NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Organization and Description of Business
Chesapeake Lodging Trust (the “Trust”) is a self-advised real estate investment trust (“REIT”) that was organized in the state of Maryland in June 2009. The Trust is focused on investments primarily in upper-upscale hotels in major business and convention markets and, on a selective basis, premium select-service hotels in urban settings or unique locations in the United States of America (“U.S.”). The Trust completed its initial public offering (“IPO”) on January 27, 2010. As of
June 30, 2013
, the Trust owned
20
hotels with an aggregate of
5,932
rooms in
eight
states and the District of Columbia.
Substantially all of the Trust’s assets are held by, and all of its operations are conducted through, Chesapeake Lodging, L.P., a Delaware limited partnership, which is wholly owned by the Trust (the “Operating Partnership”). For the Trust to qualify as a REIT, it cannot operate hotels. Therefore, the Operating Partnership leases its hotels to CHSP TRS LLC (“CHSP TRS”), which is a wholly owned subsidiary of the Operating Partnership. CHSP TRS then engages hotel management companies to operate the hotels pursuant to management agreements. CHSP TRS is treated as a taxable REIT subsidiary for federal income tax purposes.
2. Summary of Significant Accounting Policies
Basis of Presentation
—The interim consolidated financial statements presented herein include all of the accounts of Chesapeake Lodging Trust and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. Certain reclassifications have been made to the prior year financial statements to conform to the current year presentation. These reclassifications had no effect on previously reported results of operations or retained earnings.
The information in these interim consolidated financial statements is unaudited but, in the opinion of management, reflects all adjustments necessary for a fair presentation of the results for the periods covered. All such adjustments are of a normal, recurring nature unless disclosed otherwise. These interim consolidated financial statements, including notes, have been prepared in accordance with the applicable rules of the Securities and Exchange Commission (“SEC”) and do not include all of the information and disclosures required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements. These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Trust's Form 10-K for the year ended December 31, 2012.
Cash and Cash Equivalents
—The Trust considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
Restricted Cash
—Restricted cash includes reserves held in escrow for normal replacements of furniture, fixtures and equipment (“FF&E”), property improvement plans (each, a “PIP”), real estate taxes, and insurance pursuant to certain requirements in the Trust’s hotel management, franchise, and loan agreements.
Investments in Hotels
—The Trust allocates the purchase prices of hotels acquired based on the fair value of the property, FF&E, and identifiable intangible assets acquired and the fair value of the liabilities assumed. In making estimates of fair value for purposes of allocating the purchase price, the Trust utilizes a number of sources of information that are obtained in connection with the acquisition of a hotel, including valuations performed by independent third parties and cost segregation studies. The Trust also considers information obtained about each hotel as a result of its pre-acquisition due diligence in estimating the fair value of the tangible and intangible assets acquired and liabilities assumed. Hotel acquisition costs, such as transfer taxes, title insurance, environmental and property condition reviews, and legal and accounting fees, are expensed in the period incurred.
Property and equipment are depreciated using the straight-line method over the estimated useful lives of the assets, generally
15
to
40
years for buildings and building improvements and
three
to
ten
years for FF&E. Leasehold improvements are amortized over the shorter of the lease term or the useful lives of the related assets. Replacements and improvements at the hotels are capitalized, while repairs and maintenance are expensed as incurred. Upon the sale or retirement of property and equipment, the cost and related accumulated depreciation are removed from the Trust’s accounts and any resulting gain or loss is recognized in the consolidated statements of operations.
Intangible assets and liabilities are recorded on non-market contracts, including air rights, lease, management, and franchise agreements, 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 the Trust’s 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. No value is allocated to market contracts. Intangible assets and liabilities are amortized using the straight-line method over the remaining non-cancelable term of the related contracts.
The Trust reviews its hotels for impairment whenever events or changes in circumstances indicate that the carrying values of the hotels may not be recoverable. Events or circumstances that may cause a review include, but are not limited to, adverse changes in the demand for lodging at the hotels due to declining national or local economic conditions and/or new hotel construction in markets where the hotels are located. When such conditions exist, management performs an analysis to determine if the estimated undiscounted future cash flows from operations and the proceeds from the ultimate disposition of a hotel exceed its carrying value. If the estimated undiscounted future cash flows are less than the carrying amount of the asset, an adjustment to reduce the carrying amount to the related hotel’s estimated fair market value is recorded and an impairment loss is recognized. No impairment losses have been recognized for the
three and six months
ended
June 30, 2013
and
2012
.
The Trust classifies a hotel as held for sale in the period in which it has made the decision to dispose of the hotel, a binding agreement to purchase the hotel has been signed under which the buyer has committed a significant amount of nonrefundable cash, and no significant financing contingencies exist which could cause the transaction not to be completed in a timely manner. If these criteria are met, depreciation and amortization of the hotel will cease and an impairment loss will be recognized if the fair value of the hotel, less the costs to sell, is lower than the carrying amount of the hotel. The Trust will classify the loss, together with the related operating results, as discontinued operations in the consolidated statements of operations and classify the related assets and liabilities as held for sale in the consolidated balance sheets. As of
June 30, 2013
, the Trust had no assets held for sale or liabilities related to assets held for sale.
Revenue Recognition
—Revenues from operations of the hotels are recognized when the services are provided. Revenues consist of room sales, food and beverage sales, and other hotel department revenues, such as parking, marina, telephone, and gift shop sales.
Prepaid Expenses and Other Assets
—Prepaid expenses and other assets consist of prepaid real estate taxes, prepaid insurance, deposits on hotel acquisitions, deferred franchise costs, loan receivables, inventories, and other assets.
Deferred Financing Costs
—Deferred financing costs are recorded at cost and consist of loan fees and other costs incurred in issuing debt. Amortization of deferred financing costs is computed using a method that approximates the effective interest method over the term of the related debt and is included in interest expense in the consolidated statements of operations.
Derivative Instruments
—The Trust is a party to interest rate swaps and an interest rate cap, which are considered derivative instruments, in order to manage its interest rate exposure. The Trust’s interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows. The Trust records these derivative instruments at fair value as either assets or liabilities and has designated them as cash flow hedging instruments at inception. The Trust evaluates the hedge effectiveness of the designated cash flow hedging instruments on a quarterly basis and records the effective portion of the change in the fair value of the cash flow hedging instruments as other comprehensive income (loss). Amounts reported in accumulated other comprehensive income (loss) related to cash flow hedging instruments are reclassified to interest expense as interest payments are made on the variable-rate debt being hedged. The Trust does not enter into derivative instruments for trading or speculative purposes and monitors the financial stability and credit standing of its counterparties.
Fair Value Measurements
— The Trust accounts for certain assets and liabilities at fair value. In evaluating the fair value of both financial and non-financial assets and liabilities, GAAP outlines a valuation framework and creates a fair value hierarchy that distinguishes between market assumptions based on market data (observable inputs) and the reporting entity’s own assumptions about market data (unobservable inputs). The three levels of the fair value hierarchy are as follows:
Level 1 – Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that are accessible at the measurement date. An active market is defined as a market in which transactions occur with sufficient frequency and volume to provide pricing on an ongoing basis.
Level 2 – Inputs include quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active (markets with few transactions), inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates, yield curves), and inputs that are derived principally from or corroborated by observable market data correlation or other means.
Level 3 – Unobservable inputs reflect the reporting entity’s own assumptions about the pricing of an asset or liability when observable inputs are not available or when there is minimal, if any, market activity for an identical or similar asset or liability at the measurement date.
Income Taxes
—The Trust has elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code. As a REIT, the Trust generally will not be subject to federal income tax on that portion of its net income that does not relate to CHSP TRS, the Trust’s wholly owned taxable REIT subsidiary, and that is currently distributed to its shareholders. CHSP TRS, which leases the Trust’s hotels from the Operating Partnership, is subject to federal and state income taxes.
The Trust accounts for income taxes using the asset and liability method under which deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Valuation allowances are provided if based upon the weight of the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
Share-Based Compensation
—From time to time, the Trust grants restricted share awards to employees and trustees. To date, the Trust has granted two types of restricted share awards: (1) awards that vest solely on continued employment or service (time-based awards) and (2) awards that vest based on the Trust achieving specified levels of relative total shareholder return and continued employment (performance-based awards). The Trust measures share-based compensation expense for the restricted share awards based on the fair value of the awards on the date of grant. The fair value of time-based awards is determined based on the closing price of the Trust’s common shares on the measurement date, which is generally the date of grant. The fair value of performance-based awards is determined using a Monte Carlo simulation. For time-based awards, share-based compensation expense is recognized on a straight-line basis over the life of the entire award. For performance-based awards, share-based compensation expense is recognized over the requisite service period for each award. No share-based compensation expense is recognized for awards for which employees or trustees do not render the requisite service.
Earnings Per Share
—Basic earnings per share is computed by dividing net income available to common shareholders, adjusted for dividends declared on and undistributed earnings allocated to unvested time-based awards, by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income available to common shareholders, adjusted for dividends declared on and undistributed earnings allocated to unvested time-based awards, by the weighted-average number of common shares outstanding, plus potentially dilutive securities, such as unvested performance-based awards, during the period. The Trust’s unvested time-based awards are entitled to receive non-forfeitable dividends, if declared. Therefore, unvested time-based awards qualify as participating securities, requiring the allocation of dividends and undistributed earnings under the two-class method to calculate basic earnings per share. The percentage of undistributed earnings allocated to the unvested time-based awards is based on the proportion of the weighted-average unvested time-based awards outstanding during the period to the total of the weighted-average common shares and unvested time-based awards outstanding during the period. No adjustment is made for shares that are anti-dilutive during the period.
Segment Information
—The Trust has determined that its business is conducted in
one
reportable segment, hotel ownership.
Use of Estimates
—The preparation of the interim consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the interim consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Recent Accounting Pronouncements—
In February 2013, the Financial Accounting Standards Board (the "FASB") issued updated accounting guidance to improve the reporting of amounts reclassified out of accumulated other comprehensive income. The new accounting guidance requires information to be provided about the amounts reclassified out of accumulated other comprehensive income by component and to present, either on the face of the statement where net income is presented or in the notes to the financial statements, significant amounts reclassified out of accumulated other comprehensive income by respective line items of net income. The new accounting guidance is to be applied prospectively and is effective for interim and annual periods beginning after December 15, 2012. The Trust adopted the new accounting guidance on January 1, 2013. The Trust does not believe that the adoption of this guidance has a material impact on the interim consolidated financial statements.
3. Acquisition of Hotels
The Trust has acquired the following hotels since January 1, 2012 (in thousands, except rooms data):
|
|
|
|
|
|
|
|
|
|
|
|
|
Hotel
|
|
Location
|
|
Rooms
|
|
Net Assets
Acquired
|
|
Acquisition Date
|
2012 Acquisitions:
|
|
|
|
|
|
|
|
|
W Chicago – Lakeshore
|
|
Chicago, IL
|
|
520
|
|
|
$
|
124,920
|
|
|
August 21, 2012
|
Hyatt Regency Mission Bay Spa and Marina
(1)
|
|
San Diego, CA
|
|
429
|
|
|
59,900
|
|
|
September 7, 2012
|
The Hotel Minneapolis, Autograph Collection
|
|
Minneapolis, MN
|
|
222
|
|
|
46,372
|
|
|
October 30, 2012
|
|
|
|
|
1,171
|
|
|
$
|
231,192
|
|
|
|
2013 Acquisitions:
|
|
|
|
|
|
|
|
|
Hyatt Place New York Midtown South
|
|
New York, NY
|
|
185
|
|
|
$
|
76,362
|
|
|
March 14, 2013
|
W New Orleans – French Quarter
|
|
New Orleans, LA
|
|
97
|
|
|
25,595
|
|
|
March 28, 2013
|
W New Orleans
|
|
New Orleans, LA
|
|
410
|
|
|
65,786
|
|
|
April 25, 2013
|
Hyatt Fisherman's Wharf
|
|
San Francisco, CA
|
|
313
|
|
|
102,485
|
|
|
May 31, 2013
|
Hyatt Santa Barbara
|
|
Santa Barbara, CA
|
|
200
|
|
|
60,972
|
|
|
June 27, 2013
|
|
|
|
|
1,205
|
|
|
$
|
331,200
|
|
|
|
|
|
(1)
|
As part of the acquisition, the Trust assumed a ground lease, which has an initial term ending
January 2056
. See Note 11, "Commitments and Contingencies," for additional information relating to the lease agreement.
|
The allocation of the purchase prices to the assets acquired and liabilities assumed based on their fair values was as follows (in thousands):
|
|
|
|
|
|
|
|
2013 Acquisitions
|
Land and land improvements
|
|
$
|
82,462
|
|
Buildings and leasehold improvements
|
|
228,349
|
|
Furniture, fixtures and equipment
|
|
20,140
|
|
Cash
|
|
142
|
|
Accounts receivable, net
|
|
2,084
|
|
Prepaid expenses and other assets
|
|
1,633
|
|
Accounts payable and accrued expenses
|
|
(3,610
|
)
|
Net assets acquired
|
|
$
|
331,200
|
|
The following financial information presents the pro forma results of operations of the Trust for the
three and six months
ended
June 30, 2013
and
2012
as if all the 2012 and 2013 hotel acquisitions had taken place on January 1,
2012
. The pro forma results for the
three and six months
ended
June 30, 2013
and
2012
have been prepared for comparative purposes only and do not purport to be indicative of the results of operations that would have actually occurred had all transactions taken place on January 1,
2012
, or of future results of operations (in thousands, except per share data).
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
Total revenue
|
|
$
|
125,906
|
|
|
$
|
110,919
|
|
|
$
|
214,416
|
|
|
$
|
195,849
|
|
Total hotel operating expenses
|
|
81,848
|
|
|
74,788
|
|
|
151,798
|
|
|
143,098
|
|
Total operating expenses
|
|
97,576
|
|
|
88,239
|
|
|
182,047
|
|
|
170,049
|
|
Operating income
|
|
28,330
|
|
|
22,680
|
|
|
32,369
|
|
|
25,800
|
|
Net income available to common shareholders
|
|
29,482
|
|
|
25,123
|
|
|
39,835
|
|
|
33,904
|
|
Net income available per common share—basic and diluted
|
|
$
|
0.61
|
|
|
$
|
0.52
|
|
|
$
|
0.83
|
|
|
$
|
0.71
|
|
For the
three and six months
ended
June 30, 2013
, the consolidated statements of operations included total revenue of
$14.7 million
and
$15.5 million
, respectively, and total hotel operating expenses of
$9.2 million
and
$9.7 million
, respectively, related to the operations of the
five
hotels acquired in 2013.
4. Property and Equipment
Property and equipment as of
June 30, 2013
and
December 31, 2012
consisted of the following (in thousands):
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|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
|
|
2013
|
|
2012
|
Land and land improvements
|
|
$
|
262,270
|
|
|
$
|
179,786
|
|
Buildings and leasehold improvements
|
|
1,133,132
|
|
|
897,725
|
|
Furniture, fixtures and equipment
|
|
99,669
|
|
|
76,077
|
|
Construction-in-progress
|
|
5,687
|
|
|
6,240
|
|
|
|
1,500,758
|
|
|
1,159,828
|
|
Less: accumulated depreciation and amortization
|
|
(71,783
|
)
|
|
(52,106
|
)
|
Property and equipment, net
|
|
$
|
1,428,975
|
|
|
$
|
1,107,722
|
|
5. Intangible Assets and Liability
Intangible assets and liability as of
June 30, 2013
and
December 31, 2012
consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
|
|
2013
|
|
2012
|
Intangible assets:
|
|
|
|
|
Air rights contract
|
|
$
|
36,105
|
|
|
$
|
36,105
|
|
Favorable ground leases
|
|
4,828
|
|
|
4,828
|
|
|
|
40,933
|
|
|
40,933
|
|
Less: accumulated amortization
|
|
(1,852
|
)
|
|
(1,551
|
)
|
Intangible assets, net
|
|
$
|
39,081
|
|
|
$
|
39,382
|
|
|
|
|
|
|
Intangible liability:
|
|
|
|
|
Unfavorable contract liability
|
|
$
|
14,236
|
|
|
$
|
14,236
|
|
Less: accumulated amortization
|
|
(686
|
)
|
|
(490
|
)
|
Intangible liability, net (included within other liabilities)
|
|
$
|
13,550
|
|
|
$
|
13,746
|
|
6. Long-Term Debt
Long-term debt as of
June 30, 2013
and
December 31, 2012
consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
|
|
2013
|
|
2012
|
Revolving credit facility
|
|
$
|
100,000
|
|
|
$
|
50,000
|
|
Term loans
|
|
190,000
|
|
|
155,000
|
|
Other mortgage loans
|
|
289,698
|
|
|
199,399
|
|
|
|
579,698
|
|
|
404,399
|
|
Unamortized premium
|
|
703
|
|
|
809
|
|
Long-term debt
|
|
$
|
580,401
|
|
|
$
|
405,208
|
|
Revolving credit facility
On October 25, 2012, the Trust entered into an amended credit agreement to (1) increase the maximum size of the revolving credit facility from
$200.0 million
to
$250.0 million
, (2) lower the interest rate to LIBOR plus
1.75%
-
2.75%
(the spread over LIBOR continues to be based on the Trust's consolidated leverage ratio), and (3) extend the maturity date to
April 2016
. The amended credit agreement provides for the possibility of further future increases, up to a maximum of
$375.0
million
, in accordance with the terms of the amended credit agreement. The amended credit agreement also provides for an extension of the maturity date by
one
year, subject to satisfaction of certain customary conditions.
As of
June 30, 2013
, the interest rate in effect for borrowings under the revolving credit facility was
1.95%
. The amount that the Trust can borrow under the revolving credit facility is based on the value of the Trust's hotels included in the borrowing base, as defined in the amended credit agreement. As of
June 30, 2013
, the revolving credit facility was secured by
seven
hotels providing borrowing availability of
$231.0 million
, of which
$131.0 million
remained available. The amended credit agreement contains standard financial covenants, including certain leverage ratios, coverage ratios, and a minimum tangible net worth requirement.
Term loans
On July 3, 2012, the Trust entered into a loan agreement to obtain a
$60.0 million
term loan. The initial term of the loan matures in
July 2014
and the Trust has
three
one
-year extension options that may be exercised subject to certain conditions. At the initial closing,
$25.0 million
was advanced by the lender and was secured by the Holiday Inn New York City Midtown – 31st Street. On March 14, 2013,
$35.0 million
was advanced by the lender in connection with the acquisition of the Hyatt Place New York Midtown South. Following the subsequent advance, the entire
$60.0 million
principal amount of the loan is secured by both hotels. The loan bears interest equal to LIBOR plus
3.25%
. Contemporaneous with the closing of the term loan, the Trust entered into an interest rate swap to effectively fix the interest rate on the initial
$25.0 million
advance for the original
two
-year term at
3.75%
per annum. Under the terms of the interest rate swap, the Trust pays fixed interest of
0.50%
per annum on a notional amount of
$25.0 million
and receives floating rate interest equal to the one-month LIBOR. The effective date of the interest rate swap is
July 3, 2012
and it matures on
July 3, 2014
. Contemporaneous with the subsequent advance, the Trust entered into an interest rate swap to effectively fix the interest rate on the
$35.0 million
subsequent advance for the remaining initial term of the loan at
3.65%
per annum. Under the terms of the interest rate swap, the Trust pays fixed interest of
0.40%
per annum on a notional amount of
$35.0 million
and receives floating rate interest equal to the one-month LIBOR. The effective date of the interest rate swap is
March 14, 2013
and it matures on
July 3, 2014
.
Other mortgage loans
On July 27, 2012, the Trust entered into a loan agreement to obtain a
$70.0 million
loan secured by the Denver Marriott City Center. The loan has a term of
30
years, but is callable by the lender after
10
years, and the Trust expects the lender to call the loan at that time. The loan carries a fixed interest rate of
4.90%
per annum, with principal and interest payments based on a
30
-year principal amortization.
On February 15, 2013, the Trust entered into a loan agreement to obtain a
$32.0 million
loan, which matures in
March 2023
and is secured by the Hilton Checkers Los Angeles. The loan carries a fixed interest rate of
4.11%
per annum, with principal and interest payments based on a
30
-year principal amortization.
On May 3, 2013, the Trust entered into a loan agreement to obtain a
$60.0 million
loan, which matures in
June 2020
and is secured by the Boston Marriott Newton. The loan carries a fixed interest rate of
3.63%
per annum, with principal and interest payments based on a
25
-year principal amortization.
As of
June 30, 2013
, the Trust was in compliance with all financial covenants under its borrowing arrangements. As of
June 30, 2013
, the Trust’s weighted-average interest rate on its long-term debt was
4.11%
. Future scheduled principal payments of debt obligations as of
June 30, 2013
are as follows (in thousands):
|
|
|
|
|
|
Year
|
|
Amounts
(1)
|
2013
|
|
$
|
2,587
|
|
2014
|
|
195,388
|
|
2015
|
|
5,645
|
|
2016
|
|
226,532
|
|
2017
|
|
3,597
|
|
Thereafter
|
|
145,949
|
|
|
|
$
|
579,698
|
|
|
|
(1)
|
Assumes no exercise of extension options and does not reflect the Trust's entrance into two new loan agreements and the related prepayment of the
$130.0 million
term loan secured jointly by the Le Meridien San Francisco and the W Chicago – City Center subsequent to June 30, 2013. See Note 12, "Subsequent Events," to our interim consolidated financial statements for additional information.
|
7. Earnings Per Share
The following is a reconciliation of the amounts used in calculating basic and diluted earnings per share (in thousands, except share and per share data):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income available to common shareholders
|
|
$
|
14,635
|
|
|
$
|
9,053
|
|
|
$
|
9,703
|
|
|
$
|
8,257
|
|
Less: Dividends declared on unvested time-based awards
|
|
(90
|
)
|
|
(34
|
)
|
|
(178
|
)
|
|
(68
|
)
|
Less: Undistributed earnings allocated to unvested time-based awards
|
|
(23
|
)
|
|
(10
|
)
|
|
—
|
|
|
—
|
|
Net income available to common shareholders, excluding amounts attributable to unvested time-based awards
|
|
$
|
14,522
|
|
|
$
|
9,009
|
|
|
$
|
9,525
|
|
|
$
|
8,189
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted-average number of common shares outstanding—basic and diluted
|
|
47,862,652
|
|
|
31,910,921
|
|
|
46,187,216
|
|
|
31,892,431
|
|
Net income available per common share—basic and diluted
|
|
$
|
0.30
|
|
|
$
|
0.28
|
|
|
$
|
0.21
|
|
|
$
|
0.26
|
|
For the
three and six months
ended
June 30, 2013
,
344,900
unvested performance-based awards, and for the
three and six months
ended
June 30,
2012
,
63,870
unvested performance-based awards, were excluded from diluted weighted-average common shares outstanding, as the awards had not achieved the specific levels of relative total shareholder return required for vesting at each period or their effect would have been anti-dilutive.
8. Shareholders’ Equity
Common Shares
—The Trust is authorized to issue up to
400,000,000
common shares,
$.01
par value per share. Each outstanding common share entitles the holder to
one
vote on all matters submitted to a vote of shareholders. Holders of the Trust’s common shares are entitled to receive distributions when authorized by the Trust’s board of trustees out of assets legally available for the payment of distributions.
On September 18, 2012, the Trust completed an underwritten public offering of
7,475,000
common shares at a price of
$18.50
per share, including
975,000
shares sold pursuant to the underwriters’ exercise of their option to purchase additional shares. After deducting underwriting fees and offering costs, the Trust generated net proceeds of
$132.6 million
.
On February 6, 2013, the Trust completed an underwritten public offering of
8,337,500
common shares at a price of
$20.75
per share, including
1,087,500
shares sold pursuant to the underwriters' exercise of their option to purchase additional shares. After deducting underwriting fees and offering costs, the Trust generated net proceeds of
$165.9 million
.
For the
six months
ended
June 30, 2013
, the Trust issued
1,834
unrestricted common shares and
533,400
restricted common shares to its trustees and employees. For the
six months
ended
June 30, 2013
, the Trust repurchased
49,239
common shares from employees to satisfy the minimum statutory tax withholding requirements related to the vesting of their previously granted restricted common shares. As of
June 30, 2013
, the Trust had
48,587,425
common shares outstanding.
For the
six months
ended
June 30, 2013
, the Trust paid or its board of trustees declared the following dividends per common share:
|
|
|
|
|
|
|
|
|
|
|
|
Record Date
|
|
Payment Date
|
|
Dividend Per Common Share
|
Fourth Quarter 2012
|
|
December 31, 2012
|
|
January 15, 2013
|
|
$
|
0.22
|
|
First Quarter 2013
|
|
March 29, 2013
|
|
April 15, 2013
|
|
$
|
0.24
|
|
Second Quarter 2013
|
|
June 28, 2013
|
|
July 15, 2013
|
|
$
|
0.24
|
|
Preferred Shares
—The Trust is authorized to issue up to
100,000,000
preferred shares,
$.01
par value per share. The Trust’s board of trustees is required to set for each class or series of preferred shares the terms, preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications, and terms or conditions of redemption.
On July 17, 2012, the Trust completed an underwritten public offering of
5,000,000
shares of its
7.75%
Series A Cumulative Redeemable Preferred Shares, including
600,000
shares sold pursuant to the underwriters’ exercise of their over-
allotment option. After deducting underwriting fees and offering costs, the Trust generated net proceeds of
$120.6
million. As of
June 30, 2013
, the Trust had
5,000,000
shares of its
7.75%
Series A Cumulative Redeemable Preferred Shares outstanding.
Holders of Series A Cumulative Redeemable Preferred Shares are entitled to receive, when and as authorized by the Trust's board of trustees, out of funds legally available for the payment of dividends, cumulative cash dividends at the rate of
7.75%
per annum of the
$25.00
per share liquidation preference, equivalent to
$1.9375
per annum per share. Dividends on the Series A Cumulative Redeemable Preferred Shares are cumulative from the date of original issuance and are payable quarterly in arrears on or about the 15th day of each of January, April, July and October. The Series A Cumulative Redeemable Preferred Shares rank senior to the Trust's common shares with respect to the payment of dividends; the Trust will not declare or pay any dividends, or set aside any funds for the payment of dividends, on its common shares unless the Trust also has declared and either paid or set aside for payment the full cumulative dividends on the Series A Cumulative Redeemable Preferred Shares.
For the
six months
ended
June 30, 2013
, the Trust paid or its board of trustees declared the following dividends per preferred share:
|
|
|
|
|
|
|
|
|
|
|
|
Record Date
|
|
Payment Date
|
|
Dividend Per Series A Cumulative Redeemable Preferred Share
|
Fourth Quarter 2012
|
|
December 31, 2012
|
|
January 15, 2013
|
|
$
|
0.484375
|
|
First Quarter 2013
|
|
March 29, 2013
|
|
April 15, 2013
|
|
$
|
0.484375
|
|
Second Quarter 2013
|
|
June 28, 2013
|
|
July 15, 2013
|
|
$
|
0.484375
|
|
The Trust cannot redeem the Series A Cumulative Redeemable Preferred Shares prior to July 17, 2017, except as described below and in certain limited circumstances related to the ownership limitation necessary to preserve the Trust's qualification as a REIT. On and after July 17, 2017, the Trust, at its option, can redeem the Series A Cumulative Redeemable Preferred Shares, in whole or from time to time in part, at a redemption price of
$25.00
per share, plus any accrued and unpaid dividends. The holders of Series A Cumulative Redeemable Preferred Shares have no voting rights except, in certain limited circumstances.
Upon the occurrence of a change of control, as defined in the articles supplementary designating the Series A Cumulative Redeemable Preferred Shares, the result of which the Trust's common shares and the common securities of the acquiring or surviving entity are not listed or quoted on the New York Stock Exchange, the NYSE Amex Equities or the NASDAQ Stock Market, or any successor exchanges, the Trust may, at its option, redeem the Series A Cumulative Redeemable Preferred Shares in whole or in part within 120 days following the change of control by paying
$25.00
per share, plus any accrued and unpaid dividends through the date of redemption. If the Trust does not exercise its right to redeem the Series A Cumulative Redeemable Preferred Shares upon a change of control, the holders of the Series A Cumulative Redeemable Preferred Shares have the right to convert some or all of their shares into a number of the Trust's common shares based on a defined formula subject to a share cap. The share cap on each Series A Cumulative Redeemable Preferred Share is
2.9189
common shares.
Universal Shelf
—In August 2012, the Trust filed a Registration Statement on Form S-3 with the SEC, registering equity securities with a maximum aggregate offering price of up to
$500.0 million
. As of
June 30, 2013
, equity securities with a maximum aggregate offering price of
$188.7 million
remained available to issue under this Registration Statement.
9. Equity Plan
In January 2010, the Trust established the Chesapeake Lodging Trust Equity Plan (the “Plan”), which provides for the issuance of equity-based awards, including restricted shares, unrestricted shares, share options, share appreciation rights, and other awards based on the Trust’s common shares. Employees and trustees of the Trust and other persons that provide services to the Trust are eligible to participate in the Plan. The compensation committee of the board of trustees administers the Plan and determines the number of awards to be granted, the vesting period, and the exercise price, if any.
The Trust initially reserved
454,657
common shares for issuance under the Plan at its establishment. In May 2012, the Trust’s common shareholders approved an amendment to the Plan such that the number of shares available for issuance under the Plan was increased by
2,750,000
. Shares that are issued under the Plan to any person pursuant to an award are counted against this limit as one share for every one share granted. If any shares covered by an award are not purchased or are forfeited, if an award is settled in cash, or if an award otherwise terminates without delivery of any shares, then the number of common shares counted against the aggregate number of shares available under the Plan with respect to the award will, to the extent of any such forfeiture or termination, again be available for making awards under the Plan. As of
June 30, 2013
, subject to increases that may result in the case of any future forfeiture or termination of currently outstanding awards,
2,053,340
common shares were reserved and available for future issuances under the Plan.
The Trust will make appropriate adjustments to outstanding awards and the number of shares available for issuance under the Plan, including the individual limitations on awards, to reflect share dividends, share splits, spin-offs and other similar
events. While the compensation committee can terminate or amend the Plan at any time, no amendment can adversely impair the rights of grantees with respect to outstanding awards. In addition, an amendment will be contingent on approval of the Trust’s common shareholders to the extent required by law or if the amendment would materially increase the benefits accruing to participants under the Plan, materially increase the aggregate number of shares that can be issued under the Plan, or materially modify the requirements as to eligibility for participation in the Plan. Unless terminated earlier, the Plan will terminate in January 2020, but will continue to govern unexpired awards.
For the
six months
ended
June 30, 2013
, the Trust granted
533,400
restricted common shares to certain employees and trustees, of which
188,500
shares were time-based awards and
344,900
shares were performance-based awards. The time-based awards are generally eligible to vest at the rate of one-fourth of the number of restricted shares granted commencing on the first anniversary of their issuance. The performance-based awards are eligible to vest at the rate of one-fourth of the number of restricted shares granted commencing on December 31, 2013 and each year thereafter. Additional vesting of performance-based awards can also occur at December 31, 2016 based on the cumulative level of relative total shareholder return during the entire performance measurement period. Dividends on these performance-based awards accrue, but are not paid unless the related shares vest. The fair value of the 2013 performance-based awards was determined using a Monte Carlo simulation with the following assumptions: volatility of
31.15%
; an expected term equal to the requisite service period for the awards; and a risk-free interest rate of
0.55%
.
As of
June 30, 2013
, there was approximately
$11.1 million
of unrecognized share-based compensation expense related to restricted common shares. The unrecognized share-based compensation expense is expected to be recognized over a weighted-average period of
3.0
years.
The following is a summary of the Trust’s restricted common share activity for the
six months
ended
June 30, 2013
:
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted-Average
Grant-Date
Fair Value
|
Restricted common shares as of December 31, 2012
|
|
341,583
|
|
|
$
|
19.59
|
|
Granted
|
|
533,400
|
|
|
$
|
17.45
|
|
Vested
|
|
(154,183
|
)
|
|
$
|
18.66
|
|
Forfeited
|
|
—
|
|
|
$
|
—
|
|
Restricted common shares as of June 30, 2013
|
|
720,800
|
|
|
$
|
18.21
|
|
10. Fair Value Measurements and Derivative Instruments
The following table sets forth the Trust’s financial assets and liabilities measured at fair value by level within the fair value hierarchy (in thousands). Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at June 30, 2013
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets:
|
|
|
|
|
|
|
|
|
Interest rate cap (included within prepaid expenses and other assets)
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Interest rate swaps (included within other liabilities)
|
|
$
|
87
|
|
|
$
|
—
|
|
|
$
|
87
|
|
|
$
|
—
|
|
|
|
$
|
87
|
|
|
$
|
—
|
|
|
$
|
87
|
|
|
$
|
—
|
|
Derivative instruments are classified within Level 2 of the fair value hierarchy as they are valued using third-party pricing models which contain inputs that are derived from observable market data. Where possible, the values produced by the pricing models are verified to market prices. Valuation models require a variety of inputs, including contractual terms, market prices, yield curves, credit spreads, measures of volatility, and correlations of such inputs.
The Trust’s financial instruments in addition to those disclosed in the table above include cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued expenses, and long-term debt. The carrying values reported in the consolidated balance sheets for cash and cash equivalents, restricted cash, accounts receivable, and accounts payable and accrued expenses approximate fair value. The Trust estimates the fair value of its fixed rate debt by discounting the future cash flows of each instrument using estimated market rates of debt instruments with similar maturities and credit profiles. These
inputs are classified as Level 3 within the fair value hierarchy. As of
June 30, 2013
, the carrying value reported in the consolidated balance sheet for the Trust's long-term debt approximated its fair value.
11. Commitments and Contingencies
Management Agreements
—The Trust’s hotels operate pursuant to management agreements with various third-party management companies. Each management company receives a base management fee generally between
2%
and
4%
of hotel revenues. The management companies are also eligible to receive an incentive management fee if hotel operating income, as defined in the management agreements, exceeds certain performance thresholds. The incentive management fee is generally calculated as a percentage of hotel operating income after the Trust has received a priority return on its investment in the hotel.
Franchise Agreements
—As of
June 30, 2013
,
12
of the Trust’s hotels operated pursuant to franchise agreements with hotel brand companies and
eight
hotels operated pursuant to management agreements with hotel brand companies that allowed them to operate under their respective brands. Under the
12
franchise agreements, the Trust generally pays a royalty fee ranging from
3%
to
6%
of room revenues and up to
3%
of food and beverage revenues, plus additional fees for marketing, central reservation systems, and other franchisor costs that amount to between
1%
and
5%
of room revenues.
Ground Lease Agreement
—The Trust leases the land underlying the Hyatt Regency Mission Bay Spa and Marina pursuant to a lease agreement, which has an initial term ending
January 2056
. Rent due under the lease agreement is the greater of base rent or percentage rent. Base rent is currently
$2.2 million
per year. Base rent resets every
three
years over the remaining term of the lease equal to
75%
of the average of the actual rent paid over the
two
years preceding the base rent reset year. The next base rent reset year is 2016. Annual percentage rent is calculated based on various percentages of the hotel's various sources of revenue, including room, food and beverage, and marina rentals, earned during the period.
FF&E Reserves
—Pursuant to its management, franchise and loan agreements, the Trust is required to establish a FF&E reserve for each hotel to cover the cost of replacing FF&E. Contributions to the FF&E reserve are based on a percentage of gross revenues at each hotel. The Trust is generally required to contribute between
3%
and
5%
of gross revenues over the term of the agreements.
Litigation
—The Trust is not involved in any material litigation nor, to its knowledge, is any material litigation threatened against the Trust.
12. Subsequent Events
On July 11, 2013, the Trust entered into a loan agreement to obtain a
$92.5 million
loan, which matures in
August 2020
and is secured by the Le Meridien San Francisco. The loan carries a fixed interest rate of
3.50%
per annum, with principal and interest payments based on a
25
-year principal amortization. Also on July 11, 2013, the Trust entered into a loan agreement to obtain a
$93.0 million
loan, which matures in
August 2023
and is secured by the W Chicago – City Center. The loan carries a fixed interest rate of
4.25%
per annum, with principal and interest payments based on a
25
-year principal amortization. A portion of the proceeds from the two loans was used to prepay the Trust's previous
$130.0 million
term loan secured jointly by the Le Meridien San Francisco and the W Chicago – City Center, which was scheduled to mature in
July 2014
.
On August 5, 2013, the Trust declared dividends in the amounts of
$0.26
per share payable to its common shareholders and
$0.484375
per share payable to its preferred shareholders, both of record as of
September 30, 2013
. The dividends will be paid on
October 15, 2013
.