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EX-32.1 - EXHIBIT 32.1 - Xenia Hotels & Resorts, Inc.xeniaq2201810qexhibit321.htm
EX-31.2 - EXHIBIT 31.2 - Xenia Hotels & Resorts, Inc.xeniaq2201810qexhibit312.htm
EX-31.1 - EXHIBIT 31.1 - Xenia Hotels & Resorts, Inc.xeniaq2201810qexhibit311.htm
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________
FORM 10-Q
____________________________
(Mark One)
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2018
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period ended ______ to ______
Commission file number 001-36594
___________________________

Xenia Hotels & Resorts, Inc.

(Exact Name of Registrant as Specified in Its Charter)
_______________________
Maryland
 
20-0141677
(State of Incorporation)
 
(I.R.S. Employer Identification No.)
 
 
 
200 S. Orange Avenue
Suite 2700, Orlando, Florida
 
32801
(Address of Principal Executive Offices)
 
(Zip Code)
(407) 246-8100
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). þ Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
þ
 
 
Accelerated filer
o
Non-accelerated filer
o
(Do not check if a smaller reporting company)
 
Smaller reporting company
o
 
 
 
 
Emerging growth company
o
 
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes þ No
As of July 27, 2018, there were 111,929,945 shares of the registrant’s common stock outstanding.
 



XENIA HOTELS & RESORTS, INC.
TABLE OF CONTENTS


Part I - Financial Information
 
Page
 
 
 
 
Item 1.
Financial Statements (unaudited)
 
 
 
Condensed Consolidated Balance Sheets as of June 30, 2018 and December 31, 2017
 
 
Condensed Consolidated Statements of Operations and Comprehensive Income for the Three and Six Months Ended June 30, 2018 and 2017
 
 
Condensed Consolidated Statement of Changes in Equity for the Six Months Ended June 30, 2018
 
 
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2018 and 2017
 
 
Notes to the Condensed Consolidated Financial Statements
 
 
 
 
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
Item 4.
Controls and Procedures
 
 
 
 
 
 
 
 
 
Part II - Other Information
 
 
 
 
 
 
Item 1.
Legal Proceedings
 
Item 1A.
Risk Factors
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
Item 3.
Defaults Upon Senior Securities
 
Item 4.
Mine Safety Disclosures
 
Item 5.
Other Information
 
Item 6.
Exhibits
 
 
 
 
 
Signatures
 



PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
XENIA HOTELS & RESORTS, INC.
Condensed Consolidated Balance Sheets
As of June 30, 2018 and December 31, 2017
(Dollar amounts in thousands, except per share data)
 
June 30, 2018
 
December 31, 2017
Assets
(Unaudited)
 
 
Investment properties:
 
 
 
Land
$
440,930

 
$
440,930

Buildings and other improvements
2,935,912

 
2,878,375

Total
$
3,376,842

 
$
3,319,305

Less: accumulated depreciation
(703,798
)
 
(628,450
)
Net investment properties
$
2,673,044

 
$
2,690,855

Cash and cash equivalents
184,809

 
71,884

Restricted cash and escrows
63,000

 
58,520

Accounts and rents receivable, net of allowance for doubtful accounts
42,728

 
35,865

Intangible assets, net of accumulated amortization of $5,134 and $3,286, respectively
66,153

 
68,000

Other assets
53,981

 
37,512

Assets held for sale

 
152,672

Total assets (including $69,576 and $70,269, respectively, related to consolidated variable interest entities - Note 6)
$
3,083,715

 
$
3,115,308

Liabilities
 
 
 
Debt, net of loan discounts and unamortized deferred financing costs (Note 7)
$
1,117,750

 
$
1,322,593

Accounts payable and accrued expenses
84,180

 
77,005

Distributions payable
31,335

 
29,930

Other liabilities
43,714

 
40,694

Total liabilities (including $46,303 and $46,637, respectively, related to consolidated variable interest entities - Note 6)
$
1,276,979

 
$
1,470,222

Commitments and Contingencies (Note 14)


 


Stockholders' equity
 
 
 
Common stock, $0.01 par value, 500,000,000 shares authorized, 111,929,945 and 106,735,336 shares issued and outstanding as of June 30, 2018 and December 31, 2017, respectively
$
1,120


$
1,068

Additional paid in capital
2,044,132

 
1,924,124

Accumulated other comprehensive income
22,169

 
10,677

Accumulated distributions in excess of net earnings
(296,830
)
 
(320,964
)
Total Company stockholders' equity
$
1,770,591

 
$
1,614,905

Non-controlling interests
36,145

 
30,181

Total equity
$
1,806,736

 
$
1,645,086

Total liabilities and equity
$
3,083,715

 
$
3,115,308

See accompanying notes to the condensed consolidated financial statements.

1


XENIA HOTELS & RESORTS, INC.
Condensed Consolidated Statements of Operations and Comprehensive Income
For the Three and Six Months Ended June 30, 2018 and 2017
(unaudited)
(Dollar amounts in thousands, except per share data)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Revenues:
 
 
 
 
 
 
 
Rooms revenues
$
175,823

 
$
164,868

 
$
338,405

 
$
309,319

Food and beverage revenues
86,419

 
66,552

 
172,835

 
128,376

Other revenues
14,815

 
12,972

 
30,316

 
25,157

Total revenues
$
277,057

 
$
244,392

 
$
541,556

 
$
462,852

Expenses:
 
 
 
 
 
 
 
Rooms expenses
38,132

 
35,349

 
77,176

 
68,979

Food and beverage expenses
53,528

 
41,798

 
106,503

 
80,982

Other direct expenses
4,715

 
3,303

 
9,189

 
6,309

Other indirect expenses
63,068

 
55,441

 
126,393

 
108,713

Management and franchise fees
12,447

 
11,722

 
24,007

 
23,100

Total hotel operating expenses
$
171,890

 
$
147,613

 
$
343,268

 
$
288,083

Depreciation and amortization
38,602

 
36,625

 
77,403

 
73,104

Real estate taxes, personal property taxes and insurance
11,819

 
10,696

 
23,679

 
22,056

Ground lease expense
1,141

 
1,409

 
2,707

 
2,785

General and administrative expenses
7,873

 
7,844

 
15,932

 
16,222

Gain on business interruption insurance
(2,649
)
 

 
(2,649
)
 

Acquisition and terminated transaction costs
222

 
1,260

 
222

 
1,265

Total expenses
$
228,898

 
$
205,447

 
$
460,562

 
$
403,515

Operating income
$
48,159

 
$
38,945

 
$
80,994

 
$
59,337

Gain on sale of investment properties
9

 
49,176

 
42,294

 
49,176

Other income
446

 
186

 
832

 
338

Interest expense
(13,053
)
 
(11,146
)
 
(26,769
)
 
(21,297
)
Loss on extinguishment of debt
(384
)
 
(274
)
 
(465
)
 
(274
)
Net income before income taxes
$
35,177

 
$
76,887

 
$
96,886

 
$
87,280

Income tax expense
(5,646
)
 
(5,889
)
 
(10,311
)
 
(8,055
)
Net income
$
29,531

 
$
70,998

 
$
86,575

 
$
79,225

Non-controlling interests in consolidated real estate entities (Note 6)
(20
)
 
(126
)
 
159

 
(54
)
Non-controlling interests of Common Units in Operating Partnership (Note 1)
(717
)
 
(1,454
)
 
(2,283
)
 
(1,640
)
Net income attributable to non-controlling interests
$
(737
)
 
$
(1,580
)
 
$
(2,124
)
 
$
(1,694
)
Net income attributable to common stockholders
$
28,794

 
$
69,418

 
$
84,451

 
$
77,531



2


XENIA HOTELS & RESORTS, INC.
Condensed Consolidated Statements of Operations and Comprehensive Income, Continued
For the Three and Six Months Ended June 30, 2018 and 2017
(unaudited)
(Dollar amounts in thousands, except per share data)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Basic and diluted earnings per share
 
 
 
 
 
 
 
Net income per share available to common stockholders - basic and diluted
$
0.26

 
$
0.65

 
$
0.78

 
$
0.72

Weighted average number of common shares (basic)
108,956,408

 
106,769,003

 
107,874,640

 
106,806,664

Weighted average number of common shares (diluted)
109,220,220

 
107,005,884

 
108,115,441

 
107,033,619

 
 
 
 
 
 
 
 
Comprehensive Income:
 
 
 
 
 
 
 
Net income
$
29,531

 
$
70,998

 
$
86,575

 
$
79,225

Other comprehensive income:
 
 
 
 
 
 
 
Unrealized gain (loss) on interest rate derivative instruments
3,643

 
(2,815
)
 
12,459

 
(1,672
)
Reclassification adjustment for amounts recognized in net income (interest expense)
(606
)
 
693

 
(660
)
 
1,505

 
$
32,568

 
$
68,876

 
$
98,374

 
$
79,058

Comprehensive (income) loss attributable to non-controlling interests:
 
 
 
 
 
 
 
Non-controlling interests in consolidated real estate entities (Note 6)
(20
)
 
(126
)
 
159

 
(54
)
Non-controlling interests of Common Units in Operating Partnership (Note 1)
(796
)
 
(1,411
)
 
(2,590
)
 
(1,637
)
Comprehensive income attributable to non-controlling interests
$
(816
)
 
$
(1,537
)
 
$
(2,431
)
 
$
(1,691
)
Comprehensive income attributable to the Company
$
31,752

 
$
67,339

 
$
95,943

 
$
77,367

See accompanying notes to the condensed consolidated financial statements.

3


XENIA HOTELS & RESORTS, INC.
Condensed Consolidated Statements of Changes in Equity
For the Six Months Ended June 30, 2018
(unaudited)
(Dollar amounts in thousands, except per share data)
 
Common Stock
 
 
 
 
 
 
 
Non-controlling Interests
 
 
 
Shares
 
Amount
 
Additional paid in capital
 
Accumulated other comprehensive income
 
Distributions in excess of retained earnings
 
Operating Partnership
 
Consolidated Real Estate Entities
 
Total Non-controlling Interests
 
Total
Balance at December 31, 2017
106,735,336

 
$
1,068

 
$
1,924,124

 
$
10,677

 
$
(320,964
)
 
$
17,781

 
$
12,400

 
$
30,181

 
$
1,645,086

Net income

 

 

 

 
84,451

 
2,283

 
(159
)
 
2,124

 
86,575

Proceeds from sale of common stock, net
5,090,656

 
51

 
119,906

 

 

 

 

 

 
119,957

Dividends, common shares / units ($0.55)

 

 

 

 
(60,317
)
 
(517
)
 

 
(517
)
 
(60,834
)
Share-based compensation
153,779

 
2

 
1,122

 

 

 
3,971

 

 
3,971

 
5,095

Shares redeemed to satisfy tax withholding on vested share-based compensation
(49,826
)
 
(1
)
 
(1,020
)
 

 

 

 

 

 
(1,021
)
Contributions from non-controlling interests

 

 

 

 

 

 
79

 
79

 
79

Other comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized gain on interest rate derivative instruments

 

 

 
12,135

 

 
324

 

 
324

 
12,459

Reclassification adjustment for amounts recognized in net income

 

 

 
(643
)
 

 
(17
)
 

 
(17
)
 
(660
)
Balance at June 30, 2018
111,929,945

 
$
1,120

 
$
2,044,132

 
$
22,169

 
$
(296,830
)
 
$
23,825

 
$
12,320

 
$
36,145

 
$
1,806,736

See accompanying notes to the condensed consolidated financial statements.

4


XENIA HOTELS & RESORTS, INC.
Condensed Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2018 and 2017
(unaudited)
(Dollar amounts in thousands)
 
Six Months Ended June 30,
 
2018
 
2017
Cash flows from operating activities:
 
 
 
Net income
$
86,575

 
$
79,225

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
75,735

 
72,478

Amortization of above and below market leases and other lease intangibles
1,782

 
877

Amortization of debt premiums, discounts, and financing costs
1,367

 
1,402

Loss on extinguishment of debt
465

 
274

Gain on sale of investment properties
(42,294
)
 
(49,176
)
Share-based compensation expense
4,827

 
5,182

Changes in assets and liabilities:
 
 
 
Accounts and rents receivable
(8,440
)
 
(12,932
)
Other assets
1,531

 
2,858

Accounts payable and accrued expenses
6,848

 
2,676

Other liabilities
2,005

 
7,274

Net cash provided by operating activities
$
130,401

 
$
110,138

Cash flows from investing activities:
 
 
 
Purchase of investment properties

 
(205,500
)
Capital expenditures and tenant improvements
(55,858
)
 
(29,320
)
Proceeds from sale of investment properties
196,920

 
186,852

Deposits for acquisition of hotel properties
(5,000
)
 

Net cash provided by (used in) investing activities
$
136,062

 
$
(47,968
)
Cash flows from financing activities:
 
 
 
Proceeds from mortgage debt and notes payable
65,000

 
115,000

Payoffs of mortgage debt
(228,344
)
 
(127,876
)
Principal payments of mortgage debt
(1,853
)
 
(1,206
)
Payment of loan fees and deposits
(3,628
)
 
(906
)
Proceeds from revolving line of credit draws

 
80,000

Payments on revolving line of credit
(40,000
)
 
(80,000
)
Contributions from non-controlling interests
79

 

Proceeds from issuance of common stock, net of offering costs
120,120

 

Repurchase of common shares

 
(4,103
)
Shares redeemed to satisfy tax withholding on vested share based compensation
(1,021
)
 
(1,761
)
Dividends
(59,411
)
 
(59,307
)
Distributions paid to non-controlling interests

 
(195
)
Net cash used in financing activities
$
(149,058
)
 
$
(80,354
)
Net increase (decrease) in cash and cash equivalents and restricted cash
117,405

 
(18,184
)
Cash and cash equivalents and restricted cash, at beginning of period
130,404

 
287,027

Cash and cash equivalents and restricted cash, at end of period
$
247,809

 
$
268,843



5


XENIA HOTELS & RESORTS, INC.
Condensed Consolidated Statements of Cash Flows, Continued
For the Six Months Ended June 30, 2018 and 2017
(unaudited)
(Dollar amounts in thousands)
 
Six Months Ended June 30,
 
2018
 
2017
Supplemental disclosure of cash flow information:
 
 
 
The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the condensed consolidated balance sheets to the amount shown in the statements of cash flows:
 
 
 
Cash and cash equivalents
$
184,809

 
$
201,815

Restricted cash
63,000

 
67,028

Total cash and cash equivalents and restricted cash shown in the statements of cash flows
$
247,809

 
$
268,843

 
 
 
 
The following represent cash paid during the periods presented for the following:
 
 
 
Cash paid for taxes
$
5,311

 
$
3,810

Cash paid for interest
27,089

 
19,896

 
 
 
 
Supplemental schedule of non-cash investing activities:
 
 
 
Accrued capital expenditures
$
2,762

 
$
3,173

See accompanying notes to the condensed consolidated financial statements.

6


XENIA HOTELS & RESORTS, INC.
Notes to Condensed Consolidated Financial Statements (unaudited)
June 30, 2018


1. Organization
Xenia Hotels & Resorts, Inc. (the "Company" or "Xenia") is a Maryland corporation that invests primarily in premium full service and lifestyle hotels, with a focus on the top 25 lodging markets as well as key leisure destinations in the United States ("U.S.").
Substantially all of the Company's assets are held by, and all the operations are conducted through XHR LP (the "Operating Partnership"). XHR GP, Inc. is the sole general partner of XHR LP and is wholly owned by the Company. As of June 30, 2018, the Company collectively owned 97.4% of the common limited partnership units issued by the Operating Partnership ("Common Units"). The remaining 2.6% of the Common Units are owned by the other limited partners. To qualify as a real estate investment trust ("REIT"), the Company cannot operate or manage its hotels. Therefore, the Operating Partnership and its subsidiaries lease the hotel properties to XHR Holding, Inc. and its subsidiaries (collectively with its subsidiaries, "XHR Holding"), the Company's taxable REIT subsidiary ("TRS"), which engages third-party eligible independent contractors to manage the hotels.
As of June 30, 2018, the Company owned 38 lodging properties, 36 of which were wholly owned. The remaining two hotels are owned through individual investments in real estate entities, in which the Company has a 75% ownership interest in each investment.
2. Summary of Significant Accounting Policies
The unaudited interim condensed consolidated financial statements and related notes have been prepared on an accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP" or "GAAP") and in conformity with the rules and regulations of the Securities and Exchange Commission ("SEC") applicable to financial information. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been omitted in accordance with the rules and regulations of the SEC. The unaudited financial statements include normal recurring adjustments, which management considers necessary for the fair presentation of the condensed consolidated balance sheets, condensed consolidated statements of operations and comprehensive income, condensed consolidated statements of changes in equity and condensed consolidated statements of cash flows for the periods presented. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto as of and for the year ended December 31, 2017, included in the Company's Annual Report on Form 10-K filed with the SEC on February 27, 2018. Operating results for the three and six months ended June 30, 2018 are not necessarily indicative of actual operating results for the entire year.
Basis of Presentation
The accompanying condensed consolidated financial statements include the accounts of the Company, the Operating Partnership, XHR Holding, and its consolidated investments in real estate entities. The Company's subsidiaries and consolidated investments in real estate entities generally consist of limited liability companies, limited partnerships and the TRS. The effects of all inter-company transactions have been eliminated.
Certain prior year amounts in these financial statements have been reclassified to conform to the presentation for the three and six months ended June 30, 2018.
Use of Estimates
The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and revenues and expenses. These estimates are prepared using management's best judgment, after considering past, current and expected economic conditions. Actual results could differ from these estimates.
Risks and Uncertainties
For the six months ended June 30, 2018, the Company had a geographical concentration of revenues generated from hotels in the Orlando, Florida and Phoenix, Arizona markets that each exceeded 10% of total revenues for the period. For the six months ended June 30, 2017, the Company had a geographical concentration of revenues generated from hotels in Houston, Texas that represented 11% of total revenues.

7


To the extent that there are adverse changes in these markets, or the industry sectors that operate in these markets, our business and operating results could be negatively impacted. The state of the overall economy can significantly impact hotel operational performance and thus, impact the Company's financial position. Should any of our hotels experience a significant decline in operational performance, it may affect the Company's ability to make distributions to our stockholders, service debt, or meet other financial obligations.
Consolidation
The Company evaluates its investments in partially owned entities to determine whether any such entities may be a variable interest entity ("VIE"). If the entity is a VIE, the determination of whether the Company is the primary beneficiary must be made. The primary beneficiary determination is based on a qualitative assessment as to whether the entity has (i) power to direct significant activities of the VIE and (ii) an obligation to absorb losses or the right to receive benefits that could be potentially significant to the VIE. The Company will consolidate a VIE if it is deemed to be the primary beneficiary. The equity method of accounting is applied to entities in which the Company is not the primary beneficiary, or the entity is not a VIE and over which the Company does not have effective control, but can exercise influence over the entity with respect to its operations and major decisions.
Cash and Cash Equivalents
The Company considers all demand deposits, money market accounts and investments in certificates of deposit and repurchase agreements purchased with a maturity of three months or less, at the date of purchase, to be cash equivalents. The Company maintains its cash and cash equivalents at financial institutions. The combined account balances at one or more institutions generally exceed the Federal Depository Insurance Corporation ("FDIC") insurance coverage and, as a result, there is a concentration of credit risk related to amounts on deposit in excess of FDIC insurance coverage. The Company believes that the risk is not significant as the Company does not anticipate the financial institutions’ non-performance.
Restricted Cash and Escrows
Restricted cash primarily relates to lodging furniture, fixtures and equipment reserves as required per the terms of our management and franchise agreements, cash held in restricted escrows for real estate taxes and insurance escrows, capital spending reserves, and at times disposition related hold back escrows.
Disposition of Real Estate
In February 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") 2017-05, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets. The guidance aims at better clarifying the scope of asset derecognition and adds further guidance for recognizing gains and losses from the transfer of nonfinancial assets in contracts with non-customers. The Company adopted ASU 2017-05 on January 1, 2018 using the modified retrospective approach. Upon adoption of ASU 2017-05, there was no change in income from continuing operations, net income nor any financial statement line item during the three and six months ended June 30, 2018 and 2017. Therefore, there was no cumulative effect adjustment recorded to distributions in excess of retained earnings on the adoption date.
The Company accounts for dispositions of real estate in accordance with Subtopic 610-20 for the transactions between the Company and unrelated third parties that are not considered a customer in the ordinary course of business. Typically, the real estate assets disposed of do not represent the transfer of a business or contain a material amount of financial assets, if any. The real estate assets promised in a sales contract are typically nonfinancial assets (i.e. land or a leasehold interest in land, building, furniture, fixtures and equipment) or in substance nonfinancial assets. The Company recognizes a gain in full when the real estate is sold, provided (a) there is a valid contract and (b) transfer of control has occurred.
Involuntary Conversion and Business Interruption Insurance
During the second half of 2017, several of the Company's lodging properties were impacted by natural disasters, including two major hurricanes and a series of wildfires in California.
Any insurance recoveries for property damage expected to be received in excess of the recorded loss will be treated as a gain and will not be recorded until contingencies are resolved.

8


In addition to property damage insurance recoveries, the Company may be entitled to business interruption insurance recoveries for certain properties related to natural disasters, however, it will not record an insurance recovery receivable for these losses until a final settlement has been reached with the insurance company. Any insurance proceeds received in excess of insurance deductibles will be accounted for as a gain. During the three and six months ended June 30, 2018, the Company recognized $2.6 million of business interruption insurance proceeds related to business lost at Hyatt Centric Key West Resort & Spa as a result of Hurricane Irma, which is included in gain on business interruption insurance on the condensed consolidated statement of operations and comprehensive income for the periods then ended. Of the $2.6 million recognized, $1.4 million of the proceeds related to lost income in the third and fourth quarters of 2017, with the remaining $1.2 million attributable to lost income from the first quarter of 2018.
Share-Based Compensation
The Company has adopted a share-based incentive plan that provides for the grant of stock options, stock awards, restricted stock units, Operating Partnership Units and other equity-based awards. Share-based compensation is measured at the estimated fair value of the award on the date of grant, adjusted for forfeitures, and recognized as an expense on a straight-line basis over the longest vesting period for each grant for the entire award. The determination of fair value of these awards is subjective and involves significant estimates and assumptions including expected volatility of the Company's shares, expected dividend yield, expected term and assumptions of whether certain of these awards will achieve performance thresholds. Share-based compensation is included in general and administrative expenses in the accompanying condensed consolidated statements of operations and comprehensive income and capitalized in building and other improvements in the condensed consolidated balance sheets for certain employees that manage property developments, renovations and capital improvements.
Derivatives and Hedging Activities
In the normal course of business, the Company is exposed to the effects of interest rate changes. The Company limits the risks associated with interest rate changes by following established risk management policies and procedures which may include the use of derivative instruments. The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management objectives and strategies for undertaking various hedge transactions. The Company assesses at the inception of the hedge whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in the cash flows of the hedged items. Instruments that meet these hedging criteria are formally designated as hedges at the inception of the derivative contract and are recorded on the balance sheet at fair value, with offsetting changes recorded to other comprehensive income (loss). The Company nets assets and liabilities when the right of offset exists. The Company incorporates credit valuation adjustments to reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements.
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02 (Topic 842), Leases, which replaces Topic 840, Leases, and requires most leases, in which we are the lessee, to be recorded on the Company's balance sheet as either operating or financing leases with a right of use asset and a corresponding lease liability measured at present value. Operating leases will be recognized on the income statement on a straight-line basis as lease expense and financing leases will be accounted for similarly to the accounting for amortizing debt. Leases with terms of less than 12 months will continue to be accounted for as they are under the current standard. The new standard is effective for the Company on January 1, 2019. The Company is currently working with its third-party hotel managers to determine the completeness of its lease population and to obtain an understanding of implementation efforts at the hotel level. This process includes reviewing lease agreements, evaluating materiality of hotel level leases and determining what, if any, changes there are to hotel-level internal controls. The Company is finalizing its calculations of existing ground and corporate lease obligations, which includes the determination of discount rates to determine the lease liability and the corresponding right-of-use asset upon adoption. The Company is also evaluating the overall impact the standard will have on its consolidated financial statements and related disclosures and continues to monitor the final standard updates issued by the FASB. The Company anticipates adopting the standard on January 1, 2019 using the modified retrospective method.
In January 2018, the FASB issued ASU 2018-01, Land Easement Practical Expedient for Transition to Topic 842. This guidance permits an entity to elect an optional transition practical expedient to not evaluate under land easements that exist or have expired before the entity’s adoption of Topic 842 and that were not previously accounted for as leases under Topic 840. An entity that elects this practical expedient would apply the practical expedient consistently to all of its existing or expired land easements that were not previously accounted for as leases under Topic 840. The Company plans to adopt the practical expedient in ASU 2018-01 upon adoption of ASU 2016-02.

9


In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases. This guidance was issued to address stakeholders' questions on how to apply certain aspects of the new guidance in Topic 842. The clarifications are to be applied upon transition of Topic 842, which is effective for the Company on January 1, 2019. The Company is currently evaluating these clarifications to determine the impact they have on its Topic 842 implementation efforts and its consolidated financial statements and related disclosures.
Also in July 2018, the FASB issued ASU 2018-11, Targeted Improvements to Topic 842, Leases. This guidance provides another option for transition, which allows entities not to apply the new lease standard in the comparative periods they present in their financial statements in the year of adoption. In addition, this guidance provides lessors with a practical expedient to not separate non-lease components from the associated lease components when certain criteria is met. These improvements are to be applied upon transition of Topic 842, which is effective for the Company on January 1, 2019. The Company is currently evaluating these improvements to determine the impact they have on its Topic 842 implementation efforts and its consolidated financial statements and related disclosures.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The guidance is intended to assist entities with evaluating whether a set of transferred assets and activities is a business. Under the new guidance, an entity first determines whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. If this threshold is met, the set is not a business. If the threshold is not met, the entity then evaluates whether the set meets the requirement that a business include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs. The Company adopted ASU 2017-01 on January 1, 2018 on a prospective basis. The Company anticipates that most future acquisitions will be accounted for as asset acquisitions rather than business combinations. As such, asset acquisitions will require the Company to capitalize future acquisition costs as part of the purchase price allocation, rather than expensing these costs as we have historically done when transactions were accounted for as business combinations.
Also in January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment. The guidance is intended to simplify the accounting for goodwill impairment and removes Step 2 of the goodwill impairment test under the current guidance, which requires a hypothetical purchase price allocation. A goodwill impairment under ASU 2017-04 will be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance will remain largely unchanged. Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. The same one-step impairment test will be applied to goodwill at all reporting units, even those with zero or negative carrying amounts. Entities will be required to disclose the amount of goodwill at reporting units with zero or negative carrying amounts. The new standard is effective for the Company on January 1, 2020; however, early adoption is permitted. The Company does not expect the adoption of ASU 2017-04 to have a material impact on its consolidated financial statements and related disclosures.
In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting. The guidance is intended to clarify when certain changes to terms or conditions of share-based payment awards must be accounted for as modifications but does not change the accounting for modifications. The new standard is to be applied prospectively to awards modified on or after the adoption date. The Company adopted ASU 2017-09 on January 1, 2018. The adoption of ASU 2017-09 did not have any impact on the Company's consolidated financial statements or related disclosures.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities (Topic 815). The purpose of this updated guidance is to better align a company’s financial reporting for hedging activities with the economic objectives of those activities. The transition guidance provides companies with the option of early adopting the new standard in any interim period after issuance of the update, or alternatively requires adoption for fiscal years beginning after December 15, 2018. The Company early adopted the standard in April 2018 using the modified retrospective transition approach. Prior to April 2018, the Company had not recorded ineffectiveness related to its active hedging relationships and therefore no transition adjustment was required upon adoption. In subsequent periods, any ineffectiveness related to the Company's derivative instruments will be reflected in accumulated other comprehensive income. While the Company made minor presentation changes in its disclosure on derivative and hedging activities, the adoption of ASU 2017-12 did not have a material effect on the Company’s consolidated financial statements.

10


3. Revenue
Adoption of new accounting guidance
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The Company adopted ASU 2014-09, and all of the following ASU clarifications on January 1, 2018 using the modified retrospective approach:
ASU 2016-08 Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
ASU 2016-10 Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing
ASU 2016-12 Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients
ASU 2016-20 Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers
Upon adoption of ASU 2014-09 and related ASU clarifications, there was no change on income from continuing operations, net income, or any financial statement line item and there was no cumulative effect adjustment recorded to accumulated distributions in excess of net earnings on the adoption date. The Company concluded upon adoption of ASU 2014-09, the disposition of real estate assets, including hotels, qualify as a sale of a nonfinancial asset and should be recognized under the guidance in ASU 2017-05.
Revenue from Contracts with Customers
Revenue consists of amounts derived from hotel operations, including the sale of rooms for lodging accommodations, food and beverage, and other ancillary revenue generated by hotel amenities including parking, spa, resort fees and other services.
Revenues are generated from various distribution channels including but not limited to direct bookings, global distribution systems and the Internet travel sites. Room transaction prices are based on an individual hotel's location, room type and the bundle of services included in the reservation and are set by the hotel daily. Any discounts, including advanced purchase, loyalty point redemptions or promotions are recognized at the discounted rate whereas rebates and incentives are recorded as a reduction in room revenue when earned. Revenues from online channels are generally recognized net of commission fees, unless the end price paid by the guest is known. Rooms revenue is recognized over the length of stay that the hotel room is occupied by the guest. Cash received from a guest prior to check-in is recorded as an advanced deposit and is generally recognized as room revenue at the time the room reservation has become non-cancellable, upon occupancy or upon expiration of the re-booking date. Advance deposits are included in other liabilities on the consolidated balance sheet. Payment of any remaining balance is typically due from the guest upon check-out. Sales, use, occupancy, and similar taxes are collected and presented on a net basis (excluded from revenues).
Food and beverage transaction prices are based on the stated price for the specific food or beverage and varies depending on type, venue and hotel location. Service charges are typically a percentage of food and beverage charges and meeting space rental. Food and beverage revenue is recognized at the point in time in which the goods and/or services are rendered to the guest. Cash received in advance of an event is recorded as either a security or advance deposit. Security and advance deposits are recognized as revenue when it becomes non-cancellable or at the time the food and beverage goods and services are rendered to the guest. Payment for the remaining balance of food and beverage goods and services is due upon delivery and completion of such goods and services.
Parking and audio visual fees are recognized at the time services are provided to the guest. In parking and audio visual contracts in which we have control over the services provided, we are considered the principal in the agreement and recognize the related revenues gross of associated costs. If we do not have control over the services in the contract, we are considered the agent and record the related revenues net of associated costs.
Resort fees, spa and other ancillary amenity revenues are recognized at the point in time the goods or services have been rendered to the guest at the stated price for the service or amenity.
Rental income is generated from space lease agreements from retail tenants in our hotels. Rental income is recognized on a straight-line basis over the term of the underlying lease. Percentage rent is recognized at the point in time in which the underlying thresholds are achieved and percentage rent is earned.

11


Our revenue sources are affected by conditions impacting the travel and hospitality industry as well as competition from other hotels and businesses in similar markets.
The following represents total revenue disaggregated by primary geographical markets (as defined by STR, Inc. ("STR")) for the three and six months ended June 30, 2018 and 2017 (in thousands):
 
 
Three Months Ended
 
Six Months Ended
Primary Markets
 
June 30, 2018
 
June 30, 2018
Orlando, FL
 
$
29,909

 
$
66,293

Phoenix, AZ
 
25,056

 
56,196

Houston, TX
 
24,280

 
50,068

Washington, DC-MD-VA
 
22,699

 
38,412

Dallas, TX
 
19,933

 
38,159

San Francisco/San Mateo, CA
 
18,462

 
36,339

San Jose-Santa Cruz, CA
 
14,216

 
29,582

Boston, MA
 
14,052

 
21,649

Atlanta, GA
 
9,889

 
21,562

California North
 
12,170

 
20,558

Other
 
86,391

 
162,738

Total
 
$
277,057

 
$
541,556

 
 
Three Months Ended
 
Six Months Ended
Primary Markets
 
June 30, 2017
 
June 30, 2017
Houston, TX
 
$
22,887

 
$
50,296

Dallas, TX
 
17,223

 
36,658

San Francisco/San Mateo, CA
 
16,677

 
33,746

San Jose-Santa Cruz, CA
 
14,466

 
28,016

Orlando, FL
 
15,685

 
26,175

California North
 
12,857

 
21,888

Boston, MA
 
14,401

 
21,434

Atlanta, GA
 
9,965

 
20,945

Oahu Island, HI
 
10,296

 
20,343

Austin, TX
 
10,151

 
20,131

Other
 
99,784

 
183,220

Total
 
$
244,392

 
$
462,852

4. Investment Properties
No hotels were acquired during the three and six months ended June 30, 2018.
In May 2017, the Company acquired the 815-room Hyatt Regency Grand Cypress located in Orlando, Florida for a purchase price of $205.5 million, excluding closing costs, that was funded with cash. The Company recognized acquisition costs of $1.2 million for the three and six months ended June 30, 2017, respectively, which are included in acquisition and terminated transaction costs on the Company’s condensed consolidated statements of operations and comprehensive income for the periods then ended. The results of operations for Hyatt Regency Grand Cypress have been included in the Company’s condensed consolidated statements of operations and comprehensive income since the acquisition date. During the six months ended June 30, 2018, the Company converted 72 guestrooms into 36 newly created suites, which resulted in a reduction in our total room count.

12


5. Disposed Properties
The following represents the disposition details for the hotels sold during the six months ended June 30, 2018 and 2017, respectively (in thousands):
Property
 
Date
 
Rooms
(unaudited)
 
Gross Sale Price
 
Net Proceeds
 
Gain on Sale
 
Aston Waikiki Beach Hotel
 
03/2018
 
645
 
$
200,000

 
$
196,920

(1) 
$
42,430

(2) 
Total for the six months ended June 30, 2018
 
 
 
 
 
$
200,000

 
$
196,920

 
$
42,430

 
 
 
 
 
 
 
 
 
 
 
 
 
Courtyard Birmingham Downtown at UAB
 
04/2017
 
122
 
$
30,000

 
$
29,176

 
$
12,972

 
Courtyard Fort Worth Downtown/Blackstone, Courtyard Kansas City Country Club Plaza, Courtyard Pittsburgh Downtown, Hampton Inn & Suites Baltimore Inner Harbor, and Residence Inn Baltimore Inner Harbor
 
06/2017
 
812
 
163,000

 
157,675

 
36,204

 
Total for the six months ended June 30, 2017
 
 
 
 
 
$
193,000

 
$
186,851

 
$
49,176

 
(1)
As of June 30, 2018, $5.0 million of the sales proceeds related to escrows were held back at closing. The holdback escrow is anticipated to be received in September 2018.
(2)
In addition to the gain on sale recognized during the six months ended June 30, 2018, we also recognized adjustments related to the 2017 dispositions amounting to $0.1 million.
6. Investment in Real Estate Entities
The Company has a 75% interest in two investments in real estate entities that own and operate the Grand Bohemian Hotel Charleston and the Grand Bohemian Hotel Mountain Brook. These entities are considered VIE's because the entities did not have enough equity to finance their activities without additional subordinated financial support. The Company determined that it has the power to direct the activities of the VIE's that most significantly impact the VIE's economic performance, as well as the obligation to absorb losses of the VIE's that could potentially be significant to the VIE, or the right to receive benefits from the VIE's that could potentially be significant to the VIE. As such, the Company has a controlling financial interest and is considered the primary beneficiary of each of these entities. Therefore, these entities are consolidated by the Company.
The following are the liabilities of the consolidated VIE's, which are non-recourse to the Company, and the assets that can be used to settle those obligations (in thousands):
 
June 30, 2018
 
December 31, 2017
Net investment properties
$
66,027

 
$
67,687

Other assets
3,549

 
2,582

Total assets
$
69,576

 
$
70,269

Mortgages payable
(43,500
)
 
(44,074
)
Other liabilities
(2,803
)
 
(2,563
)
Total liabilities
$
(46,303
)
 
$
(46,637
)
Net assets
$
23,273

 
$
23,632


13


7. Debt
Debt as of June 30, 2018 and December 31, 2017 consisted of the following (dollar amounts in thousands):
 
 
 
 
 
 
 
Balance Outstanding as of
 
Rate Type
 
Rate(1)
 
Maturity Date
 
June 30, 2018
 
December 31, 2017
Mortgage Loans
 
 
 
 
 
 
 
 
 
Andaz Savannah
 Variable
 

 
1/14/2019
 
$

(3) 
$
21,500

Hotel Monaco Denver
Fixed(2)
 

 
1/17/2019
 

(3) 
41,000

Hotel Monaco Chicago
 Variable
 

 
1/17/2019
 

(3) 
18,344

Loews New Orleans Hotel
 Variable
 

 
2/22/2019
 

(3) 
37,500

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

 
38,000

Westin Galleria Houston & Westin Oaks Houston at The Galleria
 Variable
 

 
5/1/2019
 

(3) 
110,000

Marriott Charleston Town Center
 Fixed
 
3.85
%
 
7/1/2020
 
15,651

 
15,908

Grand Bohemian Hotel Charleston (VIE)
 Variable
 
4.59
%
 
11/10/2020
 
18,739

 
19,026

Grand Bohemian Hotel Mountain Brook (VIE)
 Variable
 
4.59
%
 
12/27/2020
 
24,914

 
25,229

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

 
51,000

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

 
90,000

Hotel Palomar Philadelphia
 Fixed(2)
 
4.14
%
 
1/13/2023
 
59,500

 
59,750

Renaissance Atlanta Waverly Hotel & Convention Center
Variable
 
4.19
%
 
8/14/2024
 
100,000

 
100,000

The Ritz-Carlton, Pentagon City
Fixed(4)
 
3.69
%
 
1/31/2025
 
65,000

 

Residence Inn Boston Cambridge
 Fixed
 
4.48
%
 
11/1/2025
 
62,325

 
62,833

Grand Bohemian Hotel Orlando
 Fixed
 
4.53
%
 
3/1/2026
 
59,763

 
60,000

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

 
115,000

Total Mortgage Loans
 
 
4.16
%
(5) 
 
 
$
699,892

 
$
865,090

Unsecured Term Loan $175M
Fixed(6)
 
2.74
%
 
2/15/2021
 
175,000

 
175,000

Unsecured Term Loan $125M
Fixed(6)
 
3.28
%
 
10/22/2022
 
125,000

 
125,000

Unsecured Term Loan $125M
Fixed(6)
 
3.62
%
 
9/13/2024
 
125,000

 
125,000

Senior Unsecured Credit Facility
 Variable
 
3.59
%
 
2/28/2022
 

 
40,000

Mortgage Loan Discounts, net(7)
 

 
 
(223
)
 
(255
)
Unamortized Deferred Financing Costs, net
 

 
 
(6,919
)
 
(7,242
)
Total Debt, net of loan discounts and unamortized deferred financing costs
 
 
3.78
%
(5) 
 
 
$
1,117,750

 
$
1,322,593

(1)
Variable index is one-month LIBOR as of June 30, 2018.
(2)
The Company entered into interest rate swap agreements to fix the interest rate of the variable rate mortgage loans through maturity.
(3)
During the six months ended June 30, 2018, the Company elected its prepayment option per the terms of the respective mortgage loan agreement and repaid the outstanding balance.
(4)
The Company entered into interest rate swap agreements to fix the interest rate of the variable rate mortgage loan from June 1, 2018 through January 2023. The effective interest rate on the loan will be 3.69% through January 2019 after which the rate will increase to 4.95% through January 2023.
(5)
Represents the weighted average interest rate as of June 30, 2018.
(6)
LIBOR has been fixed for a portion of or the entire term of the loan. The spread may vary, as it is determined by the Company's leverage ratio.
(7)
Loan discounts recognized upon loan modifications, net of the accumulated amortization.
In connection with repaying mortgage loans during the three and six months ended June 30, 2018, the Company wrote off the related unamortized deferred financing costs of $384 thousand and $465 thousand, respectively, which is included in loss on extinguishment of debt on the condensed consolidated statements of operations and comprehensive income for the periods then ended.

14


Total debt outstanding as of June 30, 2018 and December 31, 2017 was $1,125 million and $1,330 million and had a weighted average interest rate of 3.78% and 3.71% per annum, respectively. The remaining unamortized mortgage discounts as of June 30, 2018 and December 31, 2017 were $0.2 million and $0.3 million, respectively. The following table shows scheduled principal payments and debt maturities for the next five years and thereafter (in thousands):
 
 
As of
June 30, 2018
 
Weighted 
average
interest rate
2018
 
$
2,277

 
4.37%
2019
 
42,622

 
3.14%
2020
 
61,341

 
4.40%
2021
 
180,135

 
2.79%
2022
 
271,459

 
3.62%
Thereafter
 
567,058

 
4.15%
Total Debt
 
$
1,124,892

 
3.78%
Total Loan Discounts, net
 
(223
)
 
Unamortized Deferred Financing Costs, net
 
(6,919
)
 
Debt, net of loan discounts and unamortized deferred financing costs
 
$
1,117,750

 
3.78%
Of the total outstanding debt at June 30, 2018none of the mortgage loans were recourse to the Company. Certain loans have options to extend the maturity dates if exercised by the Company, subject to being compliant with certain covenants and the payment of an extension fee. Some of the mortgage loans require compliance with certain covenants, such as debt service coverage ratios, loan-to-value tests, investment restrictions and distribution limitations. As of June 30, 2018, the Company was in compliance with all such covenants.
Senior Unsecured Credit Facility
As of June 30, 2018, there was no outstanding balance on the senior unsecured facility. During the three and six months ended June 30, 2018, the Company incurred unused commitment fees of approximately $0.4 million and $0.7 million, respectively, and interest expense of $0 and $34 thousand, respectively. During the three and six months ended June 30, 2017, the Company incurred unused commitment fees of approximately $0.3 million and $0.6 million, respectively, and interest expense of $0.2 million, respectively.
8. Derivatives
The Company primarily uses interest rate swaps as part of its interest rate risk management strategy for variable-rate debt. As of June 30, 2018, all interest rate swaps were designated as cash flow hedges and involve the receipt of variable-rate payments from a counterparty in exchange for making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. Unrealized gains and losses of hedging instruments are reported in other comprehensive income. Amounts reported in accumulated other comprehensive income (loss) related to currently outstanding derivatives are recognized as an adjustment to income (loss) through interest expense as interest payments are made on the Company’s variable rate debt.


15


As of June 30, 2018 and December 31, 2017, all derivative instruments held by the Company with the right of offset were in a net asset position and were included in other assets on the condensed consolidated balance sheets. The following table summarizes the terms of the derivative financial instruments held by the Company as of June 30, 2018 and December 31, 2017, respectively (in thousands):
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2018
 
December 31, 2017
Hedged Debt
 
Type
 
Fixed Rate
 
Index + Spread
 
Effective Date
 
Maturity
 
Notional Amounts
 
Estimated Fair Value
 
Notional Amounts
 
Estimated Fair Value
$175M Term Loan
 
Swap
 
1.30%
 
1-Month LIBOR + 1.50%
 
10/22/2015
 
2/15/2021
 
$
50,000

 
$
1,746

 
$
50,000

 
$
1,134

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

 
2,289

 
65,000

 
1,497

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

 
2,109

 
60,000

 
1,379

$125M Term Loan
 
Swap
 
1.83%
 
1-Month LIBOR + 1.45%
 
1/15/2016
 
10/22/2022
 
50,000

 
1,853

 
50,000

 
675

$125M Term Loan
 
Swap
 
1.83%
 
1-Month LIBOR + 1.45%
 
1/15/2016
 
10/22/2022
 
25,000

 
922

 
25,000

 
334

$125M Term Loan
 
Swap
 
1.84%
 
1-Month LIBOR + 1.45%
 
1/15/2016
 
10/22/2022
 
25,000

 
914

 
25,000

 
325

$125M Term Loan
 
Swap
 
1.83%
 
1-Month LIBOR + 1.45%
 
1/15/2016
 
10/22/2022
 
25,000

 
916

 
25,000

 
330

Mortgage Debt
 
Swap
 
1.54%
 
1-Month LIBOR + 2.60%
 
1/13/2016
 
1/13/2023
 
59,500

 
2,931

 
60,000

 
1,630

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

 
306

 
41,000

 
386

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

 
387

 
38,000

 
428

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

 
1,582

 
51,000

 
588

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

 
1,370

 
45,000

 
521

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

 
1,399

 
45,000

 
493

$125M Term Loan
 
Swap
 
1.92%
 
1-Month LIBOR + 1.80%
 
10/13/2017
 
10/12/2022
 
40,000

 
1,300

 
40,000

 
362

$125M Term Loan
 
Swap
 
1.92%
 
1-Month LIBOR + 1.80%
 
10/13/2017
 
10/12/2022
 
40,000

 
1,293

 
40,000

 
358

$125M Term Loan
 
Swap
 
1.92%
 
1-Month LIBOR + 1.80%
 
10/13/2017
 
10/12/2022
 
25,000

 
805

 
25,000

 
218

$125M Term Loan
 
Swap
 
1.92%
 
1-Month LIBOR + 1.80%
 
10/13/2017
 
10/12/2022
 
20,000

 
649

 
20,000

 
180

Mortgage Debt
 
Swap
 
2.80%
 
1-Month LIBOR + 2.10%
 
6/1/2018
 
2/1/2023
 
24,000

 
(45
)
 

 

Mortgage Debt(1)
 
Swap
 
2.89%
 
1-Month LIBOR + 2.10%
 
1/17/2019
 
2/1/2023
 

 
(89
)
 

 

 
 
 
 
 
 
 
 
 
 
 
 
$
728,500

 
$
22,637

 
$
705,000

 
$
10,838

(1) The interest rate swap is effective January 2019. Upon effectiveness, the notional amount will be $41 million.



16


The table below details the location in the condensed consolidated financial statements of the gain (loss) recognized on derivative financial instruments designated as cash flow hedges for the three and six months ended June 30, 2018 and 2017 (in thousands):
 
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
 
 
2018
 
2017
 
2018
 
2017
Effect of derivative instruments:
 
Location in Statement of Operations and Comprehensive Income:
 
 
 
 
 
 
 
 
Gain (loss) recognized in other comprehensive income
 
Unrealized gain (loss) on interest rate derivative instruments
 
$
3,643

 
$
(2,815
)
 
$
12,459

 
$
(1,672
)
Gain (loss) reclassified from accumulated other comprehensive income to net income
 
Reclassification adjustment for amounts recognized in net income
 
$
(606
)
 
$
693

 
$
(660
)
 
$
1,505

Total interest expense in which effects of cash flow hedges are recorded
 
Interest expense
 
$
13,053

 
$
11,146

 
$
26,769

 
$
21,297

The Company expects approximately $5.3 million will be reclassified from accumulated other comprehensive income as a reduction to interest expense in the next 12 months.
9. Fair Value Measurements
The Company defines fair value based on the price that would be received upon sale of an asset or the exit price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company uses a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value. The fair value hierarchy consists of three broad levels, which are described below:
Level 1 - Quoted prices for identical assets or liabilities in active markets that the entity has the ability to access.
Level 2 - Observable inputs, other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
The Company has estimated the fair value of its financial and non-financial instruments using widely accepted valuation techniques and available market information. Considerable judgment and a high degree of subjectivity are involved in developing these estimates and, accordingly, they are not necessarily indicative of amounts that would be realized upon disposition.

17


Recurring Measurements
For assets and liabilities measured at fair value on a recurring basis, quantitative disclosure of their fair value is as follows, which are netted as applicable per the terms of the respective master netting agreements (in thousands):
 
 
Fair Value Measurement Date
 
 
June 30, 2018
 
December 31, 2017
Location / Description
 
Significant Unobservable Inputs (Level 2)
 
Significant Unobservable Inputs (Level 2)
Other assets
 
 
 
 
Interest rate swap assets
 
$
22,637

 
$
10,838

Total
 
$
22,637

 
$
10,838

The fair value of each derivative instrument is based on a discounted cash flow analysis of the expected cash flows under each arrangement. This analysis reflects the contractual terms of the derivative instrument, including the period to maturity, and utilizes observable market-based inputs, including interest rate curves and implied volatilities, which are classified within Level 2 of the fair value hierarchy. The Company also incorporates credit value adjustments to appropriately reflect each parties’ nonperformance risk in the fair value measurement, which utilizes Level 3 inputs such as estimates of current credit spreads. However, the Company has assessed that the credit valuation adjustments are not significant to the overall valuation of the derivatives. As a result, the Company has determined that its derivative valuations in their entirety are classified within Level 2 of the fair value hierarchy.
Non-Recurring Measurements
Financial Instruments Not Measured at Fair Value
The table below represents the fair value of financial instruments presented at carrying values in the condensed consolidated balance sheets as of June 30, 2018 and December 31, 2017 (in thousands):
 
 
June 30, 2018
 
December 31, 2017
 
 
Carrying Value
 
Estimated Fair Value
 
Carrying Value
 
Estimated Fair Value
Total Debt, net of discounts
 
$
1,124,669

 
$
1,131,952

 
$
1,289,835

 
$
1,303,550

Senior Unsecured Credit Facility
 

 

 
40,000

 
40,101

Total
 
$
1,124,669

 
$
1,131,952

 
$
1,329,835

 
$
1,343,651

The Company estimated the fair value of its total debt, net of discounts, using a weighted average effective interest rate of 4.4% and 3.93% per annum as of June 30, 2018 and December 31, 2017, respectively. The Company has determined that its debt instrument valuations are classified in Level 2 of the fair value hierarchy.
10. Income Taxes
The Company estimated the TRS income tax expense for the three and six months ended June 30, 2018 using an estimated federal and state statutory combined rate of 29.81% and recognized income tax expense of $5.6 million and $10.3 million, respectively.
The Company estimated the TRS income tax expense for the three and six months ended June 30, 2017 using an estimated federal and state statutory combined rate of 40.1% and recognized income tax expense of $5.9 million and $8.1 million, respectively.

18


11. Stockholders' Equity
Common Stock
In March 2018, the Company entered into an "At-the-Market" ("ATM") program pursuant to an Equity Distribution Agreement ("ATM Agreement") with Wells Fargo Securities, LLC, Robert W. Baird & Co. Incorporated, Jefferies LLC, KeyBanc Capital Markets Inc., and Raymond James & Associates, Inc.  In accordance with the terms of the ATM Agreement, the Company may from time to time offer, and sell shares of its common stock having an aggregate offering price of up to $200 million. During the three and six months ended June 30, 2018, the Company received gross proceeds of $122.2 million, and paid $1.5 million in transaction fees, from the issuance of 5,090,656 shares of its common stock in accordance with the ATM Agreement. In addition, the Company amortized capitalized transaction costs of $0.7 million during the three and six months ended June 30, 2018 that were previously included in other assets. As of June 30, 2018, the Company had $77.8 million available for sale under the ATM Agreement.
In December 2015, the Company’s Board of Directors authorized a stock repurchase program pursuant to which the Company is authorized to purchase up to $100 million of the Company’s outstanding Common Stock in the open market, in privately negotiated transactions or otherwise, including pursuant to Rule 10b5-1 plans. In November 2016, the Company's Board of Directors authorized the repurchase of up to an additional $75 million of the Company's outstanding Common Stock (such repurchase authorizations collectively referred to as the "Repurchase Program"). The Repurchase Program does not have an expiration date. This Repurchase Program may be suspended or discontinued at any time and does not obligate the Company to acquire any particular amount of shares.
No shares were purchased as part of the Repurchase Program during the three and six months ended June 30, 2018. For the three and six months ended June 30, 2017, 132,843 and 240,352 shares were repurchased under the Repurchase Program, at a weighted average price of $17.44 and $17.07 per share for an aggregate purchase price of $2.3 million and $4.1 million, respectively. As of June 30, 2018, the Company had approximately $96.9 million remaining under its share repurchase authorization.
Distributions
The Company declared the following dividends during the six months ended June 30, 2018:
Dividend per Share/Unit
 
For the Quarter Ended
 
Record Date
 
Payable Date
$0.275
 
March 31, 2018
 
March 30, 2018
 
April 13, 2018
$0.275
 
June 30, 2018
 
June 29, 2018
 
July 13, 2018
Non-Controlling Interest of Common Units in Operating Partnership
As of June 30, 2018, the Operating Partnership had 2,984,633 long-term incentive partnership units (“LTIP Units”) outstanding, representing a 2.6% partnership interest held by the limited partners. Of the 2,984,633 LTIP units outstanding at June 30, 2018, 595,861 units had vested. Only vested LTIP Units may be converted to Common Units of the Operating Partnership, which in turn can be tendered for redemption per the terms of the LTIP Unit award agreements.
As of June 30, 2018, the Company had accrued $243 thousand in dividends related to the LTIP Units, which were paid in July 2018.
12. Earnings Per Share
Basic earnings per common share is calculated by dividing income or loss available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per common share is calculated by dividing income or loss available to common stockholders by the weighted-average number of common shares outstanding during the period, plus any shares that could potentially be outstanding during the period. Any anti-dilutive shares have been excluded from the diluted earnings per share calculation.
Unvested share-based awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and are included in the computation of earnings per share pursuant to the two-class method. Accordingly, distributed and undistributed earnings attributable to unvested share-based compensation (participating securities) have been excluded, as applicable, from net income or loss available to common stockholders used in the basic and diluted

19


earnings per share calculations.
Income allocated to non-controlling interest in the Operating Partnership has been excluded from the numerator and Common Units and vested LTIP Units in the Operating Partnership, which may be converted to common shares, have been omitted from the denominator for the purpose of computing diluted earnings per share since including these amounts in the numerator and denominator would have no impact.
The following table reconciles net income attributable to common stockholders to basic and diluted earnings per share (in thousands, except share and per share data):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Numerator:
 
 
 
 
 
 
 
Net income attributable to common stockholders
$
28,794

 
$
69,418

 
$
84,451

 
$
77,531

Dividends paid on unvested share-based compensation
(152
)
 
(162
)
 
(304
)
 
(303
)
Undistributed earnings attributable to unvested share based compensation

 
(69
)
 
(34
)
 
(30
)
Net income available to common stockholders
$
28,642

 
$
69,187

 
$
84,113

 
$
77,198

 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Weighted average shares outstanding - Basic
108,956,408

 
106,769,003

 
107,874,640

 
106,806,664

Effect of dilutive share-based compensation
263,812

 
236,881

 
240,801

 
226,955

Weighted average shares outstanding - Diluted
109,220,220

 
107,005,884

 
108,115,441

 
107,033,619

 
 
 
 
 
 
 
 
Basic and diluted earnings per share:
 
 
 
 
 
 
 
Net income per share available to common stockholders - basic and diluted
$
0.26

 
$
0.65

 
$
0.78

 
$
0.72

13. Share Based Compensation
Restricted Stock Units
In February 2018, the Compensation Committee (the "Compensation Committee") of the Board of Directors of the Company approved the grant of Restricted Stock Units under the Company's 2015 Incentive Award Plan to certain Company employees (the "2018 Restricted Stock Units"). The 2018 Restricted Stock Units include 79,812 Restricted Stock Units that vest over a three-year period based on the holder's continued service with the Company or any of its affiliates and 45,464 performance-based Restricted Stock Units that cliff vest based on the achievement of applicable performance goals over a three-year period. The 2018 Restricted Stock Units have weighted average grant date fair value of $15.92 per share.
Each time-based 2018 Restricted Stock Unit will vest as follows, subject to the employee’s continued service through each applicable vesting date: 33% on February 4, 2019, which is the first anniversary of the vesting commencement date of the award (February 4, 2018), 33% on the second anniversary of the vesting commencement date, and 34% on the third anniversary of the vesting commencement date.
Of the performance-based 2018 Restricted Stock Units, twenty-five percent (25%) are designated as absolute total stockholder return ("TSR") units (the "Absolute TSR Share Units"), and vest based on achievement of varying levels of the Company’s TSR over the three-year performance period. The other seventy-five percent (75%) of the performance-based 2018 Restricted Stock Units are designated as relative TSR share units (the "Relative TSR Share Units") and vest based on the ranking of the Company’s TSR as compared to a defined peer group over the three-year performance period.

20


LTIP Unit Grants
In February 2018, the Compensation Committee approved the issuance of 725,860 performance-based LTIP Units (the "2018 Class A LTIP Units") and 84,505 time-based LTIP Units (the "2018 Time-Based LTIP Units") of the Operating Partnership under the 2015 Incentive Award Plan that had a weighted average grant date fair value of $8.79 per unit.
Each award of 2018 Time-Based LTIP Units will vest as follows, subject to the executive’s continued service through each applicable vesting date: 33% on February 4, 2019, which is the first anniversary of the vesting commencement date of the award (February 4, 2018), 33% on the second anniversary of the vesting commencement date, and 34% on the third anniversary of the vesting commencement date.
A portion of each award of 2018 Class A LTIP Units is designated as a number of “base units.” Twenty-five percent (25%) of the base units are designated as absolute TSR base units, and vest based on achievement of varying levels of the Company’s TSR over the three-year performance period. The other seventy-five percent (75%) of the base units are designated as relative TSR base units and vest based on the ranking of the Company’s TSR as compared to a defined peer group over the three-year performance period.
In May 2018, pursuant to the Company's Director Compensation Program, as amended and restated as of February 21, 2018, the Company approved the issuance of 24,661 fully-vested LTIP Units to the Company's seven non-employee directors with a weighted average grant date fair value of $24.13 per unit.
LTIP Units (other than Class A LTIP Units that have not vested), whether vested or not, receive the same quarterly per-unit distributions as Common Units, which equal the per-share distributions on the Common Stock of the Company. Class A LTIP Units that have not vested receive a quarterly per-unit distribution equal to 10% of the distribution paid on Common Units.
The following is a summary of the unvested incentive awards under the Company's 2014 Share Unit Plan and the 2015 Incentive Award Plan as of June 30, 2018:
 
2014 Share Unit Plan Share Units
 
2015 Incentive Award Plan Restricted Stock Units(1)
 
2015 Incentive Award Plan LTIP Units(1)
 
Total
Unvested as of December 31, 2017
48,682

 
264,302

 
1,662,073

 
1,975,057

Granted

 
125,276

 
835,026

 
960,302

Vested(2)
(48,682
)
 
(105,113
)
 
(108,327
)
 
(262,122
)
Expired

 
(2,541
)
 

 
(2,541
)
Forfeited

 

 

 

Unvested as of June 30, 2018

 
281,924

 
2,388,772

 
2,670,696

Weighted average fair value of unvested shares/units

 
$
14.35

 
$
8.23

 
$
8.88

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

(2)
During the six months ended June 30, 2018, 49,826 shares of common stock were withheld by the Company upon the settlement of the applicable award in order to satisfy minimum federal and state tax withholding requirements with respect to Share Units and Restricted Stock Units under the 2014 Share Unit Plan and the 2015 Incentive Award Plan.


21


The fair value of the time-based Restricted Stock Units and Time-Based LTIP Units are determined based on the closing price of the Company’s Common Stock on the grant date and compensation expense is recognized on a straight-line basis over the vesting period. The grant date fair values of performance-based awards for the 2018 Restricted Stock Units and the 2018 Class A LTIP Units were determined based on a Monte Carlo simulation method with the following assumptions, and compensation expense is recognized on a straight-line basis over the performance period:
Performance Award Grant Date
 
Percentage of Total Award
 
Grant Date Fair Value by Component
(in dollars)
 
Volatility
 
Interest Rate
 
Dividend Yield
February 20, 2018
 
 
 
 
 
 
 
 
 
 
Absolute TSR Restricted Stock Units
 
25%
 
$6.54
 
24.52%
 
1.82% - 2.47%
 
5.553%
Relative TSR Restricted Stock Units
 
75%
 
$10.44
 
24.52%
 
1.82% - 2.47%
 
5.553%
Absolute TSR Class A LTIPs
 
25%
 
$6.60
 
24.52%
 
1.82% - 2.47%
 
5.553%
Relative TSR Class A LTIPs
 
75%
 
$10.13
 
24.52%
 
1.82% - 2.47%
 
5.553%
The absolute and relative stockholder returns are market conditions as defined by Accounting Standard Codification ("ASC") 718, Compensation - Stock Compensation. Market conditions include provisions wherein the vesting condition is met through the achievement of a specific value of the Company’s Common Stock, which is total stockholder return in this case. Market conditions differ from other performance awards under ASC 718 in that the probability of attaining the condition (and thus vesting of the units or shares) is reflected in the initial grant date fair value of the award. Accordingly, it is not appropriate to reconsider the probability of vesting in the award subsequent to the initial measurement of the award, nor is it appropriate to reverse any of the expense if the condition is not met.
Therefore, once the expense for these awards is measured, the expense must be recognized over the service period regardless of whether the target is met, or at what level the target is met. Expense may only be reversed if the holder of the instrument forfeits the award as a result of the holder's termination of service of the Company prior to vesting.
For the three and six months ended