NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - DESCRIPTION OF BUSINESS
Summit Hotel Properties, Inc. (the “Company”) is a self-managed hotel investment company that was organized on June 30, 2010, as a Maryland corporation. The Company holds both general and limited partnership interests in Summit Hotel OP, LP (the “Operating Partnership”), a Delaware limited partnership also organized on June 30, 2010. On February 14, 2011, the Company closed on its initial public offering ("IPO") and completed certain formation transactions, including the merger of Summit Hotel Properties, LLC with and into the Operating Partnership. Unless the context otherwise requires, “we,” “us,” and “our” refer to the Company and its consolidated subsidiaries.
At
March 31, 2016
, our portfolio consists of
83
Upscale and Upper-midscale hotels with a total of
11,099
guestrooms located in
23
states. We have elected to be taxed as a real estate investment trust (“REIT”) for federal income tax purposes commencing with our short taxable year ended December 31, 2011. To qualify as a REIT, we cannot operate or manage our hotels. Accordingly, all of our hotels, except our Leasehold Venture (See "Note 6 - Equity - Leasehold Venture"), are leased to subsidiaries (“TRS Lessees”) of our taxable REIT subsidiary (“TRS”). We indirectly own
100%
of the outstanding equity interests in all of our TRS Lessees.
NOTE 2 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying Condensed Consolidated Financial Statements of the Company consolidate the accounts of the Company and all entities that are controlled by the Company’s ownership of a majority voting interest in such entities, as well as variable interest entities for which the Company is the primary beneficiary. All significant intercompany balances and transactions have been eliminated in the Condensed Consolidated Financial Statements.
We prepare our Condensed Consolidated Financial Statements in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Act of 1934 (the “Exchange Act”). Accordingly, the Condensed Consolidated Financial Statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring items) considered necessary for a fair presentation in accordance with GAAP have been included. Results for the
three
months ended
March 31, 2016
may not be indicative of the results that may be expected for the full year of
2016
. For further information, please read the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended
December 31, 2015
.
Segment Disclosure
Accounting Standards Codification (“ASC”) Topic 280,
Segment Reporting
, establishes standards for reporting financial and descriptive information about an enterprise’s reportable segments. We have determined that we have
one
reportable segment for activities related to investing in real estate. Our investments in real estate are geographically diversified and the chief operating decision makers evaluate operating performance on an individual asset level. As each of our assets has similar economic characteristics, the assets have been aggregated into one reportable segment.
Investment in Hotel Properties
The Company allocates the purchase price of acquired hotel properties based on the fair value of the acquired land, land improvements, building, furniture, fixtures and equipment, identifiable intangible assets or liabilities, other assets and assumed liabilities. Intangible assets may include certain value associated with the on-going operations of the hotel business being acquired as part of the hotel property acquisition. Acquired intangible assets that derive their values from real property or an interest in real property, are inseparable from that real property or interest in real property, and do not produce or contribute to the production of income other than consideration for the use or occupancy of space, are recorded as a component of the related real estate asset in our Condensed Consolidated Financial Statements. Identifiable intangible assets or liabilities may also arise from assumed contractual arrangements as part of the acquisition of the hotel property, including terms that are above or below market compared to an estimated fair market value of the agreement at the acquisition date. We determine the acquisition-date fair values of all assets and assumed liabilities using methods similar to those used by independent appraisers, including using a discounted cash flow analysis that uses appropriate discount or capitalization rates and available market information. Estimates of future cash flows are based on a number of factors including historical operating results, known and anticipated trends, and market and economic conditions. Acquisition costs are expensed as incurred.
Our hotel properties and related assets are recorded at cost, less accumulated depreciation. We capitalize the costs of significant additions and improvements that materially extend a property’s life. These costs may include hotel refurbishment, renovation, and remodeling expenditures, as well as certain indirect internal costs related to construction projects. We expense the cost of repairs and maintenance as incurred.
We generally depreciate our hotel properties and related assets using the straight-line method over their estimated useful lives as follows:
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Classification
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Estimated Useful Lives
|
Buildings and improvements
|
|
6 to 40 years
|
Furniture, fixtures and equipment
|
|
2 to 15 years
|
We periodically re-evaluate asset lives based on current assessments of remaining utilization, which may result in changes in estimated useful lives. Such changes are accounted for prospectively and will increase or decrease future depreciation expense.
When depreciable property and equipment is retired or disposed, the related costs and accumulated depreciation are removed from the balance sheet and any gain or loss is reflected in current operations.
On a limited basis, we provide financing to developers of hotel properties for development projects. We evaluate these arrangements to determine if we participate in residual profits of the hotel property through the loan provisions or other agreements. Where we conclude that these arrangements are more appropriately treated as an investment in the hotel property, we reflect the loan as an investment in hotel properties under development in our Condensed Consolidated Balance Sheets. If classified as hotel properties under development, no interest income is recognized on the loan and interest expense is capitalized on our investment in the hotel property during the construction period.
We monitor events and changes in circumstances for indicators that the carrying value of a hotel property or land held for development may be impaired. Additionally, we perform at least annual reviews to monitor the factors that could trigger an impairment. Factors that could trigger an impairment analysis include, among others: i) significant underperformance relative to historical or projected operating results, ii) significant changes in the manner of use of a property or the strategy of our overall business, including changes in the estimated holding periods for hotel properties and land parcels, iii) a significant increase in competition, iv) a significant adverse change in legal factors or regulations, and v) significant negative industry or economic trends. When such factors are identified, we prepare an estimate of the undiscounted future cash flows of the specific property and determine if the carrying amount of the asset is recoverable. If an impairment is identified, we estimate the fair value of the property based on discounted cash flows or sales price if the property is under contract and an adjustment is made to reduce the carrying value of the property to its estimated fair value.
Intangible Assets
We amortize intangible assets with determined finite useful lives using the straight-line method. We do not amortize intangible assets with indefinite useful lives, but we evaluate these assets for impairment annually or at interim periods if events or circumstances indicate that the asset may be impaired.
Assets Held for Sale and Discontinued Operations
We periodically review our hotel properties and our land held for development based on established criteria such as age, type of franchise, adverse economic and competitive conditions, and strategic fit to identify properties that we believe are either non-strategic or no longer complement our business. Based on our review, we periodically market properties for sale that no longer meet our investment criteria.
We classify assets as Assets Held for Sale in the period in which certain criteria are met, including when the sale of the asset within one year is probable. Assets classified as Assets Held for Sale are no longer depreciated and are carried at the lower of carrying amount or fair value less selling costs.
Historically, we presented the results of operations of hotel properties that had been sold or otherwise qualified as Assets Held for Sale in discontinued operations if the operations and cash flows of the hotel properties had been or would be eliminated from our ongoing operations. In the prior year we adopted Accounting Standards Update (“ASU”) No. 2014-08,
Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity
and we currently anticipate that the majority of future properties for sale will not be classified as discontinued operations.
Variable Interest Entities
We consolidate variable interest entities (“VIE”) if we determine that we are the primary beneficiary of the entity. When evaluating the accounting for a VIE, we consider the purpose for which the VIE was created, the importance of each of the activities in which it is engaged and our decision-making role, if any, in those activities that significantly determine the entity’s economic performance relative to other economic interest holders. We determine our rights, if any, to receive benefits or the obligation to absorb losses that could potentially be significant to the VIE by considering the economic interest in the entity, regardless of form, which may include debt, equity, management and servicing fees, or other contractual arrangements. We consider other relevant factors including each entity’s capital structure, contractual rights to earnings (losses), subordination of our interests relative to those of other investors, contingent payments, and other contractual arrangements that may be economically significant.
Additionally, we have in the past and may in the future enter into purchase and sale transactions in accordance with Section 1031 of the Internal Revenue Code of 1986, as amended (“IRC”), for the exchange of like-kind property to defer taxable gains on the sale of properties (“1031 Exchange”). For reverse transactions under a 1031 Exchange in which we purchase a new property prior to selling the property to be matched in the like-kind exchange (we refer to a new property being acquired by us in the 1031 Exchange prior to the sale of the related property as a “Parked Asset”), legal title to the Parked Asset is held by a Qualified Intermediary engaged to execute the 1031 Exchange until the sale transaction and the 1031 Exchange is completed. We retain essentially all of the legal and economic benefits and obligations related to the Parked Assets prior to completion of the 1031 Exchanges. As such, the Parked Assets are included in our Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Operations as a VIE until legal title is transferred to us upon completion of the 1031 Exchange.
Cash and Cash Equivalents
We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. At times, cash on deposit may exceed the federally insured limit. We maintain our cash with high credit quality financial institutions.
Restricted Cash
Restricted cash consists of certain funds maintained in escrow for property taxes, insurance, and certain capital expenditures. Funds may be disbursed from the account upon proof of expenditures and approval from the lender or other party requiring the restricted cash reserves.
Trade Receivables and Credit Policies
We grant credit to qualified customers, generally without collateral, in the form of trade accounts receivable. Trade receivables result from the rental of hotel guestrooms and the sales of food, beverage, and banquet services and are payable under normal trade terms. Trade receivables are stated at the amount billed to the customer and do not accrue interest.
We regularly review the collectability of our trade receivables. A provision for losses is determined on the basis of previous loss experience and current economic conditions.
Deferred Charges, net
Initial franchise fees are capitalized and amortized over the term of the franchise agreement using the straight-line method.
Deferred Financing Fees
In accordance with ASU No. 2015-03,
Simplifying the Presentation of Debt Issuance Costs
, debt issuance costs are presented as a direct deduction from the carrying value of the debt liability on the Condensed Consolidated Balance Sheets. Debt issuance costs are amortized as a component of interest expense over the term of the related debt using the straight-line method, which approximates the interest method.
Non-controlling Interests
Non-controlling interests represent the portion of equity in a consolidated entity held by owners other than the consolidating parent. Non-controlling interests are reported in the Condensed Consolidated Balance Sheets within equity, separately from stockholders’ equity. Revenue, expenses and net income (loss) attributable to both the Company and the non-controlling interests are reported in the Condensed Consolidated Statements of Operations.
Our Condensed Consolidated Financial Statements include non-controlling interests related to common units of limited partnership interests (“Common Units”) in the Operating Partnership held by unaffiliated third parties.
Revenue Recognition
We recognize revenue when guestrooms are occupied and services have been rendered. Revenues are recorded net of any sales and other taxes collected from customers. All discounts are recorded as a reduction to revenue. Cash received prior to guest arrival is recorded as an advance from the customer and is recognized at the time of occupancy.
Sales and Other Taxes
We have operations in states and municipalities that impose sales or other taxes on certain sales. We collect these taxes from our customers and remit the entire amount to the various governmental units. The taxes collected and remitted are excluded from revenues and are included in accrued expenses until remitted.
Equity-Based Compensation
Our 2011 Equity Incentive Plan, which was amended and restated effective June 15, 2015 (the “Equity Plan”), provides for the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalent rights, and other stock-based awards. We account for the stock options granted upon completion of our IPO at fair value using the Black-Scholes option-pricing model and we account for all other awards of equity, including time-based and performance-based stock awards, using the grant date fair value of those equity awards. Restricted stock awards with performance-based vesting conditions are market-based awards tied to total stockholder return and are valued using a Monte Carlo simulation model in accordance with ASC Topic 718,
Compensation — Stock Compensation
. We expense the fair value of awards under the Equity Plan ratably over the vesting period and market-based awards are not adjusted for performance. The amount of stock-based compensation expense may be subject to adjustment in future periods due to a change in forfeiture assumptions or modification of previously granted awards.
Derivative Financial Instruments and Hedging
All derivative financial instruments are recorded at fair value and reported as a derivative financial instrument asset or liability in our Condensed Consolidated Balance Sheets. We use interest rate derivatives to hedge our risks on variable-rate debt. Interest rate derivatives could include swaps, caps and floors. We assess the effectiveness of each hedging relationship by comparing changes in fair value or cash flows of the derivative financial instrument with the changes in fair value or cash flows of the designated hedged item or transaction.
For interest rate derivatives designated as cash flow hedges, the effective portion of changes in fair value is initially reported as a component of accumulated other comprehensive loss in the equity section of our Condensed Consolidated Balance Sheets and
reclassified to interest expense in our Condensed Consolidated Statements of Operations in the period in which the hedged item affects earnings. The ineffective portion of changes in fair value is recognized in current earnings in other income (expense) in the Condensed Consolidated Statements of Operations.
Income Taxes
We have elected to be taxed as a REIT under certain provisions of the IRC. To qualify as a REIT, we must meet certain organizational and operational requirements, including a requirement to distribute annually to our stockholders at least 90% of our REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gains, which does not necessarily equal net income as calculated in accordance with GAAP. As a REIT, we generally will not be subject to federal income tax (other than taxes paid by our TRS at regular corporate income tax rates) to the extent we distribute 100% of our REIT taxable income to our stockholders. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax on our taxable income at regular corporate income tax rates and generally will be unable to re-elect REIT status until the fifth calendar year after the year in which we failed to qualify as a REIT, unless we satisfy certain relief provisions.
Substantially all of our assets are held by, and all of our operations are conducted through our Operating Partnership. Partnerships are not subject to U.S. federal income taxes as revenues and expenses pass through to and are taxed on the owners. Generally, the states and cities where partnerships operate follow the U.S. federal income tax treatment. However, there are a limited number of local and state jurisdictions that tax the taxable income of the Operating Partnership. Accordingly, we provide for income taxes in these jurisdictions for the Operating Partnership.
Taxable income related to our TRS is subject to federal, state and local income taxes at applicable tax rates. Our consolidated income tax provision or benefit includes the income tax provision or benefit related to the operations of the TRS as well as state and local income taxes related to the Operating Partnership.
Where required, we account for federal and state income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for: i) the future tax consequences attributable to differences between carrying amounts of existing assets and liabilities based on GAAP and the respective carrying amounts for tax purposes, and ii) operating losses and tax-credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date of the change in tax rates. However, deferred tax assets are recognized only to the extent that it is more likely than not they will be realized based on consideration of available evidence, including future reversals of taxable temporary differences, future projected taxable income and tax planning strategies.
We perform a review of any uncertain tax positions and if necessary will record expected future tax consequences of uncertain tax positions in the financial statements.
Fair Value Measurement
Fair value measures are classified into a three-tiered fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
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Level 1:
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Observable inputs such as quoted prices in active markets.
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Level 2:
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Directly or indirectly observable inputs, other than quoted prices in active markets.
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Level 3:
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Unobservable inputs in which there is little or no market information, which require a reporting entity to develop its own assumptions.
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Assets and liabilities measured at fair value are based on one or more of the following valuation techniques:
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Market approach:
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Prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.
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Cost approach:
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Amount required to replace the service capacity of an asset (replacement cost).
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Income approach:
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Techniques used to convert future amounts to a single amount based on market expectations (including present-value, option-pricing, and excess-earnings models).
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Our estimates of fair value were determined using available market information and appropriate valuation methods. Considerable judgment is necessary to interpret market data and develop estimated fair value. The use of different market assumptions or estimation methods may have a material effect on the estimated fair value amounts. We classify assets and liabilities in the fair value hierarchy based on the lowest level of input that is significant to the fair value measurement.
We elected not to use the fair value option for cash and cash equivalents, restricted cash, trade receivables, prepaid expenses and other, debt, accounts payable, and accrued expenses and other. With the exception of our fixed-rate debt (See “Note 4 — Debt”), the carrying amounts of these financial instruments approximate their fair values due to their short-term nature or variable interest rates.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Reclassifications
Certain amounts reported in previous periods have been reclassified to conform to the current presentation primarily as a result of adopting new accounting standards in the current period. Reclassifications had no net effect on the Company’s previously reported consolidated financial position or consolidated results of operations.
New Accounting Standards
In January 2016, the FASB issued ASU No. 2016-01,
Recognition and Measurement of Financial Assets and Financial Liabilities
, which enhances the reporting requirements surrounding the measurement of financial instruments and requires equity securities to be measured at fair value with changes in the fair value recognized through net income. ASU No. 2016-01 is effective for our fiscal year commencing on January 1, 2018. We do not anticipate that the adoption of ASU No. 2016-01 will have a material effect on our consolidated financial position or our consolidated results of operations.
In February 2016, the FASB issued ASU No. 2016-02,
Leases
, which changes lessee accounting to reflect the financial liability and right-of-use asset that are inherent to leasing an asset on the balance sheet. ASU No. 2016-02 is effective for our fiscal year commencing on January 1, 2019, but early adoption is permitted. We are evaluating the effect that ASU 2016-02 will have on our Condensed Consolidated Financial Statements and related disclosures. We have not yet selected a transition date nor have we determined the effect of ASU No. 2016-02 on our consolidated financial position or consolidated results of operations.
In March 2016, the FASB issued ASU No. 2016-09,
Improvements to Employee Share-Based Payment Accounting
, which simplifies the accounting for income taxes for certain equity-based awards to employees. ASU No. 2016-09 is effective for our fiscal year commencing on January 1, 2017. We do not anticipate that the adoption of ASU No. 2016-09 will have a material effect on our consolidated financial position or our consolidated results of operations.
NOTE 3 - INVESTMENT IN HOTEL PROPERTIES, NET
Investment in Hotel Properties, net
Investment in hotel properties, net at
March 31, 2016
and
December 31, 2015
is as follows (in thousands):
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|
March 31, 2016
|
|
December 31, 2015
|
Land
|
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$
|
162,169
|
|
|
$
|
149,996
|
|
Hotel buildings and improvements
|
|
1,321,208
|
|
|
1,222,017
|
|
Construction in progress
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13,582
|
|
|
6,555
|
|
Furniture, fixtures and equipment
|
|
121,755
|
|
|
123,332
|
|
|
|
1,618,714
|
|
|
1,501,900
|
|
Less accumulated depreciation
|
|
(184,699
|
)
|
|
(168,493
|
)
|
|
|
$
|
1,434,015
|
|
|
$
|
1,333,407
|
|
Assets Held for Sale
Assets held for sale at
March 31, 2016
and
December 31, 2015
include the following (in thousands):
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|
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|
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|
March 31, 2016
|
|
December 31, 2015
|
Land
|
|
$
|
15,228
|
|
|
$
|
24,250
|
|
Hotel buildings and improvements
|
|
61,728
|
|
|
97,249
|
|
Furniture, fixtures and equipment
|
|
6,832
|
|
|
10,906
|
|
Construction in progress
|
|
36
|
|
|
42
|
|
Notes receivable
|
|
2,490
|
|
|
—
|
|
Franchise fees
|
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471
|
|
|
691
|
|
Total
|
|
$
|
86,785
|
|
|
$
|
133,138
|
|
On June 2, 2015, the Operating Partnership and certain affiliated entities entered into
two
separate agreements, as amended on July 15, 2015 (collectively, the "ARCH Agreements"), to sell a portfolio of
26
hotels containing an aggregate of
2,793
guestrooms to affiliates of American Realty Capital Hospitality Trust, Inc. ("ARCH") for an aggregate cash purchase price of approximately
$347.4 million
. As a result of the ARCH Agreements, we classified the hotel properties to be sold pursuant to the ARCH Agreements as Assets Held for Sale. The hotels were to be sold in
three
separate closings. The first closing of
10
hotels containing
1,090
guestrooms was completed on October 15, 2015 for an aggregate cash payment of
$150.1 million
and was executed through forward and reverse 1031 Exchanges to defer taxable gains on the sale of the hotels.
On December 29, 2015, we and ARCH agreed to terminate the ARCH Agreement with respect to ARCH’s right to acquire fee simple interests in
10
hotels containing a total of
996
guestrooms for an aggregate purchase price of
$89.1 million
at a closing that had been scheduled to occur on December 29, 2015 (the “Terminated Purchase Agreement”). As a result of the termination, ARCH forfeited and we retained, the
$9.1 million
earnest money deposit made by ARCH under the ARCH Agreements related to the sale of these ten hotels and the parties were released from further obligations, except those which expressly survive the termination of the ARCH Agreement pursuant to its terms.
On February 11, 2016, we completed the sale of
six
hotels to ARCH for an aggregate purchase price of
$108.3 million
. We provided seller-financing (as provided below) to ARCH of
$20.0 million
to consummate the transaction. The proceeds from the sale were used to complete certain reverse 1031 Exchanges. The hotels acquired by us to complete the reverse 1031 Exchanges included the
179
-guestroom Courtyard by Marriott in Atlanta (Decatur), GA on October 20, 2015 for a purchase price of
$44.0 million
and the
226
-guestroom Courtyard by Marriott in the West End of Nashville, TN on January 19, 2016 for a purchase price of
$71.0 million
. The completion of the reverse 1031 Exchanges resulted in the deferral of taxable gains of approximately
$74.0 million
and the pay-down of our unsecured revolving credit facility by
$105.0 million
. Additionally, we repaid a mortgage loan totaling
$5.8 million
related to the sale to ARCH. The sale to ARCH resulted in a
$56.8 million
gain, of which we recorded a gain of
$36.8 million
during the three months ended March 31, 2016, and deferred gains of
$20.0 million
on the sale related to the seller financing. We will recognize the deferred gains as we receive repayment of the principal balance of the loan from ARCH.
On February 11, 2016, the Company and American Realty Capital Hospitality Portfolio SMT ALT, LLC, an affiliate of ARCH, as substitute purchaser (“New ARCH Purchaser”), entered into a letter agreement (the “Reinstatement Agreement”) and agreed, subject to the terms and conditions of the Reinstatement Agreement, to reinstate the Terminated Purchase Agreement in its entirety, except as modified by the Reinstatement Agreement (the Terminated Purchase Agreement, as reinstated and modified by the Reinstatement Agreement, is referred to herein as the “Reinstated Purchase Agreement”), to make null and void the prior termination of the Terminated Purchase Agreement and to proceed with the proposed sale of the
10
hotels (the “Reinstated Hotels”) pursuant to the Reinstated Purchase Agreement for an aggregate purchase price of
$89.1 million
. The Reinstated Hotels are being sold to the New ARCH Purchaser as part of the ARCH Sale.
The Reinstatement Agreement required the New ARCH Purchaser to deposit non-refundable earnest money in the amount of
$7.5 million
(the “New Deposit”) with an escrow agent to support the closing of the Reinstated Hotels. The New Deposit is non-refundable to the New ARCH Purchaser except in limited circumstances. The prior earnest money deposit in the amount of
$9.1 million
that was retained by us in connection with the termination of the Terminated Purchase Agreement will not be credited to the New ARCH Purchaser against the purchase price for the Reinstated Hotels, and the purchase price remains the same. The closing of the sale of the Reinstated Hotels is scheduled to occur on or before December 30, 2016 (the “New Closing Date”), or at such later date as the closing may be adjourned or extended in accordance with the express terms of the Reinstatement Agreement. If the closing of the Reinstated Hotels does not occur as required by the Reinstatement Agreement
because of a default by the New ARCH Purchaser, then the New ARCH Purchaser will forfeit the New Deposit to us as liquidated damages.
Prior to the New Closing Date, we have the right to continue to market and ultimately sell, without the consent of the New ARCH Purchaser, any or all of the Reinstated Hotels to bona fide third-party purchasers that are not affiliates of ours. If we sell some, but not all, of the Reinstated Hotels to bona fide third-party purchasers, then the purchase price to be paid by the New ARCH Purchaser for the remaining Reinstated Hotels will be reduced, but the New Deposit will remain with the escrow agent except in limited circumstances. We are actively marketing the properties subject to the Reinstated Purchase Agreement to other potential buyers and
two
of the properties are currently under contract for sale to purchasers that are unrelated to the new ARCH Purchaser.
On February 11, 2016, the Operating Partnership entered into a loan agreement with ARCH, as borrower, which provides for a loan by the Operating Partnership to ARCH in the amount of
$27.5 million
(the “Loan”). The proceeds of the Loan were required to be applied by ARCH as follows: (i)
$20.0 million
was applied toward the payment of a portion of the
$108.3 million
purchase price for the
six
hotels containing
707
guestrooms, which were acquired by ARCH on February 11, 2016 as part of the ARCH Sale; and (ii) the remaining
$7.5 million
was applied by ARCH to fund the New Deposit under the Reinstated Purchase Agreement. The Loan is recorded net of deferred gains in Investment in Real Estate Loans, net on our Condensed Consolidated Balance Sheet at March 31, 2016.
The entire principal amount of the Loan, and any accrued and unpaid interest, will be due and payable on February 11, 2017 (the “Maturity Date”), unless extended pursuant to the Loan agreement. ARCH will repay a portion of the outstanding principal balance of the Loan in an aggregate amount equal to
$5.0 million
, to be paid in
five
equal installments of
$1.0 million
, on the last day of May, June, July, August and September 2016 (the “Amortization Payments”). The Loan may be prepaid in whole or in part at any time by ARCH, without payment of any penalty or premium. ARCH may extend the maturity date of the Loan under certain conditions by up to
two years
pursuant to
two
one
-year extension options (each an “Extension Option”).
Interest will accrue on the unpaid principal balance of the Loan at a rate of
13.0%
per annum from the date of the Loan to the initial Maturity Date,
14.0%
per annum during the first extension period and
15.0%
per annum during the second extension period. An amount equal to
9.0%
per annum is to be paid monthly (the "Monthly Interest"). The remaining
4.0%
,
5.0%
and
6.0%
, as the case may be, will accrue and be compounded monthly (the “PIK”). The PIK must be paid in order to exercise any Extension Option, otherwise the PIK is payable at the initial Maturity Date. The PIK may be paid in cash prior to the initial Maturity Date, or any extension thereof. ARCH is current with respect to the payment of the Monthly Interest.
To secure the payment of the Amortization Payments, ARCH will cause the rents from certain hotel properties or assets of its taxable REIT subsidiaries to be deposited into a separate controlled account (the “Control Account”) and ARCH has granted the Operating Partnership a continuing security interest in all of its right, title and interest in and to the Control Account until the Amortization Payments have been satisfied in full in accordance with the terms of the Loan agreement.
At
December 31, 2015
, we had
two
notes receivable totaling
$2.7 million
included in Investment in Real Estate Loans, net on our Condensed Consolidated Balance Sheet related to seller-financing for the sale in a prior year of
two
hotel properties in Emporia, KS (each an "Emporia Property"). The loans had matured and the buyer was in payment default under the terms of the loans. We were awarded legal title to one Emporia Property through foreclosure and foreclosure proceedings related to the other Emporia Property are ongoing. The reacquired Emporia Property is recorded as Assets Held for Sale on our Condensed Consolidated Balance Sheet at
March 31, 2016
.
During the three months ended March 31, 2016, we purchased an additional note receivable from the first priority lien holder for the Emporia Property for which foreclosure proceedings are ongoing to facilitate the completion of the reacquisition of this Emporia Property through a foreclosure. The remaining notes receivable are recorded as Assets Held for Sale on our Condensed Consolidated Balance Sheet at
March 31, 2016
.
On April 11, 2016, we entered into contracts for sale of the reacquired Emporia Property and the first priority lien note and our second lien note related to the remaining Emporia Property to a third party purchaser that is unrelated to the prior owner for an aggregate selling price of approximately
$4.5 million
. On April 15, 2016, we completed the sale of the reacquired Emporia Property and we expect to close the sale of the first and second lien notes related to the remaining Emporia Property to the same buyer in the second quarter of 2016. We do not expect the sale of the assets to result in a significant gain or loss. There can be no assurance that we will successfully complete the sale of the notes on the terms contemplated by the contract for sale or at all.
In addition to the hotel properties related to the ARCH Agreements noted above, Assets Held for Sale at
December 31, 2015
included land parcels in Spokane, WA, Fort Myers, FL and Flagstaff, AZ, which are being actively marketed for sale. These land parcels remain in Assets Held for Sale on the Condensed Consolidated Balance Sheets at
March 31, 2016
.
Hotel Property Acquisitions
A summary of the hotel properties acquired during the
three months ended March 31, 2016
is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Date Acquired
|
|
Franchise/Brand
|
|
Location
|
|
Purchase
Price
|
|
|
January 19, 2016
|
|
Courtyard by Marriott
|
|
Nashville, TN
|
|
$
|
71,000
|
|
|
|
January 20, 2016
|
|
Residence Inn by Marriott
|
|
Atlanta, GA
|
|
38,000
|
|
|
(1
|
)
|
|
|
|
|
$
|
109,000
|
|
|
(2
|
)
|
|
|
(1)
|
This Parked Asset was purchased as part of a potential reverse 1031 Exchange. See "Note 2 — Basis of Presentation and Significant Accounting Policies—Variable Interest Entities". As such, the legal title to this Parked Asset is held by a qualified intermediary engaged to execute the potential 1031 Exchange. We retain essentially all of the legal and economic benefits and obligations related to the Parked Asset. As such, the Parked Asset is included in our Condensed Consolidated Balance Sheets at March 31, 2016 and Condensed Consolidated Statements of Operations for the three months then ended as a VIE until legal title is transferred to us upon completion of the 1031 Exchange.
|
(2) The net assets acquired totaled $109,182 due to the purchase at settlement of certain working capital assets and liabilities related to the properties that was in addition to the purchase price of $109,000.
The hotel properties were acquired using funds advanced on our senior unsecured credit facility (See "Note 4 - Debt").
The allocation of the aggregate purchase prices to the fair value of assets and liabilities acquired for the above acquisitions is as follows (in thousands):
|
|
|
|
|
|
|
|
For the Three Months Ended
March 31, 2016
|
Land
|
|
$
|
12,173
|
|
Hotel buildings and improvements
|
|
95,358
|
|
Furniture, fixtures and equipment
|
|
2,130
|
|
Other assets
(1)
|
|
383
|
|
Total assets acquired
|
|
110,044
|
|
Less other liabilities
(1)
|
|
(862
|
)
|
Net assets acquired
|
|
$
|
109,182
|
|
|
|
(1)
|
The net assets acquired totaled $109,182 due to the purchase at settlement of certain working capital assets and liabilities related to the properties that was in addition to the purchase price of $109,000.
|
Total revenues and net income for hotel properties acquired in the
three
months ended
March 31, 2016
, which are included in our Condensed Consolidated Statements of Operations, are as follows (in thousands):
|
|
|
|
|
|
|
|
For the Three Months Ended
March 31, 2016
|
Revenues
|
|
$
|
4,244
|
|
Net income
|
|
$
|
977
|
|
The results of operations of acquired hotel properties are included in the Condensed Consolidated Statements of Operations beginning on their respective acquisition dates. The following unaudited condensed pro forma financial information presents the results of operations as if all acquisitions in
2016
and
2015
had taken place on January 1, 2015 and all dispositions had occurred prior to that date. Additionally, the unaudited condensed pro forma information excludes the operating results from discontinued operations and disposed properties that were not classified as discontinued operations after the adoption of ASU No. 2014-08. The unaudited condensed pro forma financial information is for comparative purposes only and is not necessarily indicative of what actual results of operations would have been had the hotel acquisitions and dispositions taken place on or before January 1, 2015. This information does not purport to be indicative of or represent results of operations for future periods.
The unaudited condensed pro forma financial information for the
three
months ended
March 31, 2016
and
2015
is as follows (in thousands, except per share):
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
March 31,
|
|
|
2016 (1)
|
|
2015
|
|
|
(unaudited)
|
Revenues
|
|
$
|
116,693
|
|
|
$
|
109,035
|
|
Income from hotel operations
|
|
$
|
43,813
|
|
|
$
|
39,716
|
|
Net income before taxes
|
|
$
|
13,749
|
|
|
$
|
13,187
|
|
Net income
|
|
$
|
12,178
|
|
|
$
|
12,668
|
|
Net income attributable to common stockholders, net of amount allocated to participating securities
|
|
$
|
7,957
|
|
|
$
|
8,425
|
|
Basic and diluted net income per share attributable to common stockholders
|
|
$
|
0.09
|
|
|
$
|
0.10
|
|
(1) The pro forma amounts exclude the
$36.8 million
gain on the sale of hotel properties during the
three months ended March 31, 2016
.
NOTE 4 - DEBT
At
March 31, 2016
our indebtedness is comprised of borrowings under a
$450.0 million
senior unsecured credit facility, the 2015 Term Loan (as defined below), and indebtedness secured by first priority mortgage liens on various hotel properties. At
December 31, 2015
our indebtedness was comprised of borrowings under the former
$300.0 million
senior unsecured credit facility, the 2015 Term Loan (as defined below), and indebtedness secured by first priority mortgage liens on various hotel properties. The weighted average interest rate, after giving effect to our interest rate derivative, for all borrowings was
3.76%
at
March 31, 2016
and
3.90%
at
December 31, 2015
.
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
December 31, 2015
|
Revolving debt
|
|
$
|
55,000
|
|
|
$
|
95,000
|
|
Term loans
|
|
290,000
|
|
|
215,000
|
|
Mortgage loans
|
|
359,061
|
|
|
367,096
|
|
|
|
704,061
|
|
|
677,096
|
|
Unamortized debt issuance costs
|
|
(6,763
|
)
|
|
(5,560
|
)
|
Debt, net of debt issuance costs
|
|
$
|
697,298
|
|
|
$
|
671,536
|
|
Our total fixed-rate and variable-rate debt, after giving effect to our interest rate derivative, is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
December 31, 2015
|
Fixed-rate debt
|
|
$
|
400,711
|
|
|
$
|
402,673
|
|
Variable-rate debt
|
|
303,350
|
|
|
274,423
|
|
|
|
$
|
704,061
|
|
|
$
|
677,096
|
|
Information about the fair value of our fixed-rate debt that is not recorded at fair value is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
December 31, 2015
|
|
|
|
|
Carrying
Value
|
|
Fair Value
|
|
Carrying
Value
|
|
Fair Value
|
|
Valuation Technique
|
Fixed-rate debt
|
|
$
|
325,711
|
|
|
$
|
319,913
|
|
|
$
|
327,673
|
|
|
$
|
321,841
|
|
|
Level 2 - Market approach
|
At
March 31, 2016
and
December 31, 2015
, we had
$75.0 million
of debt with variable interest rates that had been converted to fixed interest rates through derivative financial instruments which are carried at fair value. Differences between the carrying value and fair value of our fixed-rate debt are primarily due to changes in interest rates. Inherently, fixed-rate debt is subject to fluctuations in fair value as a result of changes in the current market rate of interest on the valuation date. For additional
information on our use of derivatives as interest rate hedges, refer to "Note 5 — Derivative Financial Instruments and Hedging."
Former $300 Million Senior Unsecured Credit Facility
At
December 31, 2015
, we had a
$300.0 million
senior unsecured credit facility. The senior unsecured credit facility was comprised of a
$225.0 million
revolving credit facility (the
“$225 Million
Revolver”) and a
$75.0 million
term loan. At December 31, 2015, the maximum amount of borrowing permitted under the senior unsecured credit facility was
$300.0 million
, of which we had
$170.0 million
borrowed and
$130.0 million
available to borrow.
$450 Million Senior Unsecured Credit Facility
On January 15, 2016, the Operating Partnership, as borrower, the Company, as parent guarantor, and each party executing the loan documentation as a subsidiary guarantor, entered into a
$450.0 million
senior unsecured facility (the “2016 Unsecured Credit Facility”) with Deutsche Bank AG New York Branch, as administrative agent, Deutsche Bank Securities Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, and Regions Capital Markets as joint lead arrangers and joint bookrunners, and a syndicate of lenders including Deutsche Bank AG New York Branch, Bank of America, N.A., Regions Bank, Royal Bank of Canada, U.S. Bank National Association, PNC Bank, National Association, KeyBank National Association, Raymond James Bank, N.A., and Branch Banking and Trust Company.
The 2016 Unsecured Credit Facility is comprised of a
$300.0 million
revolving credit facility (the “$300 Million Revolver”) and a
$150.0 million
term loan (the “$150 Million Term Loan”) and replaces the former $300 million unsecured credit facility. The Company transferred to the 2016 Unsecured Credit Facility the outstanding principal balance of
$170.0 million
on the former $300.0 million senior unsecured credit facility, and the former $300.0 million senior unsecured credit facility was paid off in full and terminated upon entry into the 2016 Unsecured Credit Facility described above. At
March 31, 2016
, the maximum amount of borrowing permitted under the the 2016 Unsecured Credit Facility was
$450.0 million
, of which we had
$205.0 million
borrowed and
$245.0 million
available to borrow.
The 2016 Unsecured Credit Facility has an accordion feature which will allow the Company to increase the total commitments by an aggregate of up to
$150.0 million
on the
$300
Million Revolver and
$150
Million Term Loan. The
$300
Million Revolver will mature on March 31, 2020 and can be extended to March 31, 2021 at the Company’s option, subject to certain conditions. The
$150
Million Term Loan will mature on March 31, 2021.
The Company pays interest on revolving credit advances at varying rates based upon, at the Company’s option, either (i) 1, 2, 3, or 6-month LIBOR, plus a LIBOR margin between
1.50%
and
2.25%
, depending upon the Company’s leverage ratio (as defined in the 2016 Unsecured Credit Facility agreement), or (ii) the applicable base rate, which is the greatest of the administrative agent’s prime rate, the federal funds rate plus
0.50%
, and 1-month LIBOR plus
1.00%
, plus a base rate margin between
0.50%
and
1.25%
, depending upon the Company’s leverage ratio. The interest rate at
March 31, 2016
was
2.13%
.
Financial and Other Covenants
. We are required to comply with a series of financial and other covenants in order to borrow under this credit facility. At
March 31, 2016
, we were in compliance with all required covenants.
Unencumbered Assets
. The 2016 Unsecured Credit Facility is unsecured. However, borrowings under the 2016 Unsecured Credit Facility are limited by the value of hotel assets that qualify as unencumbered assets. At
March 31, 2016
, the Company had
44
unencumbered hotel properties supporting the 2016 Unsecured Credit Facility.
The interest rate swap entered into on September 5, 2013 with a notional value of
$75.0 million
, an effective date of January 2, 2014 and a maturity date of October 10, 2018 remains outstanding. This interest rate swap was designated as a cash flow hedge and effectively fixes LIBOR at
2.04%
and the interest rate on borrowings under a portion of the
$150
Million Term Loan to a fixed rate of
3.64%
.
Unsecured Term Loan
On April 7, 2015, our Operating Partnership, as borrower, the Company, as parent guarantor, and each party executing the term loan documentation as a subsidiary guarantor, entered into a
$125.0 million
unsecured term loan (the “2015 Term Loan”). The 2015 Term Loan matures on April 7, 2022 and has an accordion feature which allows us to increase the total commitments by an aggregate of
$75.0 million
prior to the maturity date, subject to certain conditions. On April 21, 2015, the Company exercised
$15.0 million
of the accordion and added American Bank, N.A. as a lender under the facility.
At closing, we were advanced the full
$125.0 million
amount of the 2015 Term Loan and on April 21, 2015, we were advanced the
$15.0 million
exercised on the accordion. All proceeds were used to pay down the principal balance of our
$225 million
revolver provided under the former $300.0 million senior unsecured credit facility. We pay interest on advances equal to the sum of LIBOR or the administrative agent’s prime rate and the applicable margin. We are currently paying interest at
2.43%
based on LIBOR at
March 31, 2016
.
Borrowings under the 2015 Term Loan are limited by the value of hotel assets that qualify as unencumbered assets. As of
March 31, 2016
, 44 of our hotel properties qualified as, and are deemed to be, unencumbered assets.
Term Loans
At
March 31, 2016
, we had
$649.1 million
in secured and unsecured term loans outstanding (including the
$150
Million Term Loan and the 2015 Term Loan described above). Term loans totaling
$359.1 million
are secured primarily by first mortgage liens on certain hotel properties.
NOTE 5 - DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING
Information about our derivative financial instruments at
March 31, 2016
and
December 31, 2015
is as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
December 31, 2015
|
|
|
Number of
Instruments
|
|
Notional
Amount
|
|
Fair Value
|
|
Number of
Instruments
|
|
Notional
Amount
|
|
Fair Value
|
Interest rate swaps (liability)
|
|
1
|
|
|
$
|
75,000
|
|
|
$
|
(2,443
|
)
|
|
1
|
|
|
$
|
75,000
|
|
|
$
|
(1,811
|
)
|
|
|
1
|
|
|
$
|
75,000
|
|
|
$
|
(2,443
|
)
|
|
1
|
|
|
$
|
75,000
|
|
|
$
|
(1,811
|
)
|
All of our interest rate swaps have been designated as cash flow hedges and are valued using a market approach, which is a Level 2 valuation technique. At
March 31, 2016
and
December 31, 2015
, our remaining interest rate swap was in a liability position. We have not posted any collateral related to these agreements and are not in breach of any financial provisions of the agreements.
The table below details the presentation in the financial statements of the gain or loss recognized on derivative financial instruments designated as cash flow hedges (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
March 31,
|
|
|
2016
|
|
2015
|
Loss recognized in accumulated other comprehensive income on derivative financial instruments (effective portion)
|
|
$
|
(938
|
)
|
|
$
|
(1,186
|
)
|
Loss reclassified from accumulated other comprehensive income to interest expense (effective portion)
|
|
$
|
(306
|
)
|
|
$
|
(425
|
)
|
Loss recognized in Other Expense (ineffective portion)
|
|
$
|
—
|
|
|
$
|
(1
|
)
|
Amounts reported in accumulated other comprehensive income related to derivative financial instruments will be reclassified to interest expense as interest payments are made on the hedged variable-rate debt. In the next twelve months, we estimate that an additional
$2.4 million
will be reclassified from other comprehensive income as an increase to interest expense.
NOTE 6 - EQUITY
Common Stock
The Company is authorized to issue up to
500,000,000
shares of common stock,
$0.01
par value per share. Each outstanding share of our common stock entitles the holder to one vote on all matters submitted to a vote of stockholders, including the election of directors and, except as may be provided with respect to any other class or series of stock, the holders of such shares possess the exclusive voting power.
Changes in common stock during the
three months ended March 31, 2016
and
2015
were as follows:
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
2016
|
|
2015
|
Beginning common shares outstanding
|
86,793,521
|
|
|
86,149,720
|
|
Common Unit redemptions
|
31,042
|
|
|
20,691
|
|
Grants under the Equity Plan
|
446,280
|
|
|
303,915
|
|
Common stock for director fees
|
2,062
|
|
|
—
|
|
Forfeitures
|
—
|
|
|
(46,030
|
)
|
Other
|
(53,059
|
)
|
|
(36,116
|
)
|
Ending common shares outstanding
|
87,219,846
|
|
|
86,392,180
|
|
Preferred Stock
The Company is authorized to issue up to
100,000,000
shares of preferred stock,
$0.01
par value per share, of which
91,600,000
is currently undesignated and
2,000,000
shares have been designated as
9.25%
Series A Cumulative Redeemable Preferred Stock (the “Series A preferred shares”),
3,000,000
shares have been designated as
7.875%
Series B Cumulative Redeemable Preferred Stock (the “Series B preferred shares”) and
3,400,000
shares have been designated as
7.125%
Series C Cumulative Redeemable Preferred Stock (the “Series C preferred shares”).
The Series A preferred shares, Series B preferred shares and Series C preferred shares (collectively, the “Preferred Shares”) rank senior to our common stock and on parity with each other with respect to the payment of dividends and distributions of assets in the event of a liquidation, dissolution, or winding up. The Preferred Shares do not have any maturity date and are not subject to mandatory redemption or sinking fund requirements. The Company may not redeem the Series A preferred shares, Series B preferred shares or Series C preferred shares prior to October 28, 2016, December 11, 2017, and March 20, 2018, respectively, except in limited circumstances relating to the Company’s continuing qualification as a REIT or in connection with certain changes in control. After those dates, the Company may, at its option, redeem the applicable Preferred Shares, in whole or from time to time in part, by payment of
$25
per share, plus any accumulated, accrued and unpaid distributions up to, but not including, the date of redemption. If the Company does not exercise its rights to redeem the Preferred Shares upon certain changes in control, the holders of the Preferred Shares have the right to convert some or all of their shares into a number of the Company’s common shares based on a defined formula, subject to a share cap, or alternative consideration. The share cap on each Series A preferred share is
5.92417
shares of common stock, each Series B preferred share is
5.6497
shares of common stock, and each Series C preferred share is
5.1440
shares of common stock, subject to certain adjustments.
The Company pays dividends at an annual rate of
$2.3125
for each Series A preferred share,
$1.96875
for each Series B preferred share, and
$1.78125
for each Series C preferred share. Dividend payments are made quarterly in arrears on or about the last day of February, May, August and November of each year.
Non-controlling Interests in Operating Partnership
Pursuant to the limited partnership agreement of our Operating Partnership, beginning on February 14, 2012, the unaffiliated third parties who hold Common Units in our Operating Partnership have the right to cause us to redeem their Common Units in exchange for cash based upon the fair value of an equivalent number of our shares of common stock at the time of redemption; however, the Company has the option to redeem with shares of our common stock on a one-for-one basis. The number of shares of our common stock issuable upon redemption of Common Units may be adjusted upon the occurrence of certain events such as share dividend payments, share subdivisions or combinations.
At
March 31, 2016
and
December 31, 2015
, unaffiliated third parties owned
484,979
and
516,021
, respectively, of Common Units of the Operating Partnership, representing an approximate
1%
limited partnership interest in the Operating Partnership.
We classify outstanding Common Units held by unaffiliated third parties as non-controlling interests in the Operating Partnership, a component of equity in the Company’s Condensed Consolidated Balance Sheets. The portion of net income (loss) allocated to these Common Units is reported on the Company’s Condensed Consolidated Statement of Operations as net income (loss) attributable to non-controlling interests of the Operating Partnership.
Leasehold Venture
We own a majority interest in a joint venture that owns a fee simple interest in a hotel property and we also own a minority interest in a related joint venture (“Leasehold Venture”) that holds a leasehold interest in the property. We control the Leasehold Venture as we are the managing member of the entity. Additionally, the majority of the profits and losses of the Leasehold Venture are absorbed by us. As a result, we have concluded that the Leasehold Venture represents a VIE that should be consolidated into our Condensed Consolidated Financial Statements. As such, all of the net assets and operating results of the Leasehold Venture are included in our Condensed Consolidated Financial Statements for the periods presented. We will have the option to purchase the remaining interest in the Leasehold Venture either through the exercise of a put option through July 1, 2016 by the other joint venture partner or a call option by us from the termination date of the unexercised put option through July 1, 2018.
NOTE 7 - FAIR VALUE MEASUREMENT
The following table presents information about our financial instruments measured at fair value on a recurring basis as of
March 31, 2016
and
December 31, 2015
. In instances in which the inputs used to measure fair value fall into different levels of the fair value hierarchy, we classify assets and liabilities based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
Disclosures concerning financial instruments measured at fair value are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at March 31, 2016 using
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
—
|
|
|
$
|
2,443
|
|
|
$
|
—
|
|
|
$
|
2,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2015 using
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
—
|
|
|
$
|
1,811
|
|
|
$
|
—
|
|
|
$
|
1,811
|
|
There were no transfers between Level 1 and Level 2 of the fair value hierarchy during the
three months ended March 31, 2016
or
2015
.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
Restricted Cash
The Company maintains reserve funds for property taxes, insurance, capital expenditures and replacement or refurbishment of furniture, fixtures and equipment at our hotel properties in accordance with management, franchise or mortgage loan agreements. These agreements generally require the Company to reserve cash ranging from
3%
to
5%
of the revenues of the individual hotel in restricted cash escrow accounts. Any unused restricted cash balances revert to the Company upon the termination of the underlying agreement or may be released to the Company from the restricted cash escrow accounts upon proof of expenditures and approval from the lender or other party requiring the restricted cash reserves. At
March 31, 2016
and
December 31, 2015
, approximately
$24.8 million
and
$23.1 million
, respectively, was available in restricted cash reserve funds for property taxes, insurance, capital expenditures and replacement or refurbishment of furniture, fixtures and equipment at our hotel properties.
Ground Leases
We lease land for
one
hotel property in Duluth, GA under the terms of an operating ground lease agreement expiring April 1, 2069. We also have
two
prepaid land leases for
two
hotel properties in Portland, OR which expire in June of 2084 and have a remaining prepaid balance of
$3.3 million
at both
March 31, 2016
and
December 31, 2015
. We have
one
option to extend these leases for an additional
14
years. We lease land for
one
hotel property in Houston (Galleria Area), TX under the terms of an operating ground lease agreement with an initial termination date of April 20, 2053 with
one
option to extend for an additional
10
years. We lease land for
one
hotel property in Austin, TX with an initial lease termination date of May 31, 2050. We lease land for
one
hotel property in Baltimore (Hunt Valley), MD with a lease termination date of December 31, 2019 and
twelve
remaining options to extend for
five
additional years per extension. Total rent expense for these leases for the
three months ended March 31, 2016
and
2015
was
$0.3 million
and
$0.2 million
, respectively.
In addition, we lease land for
one
hotel property in Garden City, NY under a PILOT (payment in lieu of taxes) lease. We pay a reduced amount of property tax each year of the lease as rent. The lease expires on December 31, 2019. Upon expiration of the lease, we expect to exercise our right to acquire a fee simple interest in the hotel for nominal consideration.
Franchise Agreements
All of our hotel properties operate under franchise agreements with major hotel franchisors. The terms of our franchise agreements generally range from
10
to
20
years with various extension provisions. Each franchisor receives franchise fees ranging from
2%
to
6%
of each hotel property’s gross revenue, and some agreements require that we pay marketing fees of up to
4%
of gross revenue. In addition, some of these franchise agreements require that we deposit a percentage of the hotel property’s gross revenue, generally not more than
5%
, into a reserve fund for capital expenditures. During the three months ended
March 31, 2016
and
2015
, we expensed fees related to our franchise agreements of
$9.1 million
and
$8.6 million
, respectively.
Management Agreements
Our hotel properties operate pursuant to management agreements with various third-party management companies. The terms of our management agreements range from
three
to
twenty-five
years with various extension provisions. Each management company receives a base management fee, generally a percentage of total hotel property revenues. In some cases there are also monthly fees for certain services, such as accounting, based on number of guestrooms. Generally there are also incentive fees based on attaining certain financial thresholds. During the
three months ended March 31, 2016
and
2015
, we expensed fees related to our hotel management agreements of
$4.9 million
and
$4.7 million
, respectively.
Litigation
We are involved from time to time in litigation arising in the ordinary course of business; however, we are not currently aware of any actions against us that we believe would have a material effect on our financial condition or results of operations.
NOTE 9 - EQUITY-BASED COMPENSATION
Our currently outstanding equity-based awards were issued under the Equity Plan, which was amended and restated on June 15, 2015 and provides for the granting of stock options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalent rights, and other equity-based awards or incentive awards.
Stock options granted may be either incentive stock options or non-qualified stock options. Vesting terms may vary with each grant, and stock option terms are generally five to ten years. We have outstanding equity-based awards in the form of stock options and restricted stock awards. All of our outstanding equity-based awards are classified as equity awards.
Stock Options Granted Under our Equity Plan
Stock option activity for the
three months ended March 31, 2016
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Options
|
|
Weighted Average
Exercise Price
|
|
Weighted Average
Remaining
Contractual Terms
|
|
|
|
Aggregate Intrinsic
Value (Current Value
Less Exercise Price)
|
|
|
|
|
(per share)
|
|
(in years)
|
|
|
|
(in thousands)
|
Outstanding at December 31, 2015
|
|
470,000
|
|
|
$
|
9.75
|
|
|
5.2
|
|
|
|
$
|
1,034
|
|
Granted
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
Exercised
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
Forfeited
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2016
|
|
470,000
|
|
|
$
|
9.75
|
|
|
4.9
|
|
|
|
$
|
1,043
|
|
Exercisable at March 31, 2016
|
|
470,000
|
|
|
$
|
9.75
|
|
|
4.9
|
|
|
|
$
|
1,043
|
|
Time-Based Restricted Stock Awards Made Pursuant to Our Equity Plan
On February 24, 2016, we granted time-based restricted stock awards for
22,010
shares of common stock to certain of our non-executive employees. The awards vest over a
four
year period based on continued service (
20%
on March 9, 2017, 2018 and 2019, and
40%
on March 9, 2020). On March 8, 2016, we granted time-based restricted stock awards for
169,707
shares of common stock to our executive officers. The awards vest over a
three
year period based on continued service (
25%
on March 9, 2017 and 2018 and
50%
on March 9, 2019), or in certain circumstances upon a change in control.
On March 3, 2015, we granted time-based restricted stock awards for
149,410
shares of common stock to our executive officers and management. Of the total awards issued,
37,230
vest based on continued service on March 9, 2018, or upon a change in control. The remaining awards vest over a
three
year period based on continued service (
25%
on March 9, 2016 and 2017 and
50%
on March 9, 2018), or upon a change in control.
The holders of these grants have the right to vote the related shares of common stock and receive all dividends declared and paid whether or not vested.
The fair value of time-based restricted stock awards is calculated based on the market value of our common stock on the date of grant.
The following table summarizes time-based restricted stock award activity under the Equity Plan for the
three months ended March 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Weighted Average
Grant Date Fair Value
|
|
Aggregate
Current Value
|
|
|
|
|
(per share)
|
|
(in thousands)
|
Non-vested December 31, 2015
|
|
250,011
|
|
|
$
|
12.03
|
|
|
$
|
2,988
|
|
Granted
|
|
191,717
|
|
|
11.35
|
|
|
|
|
Vested
|
|
(59,975
|
)
|
|
11.53
|
|
|
|
|
Forfeited
|
|
—
|
|
|
—
|
|
|
|
|
Outstanding at March 31, 2016
|
|
381,753
|
|
|
$
|
11.77
|
|
|
$
|
4,570
|
|
Performance-Based Restricted Stock Awards Made Pursuant to Our Equity Plan
On March 8, 2016, we granted performance-based restricted stock awards for
254,563
shares of common stock to certain of our executive officers. Our performance-based restricted stock awards are market-based awards and are accounted for based on the fair value of our common stock on the grant date. The fair value of the performance-based restricted stock awards granted was estimated using a Monte Carlo simulation valuation model.
These awards generally vest based the Company’s percentile ranking within the SNL U.S. REIT Hotel Index at the end of the period beginning on March 8, 2016 and ending on the earlier of March 8, 2019, or upon a change in control.
On March 3, 2015, we granted performance-based restricted stock awards for
154,505
shares of common stock to certain of our executive officers. Our performance-based restricted stock awards are market-based awards and are accounted for based on the fair value of our common stock on the grant date. The fair value of the performance-based restricted stock awards granted was estimated using a Monte Carlo simulation valuation model.
These awards vest based the Company’s percentile ranking within the SNL U.S. REIT Hotel Index at the end of the period beginning on January 1, 2015 and ending on the earlier of December 31, 2017, or upon a change in control.
The awards require continued service during the measurement period and are subject to the other conditions described in the Equity Plan or award document.
The number of shares the executive officers may earn under these awards range from
zero
shares to twice the number of shares granted based on the Company’s percentile ranking within the index at the end of the measurement period. In addition, a portion of the performance-based shares may be earned based on the Company's absolute total shareholder return calculated during the performance period. The holders of these grants have the right to vote the granted shares of common stock and any dividends declared will be accumulated and will be subject to the same vesting conditions as the awards. Further, if additional shares are earned based on the Company’s percentile ranking within the index, dividend payments will be issued as if the additional shares had been held throughout the measurement period.
The following table summarizes performance-based restricted stock activity under the Equity Plan for the
three months ended March 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Weighted Average
Grant Date Fair Value (1)
|
|
Aggregate
Current Value
|
|
|
|
|
(per share)
|
|
(in thousands)
|
Non-vested December 31, 2015
|
|
308,367
|
|
|
$
|
12.95
|
|
|
$
|
3,685
|
|
Granted
|
|
254,563
|
|
|
13.77
|
|
|
|
|
Vested
|
|
(113,903
|
)
|
|
7.10
|
|
|
|
|
Forfeited
|
|
—
|
|
|
—
|
|
|
|
|
Outstanding at March 31, 2016
|
|
449,027
|
|
|
$
|
14.90
|
|
|
$
|
5,375
|
|
(1) The amounts included in this column represent the expected future value of the performance-based restricted stock awards calculated using the Monte Carlo simulation valuation model discussed above.
Director Stock Awards Made Pursuant to Our Equity Plan
Our non-employee directors have the option to receive shares of our common stock in lieu of cash for their director fees. In the
three months ended March 31, 2016
, we issued
2,062
shares of our common stock in lieu of cash for director fees. The fair value of director stock awards is calculated based on the market value of our common stock on the date of grant.
Equity-Based Compensation Expense
Equity-based compensation expense included in Corporate General and Administrative expenses in the Condensed Consolidated Statements of Operations for the
three months ended March 31, 2016
and
2015
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
2016
|
|
2015
|
Stock options
|
|
$
|
55
|
|
|
$
|
147
|
|
Time-based restricted stock
|
|
337
|
|
|
222
|
|
Performance-based restricted stock
|
|
381
|
|
|
267
|
|
Director stock
|
|
20
|
|
|
—
|
|
|
|
$
|
793
|
|
|
$
|
636
|
|
We recognize equity-based compensation expense ratably over the vesting period of the equity awards granted.
Unrecognized equity-based compensation expense for all non-vested awards was
$9.0 million
at
March 31, 2016
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
2016
|
|
2017
|
|
2018
|
|
2019
|
|
2020
|
Time-based restricted stock
|
|
$
|
3,758
|
|
|
$
|
1,260
|
|
|
$
|
1,505
|
|
|
$
|
819
|
|
|
$
|
165
|
|
|
$
|
9
|
|
Performance-based restricted stock
|
|
5,281
|
|
|
1,726
|
|
|
2,192
|
|
|
1,168
|
|
|
195
|
|
|
—
|
|
|
|
$
|
9,039
|
|
|
$
|
2,986
|
|
|
$
|
3,697
|
|
|
$
|
1,987
|
|
|
$
|
360
|
|
|
$
|
9
|
|
NOTE 10 - INCOME TAXES
Income taxes for the interim periods presented have been included in our Condensed Consolidated Financial Statements on the basis of an estimated annual effective tax rate. Our effective tax rate is affected by the mix of earnings and losses by taxing jurisdictions. Our earnings, other than in our TRS, are not generally subject to federal corporate and state income taxes due to our REIT election. However, there are a limited number of local and state jurisdictions that do tax the taxable income of the Operating Partnership. Accordingly, we provide for income taxes in these jurisdictions for the Operating Partnership.
For the
first
quarter of
2016
and
2015
, we recorded an income tax provision attributable to continuing operations of
$1.6 million
and
$0.5 million
, respectively. At
March 31, 2015
, the Company had a valuation allowance against substantially all its deferred tax assets. The valuation allowance was adjusted to
zero
during the year ended
December 31, 2015
.
We had
no
unrecognized tax benefits at
March 31, 2016
. We expect no significant changes in unrecognized tax benefits within the next year.
NOTE 11 - EARNINGS PER SHARE
We apply the two-class method of computing earnings per share, which requires the calculation of separate earnings per share amounts for our non-vested time-based restricted stock awards with non-forfeitable dividends and for our common stock. Our non-vested time-based restricted stock awards with non-forfeitable rights to dividends are considered securities which participate in undistributed earnings with common stock. Under the two-class computation method, net losses are not allocated to participating securities unless the holder of the security has a contractual obligation to share in the losses. Our non-vested time-based restricted stock awards with non-forfeitable dividends do not have such an obligation so they are not allocated losses.
Below is a summary of the components used to calculate basic and diluted earnings per share (in thousands, except per share):
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
March 31,
|
|
|
2016
|
|
2015
|
Numerator:
|
|
|
|
|
|
|
Net income
|
|
$
|
48,734
|
|
|
$
|
10,591
|
|
Less: Preferred dividends
|
|
4,147
|
|
|
4,147
|
|
Allocation to participating securities
|
|
29
|
|
|
21
|
|
Attributable to non-controlling interest
|
|
249
|
|
|
57
|
|
Net income attributable to common stockholders, net of amount allocated to participating securities
|
|
$
|
44,309
|
|
|
$
|
6,366
|
|
Denominator:
|
|
|
|
|
|
|
Weighted average common shares outstanding - basic
|
|
86,360
|
|
|
85,704
|
|
Dilutive effect of equity-based compensation awards
|
|
810
|
|
|
1,171
|
|
Weighted average common shares outstanding - diluted
|
|
87,170
|
|
|
86,875
|
|
Earnings per share:
|
|
|
|
|
|
|
Basic and diluted net income per share
|
|
$
|
0.51
|
|
|
$
|
0.07
|
|
All outstanding stock options were included in the computation of diluted earnings per share for the
three months ended March 31, 2016
and
2015
due to their dilutive effect.
NOTE 12 - SUBSEQUENT EVENTS
Equity Transactions
On April 1, 2016,
22,594
Common Units were tendered for redemption and were redeemed for an equivalent number of shares of our common stock.
Dividends
On April 29, 2016, our Board of Directors declared cash dividends of
$0.1325
per share of common stock,
$0.578125
per share of
9.25%
Series A Cumulative Redeemable Preferred Stock,
$0.4921875
per share of
7.875%
Series B Cumulative Redeemable Preferred Stock, and
$0.4453125
per share of
7.125%
Series C Cumulative Redeemable Preferred Stock. These dividends are payable on May 31, 2016 to stockholders of record on May 16, 2016.