission File Number: 000-54263
cwihighreslogoa02.jpg
CAREY WATERMARK INVESTORS INCORPORATED
(Exact name of registrant as specified in its charter)
Maryland
 
26-2145060
(State of incorporation)
 
(I.R.S. Employer Identification No.)
 
 
 
50 Rockefeller Plaza
 
 
New York, New York
 
10020
(Address of principal executive office)
 
(Zip Code)
Investor Relations (212) 492-8920
(212) 492-1100
(Registrant’s telephone numbers, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
Accelerated filer o
Non-accelerated filer þ
 
 
(Do not check if a smaller reporting company)
 
 
 
Smaller reporting company o
Emerging growth company o
 

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

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

Registrant has 138,164,440 shares of common stock, $0.001 par value, outstanding at November 3, 2017.
 




INDEX

Forward-Looking Statements

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

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


CWI 9/30/2017 10-Q 1




PART I — FINANCIAL INFORMATION
Item 1. Financial Statements.

CAREY WATERMARK INVESTORS INCORPORATED
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except share and per share amounts)
 
September 30, 2017
 
December 31, 2016
Assets
 
 
 
Investments in real estate:
 
 
 
Hotels, at cost
$
2,285,805

 
$
2,290,542

Accumulated depreciation
(223,945
)
 
(176,423
)
Net investments in hotels
2,061,860

 
2,114,119

Assets held for sale (Note 4)

 
35,023

Equity investments in real estate
136,514

 
75,928

Cash
64,854

 
61,762

Intangible assets, net
78,819

 
80,117

Accounts receivable
39,063

 
23,879

Restricted cash
71,138

 
56,496

Other assets
27,101

 
29,620

Total assets
$
2,479,349

 
$
2,476,944

Liabilities and Equity
 
 
 
Non-recourse debt, net, including debt attributable to Assets held for sale (Note 4)
$
1,423,498

 
$
1,456,152

WPC Credit Facility (Note 3)
97,835

 

Senior Credit Facility (Note 9)

 
22,785

Accounts payable, accrued expenses and other liabilities
125,598

 
112,033

Due to related parties and affiliates
3,243

 
2,628

Distributions payable
19,527

 
19,292

Other liabilities held for sale (Note 4)

 
797

Total liabilities
1,669,701

 
1,613,687

Commitments and contingencies (Note 10)

 


Common stock, $0.001 par value; 300,000,000 shares authorized; 137,038,178 and 135,379,038 shares, respectively, issued and outstanding
137

 
135

Additional paid-in capital
1,144,797

 
1,125,835

Distributions and accumulated losses
(388,974
)
 
(326,748
)
Accumulated other comprehensive loss
(552
)
 
(1,128
)
Total stockholders’ equity
755,408

 
798,094

Noncontrolling interests
54,240

 
65,163

Total equity
809,648

 
863,257

Total liabilities and equity
$
2,479,349

 
$
2,476,944


See Notes to Consolidated Financial Statements.

CWI 9/30/2017 10-Q 2




CAREY WATERMARK INVESTORS INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except share and per share amounts)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Revenues
 
 
 
 
 
 
 
Hotel Revenues
 
 
 
 
 
 
 
Rooms
$
102,791

 
$
111,812

 
$
320,043

 
$
332,986

Food and beverage
37,445

 
39,857

 
123,555

 
120,772

Other operating revenue
14,593

 
15,196

 
42,289

 
42,043

Total Hotel Revenues
154,829

 
166,865

 
485,887

 
495,801

Operating Expenses
 
 
 
 
 
 
 
Hotel Expenses
 
 
 
 
 
 
 
Rooms
23,276

 
24,409

 
71,095

 
70,979

Food and beverage
27,725

 
28,501

 
87,315

 
84,956

Other hotel operating expenses
7,486

 
7,927

 
22,413

 
22,585

Property taxes, insurance, rent and other
15,887

 
15,666

 
49,041

 
49,851

Sales and marketing
14,784

 
15,633

 
45,589

 
46,672

General and administrative
14,202

 
13,868

 
42,373

 
40,981

Repairs and maintenance
5,077

 
5,283

 
15,652

 
15,741

Management fees
3,248

 
3,100

 
13,516

 
13,824

Utilities
4,413

 
4,624

 
12,531

 
12,376

Depreciation and amortization
20,478

 
20,538

 
61,510

 
60,272

Total Hotel Expenses
136,576

 
139,549

 
421,035

 
418,237

 
 
 
 
 
 
 
 
Other Operating Expenses
 
 
 
 
 
 
 
Asset management fees to affiliate and other expenses
3,660

 
4,029

 
11,679

 
11,740

Corporate general and administrative expenses
2,579

 
2,641

 
7,898

 
8,978

Hurricane loss
7,609

 

 
7,609

 

Impairment charges

 
452

 

 
4,112

Acquisition-related expenses

 

 

 
3,727

Total Other Operating Expenses
13,848

 
7,122

 
27,186

 
28,557

Operating Income
4,405

 
20,194

 
37,666

 
49,007

Other Income and (Expenses)
 
 
 
 
 
 
 
Interest expense
(16,957
)
 
(16,363
)
 
(49,820
)
 
(48,542
)
   Equity in (losses) earnings of equity method investments in real estate
(3,464
)
 
(140
)
 
1,072

 
4,976

Net loss on extinguishment of debt (Note 9)

 
(1,204
)
 
(225
)
 
(2,268
)
Other income
33

 
8

 
93

 
22

Total Other Income and (Expenses)
(20,388
)
 
(17,699
)
 
(48,880
)
 
(45,812
)
(Loss) Income from Operations Before Income Taxes and Net Gain on Sale of Real Estate
(15,983
)
 
2,495

 
(11,214
)
 
3,195

Benefit from (provision for) income taxes
162

 
(1,037
)
 
(630
)
 
(3,041
)
(Loss) Income from Operations Before Net Gain on Sale of Real Estate
(15,821
)
 
1,458

 
(11,844
)
 
154

Net gain on sale of real estate, net of tax

 

 
5,164

 

Net (Loss) Income
(15,821
)
 
1,458

 
(6,680
)
 
154

Loss (income) attributable to noncontrolling interests (inclusive of Available Cash Distributions to a related party of $2,498, $2,838, $5,743 and $6,931, respectively)
7,052

 
3,039

 
2,881

 
(2,039
)
Net (Loss) Income Attributable to CWI Stockholders
$
(8,769
)
 
$
4,497

 
$
(3,799
)
 
$
(1,885
)
Basic and Diluted (Loss) Income Per Share
$
(0.06
)
 
$
0.03

 
$
(0.03
)
 
$
(0.01
)
Basic and Diluted Weighted-Average Shares Outstanding
137,326,890

 
134,956,598

 
136,759,817

 
134,329,382

 
 
 
 
 
 
 
 
Distributions Declared Per Share
$
0.1425

 
$
0.1425

 
$
0.4275

 
$
0.4275


See Notes to Consolidated Financial Statements.

CWI 9/30/2017 10-Q 3




CAREY WATERMARK INVESTORS INCORPORATED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (UNAUDITED)
(in thousands)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Net (Loss) Income
$
(15,821
)
 
$
1,458

 
$
(6,680
)
 
$
154

Other Comprehensive Income (Loss)
 
 
 
 
 
 
 
Unrealized gain (loss) on derivative instruments
248

 
594

 
585

 
(464
)
Comprehensive (Loss) Income
(15,573
)
 
2,052

 
(6,095
)
 
(310
)
 
 
 
 
 
 
 
 
Amounts Attributable to Noncontrolling Interests
 
 
 
 
 
 
 
Net loss (income)
7,052

 
3,039

 
2,881

 
(2,039
)
Unrealized (gain) loss on derivative instruments
(5
)
 

 
(9
)
 
372

Comprehensive loss (income) attributable to noncontrolling interests
7,047

 
3,039

 
2,872

 
(1,667
)
Comprehensive (Loss) Income Attributable to CWI Stockholders
$
(8,526
)
 
$
5,091

 
$
(3,223
)
 
$
(1,977
)

See Notes to Consolidated Financial Statements.

CWI 9/30/2017 10-Q 4




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

 
$
135

 
$
1,125,835

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

 
$
65,163

 
$
863,257

Net loss
 
 
 
 
 
 
(3,799
)
 
 
 
(3,799
)
 
(2,881
)
 
(6,680
)
Shares issued, net of offering costs
3,179,252

 
4

 
34,065

 
 
 
 
 
34,069

 
 
 
34,069

Shares issued to affiliates
1,078,350

 
1

 
11,614

 
 
 
 
 
11,615

 
 
 
11,615

Distributions to noncontrolling interests
 
 
 
 
 
 
 
 
 
 

 
(8,051
)
 
(8,051
)
Shares issued under share incentive plans
23,710

 

 
176

 
 
 
 
 
176

 
 
 
176

Stock-based compensation to directors
16,667

 

 
180

 
 
 
 
 
180

 
 
 
180

Distributions declared ($0.4275 per share)
 
 
 
 
 
 
(58,427
)
 
 
 
(58,427
)
 
 
 
(58,427
)
Other comprehensive income:
 
 
 
 
 
 
 
 
 
 

 
 
 

   Net unrealized gain on derivative instruments
 
 
 
 
 
 
 
 
576

 
576

 
9

 
585

Repurchase of shares
(2,638,839
)
 
(3
)
 
(27,073
)
 
 
 
 
 
(27,076
)
 
 
 
(27,076
)
Balance at September 30, 2017
137,038,178

 
$
137

 
$
1,144,797

 
$
(388,974
)
 
$
(552
)
 
$
755,408

 
$
54,240

 
$
809,648

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2016
132,686,254

 
$
134

 
$
1,112,640

 
$
(241,379
)
 
$
(885
)
 
$
870,510

 
$
84,937

 
$
955,447

Net (loss) income
 
 
 
 
 
 
(1,885
)
 
 
 
(1,885
)
 
2,039

 
154

Shares issued, net of offering costs
3,293,952

 
3

 
34,704

 
 
 
 
 
34,707

 
 
 
34,707

Distributions to noncontrolling interests
 
 
 
 
 
 
 
 
 
 

 
(13,417
)
 
(13,417
)
Shares issued under share incentive plans
24,664

 

 
168

 
 
 
 
 
168

 
 
 
168

Stock-based compensation to directors
16,886

 

 
180

 
 
 
 
 
180

 
 
 
180

Purchase of membership interest from noncontrolling interest
 
 
 
 
(16,024
)
 
 
 
(923
)
 
(16,947
)
 
(4,174
)
 
(21,121
)
Distributions declared ($0.4275 per share)
 
 
 
 
 
 
(57,325
)
 
 
 
(57,325
)
 
 
 
(57,325
)
Other comprehensive loss:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   Net unrealized loss on derivative instruments
 
 
 
 
 
 
 
 
(92
)
 
(92
)
 
(372
)
 
(464
)
Repurchase of shares
(1,303,174
)
 
(2
)
 
(13,191
)
 
 
 
 
 
(13,193
)
 
 
 
(13,193
)
Balance at September 30, 2016
134,718,582

 
$
135

 
$
1,118,477

 
$
(300,589
)
 
$
(1,900
)
 
$
816,123

 
$
69,013

 
$
885,136


See Notes to Consolidated Financial Statements.

CWI 9/30/2017 10-Q 5




CAREY WATERMARK INVESTORS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
 
Nine Months Ended September 30,
 
2017
 
2016
Cash Flows — Operating Activities
 
 
 
Net (loss) income
$
(6,680
)
 
$
154

Adjustments to net (loss) income:
 
 
 
Depreciation and amortization
61,510

 
60,272

Asset management fees to affiliates settled in shares
10,777

 

Hurricane loss
7,609

 

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

Straight-line rent adjustments
3,939

 
3,983

Amortization of deferred financing costs, fair market value of debt, ground lease intangible and other
2,250

 
611

Acquisition fees to affiliates settled in shares
2,065

 

Equity in losses (earnings) of equity method investments in real estate in excess of distributions received
1,092

 
(1,782
)
Amortization of stock-based compensation expense
482

 
465

Net loss on extinguishment of debt (Note 9)
222

 
1,872

Impairment charges

 
4,112

Net changes in other operating assets and liabilities
1,976

 
2,031

Decrease in due to related parties and affiliates
(473
)
 
(424
)
Receipt of key money and other deferred incentive payments
66

 
1,075

Net Cash Provided by Operating Activities
79,671

 
72,369

 
 
 
 
Cash Flows — Investing Activities
 
 
 
Funds placed in escrow
(114,046
)
 
(107,304
)
Funds released from escrow
98,831

 
105,809

Purchase of equity interest (Note 5)
(66,332
)
 

Capital expenditures
(33,038
)
 
(51,133
)
Proceeds from the sale of investments (Note 4)
25,743

 

Distributions received from equity investments in excess of equity income
4,790

 
2,014

Repayments of loan receivable
203

 

Acquisitions of hotels

 
(75,263
)
Deposits released for hotel investments

 
5,718

Net Cash Used in Investing Activities
(83,849
)
 
(120,159
)
 
 
 
 
Cash Flows — Financing Activities
 
 
 
Proceeds from note payable to affiliate
97,835

 

Scheduled payments and prepayments of mortgage principal
(90,463
)
 
(291,637
)
Proceeds from mortgage financing
83,500

 
403,500

Distributions paid
(58,192
)
 
(57,037
)
Proceeds from issuance of shares, net of offering costs
34,075

 
34,707

Repurchase of shares
(27,076
)
 
(13,142
)
Repayment of Senior Credit Facility
(22,785
)
 
(27,215
)
Distributions to noncontrolling interests
(8,051
)
 
(13,417
)
Deposits released for mortgage financing
1,610

 
4,080

Deposits for mortgage financing
(1,510
)
 
(1,970
)
Deferred financing costs
(1,302
)
 
(4,163
)
Scheduled payments of loan
(234
)
 

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

 
30,000

Purchase of membership interest from noncontrolling interest (Note 11)

 
(21,121
)
Termination of interest rate swap

 
(1,221
)
Defeasance premium and related costs on mortgage refinancing

 
(4,133
)
Net Cash Provided by Financing Activities
7,270

 
37,041

 
 
 
 
Change in Cash During the Period
 
 
 
Net increase (decrease) in cash
3,092

 
(10,749
)
Cash, beginning of period
61,762

 
83,112

Cash, end of period
$
64,854

 
$
72,363

See Notes to Consolidated Financial Statements.

CWI 9/30/2017 10-Q 6




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

Note 1. Business

Organization

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

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

We held ownership interests in 32 hotels at September 30, 2017. See Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 2 — Portfolio Overview for a complete listing of the hotels that we consolidate, or our Consolidated Hotels, and the hotels that we record as equity investments, or our Unconsolidated Hotels, at September 30, 2017.

Public Offerings

We raised $575.8 million through our initial public offering, which ran from September 15, 2010 through September 15, 2013, and $577.4 million through our follow-on offering, which ran from December 20, 2013 through December 31, 2014. In addition, from inception through September 30, 2017, $158.7 million of distributions were reinvested in our common stock as a result of our distribution reinvestment plan, or DRIP. We have fully invested the proceeds from both our initial public offering and follow-on offering.

Note 2. Basis of Presentation

Basis of Presentation

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

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

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


CWI 9/30/2017 10-Q 7



Notes to Consolidated Financial Statements (Unaudited)

Basis of Consolidation

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

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

At both September 30, 2017 and December 31, 2016, we considered five entities to be VIEs, four of which we consolidated as we are considered the primary beneficiary. The following table presents a summary of selected financial data of consolidated VIEs included in the consolidated balance sheets (in thousands):
 
September 30, 2017
 
December 31, 2016
Net investments in hotels
$
504,525

 
$
518,335

Intangible assets, net
38,849

 
39,451

Total assets
575,036

 
587,608

 
 
 
 
Non-recourse debt, net
$
341,445

 
$
341,082

Total liabilities
371,360

 
372,991


Recent Accounting Pronouncements

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

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 outlines a new model for accounting by lessees, whereby their rights and obligations under substantially all leases, existing and new, would be capitalized and recorded on the balance sheet. For lessors, however, the accounting remains largely unchanged from the current model, with the distinction between operating and financing leases retained, but updated to align with certain changes to the lessee model and the new revenue recognition standard. Additionally, the new standard requires extensive quantitative and qualitative disclosures. The new standard must be adopted using a modified retrospective transition of the new guidance and provides for certain practical expedients. Transition will require application of the new model at the beginning of the earliest comparative period presented. We will adopt this guidance for our interim and annual periods beginning January 1, 2019. We have not yet

CWI 9/30/2017 10-Q 8



Notes to Consolidated Financial Statements (Unaudited)

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

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

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

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

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

In February 2017, the FASB issued ASU 2017-05, Other Income — Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20). ASU 2017-05 clarifies that a financial asset is within the scope of Subtopic 610-20 if it meets the definition of an in substance nonfinancial asset. The amendments define the term “in substance nonfinancial asset,” in part, as a financial asset promised to a counterparty in a contract if substantially all of the fair value of the assets (recognized and unrecognized) that are promised to the counterparty in the contract is concentrated in nonfinancial assets. If substantially all of the fair value of the assets that are promised to the counterparty in a contract is concentrated in nonfinancial assets, then all of the financial assets promised to the counterparty are in substance nonfinancial assets within the scope of Subtopic 610-20. This amendment also clarifies that nonfinancial assets within the scope of Subtopic 610-20 may include nonfinancial assets transferred within a legal entity to a counterparty. For example, a parent company may transfer control of nonfinancial assets by transferring ownership interests in a consolidated subsidiary. ASU 2017-05 is effective for periods beginning after December 15, 2017, with early application permitted for fiscal years beginning after December 15, 2016. We are in the process of evaluating the impact of ASU 2017-05 on our consolidated financial statements and will adopt the standard for the fiscal year beginning January 1, 2018.


CWI 9/30/2017 10-Q 9



Notes to Consolidated Financial Statements (Unaudited)

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. ASU 2017-12 will make more financial and nonfinancial hedging strategies eligible for hedge accounting. It also amends the presentation and disclosure requirements and changes how companies assess hedge effectiveness. It is intended to more closely align hedge accounting with companies’ risk management strategies, simplify the application of hedge accounting, and increase transparency as to the scope and results of hedging programs. ASU 2017-12 will be effective in fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. We are in the process of evaluating the impact of adopting ASU 2017-12 on our consolidated financial statements.

Note 3. Agreements and Transactions with Related Parties

Agreements with Our Advisor and Affiliates

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

The following tables present a summary of fees we paid, expenses we reimbursed and distributions we made to our Advisor, the Subadvisor and other affiliates, as described below, in accordance with the terms of those agreements (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Amounts Included in the Consolidated Statements of Operations
 
 
 
 
 
 
 
Asset management fees
$
3,578

 
$
3,560

 
$
10,777

 
$
10,568

Available Cash Distributions
2,498

 
2,838

 
5,743

 
6,931

Personnel and overhead reimbursements
1,563

 
1,527

 
4,473

 
5,106

Interest expense
170

 

 
299

 

Disposition fees (Note 4)

 

 
225

 

Acquisition fees

 

 

 
2,158

 
$
7,809

 
$
7,925

 
$
21,517

 
$
24,763

 
 
 
 
 
 
 
 
Other Transaction Fees Incurred
 
 
 
 
 
 
 
Capitalized acquisition fees for equity method investment (a) (Note 5)
$
4,131

 
$

 
$
4,131

 
$

Capitalized loan refinancing fees

 
306

 
340

 
806

Capitalized acquisition fees for asset acquisition

 
29

 

 
29

Advisor fee for purchase of membership interest (Note 11)

 

 

 
527

 
$
4,131

 
$
335

 
$
4,471

 
$
1,362

___________
(a)
Our Advisor elected to receive 50% of the acquisition fee related to our investment in the Ritz-Carlton Bacara, Santa Barbara Venture in shares of our common stock and 50% in cash.


CWI 9/30/2017 10-Q 10



Notes to Consolidated Financial Statements (Unaudited)

The following table presents a summary of the amounts included in Due to related parties and affiliates in the consolidated financial statements (in thousands):
 
September 30, 2017
 
December 31, 2016
Amounts Due to Related Parties and Affiliates
 
 
 
Reimbursable costs
$
1,557

 
$
1,311

Other amounts due to our Advisor
1,234

 
1,202

Accrued interest on WPC Credit Facility
299

 

Due to joint venture partners and other
153

 
115

 
$
3,243

 
$
2,628


Asset Management Fees, Dispositions Fees and Loan Refinancing Fees

We pay our Advisor an annual asset management fee equal to 0.5% of the aggregate Average Market Value of our Investments, both as defined in our advisory agreement with our Advisor. Our Advisor is also entitled to receive disposition fees of up to 1.5% of the contract sales price of a property, as well as a loan refinancing fee of up to 1.0% of the principal amount of a refinanced loan, if certain conditions described in the advisory agreement are met. If our Advisor elects to receive all or a portion of its fees in shares, the number of shares issued is determined by dividing the dollar amount of fees by our most recently published estimated net asset value per share, or NAV. At our Advisor’s election, we paid our asset management fees in shares of our common stock for the three and nine months ended September 30, 2017 and in cash for the three and nine months ended September 30, 2016. For the nine months ended September 30, 2017, $9.5 million in asset management fees were settled in shares of our common stock. No such fees were settled in shares during the nine months ended September 30, 2016. At September 30, 2017, our Advisor owned 2,579,378 shares (1.9%) of our outstanding common stock. Asset management fees are included in Asset management fees to affiliate and other expenses in the consolidated financial statements.

Available Cash Distributions

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

Personnel and Overhead Reimbursements/Reimbursable Costs

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

Acquisition Fees to our Advisor

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

Other Amounts Due to our Advisor

This balance primarily represents asset management fees payable to our Advisor.

CWI 9/30/2017 10-Q 11



Notes to Consolidated Financial Statements (Unaudited)


Other Transactions with Affiliates

WPC Line of Credit

During the first quarter of 2017, our board of directors and the board of directors of WPC approved unsecured loans from WPC to us of up to $25.0 million, at an interest rate equal to the rate at which WPC was able to borrow funds under its senior unsecured credit facility, which we refer to as the WPC Line of Credit, for the purpose of replacing our Senior Credit Facility (Note 9). On March 23, 2017, we borrowed $22.8 million from WPC at the London Interbank Offered Rate, or LIBOR, plus 1.0% and a maturity date of March 22, 2018 and simultaneously repaid and terminated our Senior Credit Facility. As further discussed below, the WPC Line of Credit was replaced by the Working Capital Facility (defined below).

WPC Credit Facility

During the third quarter of 2017, our board of directors and the board of directors of WPC approved secured loans from WPC to us of up to $100.0 million for acquisition funding purposes and $25.0 million for working capital purposes. On September 26, 2017, we entered into a secured credit facility, or the WPC Credit Facility, with our Operating Partnership as borrower and WPC as lender. The WPC Credit Facility consists of (i) a bridge term loan of $75.0 million, or the Bridge Loan, for the purpose of acquiring an interest in the Ritz-Carlton Bacara, Santa Barbara Venture (Note 5) and (ii) a $25.0 million revolving working capital facility, or the Working Capital Facility, to be used for our working capital needs. The Working Capital Facility replaced the WPC Line of Credit, which had an outstanding principal balance of $22.8 million on that date and a maturity date of March 22, 2018. Unless the Advisory Agreement expires or is terminated, the Bridge Loan and Working Capital Facility are scheduled to mature on June 30, 2018 and December 31, 2018, respectively. We can request a three month extension of the Bridge Loan, which WPC may grant in its sole discretion. Both loans bear interest at LIBOR plus 1.0%; provided however, that upon the occurrence of certain events of default (as defined in the loan agreement), all outstanding amounts will be subject to a 2% annual interest rate increase. We serve as guarantor of the WPC Credit Facility and have pledged our unencumbered equity interests in certain properties as collateral, as further described in the pledge and security agreement entered into between the borrower and lender. On September 27, 2017, the Operating Partnership drew down $75.0 million from the Bridge Loan to acquire our interest in the Ritz-Carlton Bacara, Santa Barbara.

The WPC Credit Facility includes various customary affirmative and negative covenants. We were in compliance with all applicable covenants at September 30, 2017.

At September 30, 2017, the outstanding balances under the Bridge Loan and Working Capital Facility were $75.0 million and $22.8 million, respectively, with $2.2 million available to be drawn on the Working Capital Facility. On October 12, 2017, we made a repayment of $3.8 million to WPC towards the outstanding balance of the Bridge Loan. Additionally, on October 27, 2017, we made repayments of $10.4 million and $15.0 million towards the Bridge Loan and Working Capital Facility, respectively (Note 13).

Jointly-Owned Investments

At September 30, 2017, we owned interests in three jointly-owned investments with CWI 2: the Ritz-Carlton Key Biscayne, a Consolidated Hotel, and the Marriott Sawgrass Golf Resort & Spa and the Ritz-Carlton Bacara, Santa Barbara, both Unconsolidated Hotels. A third-party also owns an interest in the Ritz-Carlton Key Biscayne. CWI 2 is a publicly owned, non-listed REIT that is also advised by our Advisor and invests in lodging and lodging-related properties.


CWI 9/30/2017 10-Q 12



Notes to Consolidated Financial Statements (Unaudited)

Note 4. Net Investments in Hotels

Net investments in hotels are summarized as follows (in thousands):
 
September 30, 2017
 
December 31, 2016
Buildings
$
1,646,528

 
$
1,670,895

Land
379,453

 
380,970

Furniture, fixtures and equipment
125,721

 
122,155

Building and site improvements
115,024

 
89,667

Construction in progress
19,079

 
26,855

Hotels, at cost
2,285,805

 
2,290,542

Less: Accumulated depreciation
(223,945
)
 
(176,423
)
Net investments in hotels
$
2,061,860

 
$
2,114,119


During the nine months ended September 30, 2017, we retired fully depreciated furniture, fixtures and equipment aggregating $10.6 million.

Hurricane-Related Disruption

Hurricane Irma made landfall in September 2017, impacting five of our Consolidated Hotels; Hawks Cay Resort, Marriott Boca Raton at Boca Center, Ritz-Carlton Key Biscayne, Ritz-Carlton Fort Lauderdale and Staybridge Suites Savannah Historic District. All five hotels sustained damage and all except for Marriott Boca Raton at Boca Center were forced to close for a period of time.

As of September 30, 2017, the estimated net book value of the property damage written off was $15.6 million. In addition, there was $5.8 million of remediation work that had been performed as of September 30, 2017 and $0.4 million of inventory that was written off. We recorded a corresponding receivable of $14.2 million for estimated insurance recoveries related to the net book value of the property damage written off and the remediation work performed. The receivable is recorded within Accounts receivable in our consolidated financial statements as of September 30, 2017. The net impact of $7.6 million, representing the property damage insurance deductibles as well as damage to certain hotels that was below the related deductible, is reflected as a hurricane loss in our consolidated financial statements for the three and nine months ended September 30, 2017.

In October and November 2017, we received advances aggregating approximately $10.0 million of insurance proceeds related to property insurance and business interruption claims. These advances have not been reflected in our consolidated financial statements for the third quarter of 2017 as they were received subsequent to September 30, 2017. 

We are still assessing the impact of the hurricane on our hotels, and the final net book value write-offs could vary significantly from our estimate and additional remediation work may be performed. Any changes to the estimates for property damage will be recorded in the periods in which they are determined, and any additional remediation work will be recorded in the periods in which it is performed. 

Property Dispositions and Assets and Liabilities Held for Sale

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

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

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

CWI 9/30/2017 10-Q 13



Notes to Consolidated Financial Statements (Unaudited)


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

 
$
32,300

Restricted cash

 
2,089

Accounts receivable

 
169

Other assets

 
465

Assets held for sale
$

 
$
35,023

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

 
$
26,560

 
 
 
 
Accounts payable, accrued expenses and other liabilities
$

 
$
789

Due to related parties and affiliates

 
8

Other liabilities held for sale
$

 
$
797


Construction in Progress

At September 30, 2017 and December 31, 2016, construction in progress, recorded at cost, was $19.1 million and $26.9 million, respectively, and related primarily to renovations at the Hutton Hotel Nashville and the Equinox, a Luxury Collection Golf Resort & Spa at September 30, 2017 and renovations at the Ritz-Carlton Key Biscayne and the Westin Pasadena at December 31, 2016 (Note 10). We capitalize interest expense and certain other costs, such as property taxes, property insurance, utilities expense and hotel incremental labor costs, related to hotels undergoing major renovations. We capitalized $0.3 million and $0.5 million of such costs during the three months ended September 30, 2017 and 2016, respectively, and $1.0 million and $1.7 million during the nine months ended September 30, 2017 and 2016, respectively. At September 30, 2017 and December 31, 2016, accrued capital expenditures were $5.0 million and $2.3 million, respectively, representing non-cash investing activity.

Note 5. Equity Investments in Real Estate

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

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

Ritz-Carlton Bacara, Santa Barbara Venture

On September 28, 2017, we formed a tenancy-in-common venture with CWI 2 to acquire the Bacara Resort & Spa for $380.0 million. We own a 40% interest in the venture and CWI 2 owns a 60% interest. Upon acquisition, the hotel was rebranded as the Ritz-Carlton Bacara, Santa Barbara and will be managed by Marriott International. The venture meets the definition of joint control as all decisions with respect to the ownership, management and operation of the hotel must be made on a unanimous basis between the two parties; therefore, we have accounted for our interest in this investment under the equity method of accounting. The venture obtained debt comprised of a $175.0 million senior mortgage loan with a floating annual interest rate of LIBOR plus 2.8% and a $55.0 million mezzanine loan with a floating annual interest rate of LIBOR plus 5.8%, both subject to interest rate caps. Both loans have maturity dates of September 28, 2021, with one-year extension options. Our initial investment in this venture, which represents our share of the purchase price and capitalized costs, including fees paid to our

CWI 9/30/2017 10-Q 14



Notes to Consolidated Financial Statements (Unaudited)

Advisor, was $66.3 million at acquisition. We capitalized our share of acquisition costs totaling $4.7 million, including acquisition fees of $4.1 million paid to our Advisor. Our Advisor has elected to receive 50% of its acquisition fees in shares of our common stock and 50% in cash, which was approved by our board of directors. For the nine months ended September 30, 2017, $2.1 million in acquisitions fees were settled in shares of our common stock.

Hurricane-Related Disruption

The Marriott Sawgrass Golf Resort & Spa was impacted by Hurricane Irma when it made landfall in September 2017. The hotel sustained damage and was forced to close for a period of time.

As of September 30, 2017, the estimated net book value of the property damage written off by the Marriott Sawgrass Golf Resort & Spa Venture was $6.2 million.  In addition, there was $1.0 million of remediation work that had been performed as of September 30, 2017. The venture recorded a corresponding receivable of $3.3 million for estimated insurance recoveries related to the net book value of the property damage written off and the remediation work performed. The net impact to the Marriott Sawgrass Golf Resort & Spa Venture was $3.8 million, representing the property damage insurance deductible.

We are still assessing the impact of the hurricane on the venture, and the final net book value write-offs could vary significantly from our estimate and additional remediation work may be performed. Any changes to the estimates for property damage will be recorded by the venture in the periods in which they are determined, and any additional remediation work will be recorded by the venture in the periods in which it is performed. 

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

 
80%
 
9/6/2011
 
Full-service
 
$
606

 
$
664

Westin Atlanta Venture (b) (c)
 
GA
 
372

 
57%
 
10/3/2012
 
Full-service
 
4,464

 
5,795

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

 
50%
 
4/1/2015
 
Resort
 
26,375

 
31,208

Ritz-Carlton Philadelphia Venture (f)
 
PA
 
301

 
60%
 
5/15/2015
 
Full-service
 
39,251

 
38,261

Ritz-Carlton Bacara, Santa Barbara Venture (g) (h)
 
CA
 
358

 
40%
 
9/28/2017
 
Resort
 
65,818

 

 
 
 
 
1,799

 
 
 
 
 
 
 
$
136,514

 
$
75,928

___________
(a)
We received cash distributions of $0.7 million from this investment during the nine months ended September 30, 2017. No cash distributions were received from this investment during the three months ended September 30, 2017.
(b)
We received cash distributions of $0.6 million and $2.0 million from this investment during the three and nine months ended September 30, 2017, respectively.
(c)
On October 19, 2017, the venture sold the Westin Atlanta Perimeter North to an unaffiliated third-party (Note 13).
(d)
We received cash distributions of $0.3 million and $3.3 million from this investment during the three and nine months ended September 30, 2017, respectively.
(e)
This investment is considered a VIE (Note 2). We do not consolidate this entity because we are not the primary beneficiary and the nature of our involvement in the activities of the entity allows us to exercise significant influence but does not give us power over decisions that significantly affect the economic performance of the entity.
(f)
We received cash distributions of $0.4 million and $1.0 million from this investment during the three and nine months ended September 30, 2017, respectively.
(g)
This investment represents a tenancy-in-common interest; the remaining 60% interest is owned by CWI 2.
(h)
No cash distributions were received from this investment during the three or nine months ended September 30, 2017.


CWI 9/30/2017 10-Q 15



Notes to Consolidated Financial Statements (Unaudited)

The following table sets forth our share of equity in earnings from our Unconsolidated Hotels, which are based on the hypothetical liquidation at book value model, as well as certain amortization adjustments related to basis differentials from acquisitions of investments (in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Venture
 
2017
 
2016
 
2017
 
2016
Ritz-Carlton Philadelphia Venture
 
$
396

 
$
804

 
$
2,025

 
$
2,190

Marriott Sawgrass Golf Resort & Spa Venture
 
(3,255
)
 
(711
)
 
(1,549
)
 
1,512

Westin Atlanta Venture
 
166

 
204

 
638

 
728

Ritz-Carlton Bacara, Santa Barbara Venture
 
(532
)
 

 
(532
)
 

Hyatt Centric French Quarter Venture
 
(239
)
 
(437
)
 
490

 
546

Total equity in (losses) earnings of equity method investments in real estate
 
$
(3,464
)
 
$
(140
)
 
$
1,072

 
$
4,976


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

At September 30, 2017 and December 31, 2016, the unamortized basis differences on our equity investments were $7.3 million and $3.3 million, respectively. Net amortization of the basis differences reduced the carrying values of our equity investments by less than $0.1 million during both the three months ended September 30, 2017 and 2016, and by $0.2 million for both the nine months ended September 30, 2017 and 2016.

The following tables present combined summarized financial information of our Marriott Sawgrass Golf Resort & Spa Venture and Ritz-Carlton Philadelphia Venture. Amounts provided are the total amounts attributable to the ventures and does not represent our proportionate share (in thousands):
 
September 30, 2017
 
December 31, 2016
Real estate, net
$
230,673

 
$
244,106

Other assets
20,311

 
19,882

Total assets
250,984

 
263,988

Debt
135,894

 
136,575

Other liabilities
24,807

 
23,394

Total liabilities
160,701

 
159,969

Members’ equity
$
90,283

 
$
104,019

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Revenues
$
18,590

 
$
20,250

 
$
68,420

 
$
64,192

Expenses
(22,085
)
 
(21,610
)
 
(70,666
)
 
(62,983
)
Hurricane loss
(3,845
)
 

 
(3,845
)
 

Net (loss) income attributable to equity method investment
$
(7,340
)
 
$
(1,360
)
 
$
(6,091
)
 
$
1,209



CWI 9/30/2017 10-Q 16



Notes to Consolidated Financial Statements (Unaudited)

Note 6. Intangible Assets and Liabilities

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

 
$
(4,639
)
 
$
67,761

 
$
72,400

 
$
(3,510
)
 
$
68,890

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

 
(678
)
 
10,977

 
11,655

 
(531
)
 
11,124

In-place leases
8 – 21
 
141

 
(60
)
 
81

 
235

 
(132
)
 
103

Total intangible assets, net
 
 
$
84,196

 
$
(5,377
)
 
$
78,819

 
$
84,290

 
$
(4,173
)
 
$
80,117

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Finite-Lived Intangible Liability
 
 
 
 
 
 
 
 
 
 
 
 
 
Above-market hotel ground lease
85
 
$
(2,100
)
 
$
83

 
$
(2,017
)
 
$
(2,100
)
 
$
64

 
$
(2,036
)

Net amortization of intangibles was $0.4 million for both the three months ended September 30, 2017 and 2016, and $1.3 million for both the nine months ended September 30, 2017 and 2016. Amortization of the villa/condo rental programs and in-place lease intangibles are included in Depreciation and amortization, and amortization of below-market hotel ground lease, below-market hotel parking garage lease and above-market hotel ground lease intangibles are included in Property taxes, insurance, rent and other in the consolidated financial statements.

Note 7. Fair Value Measurements

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

Items Measured at Fair Value on a Recurring Basis

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

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

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


CWI 9/30/2017 10-Q 17



Notes to Consolidated Financial Statements (Unaudited)

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

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

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

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

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

We determined that the significant inputs used to value these investments fall within Level 3 for fair value reporting. As a result of our assessments, we calculated an impairment charge based on market conditions and assumptions that existed at the time. The valuation of real estate is subject to significant judgment and actual results may differ materially if market conditions or the underlying assumptions change. During the three and nine months ended September 30, 2016, we recognized impairment charges totaling $0.5 million and $4.1 million, respectively, on three properties with an aggregate fair value measurement of $33.0 million in order to reduce the carrying value of the properties to their estimated fair values. We did not recognize any impairment charges during the three or nine months ended September 30, 2017.

Note 8. Risk Management and Use of Derivative Financial Instruments

Risk Management

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

Derivative Financial Instruments

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


CWI 9/30/2017 10-Q 18



Notes to Consolidated Financial Statements (Unaudited)

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

The following table sets forth certain information regarding our derivative instruments on our Consolidated Hotels (in thousands):
Derivatives Designated as Hedging Instruments 
 
 
 
Asset Derivatives Fair Value at
 
Liability Derivatives Fair Value at
 
Balance Sheet Location
 
September 30, 2017
 
December 31, 2016
 
September 30, 2017
 
December 31, 2016
Interest rate swaps
 
Other assets
 
$
35

 
$
48

 
$

 
$

Interest rate caps
 
Other assets
 
1

 
51

 

 

Interest rate swaps
 
Accounts payable, accrued expenses and other liabilities
 

 

 

 
(2
)
 
 
 
 
$
36

 
$
99

 
$

 
$
(2
)

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

We recognized unrealized income of $0.1 million and $0.2 million in Other comprehensive (loss) income on derivatives in connection with our interest rate swaps and caps during the three months ended September 30, 2017 and 2016, respectively, and unrealized losses of $0.1 million and $1.5 million during the nine months ended September 30, 2017 and 2016, respectively.

We reclassified $0.1 million and $0.2 million from Other comprehensive (loss) income on derivatives into Interest expense during each of the three months ended September 30, 2017 and 2016, respectively, and $0.5 million and $0.8 million during the nine months ended September 30, 2017 and 2016, respectively.

Amounts reported in Other comprehensive (loss) income related to interest rate swaps and caps will be reclassified to Interest expense as interest expense is incurred on our variable-rate debt. At September 30, 2017, we estimated that an additional $0.5 million, inclusive of amounts attributable to noncontrolling interests of less than $0.1 million, will be reclassified as Interest expense during the next 12 months related to our interest rate swaps and caps.

Interest Rate Swaps and Caps

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

The interest rate swaps and caps that we had outstanding on our Consolidated Hotels at September 30, 2017 were designated as cash flow hedges and are summarized as follows (dollars in thousands): 
 
 
Number of
 
Notional
 
Fair Value at
Interest Rate Derivatives
 
Instruments
 
Amount
 
September 30, 2017
Interest rate swap
 
1
 
$
47,450

 
$
35

Interest rate caps
 
8
 
302,184

 
1

 
 
 
 
 
 
$
36



CWI 9/30/2017 10-Q 19



Notes to Consolidated Financial Statements (Unaudited)

Credit Risk-Related Contingent Features

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

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

Note 9. Debt

Non-Recourse Debt

Our non-recourse debt consists of mortgage notes payable, which are collateralized by the assignment of hotel properties. The following table presents the non-recourse debt, net on our Consolidated Hotel investments (dollars in thousands):
 
 
 
 
 
 
Carrying Amount at
 
 
Interest Rate Range
 
Current Maturity Date Range (a)
 
September 30, 2017
 
December 31, 2016
Fixed rate
 
3.6% – 6.5%
 
3/2018 – 4/2024
 
$
1,084,480

 
$
1,084,987

Variable rate (b)
 
3.5% – 8.5%
 
10/2017 – 12/2020
 
339,018

 
371,165

 
 
 
 
 
 
$
1,423,498

 
$
1,456,152

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

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

Covenants

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


CWI 9/30/2017 10-Q 20



Notes to Consolidated Financial Statements (Unaudited)

WPC Credit Facility

At September 30, 2017, we had outstanding balances under the Bridge Loan and Working Capital Facility of $75.0 million and $22.8 million, respectively, with $2.2 million available to be drawn on the Working Capital Facility. On October 12, 2017, we made a repayment of $3.8 million to WPC towards the outstanding balance of the Bridge Loan. Additionally, on October 27, 2017, we made repayments of $10.4 million and $15.0 million towards the Bridge Loan and Working Capital Facility, respectively (Note 13). These loans are described in Note 3.

Senior Credit Facility

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

Mortgage Financing Activity During 2017

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

Scheduled Debt Principal Payments

Scheduled debt principal payments during the remainder of 2017, each of the next four calendar years following December 31, 2017, and thereafter are as follows (in thousands):
Years Ending December 31,
 
Total
2017 (remainder) (a)
 
$
75,648

2018 (b) (c)
 
228,723

2019
 
148,727

2020
 
196,362

2021
 
458,253

Thereafter through 2024
 
420,973

 
 
1,528,686

Unamortized deferred financing costs
 
(7,353
)
Total
 
$
1,521,333

___________
(a)
Balance includes $72.5 million of scheduled balloon payments on two consolidated mortgage loans. We currently intend to refinance these mortgage loans, although there can be no assurance that we will be able to do so on favorable terms, if at all.
(b)
Balance includes $117.1 million of scheduled balloon payments on five consolidated mortgage loans. We currently intend to refinance these mortgage loans, although there can be no assurance that we will be able to do so on favorable terms, if at all.
(c)
Includes $75.0 million and $22.8 million of loan proceeds from the Bridge Loan and Working Capital Facility from WPC (Note 3).

Note 10. Commitments and Contingencies

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


CWI 9/30/2017 10-Q 21



Notes to Consolidated Financial Statements (Unaudited)

Hotel Management Agreements

As of September 30, 2017, our Consolidated Hotel properties were operated pursuant to long-term management agreements with 12 different management companies, with initial terms ranging from five to 30 years. For hotels operated with separate franchise agreements, each management company receives a base management fee, generally ranging from 1.0% to 3.5% of hotel revenues. Four of our management agreements contain the right and license to operate the hotels under specified brands; no separate franchise agreements exist and no separate franchise fee is required for these hotels. The management agreements that include the benefit of a franchise agreement incur a base management fee equal to 3.0% of hotel revenues. The management companies are generally also eligible to receive an incentive management fee, which is typically calculated as a percentage of operating profit, either (i) in excess of projections with a cap or (ii) after we have received a priority return on our investment in the hotel. For the three months ended September 30, 2017 and 2016, we incurred management fee expense, including amortization of deferred management fees, of $3.2 million and $3.1 million, respectively, and $13.5 million and $13.8 million for the nine months ended September 30, 2017 and 2016, respectively.

Franchise Agreements

As of September 30, 2017, we had 12 franchise agreements with Marriott owned brands, five with Hilton owned brands, two with InterContinental Hotels owned brands and one with a Hyatt owned brand related to our Consolidated Hotels. The franchise agreements have initial terms ranging from 15 to 25 years. This number excludes four hotels that receive the benefits of a franchise agreement pursuant to management agreements, as discussed above. Also, three of our Consolidated Hotels are independent and not subject to franchise agreements. Our franchise agreements grant us the right to the use of the brand name, systems and marks with respect to specified hotels and establish various management, operational, record-keeping, accounting, reporting and marketing standards and procedures that the licensed hotel must comply with. In addition, the franchisor establishes requirements for the quality and condition of the hotel and its furniture, fixtures and equipment, and we are obligated to expend such funds as may be required to maintain the hotel in compliance with those requirements. Typically, our franchise agreements provide for a license fee, or royalty, of 3.0% to 7.0% of room revenues and, if applicable, 2.0% to 3.0% of food and beverage revenue. In addition, we generally pay 1.0% to 4.0% of room revenues as marketing and reservation system contributions for the system-wide benefit of brand hotels. Franchise fees are included in sales and marketing expense in our consolidated financial statements. For the three months ended September 30, 2017 and 2016, we incurred franchise fee expense, including amortization of deferred franchise fees, of $4.4 million and $5.3 million, respectively, and $14.1 million and $15.4 million for the nine months ended September 30, 2017 and 2016, respectively.

Renovation Commitments

Certain of our hotel franchise and loan agreements require us to make planned renovations to our Consolidated Hotels (Note 4). We do not currently expect, and are not obligated, to fund any planned renovations on our Unconsolidated Hotels beyond our original investment. The table below does not reflect any renovation work to be undertaken as a result of Hurricane Irma, as discussed in Note 4.

At September 30, 2017, eight hotels were either undergoing renovation or in the planning stage of renovations, and we currently expect that three will be completed during the fourth quarter of 2017, one will be completed during the first half of 2018, three will be completed during the second half of 2018 and one will be completed during the first half of 2019. The following table summarizes our capital commitments related to our Consolidated Hotels (in thousands):        
 
 
September 30, 2017
 
December 31, 2016
Capital commitments
 
$
57,760

 
$
84,325

Less: amounts paid
 
(22,460
)
 
(43,179
)
Unpaid commitments
 
35,300

 
41,146

Less: amounts in restricted cash designated for renovations
 
(25,578
)
 
(13,136
)
Unfunded commitments (a)
 
$
9,722

 
$
28,010

___________
(a)
Of our unfunded commitments at September 30, 2017 and December 31, 2016, approximately $0.6 million and $5.3 million, respectively, of unrestricted cash on our balance sheet was designated for renovations.


CWI 9/30/2017 10-Q 22



Notes to Consolidated Financial Statements (Unaudited)

Capital Expenditures and Reserve Funds

With respect to our hotels that are operated under management or franchise agreements with major international hotel brands and for most of our hotels subject to mortgage loans, we are obligated to maintain furniture, fixtures and equipment reserve accounts for future capital expenditures at these hotels, sufficient to cover the cost of routine improvements and alterations at the hotels. The amount funded into each of these reserve accounts is generally determined pursuant to the management agreements, franchise agreements and/or mortgage loan documents for each of the respective hotels and typically ranges between 3% and 5% of the respective hotel’s total gross revenue. As of September 30, 2017 and December 31, 2016$34.0 million and $29.3 million, respectively, was held in furniture, fixtures and equipment reserve accounts for future capital expenditures, and is included in Restricted cash in the consolidated financial statements.

Ground Lease Commitments

Three of our hotels are subject to ground leases. Scheduled future minimum ground lease payments during the remainder of 2017, each of the next four calendar years following December 31, 2017 and thereafter are as follows (in thousands):
Years Ending December 31,
 
Total
2017 (remainder)
 
$
799

2018
 
3,254

2019
 
3,328

2020
 
3,404

2021
 
3,482

Thereafter through 2106
 
651,117

Total
 
$
665,384


For each of the three months ended September 30, 2017 and 2016, we recorded rent expense of $1.0 million, inclusive of percentage rents of $0.2 million for each period, related to these ground leases, which are included in Property taxes, insurance, rent and other in the consolidated financial statements. For each of the nine months ended September 30, 2017 and 2016, we recorded rent expense of $2.9 million, inclusive of percentage rents of $0.6 million and $0.5 million, respectively, related to these ground leases. Additionally, we recorded straight-line rent adjustment expense related to these ground leases of $1.3 million for each of the three months ended September 30, 2017 and 2016 and $3.9 million and $4.0 million for the nine months ended September 30, 2017 and 2016, respectively.

Note 11. Equity

Transfers to Noncontrolling Interests

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


CWI 9/30/2017 10-Q 23



Notes to Consolidated Financial Statements (Unaudited)

Reclassifications Out of Accumulated Other Comprehensive Loss

The following tables present a reconciliation of changes in Accumulated other comprehensive loss by component for the periods presented (in thousands):
 
 
Three Months Ended September 30,
Gains and Losses on Derivative Instruments
 
2017
 
2016
Beginning balance
 
$
(795
)
 
$
(2,494
)
Other comprehensive income before reclassifications
 
89

 
247

Amounts reclassified from accumulated other comprehensive loss to:
 
 
 
 
Interest expense
 
110

 
242

Equity in earnings of equity method investments in real estate
 
49

 
105

Total
 
159

 
347

Net current period other comprehensive income
 
248

 
594

Net current period other comprehensive income attributable to noncontrolling interests
 
(5
)
 

Ending balance
 
$
(552
)
 
$
(1,900
)

 
 
Nine Months Ended September 30,
Gains and Losses on Derivative Instruments
 
2017
 
2016
Beginning balance
 
$
(1,128
)
 
$
(885
)
Other comprehensive loss before reclassifications
 
(74
)
 
(1,547
)
Amounts reclassified from accumulated other comprehensive loss to:
 
 
 
 
Interest expense
 
466

 
760

Equity in earnings of equity method investments in real estate
 
193

 
323

Total
 
659

 
1,083

Net current period other comprehensive income (loss)
 
585

 
(464
)
Net current period other comprehensive (income) loss attributable to noncontrolling interests
 
(9
)
 
372

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

 
(923
)
Ending balance
 
$
(552
)
 
$
(1,900
)

Distributions Declared

During the third quarter of 2017, our board of directors declared a quarterly distribution of $0.1425 per share, which was paid on October 16, 2017 to stockholders of record on September 29, 2017, in the aggregate amount of $19.5 million.

For the nine months ended September 30, 2017, our board of directors declared distributions of $58.4 million, including distributions of $38.9 million declared during the six months ended June 30, 2017. We paid distributions of $58.2 million during the nine months ended September 30, 2017, comprised of $38.9 million declared during the six months ended June 30, 2017 and $19.3 million declared during the three months ended December 31, 2016.

Note 12. Income Taxes

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

CWI 9/30/2017 10-Q 24



Notes to Consolidated Financial Statements (Unaudited)

state jurisdictions. As a result, we are subject to certain state and local taxes and a provision for such taxes is included in the consolidated financial statements.

Certain of our subsidiaries have elected taxable REIT subsidiary, or TRS, status. A TRS may provide certain services considered impermissible for REITs and may hold assets that REITs may not hold directly. The accompanying consolidated financial statements include an interim tax provision for our TRSs for the three and nine months ended September 30, 2017 and 2016. Current income tax benefit was $0.2 million and $0.7 million for the three months ended September 30, 2017 and 2016, respectively. Current tax expense was $1.4 million and $3.0 million for the nine months ended September 30, 2017 and 2016, respectively.

Our TRSs are subject to U.S. federal and state income taxes. As such, deferred tax assets and liabilities are established for temporary differences between the financial reporting basis and the tax basis of assets and liabilities at the enacted tax rates expected to be in effect when the temporary differences reverse. A valuation allowance for deferred tax assets is provided if we believe that it is more likely than not that we will not realize the tax benefit of deferred tax assets based on available evidence at the time the determination is made. A change in circumstances may cause us to change our judgment about whether a deferred tax asset will more likely than not be realized. We generally report any change in the valuation allowance through our income statement in the period in which such changes in circumstances occur. Deferred tax assets (net of valuation allowance) and liabilities for our TRSs were recorded, as necessary, as of September 30, 2017 and December 31, 2016. Deferred tax assets (net of valuation allowance) totaled $3.0 million and $4.4 million at September 30, 2017 and December 31, 2016, respectively, and are included in Other assets in the consolidated financial statements. Deferred tax liabilities totaled $5.5 million and $7.5 million at September 30, 2017 and December 31, 2016, respectively, and are included in Accounts payable, accrued expenses and other liabilities in the consolidated financial statements. The majority of our deferred tax assets relate to net operating losses, accrued expenses and deferred key money liabilities. The majority of our deferred tax liabilities relate to differences between the tax basis and financial reporting basis of the villa/condo rental management agreements. Provision for income taxes included deferred income tax expense of less than $0.1 million and $1.7 million for the three months ended September 30, 2017 and 2016, respectively, and deferred income tax benefit of $0.8 million for the nine months ended September 30, 2017 and deferred income tax expense of less than $0.1 million for the nine months ended September 30, 2016.

Note 13. Subsequent Events

On October 12, 2017, we made a repayment of $3.8 million to WPC towards the outstanding balance of the Bridge Loan (Note 3).

On October 19, 2017, the Westin Atlanta Venture sold the Westin Atlanta Perimeter North to an unaffiliated third-party for a contractual sales price of $85.5 million. We owned a 57% interest in the venture and received net proceeds of approximately $25.9 million from the sale. The carrying value of our investment in this venture was $4.5 million at September 30, 2017 (Note 5).

On October 27, 2017, we used $10.4 million and $15.0 million, respectively, of the proceeds from the sale of the Westin Atlanta Perimeter North to make repayments towards the Bridge Loan and Working Capital Facility, respectively (Note 3).


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

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

Business Overview

As described in more detail in Item 1 of the 2016 Annual Report, we are a publicly-owned, non-listed REIT that invests in, and through our Advisor, manages and seeks to enhance the value of, our interests in lodging and lodging-related properties. At September 30, 2017, we held ownership interests in 32 hotels, with a total of 8,719 rooms.

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

Significant Developments

Acquisition

On September 28, 2017, we formed a tenancy-in-common venture with CWI 2 to acquire the Bacara Resort & Spa for $380.0 million. We own a 40% interest in the venture and CWI 2 owns a 60% interest. Upon acquisition, the hotel was rebranded as the Ritz-Carlton Bacara, Santa Barbara. This investment is accounted for under the equity method of accounting (Note 5).

WPC Credit Facility

During the third quarter of 2017, our board of directors and the board of directors of WPC approved secured loans from WPC to us of up to $100.0 million for acquisition funding purposes and $25.0 million for working capital purposes. On September 26, 2017, we entered into a secured credit facility, or the WPC Credit Facility, with our Operating Partnership as borrower and WPC as lender. The WPC Credit Facility consists of (i) a bridge term loan of $75.0 million, or the Bridge Loan, for the purpose of acquiring an interest in the Ritz-Carlton Bacara, Santa Barbara (Note 5) and (ii) a $25.0 million revolving working capital facility, or the Working Capital Facility, to be used for our working capital needs. The Working Capital Facility replaced the WPC Line of Credit, which had an outstanding principal balance of $22.8 million on that date and a maturity date of March 22, 2018. Unless the Advisory Agreement expires or is terminated, the Bridge Loan and Working Capital Facility are scheduled to mature on June 30, 2018 and December 31, 2018, respectively. We can request a three month extension of the Bridge Loan, which WPC may grant in its sole discretion. Both loans bear interest at LIBOR plus 1.0%; provided however, that upon the occurrence of certain events of default (as defined in the loan agreement), all outstanding amounts will be subject to a 2% annual interest rate increase. We serve as guarantor of the WPC Credit Facility and have pledged our unencumbered equity interests in certain properties as collateral, as further described in the pledge and security agreement entered into between the borrower and lender. On September 27, 2017, the Operating Partnership drew down $75.0 million from the Bridge Loan to acquire our interest in the Ritz-Carlton Bacara, Santa Barbara.

At September 30, 2017, the outstanding balances under the Bridge Loan and Working Capital Facility were $75.0 million and $22.8 million, respectively, with $2.2 million available to be drawn on the Working Capital Facility (Note 3). On October 12, 2017, we made a repayment of $3.8 million to WPC towards the outstanding balance of the Bridge Loan. Additionally, on October 27, 2017, we made repayments of $10.4 million and $15.0 million towards the Bridge Loan and Working Capital Facility, respectively (Note 13).

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Financings

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

Weather-Related Disruption

At September 30, 2017, we held ownership interests in six hotels in Florida and Georgia that were impacted by Hurricane Irma when it made landfall in September 2017; Hawks Cay Resort, Marriott Boca Raton at Boca Center, Ritz-Carlton Key Biscayne, Ritz-Carlton Fort Lauderdale and Staybridge Suites Savannah Historic District, all of which are Consolidated Hotels and Marriott Sawgrass Golf Resort & Spa, which is an Unconsolidated Hotel. All six hotels sustained some damage and all except for Marriott Boca Raton at Boca Center were forced to close for a period of time.  As of September 30, 2017, all hotels had reopened, with the exception of the Hawks Cay Resort, which is expected to remain closed for an extended period of time. During the third quarter of 2017, we recognized a hurricane loss of $7.6 million in our Consolidated Hotels, representing our best estimate of uninsured losses from Hurricane Irma as of September 30, 2017. The Sawgrass Golf Resort & Spa Venture, in which we own a 50% interest, recognized a $3.8 million hurricane loss, representing the property damage insurance deductible. We will continue to monitor the effects of the hurricane on our hotels. There can be no assurance that we will not recognize additional hurricane-related losses in the future, some of which may be material.

During October 2017, the Fairmont Sonoma Inn & Spa was closed for six days as a result of evacuations caused by wildfires in the Northern California region. We anticipate filing a claim for lost revenue under our business interruption coverage, which will be recorded when the recovery is probable and the claim is settled.

Senior Credit Facility

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


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Financial and Operating Highlights

(Dollars in thousands, except average daily rate, or ADR, and revenue per available room, or RevPAR)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
Hotel revenues
 
$
154,829

 
$
166,865

 
$
485,887

 
$
495,801

Hurricane loss
 
7,609

 

 
7,609

 

Acquisition-related expenses