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EX-32.1 - EX-32.1 - Sunstone Hotel Investors, Inc.sho-20180331ex321c5a08e.htm
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EX-31.1 - EX-31.1 - Sunstone Hotel Investors, Inc.sho-20180331ex311693600.htm

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2018

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                to               

 

Commission file number 001-32319

 


 

Sunstone Hotel Investors, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 


 

 

 

 

Maryland

 

20-1296886

(State or Other Jurisdiction of
Incorporation or Organization)

 

(I.R.S. Employer
Identification Number)

 

 

 

120 Vantis, Suite 350
Aliso Viejo, California

 

92656

(Address of Principal Executive Offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code: (949) 330-4000

 


 

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

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

Large accelerated filer ☒

 

Accelerated filer ☐

 

 

 

Non-accelerated filer ☐

 

Smaller reporting company ☐

(Do not check if a smaller reporting company)

 

 

 

 

 

Emerging growth company  ◻

 

 

 

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

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

225,614,712 shares of Common Stock, $0.01 par value, as of May  1, 2018

 

 


 

 

SUNSTONE HOTEL INVESTORS, INC.

QUARTERLY REPORT ON

FORM 10-Q

 

For the Quarterly Period Ended March 31, 2018

 

TABLE OF CONTENTS

 

 

 

 

 

 

Page

PART I—FINANCIAL INFORMATION 

 

 

 

Item 1. 

Financial Statements

2

 

 

 

 

Consolidated Balance Sheets as of March 31, 2018 (unaudited) and December 31, 2017

2

 

 

 

 

Unaudited Consolidated Statements of Operations for the Three Months Ended March 31, 2018 and 2017

3

 

 

 

 

Unaudited Consolidated Statement of Equity for the Three Months Ended March 31, 2018

4

 

 

 

 

Unaudited Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2018 and 2017

5

 

 

 

 

Notes to Unaudited Consolidated Financial Statements

7

 

 

 

Item 2. 

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

21

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures about Market Risk

36

 

 

 

Item 4. 

Controls and Procedures

37

 

 

 

PART II—OTHER INFORMATION 

 

 

 

Item 1. 

Legal Proceedings

38

 

 

 

Item 1A. 

Risk Factors

38

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

38

 

 

 

Item 3. 

Defaults Upon Senior Securities

38

 

 

 

Item 4. 

Mine Safety Disclosures

38

 

 

 

Item 5. 

Other Information

38

 

 

 

Item 6. 

Exhibits

39

 

 

 

SIGNATURES 

40

 

 

 

i

 


 

PART I—FINANCIAL INFORMATION

Item 1.Financial Statements

 

SUNSTONE HOTEL INVESTORS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

    

2018

    

2017

 

 

(unaudited)

 

 

 

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

467,050

 

$

488,002

Restricted cash

 

 

79,336

 

 

71,309

Accounts receivable, net

 

 

48,589

 

 

34,219

Inventories

 

 

1,375

 

 

1,323

Prepaid expenses

 

 

12,532

 

 

10,464

Assets held for sale, net

 

 

 —

 

 

122,807

Total current assets

 

 

608,882

 

 

728,124

Investment in hotel properties, net

 

 

3,110,887

 

 

3,106,066

Deferred financing fees, net

 

 

1,045

 

 

1,305

Other assets, net

 

 

31,971

 

 

22,317

Total assets

 

$

3,752,785

 

$

3,857,812

LIABILITIES AND EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

34,950

 

$

31,810

Accrued payroll and employee benefits

 

 

18,174

 

 

26,687

Dividends and distributions payable

 

 

14,488

 

 

133,894

Other current liabilities

 

 

43,073

 

 

44,502

Current portion of notes payable, net

 

 

5,569

 

 

5,477

Liabilities of assets held for sale

 

 

 —

 

 

189

Total current liabilities

 

 

116,254

 

 

242,559

Notes payable, less current portion, net

 

 

975,779

 

 

977,282

Capital lease obligations, less current portion

 

 

26,854

 

 

26,804

Other liabilities

 

 

31,041

 

 

28,989

Total liabilities

 

 

1,149,928

 

 

1,275,634

Commitments and contingencies (Note 11)

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

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

 

 

 

 

 

 

6.95% Series E Cumulative Redeemable Preferred Stock, 4,600,000 shares issued and outstanding at March 31, 2018 and December 31, 2017, stated at liquidation preference of $25.00 per share

 

 

115,000

 

 

115,000

6.45% Series F Cumulative Redeemable Preferred Stock, 3,000,000 shares issued and outstanding at March 31, 2018 and December 31, 2017, stated at liquidation preference of $25.00 per share

 

 

75,000

 

 

75,000

Common stock, $0.01 par value, 500,000,000 shares authorized, 225,614,712 shares issued and outstanding at March 31, 2018 and 225,321,660 shares issued and outstanding at December 31, 2017

 

 

2,256

 

 

2,253

Additional paid in capital

 

 

2,677,099

 

 

2,679,221

Retained earnings

 

 

968,293

 

 

932,277

Cumulative dividends and distributions

 

 

(1,284,501)

 

 

(1,270,013)

Total stockholders’ equity

 

 

2,553,147

 

 

2,533,738

Noncontrolling interest in consolidated joint venture

 

 

49,710

 

 

48,440

Total equity

 

 

2,602,857

 

 

2,582,178

Total liabilities and equity

 

$

3,752,785

 

$

3,857,812

 

See accompanying notes to consolidated financial statements.

2

 


 

SUNSTONE HOTEL INVESTORS, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

    

2018

    

2017

REVENUES

 

 

 

 

 

 

Room

 

$

180,276

 

$

190,367

Food and beverage

 

 

74,266

 

 

75,501

Other operating

 

 

16,904

 

 

14,875

Total revenues

 

 

271,446

 

 

280,743

OPERATING EXPENSES

 

 

 

 

 

 

Room

 

 

51,095

 

 

51,292

Food and beverage

 

 

50,154

 

 

50,537

Other operating

 

 

3,941

 

 

3,831

Advertising and promotion

 

 

13,906

 

 

14,946

Repairs and maintenance

 

 

11,103

 

 

10,967

Utilities

 

 

7,475

 

 

7,222

Franchise costs

 

 

7,853

 

 

8,055

Property tax, ground lease and insurance

 

 

21,781

 

 

21,287

Other property-level expenses

 

 

33,907

 

 

34,738

Corporate overhead

 

 

7,102

 

 

6,779

Depreciation and amortization

 

 

36,688

 

 

40,807

Total operating expenses

 

 

245,005

 

 

250,461

Operating income

 

 

26,441

 

 

30,282

Interest and other income

 

 

1,491

 

 

721

Interest expense

 

 

(8,876)

 

 

(11,249)

Loss on extinguishment of debt

 

 

 —

 

 

(4)

Gain on sale of assets

 

 

15,659

 

 

44,285

Income before income taxes

 

 

34,715

 

 

64,035

Income tax benefit (provision), net

 

 

3,740

 

 

(208)

NET INCOME

 

 

38,455

 

 

63,827

Income from consolidated joint venture attributable to noncontrolling interest

 

 

(2,439)

 

 

(1,992)

Preferred stock dividends

 

 

(3,207)

 

 

(3,207)

INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS

 

$

32,809

 

$

58,628

 

 

 

 

 

 

 

Basic and diluted per share amounts:

 

 

 

 

 

 

Basic and diluted income attributable to common stockholders per common share

 

$

0.15

 

$

0.27

Basic and diluted weighted average common shares outstanding

 

 

224,282

 

 

219,093

 

 

 

 

 

 

 

Distributions declared per common share

 

$

0.05

 

$

0.05

 

See accompanying notes to consolidated financial statements.

 

3

 


 

 

SUNSTONE HOTEL INVESTORS, INC.

UNAUDITED CONSOLIDATED STATEMENT OF EQUITY

(In thousands, except share and per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

Noncontrolling

 

 

 

 

 

Series E

 

Series F

 

Common Stock

 

 

 

 

 

 

 

Cumulative

 

Interest in

 

 

 

 

 

Number of

 

 

 

Number of

 

 

 

Number of

 

 

 

Additional

 

Retained

 

Dividends and

 

Consolidated

 

 

 

 

  

Shares

  

Amount

  

Shares

    

Amount

  

Shares

  

Amount

  

Paid in Capital

  

 Earnings

  

Distributions

  

 Joint Venture 

  

Total

Balance at December 31, 2017 (audited)

 

4,600,000

 

$

115,000

 

3,000,000

 

$

75,000

 

225,321,660

 

$

2,253

 

$

2,679,221

 

$

932,277

 

$

(1,270,013)

 

$

48,440

 

$

2,582,178

Deferred stock compensation, net

 

 —

 

 

 —

 

 —

 

 

 —

 

293,052

 

 

 3

 

 

(2,122)

 

 

 —

 

 

 —

 

 

 —

 

 

(2,119)

Common stock distributions and distributions payable at $0.05 per share year to date

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(11,281)

 

 

 —

 

 

(11,281)

Series E preferred stock dividends and dividends payable at $0.434375 per share year to date

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(1,998)

 

 

 —

 

 

(1,998)

Series F preferred stock dividends and dividends payable at $0.403125 per share year to date

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(1,209)

 

 

 —

 

 

(1,209)

Distributions to noncontrolling interest

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(1,169)

 

 

(1,169)

Net income

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

36,016

 

 

 —

 

 

2,439

 

 

38,455

Balance at March 31, 2018

 

4,600,000

 

$

115,000

 

3,000,000

 

$

75,000

 

225,614,712

 

$

2,256

 

$

2,677,099

 

$

968,293

 

$

(1,284,501)

 

$

49,710

 

$

2,602,857

 

 

See accompanying notes to consolidated financial statements.

 

4

 


 

SUNSTONE HOTEL INVESTORS, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

    

2018

    

2017

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

Net income

 

$

38,455

 

$

63,827

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

 

 

 

 

 

 

Bad debt expense

 

 

82

 

 

131

Gain on sale of assets, net

 

 

(15,669)

 

 

(44,570)

Loss on extinguishment of debt

 

 

 —

 

 

 4

Noncash interest on derivatives and capital lease obligations, net

 

 

(3,137)

 

 

(657)

Depreciation

 

 

36,008

 

 

40,150

Amortization of franchise fees and other intangibles

 

 

746

 

 

819

Amortization of deferred financing fees

 

 

747

 

 

578

Amortization of deferred stock compensation

 

 

2,000

 

 

1,749

Deferred income taxes

 

 

(3,966)

 

 

 —

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

(13,096)

 

 

(10,575)

Inventories

 

 

(52)

 

 

 5

Prepaid expenses and other assets

 

 

(3,523)

 

 

(2,387)

Accounts payable and other liabilities

 

 

514

 

 

(370)

Accrued payroll and employee benefits

 

 

(8,513)

 

 

(8,569)

Net cash provided by operating activities

 

 

30,596

 

 

40,135

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

Proceeds from sales of assets

 

 

136,993

 

 

123,117

Renovations and additions to hotel properties

 

 

(39,321)

 

 

(29,872)

Payment for interest rate derivative

 

 

 —

 

 

(19)

Net cash provided by investing activities

 

 

97,672

 

 

93,226

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

Repurchase of common stock for employee withholding obligations

 

 

(4,232)

 

 

(3,793)

Proceeds from notes payable

 

 

 —

 

 

240,000

Payments on notes payable

 

 

(1,893)

 

 

(178,599)

Payments of deferred financing costs

 

 

(5)

 

 

(13)

Dividends and distributions paid

 

 

(133,894)

 

 

(119,847)

Distributions to noncontrolling interest

 

 

(1,169)

 

 

(2,325)

Net cash used in financing activities

 

 

(141,193)

 

 

(64,577)

Net (decrease) increase in cash and cash equivalents and restricted cash

 

 

(12,925)

 

 

68,784

Cash and cash equivalents and restricted cash, beginning of period

 

 

559,311

 

 

437,460

Cash and cash equivalents and restricted cash, end of period

 

$

546,386

 

$

506,244

 

 

 

 

 

See accompanying notes to consolidated financial statements.

5


 

SUNSTONE HOTEL INVESTORS, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

Supplemental Disclosure of Cash Flow Information

 

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated balance sheet to the amount shown in the consolidated statements of cash flows:

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

2018

 

2017

Cash and cash equivalents

 

$

467,050

 

$

441,830

Restricted cash

 

 

79,336

 

 

64,414

Total cash and cash equivalents and restricted cash shown on the consolidated statements of cash flow

 

$

546,386

 

$

506,244

 

The Company paid the following amounts for interest and income taxes, during the three months ended March 31, 2018 and 2017:

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

2018

 

2017

Cash paid for interest

 

$

13,618

 

$

9,632

Cash paid for income taxes

 

$

35

 

$

38

 

Supplemental Disclosure of Noncash Investing and Financing Activities

 

The Company’s noncash investing and financing activities during the three months ended March 31, 2018 and 2017 consisted of the following:

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

2018

 

2017

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

 

$

3,112

 

$

2,119

Amortization of deferred stock compensation — construction activities

 

$

113

 

$

151

Dividends and distributions payable

 

$

14,488

 

$

14,228

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

6


 

 

SUNSTONE HOTEL INVESTORS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

1. Organization and Description of Business

 

Sunstone Hotel Investors, Inc. (the “Company”) was incorporated in Maryland on June 28, 2004 in anticipation of an initial public offering of common stock, which was consummated on October 26, 2004. The Company, through its 100% controlling interest in Sunstone Hotel Partnership, LLC (the “Operating Partnership”), of which the Company is the sole managing member, and the subsidiaries of the Operating Partnership, including Sunstone Hotel TRS Lessee, Inc. (the “TRS Lessee”) and its subsidiaries, is currently engaged in acquiring, owning, asset managing and renovating hotel properties. The Company may also sell certain hotel properties from time to time. The Company operates as a real estate investment trust (“REIT”) for federal income tax purposes.

 

As a REIT, certain tax laws limit the amount of “non-qualifying” income the Company can earn, including income derived directly from the operation of hotels. The Company leases all of its hotels to its TRS Lessee, which in turn enters into long-term management agreements with third parties to manage the operations of the Company’s hotels, in transactions that are intended to generate qualifying income. As of March 31, 2018, the Company had interests in 25 hotels (the “25 hotels”), and the Company’s third-party managers included the following:

 

 

 

 

 

 

 

 

    

Number of Hotels

Subsidiaries of Marriott International, Inc. or Marriott Hotel Services, Inc. (collectively, “Marriott”)

 

 9

Interstate Hotels & Resorts, Inc.

 

 4

Highgate Hotels L.P. and an affiliate

 

 3

Crestline Hotels & Resorts

 

 2

Hilton Worldwide

 

 2

Hyatt Corporation

 

 2

Davidson Hotels & Resorts

 

 1

HEI Hotels & Resorts

 

 1

Singh Hospitality, LLC

 

 1

 

 

 

Total hotels held for investment

 

25

 

 

2. Summary of Significant Accounting Policies

 

Basis of Presentation

 

The accompanying consolidated financial statements as of March 31, 2018 and December 31, 2017, and for the three months ended March 31, 2018 and 2017, include the accounts of the Company, the Operating Partnership, the TRS Lessee and their controlled subsidiaries. All significant intercompany balances and transactions have been eliminated. If the Company determines that it has an interest in a variable interest entity, the Company will consolidate the entity when it is determined to be the primary beneficiary of the entity.

 

The accompanying interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and in conformity with the rules and regulations of the Securities and Exchange Commission. In the Company’s opinion, the interim financial statements presented herein reflect all adjustments, consisting solely of normal and recurring adjustments, which are necessary to fairly present the interim financial statements. These financial statements should be read in conjunction with the financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017, filed with the Securities and Exchange Commission on February 14, 2018. Operating results for the three months ended March 31, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018.

 

The Company does not have any comprehensive income other than what is included in net income. If the Company has any comprehensive income in the future such that a statement of comprehensive income would be necessary, the Company will include such statement in one continuous consolidated statement of operations.

 

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

 

7


 

Use of Estimates

 

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

 

Earnings Per Share

 

The Company applies the two-class method when computing its earnings per share. Net income per share for each class of stock (common stock and convertible preferred stock) is calculated assuming all of the Company’s net income is distributed as dividends to each class of stock based on their contractual rights.

 

Unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are considered participating securities and are included in the computation of earnings per share.

 

Basic earnings (loss) attributable to common stockholders per common share is computed based on the weighted average number of shares of common stock outstanding during each period. Diluted earnings (loss) attributable to common stockholders per common share is computed based on the weighted average number of shares of common stock outstanding during each period, plus potential common shares considered outstanding during the period, as long as the inclusion of such awards is not anti-dilutive. Potential common shares consist of unvested restricted stock awards and the incremental common shares issuable upon the exercise of stock options, using the more dilutive of either the two-class method or the treasury stock method.

 

The following table sets forth the computation of basic and diluted earnings per common share (in thousands, except per share data):

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

    

2018

    

2017

 

 

(unaudited)

 

(unaudited)

Numerator:

 

 

 

 

 

 

Net income

 

$

38,455

 

$

63,827

Income from consolidated joint venture attributable to noncontrolling interest

 

 

(2,439)

 

 

(1,992)

Preferred stock dividends

 

 

(3,207)

 

 

(3,207)

Distributions paid on unvested restricted stock compensation

 

 

(59)

 

 

(60)

Undistributed income allocated to unvested restricted stock compensation

 

 

(117)

 

 

(248)

Numerator for basic and diluted income attributable to common stockholders

 

$

32,633

 

$

58,320

Denominator:

 

 

 

 

 

 

Weighted average basic and diluted common shares outstanding

 

 

224,282

 

 

219,093

Basic and diluted income attributable to common stockholders per common share

 

$

0.15

 

$

0.27

 

The Company’s unvested restricted shares associated with its long-term incentive plan and shares associated with common stock options have been excluded from the above calculation of earnings per share for the three months ended March 31, 2018 and 2017, as their inclusion would have been anti-dilutive.

 

New Accounting Standards and Accounting Changes

 

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU No. 2014-09”). The core principle of ASU No. 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity applies a five-step model: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) the entity satisfies a performance obligation.

 

In March 2016, the FASB clarified the principal versus agent guidance in ASU No. 2014-09 with its issuance of Accounting Standards Update No. 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)” (“ASU No. 2016-08”). In particular, ASU No. 2016-08 clarifies how an entity should identify the unit of accounting for the principal versus agent evaluation and how it should apply the control principle to certain types of

8


 

arrangements, such as service transactions by explaining what a principal controls before the specified good or service is transferred to the customer. In addition, ASU No. 2016-08 reframes the indicators to focus on evidence that an entity is acting as a principal rather than as an agent. 

 

In May 2016, the FASB amended ASU No. 2014-09’s guidance on transition, collectability, noncash consideration and the presentation of sales and other similar taxes with its issuance of Accounting Standards Update No. 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients” (“ASU No. 2016-12”). The amendments clarify that, for a contract to be considered completed at transition, all (or substantially all) of the revenue must have been recognized under legacy GAAP. This clarification is important because entities that use the modified retrospective transition approach need to apply the standard only to contracts that are not complete as of the date of initial application, and entities that use the full retrospective approach may apply certain practical expedients to completed contracts. In addition, ASU No. 2016-12 clarifies that an entity should consider the probability of collecting substantially all of the consideration to which it will be entitled in exchange for goods and services expected to be transferred to the customer rather than the total amount promised for all the goods or services in the contract. ASU No. 2016-12 also clarifies that an entity may consider its ability to manage its exposure to credit risk as part of the collectability assessment, as well as that the fair value of noncash consideration should be measured at contract inception when determining the transaction price. Finally, ASU No. 2016-12 allows an entity to make an accounting policy election to exclude from the transaction price certain types of taxes collected from a customer if it discloses that policy.

 

The Company adopted ASU No. 2014-09, along with the related clarifications and amendments in ASU No. 2016-08 and ASU No. 2016-12, in January 2018, using the modified retrospective approach to contracts that were not complete as of January 1, 2018.  Due to the short-term nature of the Company’s revenue streams, the adoption of ASU No. 2014-09 did not have a material impact on the amount and timing of revenue recognized from rooms, food and beverage and other ancillary hotel services. In addition, the Company determined that presenting its revenue streams disaggregated into the categories of rooms, food and beverage, and other on its consolidated statements of operations depicts how the nature, timing and uncertainty of revenue and cash flows are affected by economic factors, and that no further disaggregation is needed. See Revenue Recognition in Note 2 for additional disclosures.

 

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, “Leases (Topic 842)” (“ASU No. 2016-02”), which will require lessees to put most leases on their balance sheets but recognize expenses in the income statement in a manner similar to today’s accounting. A lessee will be required to record a right-of-use asset and a lease liability for all leases with a term greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similarly to existing guidance for operating leases today. ASU No. 2016-02 also eliminates today’s real estate-specific provisions and changes the guidance on sale-leaseback transactions, initial direct costs and lease executory costs for all entities. For lessors, the standard modifies the classification criteria and requires lessors to identify lease and non-lease components under their leasing arrangements and to allocate the total consideration in the lease agreement to these lease and non-lease components based on their relative standalone selling prices. All entities will classify leases to determine how to recognize lease-related revenue and expense. Classification will continue to affect amounts that lessors record on the balance sheet. ASU No. 2016-02 will become effective during the first quarter of 2019, and will require a modified retrospective approach for leases that exist or are entered into after the date of initial application, with an option to use certain transition relief. In January 2018, the FASB issued a proposed amendment to ASU No. 2016-02 which would add a transition option to the new leases standard that would allow entities to apply the transition provisions of the new standard at its adoption date instead of the earliest comparative period presented in its financial statements. The FASB also proposed a practical expedient that would permit lessors to not separate lease and non-lease components if certain conditions are met. The Company is creating an inventory of its leases and is analyzing its current ground lease obligations. In addition, the Company is evaluating the impact that ASU No. 2016-02, as well as the FASB’s proposed transition option and practical expedient if adopted, will have on its consolidated financial statements, and, other than the inclusion of operating leases on the Company’s balance sheet, such effects have not yet been determined. 

 

In January 2018, the FASB issued Accounting Standards Update No. 2018-01, “Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842” (“ASU No. 2018-01”), which clarifies, among other things, that perpetual easements are not leases because they do not convey the right to use the underlying land for a period of time. The Company has a perpetual easement agreement at the Hilton Times Square, which, under the guidance of ASU No. 2018-01, will not be considered a lease and will continue to be an intangible asset with an indefinite useful life. ASU No. 2018-01 will become effective, along with ASU No. 2016-02, during the first quarter of 2019.

 

In November 2016, the FASB issued Accounting Standards Update No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force)” (“ASU No. 2016-18”), which requires entities to show the changes in total cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. As a result, entities no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. When cash, cash equivalents, restricted cash and restricted cash equivalents are presented in more than one line item on the balance sheet, the guidance requires a reconciliation of the totals in the statement of cash flows to the related caption in the balance sheet. The Company adopted ASU No. 2016-18 in January 2018. As a result, amounts included in restricted cash on the

9


 

Company’s consolidated balance sheet are included with cash and cash equivalents on the consolidated statement of cash flows. A reconciliation of the totals in the statement of cash flows to the related caption in the balance sheet has been added as a supplemental disclosure to the Company’s consolidated statements of cash flow. The adoption of this standard did not change the Company’s balance sheet presentation. 

 

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

 

In January 2017, the FASB issued Accounting Standards Update No. 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” (“ASU No. 2017-04”), which eliminates the requirement to calculate the implied fair value of goodwill (i.e., Step 2 of today’s goodwill impairment test) to measure a goodwill impairment charge. Under the new guidance, if a reporting unit’s carrying amount exceeds its fair value, an entity will record an impairment charge based on that difference. The impairment charge will be limited to the amount of goodwill allocated to that reporting unit. The standard does not change the guidance on completing Step 1 of the goodwill impairment test. An entity will still be able to perform today’s optional qualitative goodwill impairment assessment before determining whether to proceed to Step 1. ASU No. 2017-04 will become effective in the first quarter of 2019, with early adoption permitted, and the guidance is to be applied prospectively. The Company elected to early adopt ASU No. 2017-04 in January 2018, with no material impact on its consolidated financial statements.

 

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

 

Noncontrolling Interest

 

The Company’s consolidated financial statements include an entity in which the Company has a controlling financial interest. Noncontrolling interest is the portion of equity (net assets) in a subsidiary not attributable, directly or indirectly, to a parent. Such noncontrolling interest is reported on the consolidated balance sheets within equity, separately from the Company’s equity. On the consolidated statements of operations, revenues, expenses and net income or loss from the less-than-wholly owned subsidiary is reported at the consolidated amount, including both the amounts attributable to the Company and the noncontrolling interest. Income or loss is allocated to the noncontrolling interest based on its weighted average ownership percentage for the applicable period. The consolidated statement of equity includes beginning balances, activity for the period and ending balances for each component of stockholders’ equity, noncontrolling interest and total equity.

 

At both March 31, 2018 and December 31, 2017, the noncontrolling interest reported in the Company’s financial statements included a third-party’s 25.0% ownership interest in the Hilton San Diego Bayfront.

 

Property and Equipment

 

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

10


 

 

Revenue Recognition

 

Revenues are recognized when control of the promised goods or services is transferred to hotel guests, which is generally defined as the date upon which a guest occupies a room and/or utilizes the hotel’s services. Room revenue is recognized over a guest’s stay at a previously agreed upon daily rate. Additionally, some of the Company’s hotel rooms are booked through independent internet travel intermediaries. If the guest pays the independent internet travel intermediary directly, revenue for the room is booked by the Company at the price the Company sold the room to the independent internet travel intermediary, less any discount or commission paid. If the guest pays the Company directly, revenue for the room is booked by the Company on a gross basis. A majority of the Company’s hotels participate in frequent guest programs sponsored by the hotel brand owners whereby the hotel allows guests to earn loyalty points during their hotel stay. The Company expenses charges associated with these programs as incurred, and recognizes revenue at the amount it will receive from the brand when a guest redeems their loyalty points by staying at one of the Company’s hotels. In addition, some contracts for rooms or food and beverage services require an advance deposit, which the Company records as deferred revenue (or a contract liability) and recognizes once the performance obligations are satisfied.

 

Food and beverage revenue and other ancillary services revenue are generated when a customer chooses to purchase goods or services separately from a hotel room. These revenue streams are recognized during the time the goods or services are provided to the customer at the amount the Company expects to be entitled to in exchange for those goods or services. For those ancillary services provided by third parties, the Company assesses whether it is the principal or the agent. If the Company is the principal, revenue is recognized based upon the gross sales price. If the Company is the agent, revenue is recognized based upon the commission earned from the third party.

 

Additionally, the Company collects sales, use, occupancy and other similar taxes at its hotels, which the Company presents on a net basis (excluded from revenues) in its consolidated statements of operations.

 

Trade receivables and contract liabilities consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

 

2018

 

2017

 

 

(unaudited)

 

 

 

Trade receivables, net (1)

 

$

27,808

 

$

20,773

Contract liabilities (2)

 

$

15,197

 

$

13,454

 

(1)

Trade receivables are included in accounts receivable, net on the accompanying consolidated balance sheets.

(2)

Contract liabilities consist of advance deposits, and are included in other current liabilities on the accompanying consolidated balance sheets.

 

Segment Reporting

 

The Company considers each of its hotels to be an operating segment, none of which meets the threshold for a separate reportable segment. Currently, the Company operates in one reportable segment, hotel ownership.

 

 

3. Investment in Hotel Properties

 

Investment in hotel properties, net consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

    

2018

    

2017

 

 

(unaudited)

 

 

 

Land

 

$

605,054

 

$

605,054

Buildings and improvements

 

 

3,067,473

 

 

3,049,569

Furniture, fixtures and equipment

 

 

496,492

 

 

484,749

Intangible assets

 

 

48,251

 

 

48,371

Franchise fees

 

 

980

 

 

980

Construction in process

 

 

66,134

 

 

54,280

Investment in hotel properties, gross

 

 

4,284,384

 

 

4,243,003

Accumulated depreciation and amortization

 

 

(1,173,497)

 

 

(1,136,937)

Investment in hotel properties, net

 

$

3,110,887

 

$

3,106,066

 

 

 

11


 

 

4. Disposals

 

In January 2018, the Company sold the Marriott Philadelphia and the Marriott Quincy, located in Pennsylvania and Massachusetts, respectively, for net proceeds of $137.0 million. The Company recognized a net gain on the sale of $15.7 million. Neither of these sales qualified as a disposition of a business. In addition, neither sale represented a  strategic shift that had a major impact on the Company’s business plan or its primary markets; therefore, neither of these sales qualified as a discontinued operation. The Company classified the assets and liabilities of both hotels as held for sale as of December 31, 2017 as follows (in thousands):

 

 

 

 

 

 

 

December 31,

 

 

2017

Accounts receivable

 

$

1,676

Prepaid expenses

 

 

193

Investment in hotel properties, net

 

 

120,916

Other assets

 

 

22

Assets held for sale, net

 

$

122,807

 

 

 

 

Accounts payable and accrued expenses

 

$

69

Other current liabilities

 

 

41

Other liabilities

 

 

79

Liabilities of assets held for sale

 

$

189

 

The following table provides summary results of operations for the Marriott Philadelphia and the Marriott Quincy, along with the Fairmont Newport Beach and the Marriott Park City, both of which were sold in 2017, which are included in continuing operations for their respective ownership periods (in thousands):

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

    

2018

    

2017

 

 

(unaudited)

 

(unaudited)

Revenues

 

$

603

 

$

18,344

Income before income taxes

 

$

(943)

 

$

2,621

Gain on sale of assets

 

$

15,659

 

$

44,285

 

 

 

5. Fair Value Measurements and Interest Rate Derivatives

 

Fair Value of Financial Instruments

 

As of March 31, 2018 and December 31, 2017, the carrying amount of certain financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued expenses were representative of their fair values due to the short-term maturity of these instruments.

 

A fair value measurement is based on the assumptions that market participants would use in pricing an asset or liability in an orderly transaction. The hierarchy for inputs used in measuring fair value is as follows:

 

 

 

Level 1

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

 

 

Level 2

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

 

 

Level 3

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

 

As of March 31, 2018 and December 31, 2017, the only financial instruments that the Company measures at fair value on recurring bases are its interest rate derivatives, along with a life insurance policy and a related retirement benefit agreement. The Company estimates the fair value of its interest rate derivatives using Level 2 measurements based on quotes obtained from the counterparties, which are based upon the consideration that would be required to terminate the agreements. Both the life insurance policy and the related retirement benefit agreement, which are for a former Company associate, are valued using Level 2 measurements.

 

12


 

The following table presents the Company’s assets measured at fair value on a recurring and nonrecurring basis at March 31, 2018 and December 31, 2017 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at Reporting Date

 

    

Total

    

Level 1

    

Level 2

    

Level 3

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2018 (unaudited):

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate cap derivatives

 

$

15

 

$

 —

 

$

15

 

$

 —

Interest rate swap derivatives

 

 

6,566

 

 

 —

 

 

6,566

 

 

 —

Life insurance policy (1)

 

 

632

 

 

 —

 

 

632

 

 

 —

Total assets measured at fair value at March 31, 2018

 

$

7,213

 

$

 —

 

$

7,213

 

$

 —

December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

Houston hotels, net

 

$

34,473

 

$

 —

 

 

 —

 

$

34,473

Interest rate cap derivatives

 

 

 4

 

 

 —

 

 

 4

 

 

 —

Interest rate swap derivatives

 

 

3,390

 

 

 —

 

 

3,390

 

 

 —

Life insurance policy (1)

 

 

645

 

 

 —

 

 

645

 

 

 —

Total assets measured at fair value at December 31, 2017

 

$

38,512

 

$

 —

 

$

4,039

 

$

34,473

 

(1)

Includes the split life insurance policy for a former Company associate. These amounts are included in other assets, net on the accompanying consolidated balance sheets, and will be used to reimburse the Company for payments made to the former associate from the related retirement benefit agreement, which is included in accrued payroll and employee benefits on the accompanying consolidated balance sheets.

 

The following table presents the Company’s liabilities measured at fair value on a recurring and nonrecurring basis at March 31, 2018 and December 31, 2017 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at Reporting Date

 

    

Total

    

Level 1

    

Level 2

    

Level 3

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2018 (unaudited):

 

 

 

 

 

 

 

 

 

 

 

 

Retirement benefit agreement (1)

 

$

632

 

$

 

$

632

 

$

Total liabilities measured at fair value at March 31, 2018

 

$

632

 

$

 

$

632

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

Retirement benefit agreement (1)

 

$

645

 

$

 

$

645

 

$

Total liabilities measured at fair value at December 31, 2017

 

$

645

 

$

 

$

645

 

$

 

(1)

Includes the retirement benefit agreement for a former Company associate. The agreement calls for the balance of the retirement benefit to be paid out to the former associate in ten annual installments, beginning in 2011. The Company has paid the former associate a total of $1.4 million through March 31, 2018, which was reimbursed to the Company using funds from the related split life insurance policy noted above. These amounts are included in accrued payroll and employee benefits on the accompanying consolidated balance sheets.

 

Interest Rate Derivatives

 

The Company’s interest rate derivatives, which are not designated as effective cash flow hedges, consisted of the following at March 31, 2018 (unaudited) and December 31, 2017 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated Fair

Value Asset

 

 

Strike / Capped

 

Effective

Maturity

 

Notional

 

March 31,

 

December 31,

Hedged Debt

Type

Rate

Index

Date

Date

 

Amount

 

2018

 

2017

Hilton San Diego Bayfront (1)

Cap

4.250

%

1-Month LIBOR

May 1, 2017

May 1, 2019

 

$

109,261

 

$

 5

 

$

 —

Hilton San Diego Bayfront (1)

Cap

6.000

%

1-Month LIBOR

November 10, 2017

December 9, 2020

 

$

220,000

 

 

10

 

 

 4

$85.0 million term loan (2)

Swap

3.391

%

1-Month LIBOR

October 29, 2015

September 2, 2022

 

$

85,000

 

 

3,380

 

 

2,010

$100.0 million term loan (3)

Swap

3.653

%

1-Month LIBOR

January 29, 2016

January 31, 2023

 

$

100,000

 

 

3,186

 

 

1,380

 

 

 

 

 

 

 

 

 

 

 

$

6,581

 

$

3,394

 

(1)

In November 2017, the Company refinanced the existing loan secured by the Hilton San Diego Bayfront. Coterminous with the loan refinance, the Company purchased a new interest rate cap agreement with a strike rate of 6.0% and an expiration date

13


 

in December 2020.  The fair values of both Hilton San Diego Bayfront cap agreements are included in other assets, net on the accompanying consolidated balance sheets as of both March 31, 2018 and December 31, 2017.  

(2)

The fair value of the $85.0 million term loan swap agreement is included in other assets, net on the Company’s consolidated balance sheets as of both March 31, 2018 and December 31, 2017. The 1-month LIBOR rate was swapped to a fixed rate of 1.591%.

(3)

The fair value of the $100.0 million term loan swap agreement is included in other assets, net on the Company’s consolidated balance sheets as of both March 31, 2018 and December 31, 2017. The 1-month LIBOR rate was swapped to a fixed rate of 1.853%.

 

Noncash changes in the fair values of the Company’s interest rate derivatives resulted in decreases to interest expense for the three months ended March 31, 2018 and 2017 as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

2018

 

2017

 

 

(unaudited)

 

(unaudited)

Noncash interest on derivatives

 

$

(3,187)

 

$

(657)

 

Fair Value of Debt

 

As of March 31, 2018 and December 31, 2017,  77.7% and 77.8%, respectively, of the Company’s outstanding debt had fixed interest rates, including the effects of interest rate swap agreements. The Company uses Level 3 measurements to estimate the fair value of its debt by discounting the future cash flows of each instrument at estimated market rates. The Company’s principal balances and fair market values of its consolidated debt as of March 31, 2018 (unaudited) and December 31, 2017  were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2018

 

December 31, 2017

 

Carrying Amount (1)

 

Fair Value