Xenia Hotels & Resorts, Inc. - FORM 10-Q

Attached files

file	filename
EX-32.1 - EXHIBIT 32.1 - Xenia Hotels & Resorts, Inc.	xeniaq3201810qexhibit321.htm
EX-31.2 - EXHIBIT 31.2 - Xenia Hotels & Resorts, Inc.	xeniaq3201810qexhibit312.htm
EX-31.1 - EXHIBIT 31.1 - Xenia Hotels & Resorts, Inc.	xeniaq3201810qexhibit311.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

____________________________

FORM 10-Q

____________________________

(Mark One)

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

For the quarterly period ended September 30, 2018

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 every Interactive Data File required to be submitted 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 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	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 October 29, 2018, there were 112,559,248 shares of the registrant’s common stock outstanding.

XENIA HOTELS & RESORTS, INC.

TABLE OF CONTENTS



Part I - Financial Information		Page

Item 1.	Financial Statements (unaudited)
	Condensed Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017	1
	Condensed Consolidated Statements of Operations and Comprehensive Income for the Three and Nine Months Ended September 30, 2018 and 2017	2
	Condensed Consolidated Statement of Changes in Equity for the Nine Months Ended September 30, 2018	4
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2018 and 2017	5
	Notes to the Condensed Consolidated Financial Statements	7

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	40
Item 4.	Controls and Procedures	42


Part II - Other Information

Item 1.	Legal Proceedings	42
Item 1A.	Risk Factors	42
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	42
Item 3.	Defaults Upon Senior Securities	42
Item 4.	Mine Safety Disclosures	42
Item 5.	Other Information	42
Item 6.	Exhibits	43

Signatures		44

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

XENIA HOTELS & RESORTS, INC.

Condensed Consolidated Balance Sheets

As of September 30, 2018 and December 31, 2017

(Dollar amounts in thousands, except per share data)



	September 30, 2018			December 31, 2017
Assets	(Unaudited)
Investment properties:
Land	$	459,439		$	440,930
Buildings and other improvements	3,073,531			2,878,375
Total	$	3,532,970		$	3,319,305
Less: accumulated depreciation	(742,132		)	(628,450		)
Net investment properties	$	2,790,838		$	2,690,855
Cash and cash equivalents	90,040			71,884
Restricted cash and escrows	57,986			58,520
Accounts and rents receivable, net of allowance for doubtful accounts	42,105			35,865
Intangible assets, net of accumulated amortization of $6,081 and $3,286, respectively	65,658			68,000
Other assets	65,081			37,512
Assets held for sale	—			152,672
Total assets (including $68,201 and $70,269, respectively, related to consolidated variable interest entities - Note 6)	$	3,111,708		$	3,115,308
Liabilities
Debt, net of loan discounts and unamortized deferred financing costs (Note 7)	$	1,133,888		$	1,322,593
Accounts payable and accrued expenses	97,700			77,005
Distributions payable	31,550			29,930
Other liabilities	44,607			40,694
Total liabilities (including $45,980 and $46,637, respectively, related to consolidated variable interest entities - Note 6)	$	1,307,745		$	1,470,222
Commitments and Contingencies (Note 14)
Stockholders' equity
Common stock, $0.01 par value, 500,000,000 shares authorized, 112,559,248 and 106,735,336 shares issued and outstanding as of September 30, 2018 and December 31, 2017, respectively	$	1,126		$	1,068
Additional paid in capital	2,059,482			1,924,124
Accumulated other comprehensive income	24,086			10,677
Accumulated distributions in excess of net earnings	(318,616		)	(320,964		)
Total Company stockholders' equity	$	1,766,078		$	1,614,905
Non-controlling interests	37,885			30,181
Total equity	$	1,803,963		$	1,645,086
Total liabilities and equity	$	3,111,708		$	3,115,308

See accompanying notes to the condensed consolidated financial statements.

XENIA HOTELS & RESORTS, INC.

Condensed Consolidated Statements of Operations and Comprehensive Income

For the Three and Nine Months Ended September 30, 2018 and 2017

(unaudited)

(Dollar amounts in thousands, except per share data)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Revenues:
Rooms revenues	$	156,973		$	152,942		$	495,378		$	462,261
Food and beverage revenues	69,179			56,653			242,014			185,030
Other revenues	14,837			13,694			45,152			38,851
Total revenues	$	240,989		$	223,289		$	782,544		$	686,142
Expenses:
Rooms expenses	38,007			35,427			115,183			104,406
Food and beverage expenses	49,130			40,507			155,633			121,489
Other direct expenses	4,609			3,441			13,798			9,750
Other indirect expenses	60,796			54,859			187,189			163,573
Management and franchise fees	10,459			9,393			34,466			32,493
Total hotel operating expenses	$	163,001		$	143,627		$	506,269		$	431,711
Depreciation and amortization	39,282			37,492			116,684			110,596
Real estate taxes, personal property taxes and insurance	11,652			10,152			35,331			32,208
Ground lease expense	1,120			1,393			3,826			4,178
General and administrative expenses	6,919			7,258			22,852			23,479
Gain on business interruption insurance	(234		)	—			(2,883		)	—
Acquisition and terminated transaction costs	8			210			230			1,476
Impairment and other losses	—			2,174			—			2,174
Total expenses	$	221,748		$	202,306		$	682,309		$	605,822
Operating income	$	19,241		$	20,983		$	100,235		$	80,320
Gain on sale of investment properties	—			1,570			42,294			50,747
Other income	10			428			842			766
Interest expense	(11,902		)	(11,599		)	(38,672		)	(32,896		)
Loss on extinguishment of debt	—			—			(465		)	(274		)
Net income before income taxes	$	7,349		$	11,382		$	104,234		$	98,663
Income tax benefit (expense)	1,985			385			(8,325		)	(7,670		)
Net income	$	9,334		$	11,767		$	95,909		$	90,993
Non-controlling interests in consolidated real estate entities (Note 6)	167			130			325			75
Non-controlling interests of Common Units in Operating Partnership (Note 1)	(257		)	(259		)	(2,539		)	(1,899		)
Net income attributable to non-controlling interests	$	(90	)	$	(129	)	$	(2,214	)	$	(1,824	)
Net income attributable to common stockholders	$	9,244		$	11,638		$	93,695		$	89,169

XENIA HOTELS & RESORTS, INC.

Condensed Consolidated Statements of Operations and Comprehensive Income, Continued

For the Three and Nine Months Ended September 30, 2018 and 2017

(unaudited)

(Dollar amounts in thousands, except per share data)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Basic and diluted earnings per share
Net income per share available to common stockholders - basic and diluted	$	0.08		$	0.11		$	0.85		$	0.83
Weighted average number of common shares (basic)	112,086,917			106,727,330			109,298,804			106,779,824
Weighted average number of common shares (diluted)	112,361,052			106,995,887			109,550,566			107,020,675

Comprehensive Income:
Net income	$	9,334		$	11,767		$	95,909		$	90,993
Other comprehensive income:
Unrealized gain (loss) on interest rate derivative instruments	2,847			(258		)	15,306			(1,932		)
Reclassification adjustment for amounts recognized in net income (interest expense)	(879		)	412			(1,539		)	1,916
	$	11,302		$	11,921		$	109,676		$	90,977
Comprehensive (income) loss attributable to non-controlling interests:
Non-controlling interests in consolidated real estate entities (Note 6)	167			130			325			75
Non-controlling interests of Common Units in Operating Partnership (Note 1)	(308		)	(262		)	(2,897		)	(1,897		)
Comprehensive income attributable to non-controlling interests	$	(141	)	$	(132	)	$	(2,572	)	$	(1,822	)
Comprehensive income attributable to the Company	$	11,161		$	11,789		$	107,104		$	89,155

See accompanying notes to the condensed consolidated financial statements.

XENIA HOTELS & RESORTS, INC.

Condensed Consolidated Statements of Changes in Equity

For the Nine Months Ended September 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	—		—			—			—			93,695			2,539			(325		)	2,214			95,909
Proceeds from sale of common stock, net	5,719,959		57			134,811			—			—			—			—			—			134,868
Dividends, common shares / units ($0.825)	—		—			—			—			(91,347		)	(779		)	—			(779		)	(92,126		)
Share-based compensation	153,779		2			1,567			—			—			5,832			—			5,832			7,401
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	—		—			—			14,908			—			398			—			398			15,306
Reclassification adjustment for amounts recognized in net income	—		—			—			(1,499		)	—			(40		)	—			(40		)	(1,539		)
Balance at September 30, 2018	112,559,248		$	1,126		$	2,059,482		$	24,086		$	(318,616	)	$	25,731		$	12,154		$	37,885		$	1,803,963

See accompanying notes to the condensed consolidated financial statements.

XENIA HOTELS & RESORTS, INC.

Condensed Consolidated Statements of Cash Flows

For the Nine Months Ended September 30, 2018 and 2017

(unaudited)

(Dollar amounts in thousands)



	Nine Months Ended September 30,
	2018			2017
Cash flows from operating activities:
Net income	$	95,909		$	90,993
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	114,158			108,988
Amortization of above and below market leases and other lease intangibles	2,723			1,963
Amortization of debt premiums, discounts, and financing costs	1,967			2,099
Loss on extinguishment of debt	465			274
Gain on sale of investment properties	(42,294		)	(50,747		)
Impairment and other losses	—			950
Share-based compensation expense	6,994			7,587
Changes in assets and liabilities:
Accounts and rents receivable	(5,992		)	(5,676		)
Other assets	2,546			4,557
Accounts payable and accrued expenses	17,199			2,454
Other liabilities	3,085			7,750
Net cash provided by operating activities	$	196,760		$	171,192
Cash flows from investing activities:
Purchase of investment properties	(127,986		)	(202,881		)
Capital expenditures and tenant improvements	(83,596		)	(52,113		)
Proceeds from sale of investment properties	196,920			204,353
Deposits for acquisition of hotel properties	(15,000		)	(6,000		)
Net cash used in investing activities	$	(29,662	)	$	(56,641	)
Cash flows from financing activities:
Proceeds from mortgage debt and notes payable	83,000			215,000
Payoffs of mortgage debt	(228,344		)	(127,876		)
Principal payments of mortgage debt	(2,930		)	(1,938		)
Proceeds from unsecured term loan	—			125,000
Payment of loan fees and deposits	(4,803		)	(3,241		)
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	135,028			—
Repurchase of common shares	—			(4,103		)
Shares redeemed to satisfy tax withholding on vested share based compensation	(1,021		)	(1,850		)
Dividends	(90,485		)	(88,893		)
Distributions paid to non-controlling interests	—			(359		)
Net cash (used in) provided by financing activities	$	(149,476	)	$	111,740
Net increase in cash and cash equivalents and restricted cash	17,622			226,291
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	$	148,026		$	513,318

XENIA HOTELS & RESORTS, INC.

Condensed Consolidated Statements of Cash Flows, Continued

For the Nine Months Ended September 30, 2018 and 2017

(unaudited)

(Dollar amounts in thousands)



	Nine Months Ended September 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	$	90,040	$	450,441
Restricted cash	57,986		62,877
Total cash and cash equivalents and restricted cash shown in the statements of cash flows	$	148,026	$	513,318

The following represent cash paid during the periods presented for the following:
Cash paid for taxes	$	5,713	$	3,930
Cash paid for interest	38,703		30,467

Supplemental schedule of non-cash investing activities:
Accrued capital expenditures	$	1,024	$	1,170

See accompanying notes to the condensed consolidated financial statements.

XENIA HOTELS & RESORTS, INC.

Notes to Condensed Consolidated Financial Statements (unaudited)

September 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 September 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 September 30, 2018, the Company owned 40 lodging properties, 38 of which were wholly owned. The remaining two hotels were owned through individual investments in real estate entities, in which the Company had a 75% ownership interest in each investment, and were previously consolidated. In October 2018, the Company acquired the remaining 25% ownership interest in these investments and now owns 100% of these entities.

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 nine months ended September 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 nine months ended September 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 nine months ended September 30, 2018, the Company had a geographical concentration of revenues generated from hotels in the Orlando, Florida market that was approximately 11.2% of total revenues for the period. For the nine months

ended September 30, 2017, the Company had a geographical concentration of revenues generated from hotels in the Houston, Texas market that represented 10.3% of total revenues.

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 condition. Should any of our hotels experience a significant decline in operational performance, it may affect the Company's results of operations, 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.

Acquisition of Real Estate

In January 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business ("ASU 2017-01"). The guidance is intended to assist entities with evaluating whether a set of transferred assets and activities is a business. Under the new guidance, an entity first determines whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. If this threshold is met, the set is not a business. If the threshold is not met, the entity then evaluates whether the set meets the requirement that a business include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs.

The Company adopted ASU 2017-01 on January 1, 2018 on a prospective basis. Following the adoption of ASU 2017-01, investments in hotel properties, including land and land improvements, building and building improvement, furniture, fixtures and equipment, and identifiable intangibles assets, will generally be accounted for as asset acquisitions. Acquired assets are recorded at their relative fair value based on total accumulated costs of the acquisition. Direct acquisition-related costs are capitalized as a component of the acquired assets.

Disposition of Real Estate

In February 2017, the FASB issued ASU 2017-05, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets ("ASU 2017-05"). The guidance clarifies 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 nine

months ended September 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.

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 nine months ended September 30, 2018, the Company recognized $0.2 million and $2.9 million of business interruption insurance proceeds related to lost income as a result of Hurricanes Harvey and Irma in 2017, 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 $2.9 million recognized, $1.4 million of the proceeds related to Hyatt Centric Key West Resort & Spa for lost income in the third and fourth quarters of 2017, with another $1.2 million attributable to lost income from the first quarter of 2018 from Hurricane Irma. The remaining $0.2 million was related to lost income at Marriott Woodlands Waterway Hotel & Convention Center from Hurricane Harvey.

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, Common 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 Company has completed its data gathering phase and identified a complete population of leases. Based on the current lease population, the Company anticipates recording a right of use asset and lease liability of less than three percent of total assets and liabilities as of September 30, 2018, respectively, upon adoption of ASU 2016-02. In addition to the recording a right of use asset and lease liability upon adoption, the Company anticipates reclassifying the below market ground lease intangibles and the above market ground lease intangibles from intangibles and other liabilities, respectively, to the beginning right of use assets. The Company will continue to evaluate the appropriate discount rates to present value the lease liability through the adoption date to consider all relevant data and is evaluating the overall impact the standard will have on its financial statement disclosures. 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 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.

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.

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 still evaluating these improvements to determine the impact they have on its Topic 842 implementation efforts and its consolidated financial statements and related disclosures. The Company expects to apply the practical expedient, which provides the Company the option to apply the new guidance at its effective date (January 1, 2019) without having to adjust the 2018 and 2017 comparative financial statements.

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.

3. Revenues

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.

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 nine months ended September 30, 2018 and 2017 (in thousands):



	Three Months Ended		Nine Months Ended
Primary Markets	September 30, 2018		September 30, 2018
Orlando, FL	$	21,631	$	87,924
Phoenix, AZ	14,693		70,889
Houston, TX	19,657		69,725
Washington, DC-MD-VA	17,443		55,856
San Francisco/San Mateo, CA	18,500		54,839
Dallas, TX	13,592		51,751
San Jose-Santa Cruz, CA	14,603		44,185
Boston, MA	12,914		34,563
California North	13,953		34,511
Atlanta, GA	10,629		32,191
Other	83,374		246,110
Total	$	240,989	$	782,544



	Three Months Ended		Nine Months Ended
Primary Markets	September 30, 2017		September 30, 2017
Houston, TX	$	20,367	$	70,663
San Francisco/San Mateo, CA	18,304		52,050
Dallas, TX	14,710		51,368
Orlando, FL	22,668		48,843
San Jose-Santa Cruz, CA	13,756		41,772
California North	13,564		35,453
Boston, MA	12,718		34,152
Oahu Island, HI	10,593		30,936
Atlanta, GA	9,748		30,693
Washington, DC-MD-VA	8,504		28,448
Other	78,357		261,764
Total	$	223,289	$	686,142

4. Investment Properties

From time to time, we evaluate acquisition opportunities based on our investment criteria and / or the opportunistic disposition of our hotels in order to take advantage of market conditions or in situations where the hotels no longer fit within our strategic objectives.

In August 2018, the Company acquired a fee-simple interest in the 202-room Ritz-Carlton located in Denver, Colorado for a net purchase price of $99.5 million, including closing costs, that was funded with cash on hand.

In September 2018, the Company acquired the fee-simple interest in the 185-room Fairmont located in Pittsburgh, Pennsylvania for a purchase price of $30.6 million, including closing costs, that was funded with cash on hand.

The Company accounted for the two hotels acquired during the three months ended September 30, 2018, as asset acquisitions and capitalized the related acquisition costs as part of the respective purchase price. The results of operations for The Ritz-Carlton, Denver and Fairmont Pittsburgh have been included in the Company’s condensed consolidated statements of operations and comprehensive income since their acquisition date.

The following represents the purchase price allocation of the two assets acquired during the three and nine months ended September 30, 2018:



	September 30, 2018
Land	$	18,479
Building and improvements	98,623
Furniture, fixtures, and equipment	12,468
Intangibles and other assets	572
Total purchase price	$	130,142

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 accounted for the purchase as a business combination and recognized acquisition costs of $1.2 million for the nine months ended September 30, 2017, which are included in acquisition and terminated transaction costs on the Company’s condensed consolidated statements of operations and comprehensive income for the period 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.

5. Disposed Properties

The following represents the disposition details for the hotels sold during the nine months ended September 30, 2018 and 2017, respectively (in thousands):



Property	Date	Rooms	Gross Sale Price		Net Proceeds		Gain on Sale
Aston Waikiki Beach Hotel	03/2018	645	$	200,000	$	196,920	$	42,430	⁽¹⁾
Total for the nine months ended September 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		36,121
Marriott West Des Moines	07/2017	219	19,000		18,014		1,654
Total for the nine months ended September 30, 2017			$	212,000	$	204,865	$	50,747


(1)	In addition to the gain on sale recognized during the nine months ended September 30, 2018, the Company also recognized adjustments related to the 2017 dispositions amounting to $0.1 million.

6. Investment in Real Estate Entities and Consolidated Entities

The Company had 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 were 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 had 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 had a controlling financial interest and is considered the primary beneficiary of each of these entities. Therefore, these entities are consolidated by the Company.

The following are the liabilities of the consolidated VIE's, which are non-recourse to the Company, and the assets that can be used to settle those obligations (in thousands):



	September 30, 2018			December 31, 2017
Net investment properties	$	65,101		$	67,687
Other assets	3,100			2,582
Total assets	$	68,201		$	70,269
Mortgages payable	(43,227		)	(44,074		)
Other liabilities	(2,753		)	(2,563		)
Total liabilities	$	(45,980	)	$	(46,637	)
Net assets	$	22,221		$	23,632

In October 2018, the Company acquired the remaining 25% of the membership interest in both the Grand Bohemian Hotel Charleston and the Grand Bohemian Hotel Mountain Brook for a combined purchase price $12.2 million. The acquisition of the remaining membership interests was an equity transaction and therefore had no impact to the consolidated statement of operations upon closing of the transaction. Simultaneously with the purchase of the membership interests, the Company repaid the outstanding principal balance of two mortgage loans collateralized by these hotels totaling $43.4 million.

7. Debt

Debt as of September 30, 2018 and December 31, 2017 consisted of the following (dollar amounts in thousands):



						Balance Outstanding as of
	Rate Type	Rate⁽¹⁾			Maturity Date	September 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
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	15,523				15,908
Grand Bohemian Hotel Charleston (VIE)	Variable	4.76	%		11/10/2020	18,602			⁽⁴⁾	19,026
Grand Bohemian Hotel Mountain Brook (VIE)	Variable	4.76	%		12/27/2020	24,764			⁽⁴⁾	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	59,250				59,750
Renaissance Atlanta Waverly Hotel & Convention Center	Variable	4.36	%		8/14/2024	100,000				100,000
Andaz Napa⁽⁵⁾	Fixed⁽²⁾	3.23	%	⁽⁵⁾	9/13/2024	56,000			⁽⁵⁾	38,000
The Ritz-Carlton, Pentagon City	Fixed⁽⁶⁾	3.69	%		1/31/2025	65,000				—
Residence Inn Boston Cambridge	Fixed	4.48	%		11/1/2025	62,153				62,833
Grand Bohemian Hotel Orlando	Fixed	4.53	%		3/1/2026	59,524				60,000
Marriott San Francisco Airport Waterfront	Fixed	4.63	%		5/1/2027	115,000				115,000
Total Mortgage Loans		4.18	%	⁽⁷⁾		$	716,816			$	865,090
Unsecured Term Loan $175M	Fixed⁽⁸⁾	2.79	%		2/15/2021	175,000				175,000
Unsecured Term Loan $125M	Fixed⁽⁸⁾	3.28	%		10/22/2022	125,000				125,000
Unsecured Term Loan $150M⁽⁹⁾	Variable	3.71	%		8/21/2023	—				—
Unsecured Term Loan $125M	Fixed⁽⁸⁾	3.72	%		9/13/2024	125,000				125,000
Senior Unsecured Credit Facility	Variable	3.81	%		2/28/2022	—				40,000
Mortgage Loan Discounts, net⁽¹⁰⁾	—	—			—	(207		)		(255		)
Unamortized Deferred Financing Costs, net	—	—			—	(7,721		)		(7,242		)
Total Debt, net of loan discounts and unamortized deferred financing costs		3.82	%	⁽⁷⁾		$	1,133,888			$	1,322,593


(1)	Variable index is one-month LIBOR as of September 30, 2018.


(2)	The Company entered into interest rate swap agreements to fix the interest rate of the variable rate mortgage loans for a portion of or the entire term of the loan.


(3)	During the nine months ended September 30, 2018, the Company elected its prepayment option per the terms of the respective mortgage loan agreement and repaid the outstanding balance.


(4)	In October 2018, the Company elected its prepayment option per the terms of the respective mortgage loan agreement and repaid the outstanding balance.


(5)	In September 2018, the Company amended its mortgage loan agreement to extend the maturity date from March 2019 through September 2024 and received additional loan proceeds of $18 million. The interest rate is fixed for the original principal of $38 million through January 2019, after which the rate will revert back to variable for the entire mortgage loan balance of $56 million.


(6)	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.


(7)	Represents the weighted average interest rate as of September 30, 2018.


(8)	LIBOR has been fixed for certain interest periods throughout the term of the loan. The spread may vary, as it is determined by the Company's leverage ratio.


(9)	In August 2018, the Company entered into an unsecured term loan for $150 million that matures in August 2023. The term loan includes an accordion option that allows the Company to request additional lender commitments of up to $100 million. The Company had not yet funded the loan as of September 30, 2018. In October 2018, the Company funded $65 million of the term loan.


(10)	Loan discounts recognized upon loan modifications, net of the accumulated amortization.

In connection with repaying mortgage loans during the nine months ended September 30, 2018, the Company wrote off the related unamortized deferred financing costs of $465 thousand, which is included in loss on extinguishment of debt on the condensed consolidated statements of operations and comprehensive income for the period then ended.

Total debt outstanding as of September 30, 2018 and December 31, 2017 was $1,142 million and $1,330 million and had a weighted average interest rate of 3.82% and 3.71% per annum, respectively. The remaining unamortized mortgage discounts as of September 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 September 30, 2018			Weighted average interest rate
2018	$	1,142		4.41%
2019	4,618			4.40%
2020	61,308			4.52%
2021	180,401			2.84%
2022	272,483			3.62%
Thereafter	621,864			4.12%
Total Debt	$	1,141,816		3.82%
Total Loan Discounts, net	(207		)	—
Unamortized Deferred Financing Costs, net	(7,721		)	—
Debt, net of loan discounts and unamortized deferred financing costs	$	1,133,888		3.82%

Of the total outstanding debt at September 30, 2018, none of the mortgage loans were recourse to the Company. Certain loans have options to extend the maturity dates if exercised by the Company, subject to being compliant with certain covenants and the payment of an extension fee. Some of the mortgage loans require compliance with certain covenants, such as debt service coverage ratios, loan-to-value tests, investment restrictions and distribution limitations. As of September 30, 2018, the Company was in compliance with all such covenants.

Senior Unsecured Credit Facility

As of September 30, 2018, there was no outstanding balance on the senior unsecured facility. During the three and nine months ended September 30, 2018, the Company incurred unused commitment fees of approximately $0.4 million and $1.1 million, respectively, and interest expense of $0 and $34 thousand, respectively. During the three and nine months ended September 30, 2017, the Company incurred unused commitment fees of approximately $0.3 million and $0.9 million, respectively, and interest expense of $0.2 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 September 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.

As of September 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 September 30, 2018 and December 31, 2017, respectively (in thousands):



						September 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	$	1,787	$	50,000	$	1,134
$175M Term Loan	Swap	1.29%	1-Month LIBOR + 1.50%	10/22/2015	2/15/2021	65,000		2,343		65,000		1,497
$175M Term Loan	Swap	1.29%	1-Month LIBOR + 1.50%	10/22/2015	2/15/2021	60,000		2,162		60,000		1,379
$125M Term Loan	Swap	1.83%	1-Month LIBOR + 1.45%	1/15/2016	10/22/2022	50,000		2,060		50,000		675
$125M Term Loan	Swap	1.83%	1-Month LIBOR + 1.45%	1/15/2016	10/22/2022	25,000		1,027		25,000		334
$125M Term Loan	Swap	1.84%	1-Month LIBOR + 1.45%	1/15/2016	10/22/2022	25,000		1,016		25,000		325
$125M Term Loan	Swap	1.83%	1-Month LIBOR + 1.45%	1/15/2016	10/22/2022	25,000		1,022		25,000		330
Mortgage Debt	Swap	1.54%	1-Month LIBOR + 2.60%	1/13/2016	1/13/2023	59,250		3,148		60,000		1,630
Mortgage Debt	Swap	0.88%	1-Month LIBOR + 2.10%	9/1/2016	1/17/2019	41,000		178		41,000		386
Mortgage Debt	Swap	0.89%	1-Month LIBOR + 2.10%	9/1/2016	3/21/2019	38,000		273		38,000		428
Mortgage Debt	Swap	1.80%	1-Month LIBOR + 2.25%	3/1/2017	1/3/2022	51,000		1,743		51,000		588
Mortgage Debt	Swap	1.80%	1-Month LIBOR + 2.00%	3/1/2017	1/3/2022	45,000		1,515		45,000		521
Mortgage Debt	Swap	1.81%	1-Month LIBOR + 2.00%	3/1/2017	1/3/2022	45,000		1,540		45,000		493
$125M Term Loan	Swap	1.92%	1-Month LIBOR + 1.80%	10/13/2017	10/12/2022	40,000		1,471		40,000		362
$125M Term Loan	Swap	1.92%	1-Month LIBOR + 1.80%	10/13/2017	10/12/2022	40,000		1,465		40,000		358
$125M Term Loan	Swap	1.92%	1-Month LIBOR + 1.80%	10/13/2017	10/12/2022	25,000		909		25,000		218
$125M Term Loan	Swap	1.92%	1-Month LIBOR + 1.80%	10/13/2017	10/12/2022	20,000		735		20,000		180
Mortgage Debt	Swap	2.80%	1-Month LIBOR + 2.10%	6/1/2018	2/1/2023	24,000		101		—		—
Mortgage Debt⁽¹⁾	Swap	2.89%	1-Month LIBOR + 2.10%	1/17/2019	2/1/2023	—		110		—		—
						$	728,250	$	24,605	$	705,000	$	10,838

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

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 nine months ended September 30, 2018 and 2017 (in thousands):



		Three Months Ended September 30,						Nine Months Ended September 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	$	2,847		$	(258	)	$	15,306		$	(1,932	)
Gain (loss) reclassified from accumulated other comprehensive income to net income	Reclassification adjustment for amounts recognized in net income	$	(879	)	$	412		$	(1,539	)	$	1,916
Total interest expense in which effects of cash flow hedges are recorded	Interest expense	$	11,902		$	11,599		$	38,672		$	32,896

The Company expects approximately $7.0 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 nonfinancial 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.

Recurring Measurements

For assets and liabilities measured at fair value on a recurring basis, quantitative disclosure of their fair value is as follows, which are netted as applicable per the terms of the respective master netting agreements (in thousands):



	Fair Value Measurement Date
	September 30, 2018		December 31, 2017
Location / Description	Significant Unobservable Inputs (Level 2)		Significant Unobservable Inputs (Level 2)
Other assets
Interest rate swap assets	$	24,605	$	10,838
Total	$	24,605	$	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 September 30, 2018 and December 31, 2017 (in thousands):



	September 30, 2018				December 31, 2017
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Total Debt, net of discounts	$	1,141,609	$	1,144,425	$	1,289,835	$	1,303,550
Senior Unsecured Credit Facility	—		—		40,000		40,101
Total	$	1,141,609	$	1,144,425	$	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 4.7% and 3.93% per annum as of September 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 nine months ended September 30, 2018 using an estimated federal and state statutory combined rate of 31.24% and recognized an income tax benefit of $2.0 million and income tax expense of $8.3 million, respectively. The reduction in the Company's federal and state statutory combined rate compared to 2017 was attributed to the Tax Cuts and Jobs Act ("TCJA") that was signed into law in December 2017. The TCJA introduced significant changes to the U.S. federal income tax code and reduced the corporate tax rate from 35% to 21%, and is effective for tax years beginning after December 31, 2017.

The Company estimated the TRS income tax expense for the three and nine months ended September 30, 2017 using an estimated federal and state statutory combined rate of 42.98% and recognized an income tax benefit of $0.4 million and income tax expense of $7.7 million, respectively.

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 nine months ended September 30, 2018, the Company received gross proceeds of $15.2 million and $137.4 million, respectively, and paid $0.2 million and $1.7 million, respectively, in transaction fees, from the issuance of 629,303 and 5,719,959 shares, respectively of its common stock in accordance with the ATM Agreement. In addition, the Company amortized capitalized transaction costs of $0.7 million during the nine months ended September 30, 2018 that were previously included in other assets. As of September 30, 2018, the Company had $62.6 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 nine months ended September 30, 2018. For the nine months ended September 30, 2017, 240,352 shares were repurchased under the Repurchase Program, at a weighted average price of $17.07 per share for an aggregate purchase price of $4.1 million. As of September 30, 2018, the Company had approximately $96.9 million remaining under its share repurchase authorization.

Distributions

The Company declared the following dividends during the nine months ended September 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
$0.275	September 30, 2018	September 28, 2018	October 15, 2018

Non-Controlling Interest of Common Units in Operating Partnership

As of September 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 September 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 September 30, 2018, the Company had accrued $243 thousand in dividends related to the LTIP Units, which were paid in October 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 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 September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Numerator:
Net income attributable to common stockholders	$	9,244		$	11,638		$	93,695		$	89,169
Dividends paid on unvested share-based compensation	(151		)	(160		)	(455		)	(463		)
Undistributed earnings attributable to unvested share based compensation	—			—			(2		)	(1		)
Net income available to common stockholders	$	9,093		$	11,478		$	93,238		$	88,705

Denominator:
Weighted average shares outstanding - Basic	112,086,917			106,727,330			109,298,804			106,779,824
Effect of dilutive share-based compensation	274,135			268,557			251,762			240,851
Weighted average shares outstanding - Diluted	112,361,052			106,995,887			109,550,566			107,020,675

Basic and diluted earnings per share:
Net income per share available to common stockholders - basic and diluted	$	0.08		$	0.11		$	0.85		$	0.83

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.

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 September 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	—		(2,893	)	—		(2,893	)
Unvested as of September 30, 2018	—

Xenia Hotels & Resorts, Inc. - FORM 10-Q - November 5, 2018

Attached files