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.
We focus on owning primarily premium-branded, select-service hotels. At
September 30, 2017
, our portfolio consisted of
79
hotels with a tota
l of
11,590
gues
trooms located in
24
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 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 and nine
months ended
September 30, 2017
may not be indicative of the results that may be expected for the full year of
2017
. For further information, please read the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended
December 31, 2016
.
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 on 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.
Effective January 1, 2017, we early adopted ASU No. 2017-01,
Clarifying the Definition of a Business
. As such, if substantially all of the fair value of the gross assets acquired are concentrated in a single identifiable asset or group of similar identifiable assets, the asset or asset group is not considered a business. When we conclude that an acquisition meets this threshold, acquisition costs will be capitalized as part of our allocation of the purchase price of the acquired hotel properties.
Our hotel properties and related assets are recorded at cost, less accumulated depreciation. We capitalize hotel development costs and the costs of significant additions and improvements that materially upgrade, increase the value or extend the useful life of the property. These costs may include hotel development, refurbishment, renovation, and remodeling expenditures, as well as certain indirect internal costs related to construction projects. If an asset requires a period of time in which to carry out the activities necessary to bring it to the condition necessary for its intended use, the interest cost incurred during that period as a result of expenditures for the asset is capitalized as part of the cost of the asset. 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:
|
|
|
|
Classification
|
|
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 as part of 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 we consider for an impairment analysis include, among others: i) significant underperformance relative to historical or anticipated 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
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.
Variable Interest Entities
We consolidate variable interest entities (each a “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 or obligations for 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 real estate 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 a Parked Asset prior to completion of a 1031 Exchange. As such, a Parked Asset is included in our Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Operations as a consolidated 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 also include credit and debit card transactions that are in the process of being settled. 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
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 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, services have been rendered or fees are earned. 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 as revenue at the time of occupancy.
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 (as amended, 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 includes the income tax provision 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:
|
|
Observable inputs such as quoted prices in active markets.
|
Level 2:
|
|
Directly or indirectly observable inputs, other than quoted prices in active markets.
|
Level 3:
|
|
Unobservable inputs in which there is little or no market information, which require a reporting entity to develop its own assumptions.
|
Assets and liabilities measured at fair value are based on one or more of the following valuation techniques:
|
|
|
|
Market approach:
|
|
Prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.
|
Cost approach:
|
|
Amount required to replace the service capacity of an asset (replacement cost).
|
Income approach:
|
|
Techniques used to convert future amounts to a single amount based on market expectations (including present-value, option-pricing, and excess-earnings models).
|
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 the reclassification of certain intangible assets related to our acquisitions of hotel properties from Other assets to Investment in hotel properties, net, on the Company's balance sheet. These reclassifications had no net effect on the Company’s previously reported financial position or results of operations. See "Note 3 - Investment in Hotel Properties, net" for further details.
New Accounting Standards
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers
, 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. ASU No. 2014-09 will replace most existing revenue recognition guidance in GAAP when it becomes effective. The standard permits the use of either the full retrospective adoption or a modified retrospective adoption. In July 2015, the FASB deferred the effective date to January 1, 2018 with early adoption beginning January 1, 2017. We expect to adopt ASU No. 2014-09 on January 1, 2018 using the modified retrospective adoption method. We have evaluated each of our revenue streams under the new model. Based on preliminary assessments, we do not expect the adoption of ASU No. 2014-09 to have a material effect on our financial position or our results of operations.
In January 2016, the FASB issued ASU No. 2016-01,
Recognition and Measurement of Financial Assets and Financial Liabilities
, which enhances the reporting requirements for 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 for the period. ASU No. 2016-01 is effective for our fiscal year commencing on January 1, 2018. We do not expect the adoption of ASU No. 2016-01 to have a material effect on our financial position or our 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 assets 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 anticipate that we will adopt ASU No. 2016-02 for our fiscal year commencing on January 1, 2019. We expect to apply the modified retrospective approach such that we will account for leases that commenced before the effective date of ASU No. 2016-02 in accordance with previous GAAP unless the lease is modified, except we will recognize right-of-use assets and a lease liability for all operating leases at each reporting date based on the present value of the remaining minimum rental payments that were tracked and disclosed under previous GAAP.
The effect that the adoption of ASU No. 2016-02 will have on our financial position or results of operations is not currently reasonably estimable.
In August 2016, the FASB issued ASU No. 2016-15,
Classification of Certain Cash Receipts and Cash Payments
, which addresses the Statement of Cash Flow classification and presentation of certain cash transactions. ASU No. 2016-15 is effective for our fiscal year commencing on January 1, 2018. The effect of this amendment is to be applied retrospectively where practical and early adoption is permitted. We expect to adopt ASU No. 2016-15 for our fiscal year commencing on January 1, 2018. We do not expect the adoption of ASU No. 2016-15 to have a material effect on our financial position or our results of operations.
In November 2016, the FASB issued ASU No. 2016-18,
Classification of Restricted Cash
, which addresses the Statement of Cash Flow classification and presentation of restricted cash transactions. ASU No. 2016-18 is effective for our fiscal year commencing on January 1, 2018. The effect of this amendment is to be applied retrospectively and early adoption is permitted. We expect to adopt ASU No. 2016-18 for our fiscal year commencing on January 1, 2018. We do not expect the adoption of ASU No. 2016-18 to have a material effect on our financial position or our results of operations.
In January 2017, the FASB issued ASU No. 2017-01,
Clarifying the Definition of a Business
, with the objective of providing guidance to assist entities with evaluating whether transactions should be accounted for as an acquisition of assets or a business. ASU No. 2017-01 is effective for our fiscal year commencing on January 1, 2018. The effect of this guidance is to be applied prospectively and early adoption is permitted. We have early adopted ASU No. 2017-01 for our fiscal year commencing on January 1, 2017. The adoption of ASU No. 2017-01 did not have a material effect on our financial position or our results of operations.
In May 2017, the FASB issued ASU No. 2017-09,
Scope of Modification Accounting
, to provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in accordance with ASC No. 718,
Compensation - Stock Compensation.
ASC No. 2017-09 is effective for our fiscal year commencing on January 1, 2018. The effect of this guidance is to be applied prospectively to an award modified on or after the adoption date and early adoption is permitted. The effect that the adoption of ASU No. 2017-09 will have on our financial position or results of operations is not currently reasonably estimable.
In August 2017, the FASB issued ASU No. 2017-12,
Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities
, with the objective of improving the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. ASC No. 2017-12 is effective for our fiscal year commencing on January 1, 2019, and early adoption is permitted. Based on our preliminary evaluation, the adoption of ASU No. 2017-12 will not have a material effect on our financial position or our results of operations.
NOTE 3 - INVESTMENT IN HOTEL PROPERTIES, NET
Investment in Hotel Properties, net
Investment in hotel properties, net at
September 30, 2017
and
December 31, 2016
is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
December 31, 2016
|
Land
|
|
$
|
237,652
|
|
|
$
|
178,423
|
|
Hotel buildings and improvements
|
|
1,745,059
|
|
|
1,433,389
|
|
Intangible assets
|
|
22,764
|
|
|
6,602
|
|
Construction in progress
|
|
13,602
|
|
|
22,490
|
|
Furniture, fixtures and equipment
|
|
152,562
|
|
|
129,437
|
|
|
|
2,171,639
|
|
|
1,770,341
|
|
Less - accumulated depreciation and amortization
|
|
(268,690
|
)
|
|
(225,219
|
)
|
|
|
$
|
1,902,949
|
|
|
$
|
1,545,122
|
|
Intangible assets included in Investment in hotel properties, net and intangible liabilities included in Accrued expenses and other in our Condensed Consolidated Balance Sheets include the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
December 31, 2016
|
Intangible assets:
|
|
|
|
|
Air rights
(1)
|
|
$
|
10,754
|
|
|
$
|
—
|
|
Favorable leases
(2)
|
|
10,569
|
|
|
6,032
|
|
In-place lease agreements
|
|
1,361
|
|
|
570
|
|
Other
|
|
80
|
|
|
—
|
|
|
|
22,764
|
|
|
6,602
|
|
Less accumulated amortization
|
|
(796
|
)
|
|
(348
|
)
|
Intangible assets, net
|
|
$
|
21,968
|
|
|
$
|
6,254
|
|
|
|
|
|
|
Intangible liabilities:
|
|
|
|
|
Unfavorable leases
(2)
|
|
$
|
5,002
|
|
|
$
|
5,002
|
|
Less accumulated amortization
|
|
(261
|
)
|
|
(190
|
)
|
Intangible liabilities, net
|
|
$
|
4,741
|
|
|
$
|
4,812
|
|
|
|
(1)
|
In conjunction with the acquisition of the Courtyard by Marriott - Charlotte, NC, the Company acquired certain air rights related to the hotel property.
|
|
|
(2)
|
Intangible assets and liabilities are recorded on contracts assumed as part of the acquisition of certain hotels. Above-market and below-market contract values are based on the present value of the difference between contractual amounts to be paid pursuant to the contracts assumed and our estimate of the fair market contract rates for corresponding contracts measured over a period equal to the remaining non-cancelable term of the contracts assumed. Intangible assets and liabilities are amortized over the remaining non-cancelable term of the related contracts.
|
Investment in Hotel Properties Under Development
We are developing a hotel in Orlando, FL on a parcel of land that we own. We expect the total development costs for the construction of the hotel to be approximately
$30.0 million
. We have incurred
$16.0 million
of costs to date and we have reclassified the
$2.8 million
carrying amount of the land parcel from Land Held for Development to Investment in Hotel Properties Under Development during the
nine months ended September 30, 2017
as a result of our development activities.
Assets Held for Sale
Assets held for sale at
September 30, 2017
and
December 31, 2016
include the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
December 31, 2016
|
Land
|
|
$
|
1,193
|
|
|
$
|
10,907
|
|
Hotel buildings and improvements
|
|
—
|
|
|
44,718
|
|
Furniture, fixtures and equipment
|
|
—
|
|
|
6,649
|
|
Franchise fees and other
|
|
—
|
|
|
421
|
|
|
|
$
|
1,193
|
|
|
$
|
62,695
|
|
Assets Held for Sale at
September 30, 2017
included land parcels in Spokane, W
A a
nd Flagstaff, AZ, which were being actively marketed for sale. Assets Held for Sale at
December 31, 2016
include the hotel properties related to the ARCH Sale and the land parcels in Spokane, W
A a
nd Flagstaff, AZ, which were being actively marketed for sale.
ARCH Sale
On February 11, 2016, we completed the sale of
six
hotels to affiliates of American Realty Capital Hospitality Trust, Inc. ("ARCH") for an aggregate selling price of
$108.3 million
(the "ARCH Sale"), with the proceeds from the ARCH Sale being used to complete certain reverse 1031 Exchanges. The hotels acquired by us for 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, Nashville, TN for a purchase price of
$71.0 million
on January 19, 2016. 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 of a hotel to ARCH. The ARCH Sale resulted in a
$56.8 million
gain, of which
$20.0 million
was initially deferred related to seller financing that we provided as described below.
In connection with the ARCH Sale, the Operating Partnership entered into a loan agreement with ARCH, as borrower, which provided for a loan by the Operating Partnership to ARCH in the amount of
$27.5 million
(the “Loan” or "Loan Agreement"). 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 acquired by ARCH as part of the ARCH Sale; and (ii) the remaining
$7.5 million
was applied by ARCH to fund the escrow deposit required for the purchase of eight hotels as described below. Through December 31, 2016, we had recognized as income
$5.0 million
of the deferred gain upon receipt of scheduled repayments of the principal balance of the loan from ARCH. On March 31, 2017, ARCH repaid the remaining
$22.5 million
principal balance of the Loan and payment-in-kind (“PIK”) interest of
$1.2 million
. As such, we recognized as income during the
nine months ended September 30, 2017
the remaining
$15.0 million
of the deferred gain related to the sale of
six
hotels to ARCH.
Pursuant to an agreement entered into by the Company and an affiliate of ARCH on February 11, 2016, as such agreement was subsequently modified and extended, the affiliate of ARCH was to purchase
ten
of the Company's hotels.
Two
of the hotels were sold during 2016 to a purchaser not affiliated with ARCH as permitted by the agreement.
On April 27, 2017, we completed the sale of
seven
of the remaining
eight
hotels to an affiliate of ARCH for a total purchase price of
$66.8 million
, resulting in a net gain of approximately
$16.0 million
. The
seven
hotels sold were as follows:
|
|
|
|
|
|
|
Hotel
|
|
Location
|
|
Guestrooms
|
Courtyard by Marriott
|
|
Jackson, MS
|
|
117
|
|
Courtyard by Marriott
|
|
Germantown, TN
|
|
93
|
|
Fairfield Inn & Suites
|
|
Germantown, TN
|
|
80
|
|
Homewood Suites
|
|
Ridgeland, MS
|
|
91
|
|
Residence Inn
|
|
Jackson, MS
|
|
100
|
|
Residence Inn
|
|
Germantown, TN
|
|
78
|
|
Staybridge Suites
|
|
Ridgeland, MS
|
|
92
|
|
Total
|
|
|
|
651
|
|
The proceeds from this sale were used to complete a 1031 Exchange, which resulted in the deferral of taxable gains of approximately
$20.8 million
. The hotel acquired by us for the 1031 Exchange was the
261
-guestroom Courtyard by Marriott, Fort Lauderdale, FL for a purchase price of
$85.0 million
on May 23, 2017.
On June 2, 2017, we completed the sale of the Courtyard by Marriott, El Paso, TX, which was the final hotel under contract for sale to ARCH, to a third-party purchaser that is unrelated to ARCH. The sale of this property resulted in the realization of a net gain of
$0.4 million
during the
nine months ended September 30, 2017
. As a result of this sale, ARCH has fulfilled its purchase obligations to us.
Other Asset Sales
On March 30, 2017, we completed the sale of the Hyatt Place in Atlanta, GA for
$14.5 million
and repaid a related mortgage loan totaling
$6.5 million
. The sale of this property resulted in the realization of a net gain of
$4.8 million
during the
nine months ended September 30, 2017
.
On July 21, 2017, we completed the sale of
three
hotel properties in Fort Worth, TX for an aggregate sales price of
$27.8 million
, resulting in a net gain of
$8.1 million
. The proceeds from this sale were used to complete a 1031 Exchange, which resulted in the deferral of taxable gains of
$8.6 million
.
At December 31, 2015, we held
two
notes receivable totaling
$2.7 million
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. We also purchased an additional note receivable from the first priority lien holder for the Emporia Property for which foreclosure proceedings were ongoing to facilitate the completion of the reacquisition of this Emporia Property through a foreclosure. On April 15, 2016, we completed the sale of the reacquired Emporia Property to a third-party purchaser that was unrelated to the prior owner. On May 18, 2016, we completed the sale of the first and second lien notes related to the remaining Emporia Property to the same purchaser. The aggregate selling price of the Emporia Properties was approximately
$4.5 million
. As a result of the foreclosure activities and the sale of the notes, we have no further interest in either Emporia Property.
Hotel Property Acquisitions
A summary of the hotel properties acquired during the
nine months ended September 30, 2017
and 2016 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Date Acquired
|
|
Franchise/Brand
|
|
Location
|
|
Purchase
Price
|
|
|
For the nine months ended September 30, 2017
|
|
|
|
|
|
|
|
March 1, 2017
|
|
Homewood Suites
|
|
Aliso Viejo (Laguna Beach), CA
|
|
$
|
38,000
|
|
|
|
March 30, 2017
|
|
Hyatt Place
|
|
Phoenix (Mesa), AZ
|
|
22,200
|
|
|
|
May 23, 2017
|
|
Courtyard by Marriott
|
|
Fort Lauderdale, FL
|
|
85,000
|
|
|
|
June 9, 2017
|
|
Courtyard by Marriott
|
|
Charlotte, NC
|
|
56,250
|
|
|
|
June 21, 2017
|
|
Courtyard by Marriott
|
|
Fort Worth, TX
|
|
40,000
|
|
|
|
June 21, 2017
|
|
Courtyard by Marriott
|
|
Kansas City, MO
|
|
24,500
|
|
|
|
June 21, 2017
|
|
Courtyard by Marriott
|
|
Pittsburgh, PA
|
|
42,000
|
|
|
|
June 21, 2017
|
|
Hampton Inn & Suites
|
|
Baltimore, MD
|
|
18,000
|
|
|
|
June 21, 2017
|
|
Residence Inn by Marriott
|
|
Baltimore, MD
|
|
38,500
|
|
|
|
July 13, 2017
|
|
AC Hotel by Marriott
|
|
Atlanta, GA
|
|
57,500
|
|
|
|
|
|
|
|
$
|
421,950
|
|
|
(1)
|
For the nine months ended September 30, 2016
|
|
|
|
|
|
|
|
January 19, 2016
|
|
Courtyard by Marriott
|
|
Nashville, TN
|
|
$
|
71,000
|
|
|
|
January 20, 2016
|
|
Residence Inn by Marriott
|
|
Atlanta, GA
|
|
38,000
|
|
|
|
August 9, 2016
|
|
Marriott
|
|
Boulder, CO
|
|
61,400
|
|
|
|
|
|
|
|
$
|
170,400
|
|
|
(2)
|
|
|
(1)
|
The net assets acquired totaled
$424.8 million
due to the purchase at settlement of
$0.6 million
of net working capital and other assets and capitalized transaction costs of
$2.2 million
.
|
|
|
(2)
|
The net assets acquired totaled
$169.7 million
due to the purchase at settlement of
$0.7 million
of net liabilities.
|
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 Nine Months Ended September 30,
|
|
|
|
2017
|
|
2016
|
|
Land
|
|
$
|
63,339
|
|
|
$
|
23,288
|
|
|
Hotel buildings and improvements
|
|
328,395
|
|
|
143,195
|
|
|
Intangible assets
|
|
16,162
|
|
|
442
|
|
|
Furniture, fixtures and equipment
|
|
16,294
|
|
|
2,948
|
|
|
Other assets
|
|
1,937
|
|
|
504
|
|
|
Total assets acquired
|
|
426,127
|
|
|
170,377
|
|
|
Less - other liabilities assumed
|
|
(1,354
|
)
|
|
(723
|
)
|
|
Net assets acquired
|
|
$
|
424,773
|
|
(1)
|
$
|
169,654
|
|
(2)
|
|
|
(1)
|
The net assets acquired totaled
$424.8 million
due to the purchase at settlement of
$0.6 million
of net working capital and other assets and capitalized transaction costs of
$2.2 million
.
|
|
|
(2)
|
The net assets acquired totaled
$169.7 million
due to the purchase at settlement of
$0.7 million
of net liabilities.
|
Under ASU No. 2017-01, all hotel purchases completed in 2017 were deemed to be the acquisition of assets. Therefore, acquisition costs related to these transactions have been capitalized as part of the recorded amount of the acquired assets.
Total revenues and net income for hotel properties acquired in the nine months ended
September 30, 2017
and 2016, which are included in our Condensed Consolidated Statements of Operations, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017 Acquisitions
(1)
|
|
2016 Acquisitions
(2)
|
|
2017 Acquisitions
(1)
|
|
2016 Acquisitions
(2)
|
|
|
For the
|
|
For the
|
|
For the
|
|
For the
|
|
|
Three Months Ended
September 30,
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2017
|
|
2017
|
|
2016
|
|
2017
|
|
2017
|
|
2016
|
Revenues
|
|
$
|
20,913
|
|
|
$
|
9,233
|
|
|
$
|
8,071
|
|
|
$
|
28,283
|
|
|
$
|
25,929
|
|
|
$
|
18,582
|
|
Net income
|
|
$
|
1,960
|
|
|
$
|
1,734
|
|
|
$
|
2,568
|
|
|
$
|
3,816
|
|
|
$
|
4,965
|
|
|
$
|
5,284
|
|
|
|
(1)
|
Net income for the 2017 Acquisitions includes depreciation expense, real estate tax expense, interest expense, and other corporate expenses totaling
$7.0 million
and
$8.5 million
for three and nine months ended September 30, 2017, respectively.
|
|
|
(2)
|
Net income for the 2016 Acquisitions includes depreciation expense, real estate tax expense, interest expense, and other corporate expenses totaling
$3.0 million
and
$1.9 million
for three months ended September 30, 2017 and 2016, respectively, and
$8.2 million
and
$4.6 million
for the nine months ended September 30, 2017 and 2016, respectively.
|
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 pro forma information includes operating results for
79
hotels owned as of September 30, 2017 as if all such hotels had been owned by us since January 1, 2016. For hotels acquired by us after January 1, 2016 (the "Acquired Hotels"), we have included in the pro forma information the financial results of each of the Acquired Hotels for the period from January 1, 2016 to the date the Acquired Hotels were purchased by us (the "Preacquisition Period"). The financial results for the Pre-Acquisition Period were provided by the third-party owner of such Acquired Hotel prior to purchase by us and such information has not been audited or reviewed by our auditors or adjusted by us. For hotels sold by us between January 1, 2016 and September 30, 2017 (the "Disposed Hotels"), the unaudited pro forma information excludes the financial results of each of the Disposed Hotels for the period of ownership by us from January 1, 2016 through the date that the Disposed Hotels were sold by us. The unaudited pro forma information is included to enable comparison of results for the current reporting period to results for the comparable period of the prior year and is not indicative of what actual results of operations would have been had the hotel acquisitions and dispositions taken place on or before January 1, 2016. The pro forma amounts exclude the gain on the sale of hotel properties during the three and nine months ended September 30, 2017 and 2016, respectively. 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
79
hotel properties owned at September 30, 2017 for the
three and nine
months ended
September 30, 2017
and
2016
is as follows (in thousands, except per share):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
Three Months Ended
September 30,
|
|
For the
Nine Months Ended
September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Revenues
|
|
$
|
136,369
|
|
|
$
|
135,373
|
|
|
$
|
405,289
|
|
|
$
|
408,104
|
|
Income from hotel operations
|
|
$
|
50,458
|
|
|
$
|
52,250
|
|
|
$
|
152,282
|
|
|
$
|
160,450
|
|
Net income before taxes
(1)
|
|
$
|
14,234
|
|
|
$
|
25,181
|
|
|
$
|
58,044
|
|
|
$
|
79,569
|
|
Net income
(1)
|
|
$
|
14,465
|
|
|
$
|
26,426
|
|
|
$
|
57,431
|
|
|
$
|
76,108
|
|
Net income attributable to common stockholders, net of amount allocated to participating securities
(1)
|
|
$
|
10,162
|
|
|
$
|
21,275
|
|
|
$
|
44,359
|
|
|
$
|
62,357
|
|
Basic and diluted net income per share attributable to common stockholders
(1)
|
|
$
|
0.10
|
|
|
$
|
0.25
|
|
|
$
|
0.45
|
|
|
$
|
0.72
|
|
Diluted net income per share attributable to common stockholders
(1)
|
|
$
|
0.10
|
|
|
$
|
0.24
|
|
|
$
|
0.45
|
|
|
$
|
0.71
|
|
|
|
(1)
|
Pro Forma amounts include depreciation expense, real estate tax expense, interest expense, income tax expense, and other corporate expenses totaling
$46.2 million
and
$34.3 million
for three months ended September 30, 2017 and 2016, respectively, and
$124.3 million
and
$110.9 million
for the nine months ended September 30, 2017 and 2016, respectively.
|
NOTE 4 - DEBT
At
September 30, 2017
our indebtedness is comprised of borrowings under a
$450.0 million
senior unsecured credit facility, the 2015 Term Loan (as defined below), the 2017 Term Loan (as defined below), and indebtedness secured by first priority mortgage liens on various hotel properties. At
December 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. The weighted average interest rate, after giving effect to our interest rate derivative, for all borrowings was
3.78%
at
September 30, 2017
and
3.69%
at
December 31, 2016
.
Debt, net of debt issuance costs, is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
December 31, 2016
|
Revolving debt
|
|
$
|
40,000
|
|
|
$
|
50,000
|
|
Term loans
|
|
415,000
|
|
|
290,000
|
|
Mortgage loans
|
|
322,464
|
|
|
317,550
|
|
|
|
777,464
|
|
|
657,550
|
|
Unamortized debt issuance costs
|
|
(5,189
|
)
|
|
(5,136
|
)
|
Debt, net of debt issuance costs
|
|
$
|
772,275
|
|
|
$
|
652,414
|
|
Our total fixed-rate and variable-rate debt, after giving effect to our interest rate derivative, is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
December 31, 2016
|
Fixed-rate debt
|
|
$
|
365,446
|
|
|
$
|
359,867
|
|
Variable-rate debt
|
|
412,018
|
|
|
297,683
|
|
|
|
$
|
777,464
|
|
|
$
|
657,550
|
|
Information about the fair value of our fixed-rate debt that is not recorded at fair value is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
December 31, 2016
|
|
|
|
|
Carrying
Value
|
|
Fair Value
|
|
Carrying
Value
|
|
Fair Value
|
|
Valuation Technique
|
Fixed-rate debt
|
|
$
|
290,446
|
|
|
$
|
293,207
|
|
|
$
|
284,867
|
|
|
$
|
283,416
|
|
|
Level 2 - Market approach
|
At
September 30, 2017
and
December 31, 2016
, we had
$75.0 million
of debt with variable interest rates that had been converted to fixed interest rates through a derivative financial instrument which is carried at fair value. Differences between 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."
$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 credit facility (the “2016 Unsecured Credit Facility”), which replaced the previous
$300.0 million
senior unsecured credit facility that was in place. 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”). At
September 30, 2017
, the maximum amount of borrowing provided by the 2016 Unsecured Credit Facility was
$450.0 million
, of which we had
$190.0 million
borrowed and
$260.0 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
. 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 margin of 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 of between
0.50%
and
1.25%
, depending upon the Company’s leverage ratio. The interest rate at
September 30, 2017
was
2.88%
.
Financial and Other Covenants
. We are required to comply with a series of financial and other covenants to borrow under this credit facility. At
September 30, 2017
, 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
September 30, 2017
, the Company had
46
unencumbered hotel properties (the "Unencumbered Properties") supporting the 2016 Unsecured Credit Facility.
An 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 1, 2018 remains outstanding. This interest rate swap was designated as a cash flow hedge and effectively fixes LIBOR at
2.04%
which results in a fixed interest rate of
3.49%
on
$75.0 million
of the
$150
Million Term Loan.
Unsecured Term Loans
2015 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. At closing, we were advanced the full
$125.0 million
amount of the 2015 Term Loan and on April 21, 2015, we were advanced
$15.0 million
upon exercise of the accordion. All proceeds were used to pay down the principal balance of our
$225.0 million
revolving credit facility 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. Interest on the outstanding balance of
$140 million
is currently being paid at an annual rate of
3.18%
based on LIBOR at
September 30, 2017
.
Borrowings under the 2015 Term Loan are limited by the value of hotel assets that qualify as unencumbered assets. As of
September 30, 2017
,
the
46
Unencumbered Properties also supported the 2015 Term Loan.
2017 Term Loan
On September 26, 2017, 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
$225.0 million
unsecured term loan (the "2017 Term Loan") with KeyBank National Association, as administrative agent, Deutsche Bank AG New York Branch and Bank of America, N.A., as co-syndication agents, KeyBanc Capital Markets, Inc., Deutsche Bank Securities, Inc., and Merrill Lynch Pierce Fenner & Smith, as joint bookrunners and joint lead arrangers, and a syndicate of lenders including KeyBank National Association, Deutsche Bank AG New York Branch, Bank of America, N.A., Capital One, National Association, PNC Bank, National Association, Regions Bank, Raymond James Bank, N.A., Royal Bank of Canada, Branch Banking and Trust Company, and U.S. Bank National Association.
The 2017 Term Loan has an accordion feature which allows us to increase the total commitments by an aggregate of
$175.0 million
prior to the maturity date, subject to certain conditions. The 2017 Term Loan matures on November 25, 2022.
We pay interest on advances at varying rates, based upon, at our option, either (i) 1, 2, 3, or 6-month LIBOR, plus a LIBOR margin between
1.45%
and
2.20%
, depending upon our leverage ratio (as defined in the loan documents), 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
0.45%
and
1.20%
, depending upon our leverage ratio. We are required to pay other fees, including customary arrangement and administrative fees.
Financial and Other Covenants.
In addition, we are required to comply with a series of financial and other covenants in order to borrow and maintain borrowings under the 2017 Term Loan. At September 30, 2017 we are in compliance with all financial covenants.
Unencumbered Assets
. The 2017 Term Loan is unsecured. However, borrowings under the term loan are limited by the value of hotel assets that qualify as unencumbered assets. As of September 30, 2017, the
46
Unencumbered Properties also supported the 2017 Term Loan.
We have the ability to delay draws of the principal amount of the term loan and, in addition to making a draw at closing, we may make up to
three
additional draws prior to September 20, 2018. Beginning December 25, 2017, we pay a facility unused fee of
0.25%
per annum on the unused principal amount of the loan.
On September 26, 2017, we drew
$125.0 million
of the
$225.0 million
available under the 2017 Term Loan and used the proceeds to pay down the principal balance of our
$300
Million Revolver.
Metabank Loan
On June 30, 2017, we entered into a
$47.6 million
secured, non-recourse loan with Metabank (the "Metabank Loan"). The Metabank Loan includes a delayed draw feature, at no additional cost, whereby
$25.0 million
of the total loan commitment must be drawn within
90
days of the closing date and the remaining loan commitment must be drawn by December 31, 2017. At September 30, 2017, we had drawn
$25.0 million
on the Metabank Loan. The Metabank Loan provides for a fixed interest rate of
4.44%
and interest only payments for
18
months following the closing date. After this
18
month period, the loan is amortized on a
25
-year amortization schedule through the maturity date of July 1, 2027. The Metabank Loan is secured by the Residence Inn in Salt Lake City, UT, the Four Points by Sheraton Hotel & Suites in South San Francisco, CA, and the Hyatt Place in Mesa, AZ. The Metabank Loan is subject to a prepayment penalty if prepaid prior to April 1, 2027.
Term Loans
At
September 30, 2017
, we had
$737.5 million
in secured and unsecured term loans outstanding (including the
$150
Million Term Loan, the 2015 Term Loan, the 2017 Term Loan and the Metabank Loan described above). Term loans totaling
$322.5 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
September 30, 2017
and
December 31, 2016
is as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
December 31, 2016
|
|
|
Number of
Instruments
|
|
Notional
Amount
|
|
Fair Value
|
|
Number of
Instruments
|
|
Notional
Amount
|
|
Fair Value
|
Interest rate swaps (liability)
|
|
1
|
|
|
$
|
75,000
|
|
|
$
|
(438
|
)
|
|
1
|
|
|
$
|
75,000
|
|
|
$
|
(1,118
|
)
|
|
|
1
|
|
|
$
|
75,000
|
|
|
$
|
(438
|
)
|
|
1
|
|
|
$
|
75,000
|
|
|
$
|
(1,118
|
)
|
Our interest rate swap has been designated as a cash flow hedge and is valued using a market approach, which is a Level 2 valuation technique. At
September 30, 2017
and
December 31, 2016
, our interest rate swap was in a liability position. The interest rate swap expires on October 1, 2018. We are not required to post any collateral related to this agreement and are not in breach of any financial provisions of the agreement.
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
September 30,
|
|
For the Nine Months Ended
September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Gain (loss) recognized in accumulated other comprehensive income on derivative financial instruments (effective portion)
|
|
$
|
2
|
|
|
$
|
248
|
|
|
$
|
92
|
|
|
$
|
(1,008
|
)
|
Loss reclassified from accumulated other comprehensive income to interest expense (effective portion)
|
|
$
|
(155
|
)
|
|
$
|
(297
|
)
|
|
$
|
(588
|
)
|
|
$
|
(906
|
)
|
Gain recognized in Other Expense (ineffective portion)
|
|
$
|
—
|
|
|
$
|
19
|
|
|
$
|
—
|
|
|
$
|
—
|
|
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
$0.4 million
will be reclassified from Other Comprehensive Income and recorded 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.
On May 9, 2017, the Company and the Operating Partnership, entered into an underwriting agreement (the “Underwriting Agreement”) with Raymond James & Associates, Inc. and Deutsche Bank Securities Inc., as the representatives of the several underwriters named therein, relating to the issuance and sale of
9,000,000
shares of the Company’s common stock,
$0.01
par value per share (“Common Stock”), at a public offering price of
$16.50
per share, less an underwriting discount of
$0.66
per share. Pursuant to the terms of the Underwriting Agreement, the Company granted the underwriters a
30
-day option to purchase up to an additional
1,350,000
shares of common stock on the same terms, which the underwriters exercised in full on May 10, 2017. The closing of the offering occurred on May 15, 2017 for net proceeds of
$163.8 million
, after the underwriting discount and offering-related expenses of
$7.0 million
.
On May 25, 2017, the Company and the Operating Partnership entered into separate sales agreements (collectively, the “Sales Agreements”) with each of Robert W. Baird & Co. Incorporated, Raymond James & Associates, Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Deutsche Bank Securities Inc., RBC Capital Markets, LLC, KeyBanc Capital Markets Inc., Canaccord Genuity Inc., Jefferies LLC, BB&T Capital Markets, a division of BB&T Securities, LLC, and BTIG, LLC (collectively, the “Sales Agents”), pursuant to which the Company may sell the Company’s shares of common stock,
$0.01
par value per share, having an aggregate offering price of up to
$200.0
million (the “Shares”), from time to time through the Sales Agents, each acting as a sales agent and/or principal. At the same time, the Company terminated each of the sales agreements entered into in connection with its prior at-the-market offering program, which was established in August 2016 and under which
6,151,514
shares of the Company’s common stock were sold for net proceeds of approximately
$89.1 million
.
Pursuant to the Sales Agreements, the Shares may be offered and sold through any Sales Agent in transactions that are deemed to be “at the market” offerings as defined in Rule 415 under the Securities Act of 1933, as amended, including sales made directly on the New York Stock Exchange or sales made to or through a market maker other than on an exchange or, with the prior consent of the Company, in privately negotiated transactions. Each Sales Agent will be entitled to compensation equal to up to
2.0%
of the gross proceeds of the Shares sold through such Sales Agent from time to time under the related Sales Agreement. The Company has no obligation to sell any of the Shares under the Sales Agreements and may at any time suspend solicitations and offers under, or terminate, any of the Sales Agreements.
Changes in common stock during the
nine months ended September 30, 2017
and
2016
were as follows:
|
|
|
|
|
|
|
|
For the
Nine Months Ended
September 30,
|
|
2017
|
|
2016
|
Beginning common shares outstanding
|
93,525,469
|
|
|
86,793,521
|
|
Stock Offering
|
10,350,000
|
|
|
—
|
|
Grants under the Equity Plan
|
366,679
|
|
|
446,686
|
|
Common Unit redemptions
|
52,808
|
|
|
61,056
|
|
Exercise of stock options
|
—
|
|
|
37,684
|
|
Annual grants to independent directors
|
28,426
|
|
|
32,180
|
|
Common stock issued for director fees
|
3,553
|
|
|
5,851
|
|
Forfeitures
|
(1,237
|
)
|
|
(406
|
)
|
Shares retained for employee tax withholding requirements
|
(59,111
|
)
|
|
(61,622
|
)
|
Ending common shares outstanding
|
104,266,587
|
|
|
87,314,950
|
|
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
90,600,000
is currently undesignated,
3,000,000
shares have been designated as
7.875%
Series B Cumulative Redeemable Preferred Stock (the “Series B preferred shares”),
3,400,000
shares have been designated as
7.125%
Series C Cumulative Redeemable Preferred Stock (the “Series C preferred shares”), and
3,000,000
shares have been designated as
6.45%
Series D Cumulative Redeemable Preferred Stock (the "Series D preferred shares").
The Company completed the offering of
3,000,000
Series D preferred shares on June 28, 2016 for net proceeds of
$72.3 million
, after the underwriting discount and offering-related expenses of
$2.7 million
.
On October 28, 2016, the Company paid
$50.7 million
to redeem all
2,000,000
of its outstanding Series A preferred shares at a redemption price of
$25
per share plus accrued and unpaid dividends.
The Company's outstanding shares of preferred stock (collectively, “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 B preferred shares, Series C preferred shares or Series D preferred shares prior to December 11, 2017, March 20, 2018, and June 28, 2021, 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 B preferred share is
5.6497
shares of common stock, each Series C preferred share is
5.1440
shares of common stock, and each Series D preferred share is
3.9216
shares of common stock, all subject to certain adjustments.
The Company pays dividends at an annual rate of
$1.96875
for each Series B preferred share,
$1.78125
for each Series C preferred share, and
$1.6125
for each Series D 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 Common Units 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
September 30, 2017
and
December 31, 2016
, unaffiliated third parties owned
343,905
and
396,713
Common Units of the Operating Partnership, respectively, representing less than a
1%
limited partnership interest in the Operating Partnership for each period.
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 allocated to these Common Units is reported on the Company’s Condensed Consolidated Statement of Operations as net income attributable to non-controlling interests of the Operating Partnership.
Leasehold Venture
At March 31, 2016, we owned a majority interest in a joint venture that owned a fee simple interest in a hotel property and we also owned a minority interest in a related joint venture (“Leasehold Venture”) that held a leasehold interest in the property. On June 30, 2016, our joint venture partner in the Leasehold Venture exercised a put option to sell its joint venture interest in the Leasehold Venture to us for
$0.4 million
. We finalized the transaction in July 2016 and we now own
100%
of the fee simple interest and leasehold interest in the hotel property effective July 31, 2016.
NOTE 7 - FAIR VALUE MEASUREMENT
The following table presents information about our financial instruments measured at fair value on a recurring basis at
September 30, 2017
and
December 31, 2016
. 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 September 30, 2017 using
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
—
|
|
|
$
|
438
|
|
|
$
|
—
|
|
|
$
|
438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2016 using
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
—
|
|
|
$
|
1,118
|
|
|
$
|
—
|
|
|
$
|
1,118
|
|
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 some of our hotel properties in accordance with management, franchise or mortgage loan agreements. These agreements generally require us 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 us upon the termination of the underlying agreement or may be released to us from the restricted cash escrow accounts upon proof of expenditures and approval from the lender or other party requiring the restricted cash reserves. At
September 30, 2017
and
December 31, 2016
, approximately
$28.9 million
and
$24.9 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 have
two
prepaid land leases for
two
hotel properties in Portland, OR which expire in June of 2084 and had remaining prepaid balances of approximately
$3.2 million
and
$3.3 million
at
September 30, 2017
and
December 31, 2016
, respectively. 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 and
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 ground leases for the
three months ended September 30, 2017
and
2016
was
$0.4 million
and
$0.4 million
, respectively. Total rent expense for ground leases for the
nine months ended September 30, 2017
and
2016
was
$1.3 million
and
$1.2 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. We also pay fees to our franchisors for services such as reservation and information systems. During the
three months ended September 30, 2017
and
2016
, we expensed fees related to our franchise agreements of
$11.4 million
and
$9.3 million
, respectively. During the
nine months ended September 30, 2017
and
2016
, we expensed fees related to our franchise agreements of
$30.8 million
and
$28.3 million
, respectively.
Management Agreements
Our hotel properties operate pursuant to management agreements with various professional third-party management companies. The terms of our management agreements range from
three
to
25
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 the number of guestrooms. Generally there are also incentive fees based on attaining certain financial thresholds. Management fee expenses for the
three months ended September 30, 2017
and
2016
were
$4.2 million
and
$4.2 million
, respectively. Management fee expenses for the
nine months ended September 30, 2017
and
2016
were
$14.0 million
and
$14.9 million
, respectively.
Litigation
We are involved from time to time in litigation arising in the ordinary course of business. We are currently involved in litigation related to the settlement of a contractual obligation related to the purchase of a hotel property in 2012. We have accrued the amount of our expected liability to settle the contractual obligation at
September 30, 2017
. 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 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
As of
September 30, 2017
, we had
235,000
outstanding and exercisable stock options with a weighted average exercise price of
$9.75
per share, weighted average contractual term of
3.4
years and an aggregate intrinsic value of
$1.5 million
.
Time-Based Restricted Stock Awards Made Pursuant to Our Equity Plan
On March 6, 2017, we granted time-based restricted stock awards for
16,079
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, 2018, 2019 and 2020, and
40%
on March 9, 2021).
On March 6, 2017, we granted time-based restricted stock awards for
120,024
shares of common stock to our executive officers. On April 18, 2017, we granted a time-based restricted stock award for
20,215
shares of common stock to an executive officer. The awards vest
25%
on March 9, 2018,
25%
on March 9, 2019 and
50%
on March 9, 2020, based on continuous service through the vesting dates or in certain circumstances upon a change in control.
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
25%
on March 9, 2017,
25%
on March 9, 2018 and
50%
on March 9, 2019, based on continuous service through the vesting dates or in certain circumstances upon a change in control.
The holders of these awards 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 granted 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 our Equity Plan for the
nine months ended September 30, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of Shares
|
|
Weighted Average
Grant Date
Fair Value
|
|
Aggregate
Current Value
|
|
|
|
|
(per share)
|
|
(in thousands)
|
Non-vested at December 31, 2016
|
|
357,845
|
|
|
$
|
11.90
|
|
|
$
|
5,736
|
|
Granted
|
|
156,318
|
|
|
15.52
|
|
|
|
|
Vested
|
|
(120,366
|
)
|
|
11.29
|
|
|
|
|
Forfeited
|
|
(1,237
|
)
|
|
13.57
|
|
|
|
|
Non-vested at September 30, 2017
|
|
392,560
|
|
|
$
|
13.52
|
|
|
$
|
6,277
|
|
Performance-Based Restricted Stock Awards Made Pursuant to Our Equity Plan
On March 6, 2017, we granted performance-based restricted stock awards for
180,039
shares of common stock to our executive officers. On April 18, 2017, we granted a performance-based restricted stock award for
30,322
shares of common stock to an executive officer. 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 on our percentile ranking within the SNL U.S. REIT Hotel Index at the end of the period beginning on March 6, 2017 and ending on the earlier of March 6,
2020 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.
On March 8, 2016, we granted performance-based restricted stock awards for
254,563
shares of common stock to 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 on our 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. 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 our 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 our 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
nine months ended September 30, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of Shares
|
|
Weighted Average
Grant Date
Fair Value (1)
|
|
Aggregate
Current Value
|
|
|
|
|
(per share)
|
|
(in thousands)
|
Non-vested at December 31, 2016
|
|
449,027
|
|
|
$
|
14.90
|
|
|
$
|
7,198
|
|
Granted
|
|
210,361
|
|
|
17.13
|
|
|
|
|
Vested
|
|
(39,959
|
)
|
|
7.12
|
|
|
|
|
Non-vested at September 30, 2017
|
|
619,429
|
|
|
$
|
16.16
|
|
|
$
|
9,905
|
|
(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.
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. During the
nine months ended September 30, 2017
, we issued
3,553
shares of common stock for director fees and we made an annual grant of
28,426
shares of common stock to our independent directors. 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 and
nine months ended September 30, 2017
and
2016
was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
Three Months Ended
September 30,
|
|
For the
Nine Months Ended
September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Time-based restricted stock
|
|
$
|
541
|
|
|
$
|
419
|
|
|
$
|
1,607
|
|
|
$
|
1,176
|
|
Performance-based restricted stock
|
|
849
|
|
|
576
|
|
|
2,333
|
|
|
1,532
|
|
Stock options
|
|
—
|
|
|
—
|
|
|
—
|
|
|
55
|
|
Director stock
|
|
99
|
|
|
25
|
|
|
543
|
|
|
439
|
|
|
|
$
|
1,489
|
|
|
$
|
1,020
|
|
|
$
|
4,483
|
|
|
$
|
3,202
|
|
We recognize equity-based compensation expense ratably over the vesting periods. The amount of expense may be subject to adjustment in future periods due to a change in the forfeiture assumptions.
Unrecognized equity-based compensation expense for all non-vested awards pursuant to our Equity Plan was
$8.1 million
at
September 30, 2017
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
2017
|
|
2018
|
|
2019
|
|
2020
|
|
2021
|
Time-based restricted stock
|
|
$
|
3,293
|
|
|
$
|
541
|
|
|
$
|
1,603
|
|
|
$
|
949
|
|
|
$
|
190
|
|
|
$
|
10
|
|
Performance-based restricted stock
|
|
4,826
|
|
|
850
|
|
|
2,374
|
|
|
1,401
|
|
|
201
|
|
|
—
|
|
|
|
$
|
8,119
|
|
|
$
|
1,391
|
|
|
$
|
3,977
|
|
|
$
|
2,350
|
|
|
$
|
391
|
|
|
$
|
10
|
|
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 from our TRS, are not generally subject to federal and state corporate income taxes due to our REIT election, provided that we distribute
100%
of our taxable income to our shareholders. 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.
We recorded an income tax benefit related to net income from continuing operations of
$0.2 million
and
$1.2 million
for the
three months ended September 30, 2017
and
2016
, respectively, and an income tax expense related to net income from continuing operations of
$0.6 million
and
$0.5 million
for the
nine months ended September 30, 2017
and 2016, respectively.
We had
no
unrecognized tax benefits at
September 30, 2017
. 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
September 30,
|
|
For the Nine Months Ended
September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
22,445
|
|
|
$
|
27,198
|
|
|
$
|
89,734
|
|
|
$
|
97,887
|
|
Less: Preferred dividends
|
|
(4,200
|
)
|
|
(4,993
|
)
|
|
(12,600
|
)
|
|
(13,287
|
)
|
Allocation to participating securities
|
|
(69
|
)
|
|
(47
|
)
|
|
(305
|
)
|
|
(127
|
)
|
Attributable to non-controlling interest
|
|
(55
|
)
|
|
(115
|
)
|
|
(289
|
)
|
|
(454
|
)
|
Net income attributable to common stockholders, net of amount allocated to participating securities
|
|
$
|
18,121
|
|
|
$
|
22,043
|
|
|
$
|
76,540
|
|
|
$
|
84,019
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding - basic
|
|
103,253
|
|
|
86,492
|
|
|
98,105
|
|
|
86,428
|
|
Dilutive effect of equity-based compensation awards
|
|
379
|
|
|
909
|
|
|
366
|
|
|
891
|
|
Weighted average common shares outstanding - diluted
|
|
103,632
|
|
|
87,401
|
|
|
98,471
|
|
|
87,319
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.18
|
|
|
$
|
0.25
|
|
|
$
|
0.78
|
|
|
$
|
0.97
|
|
Diluted
|
|
$
|
0.17
|
|
|
$
|
0.25
|
|
|
$
|
0.78
|
|
|
$
|
0.96
|
|
All outstanding stock options were included in the computation of diluted earnings per share for the three and
nine months ended September 30, 2017
and
2016
due to their dilutive effect. The Common Units held by the non-controlling interest holders have been excluded from the denominator of the diluted earnings per share as there would be no effect on the amounts since the limited partners' share of income would also be added to derive net income attributable to common stockholders. We had unvested performance-based restricted stock awards of
464,924
shares and
449,027
shares for the
three months ended September 30, 2017
and
2016
, respectively, and
464,924
shares and
449,027
shares for the
nine months ended September 30, 2017
and
2016
, respectively, which were excluded from the denominator of the diluted earnings per share as the awards had not achieved the requisite performance conditions for vesting at each period end.
NOTE 12 - SUBSEQUENT EVENTS
Derivatives
On October 2, 2017, we entered into
two
separate
$100 million
interest rate swap agreements with an effective date of January 29, 2018, to partially fix the interest rate on a portion of our variable interest rate unsecured indebtedness. The swaps convert LIBOR from floating rate to an average fixed rate of
1.98%
through January 31, 2023.
Mezzanine Loans
We are a mezzanine lender on a construction loan to fund up to
$12.0 million
to a developer for the development of a hotel property. The mezzanine loan closed on October 27, 2017, and has an initial maturity date of November 2020. As of October 27, 2017, we have funded
$7.2 million
on the loan. We have the option to purchase a
90%
interest in the hotel upon completion of construction. We have the right to purchase the remaining interest at a future date.
Dividends
On October 30, 2017, our Board of Directors declared cash dividends of
$0.17
per share of common stock,
$0.4921875
per share of
7.875%
Series B Cumulative Redeemable Preferred Stock,
$0.4453125
per share of
7.125%
Series C Cumulative Redeemable Preferred Stock and
$0.403125
per share of
6.45%
Series D Cumulative Redeemable Preferred Stock. These dividends are payable on November 30, 2017 to stockholders of record on November 16, 2017.