Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Statement Regarding Forward Looking Statements
This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including, without limitation, statements containing the words, “believe,” “expect,” “anticipate,” “estimate,” “plan,” “continue,” “intend,” “should,” “may” and words of similar import. Such forward-looking statements relate to future events, our plans, strategies, prospects and future financial performance, and involve known and unknown risks that are difficult to predict, uncertainties and other factors which may cause our actual results, performance or achievements or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Readers should specifically consider the various factors identified in this and other reports filed by us with the SEC, including, but not limited to those discussed in the section entitled “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 201
5
, that could cause actual results to differ. Statements regarding the following subjects are forward-looking by their nature:
●
our business or investment strategy;
●
our projected operating results;
●
our distribution policy;
●
our liquidity;
●
completion of any pending transactions;
●
our ability to obtain future financing arrangements
on favorable terms or at all
;
●
our understanding of our competition;
●
market trends; and
●
projected capital expenditures.
Forward-looking statements are based on our beliefs, assumptions and expectations, taking into account all information currently available to us. These beliefs, assumptions and expectations are subject to risks and uncertainties and can change as a result of many possible events or factors, not all of which are known to us. If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements. Readers should not place undue reliance on forward-looking statements. The following factors could cause actual results to vary from our forward-looking statements:
●
general volatility of the capital markets and the market price of our common shares;
●
changes in our business or investment strategy;
●
availability, terms and deployment of capital;
●
availability of qualified personnel;
●
changes in our industry and the market in which we operate, interest rates, or the general economy;
●
the degree and nature of our competition;
●
financing risks, including the risk of leverage and the corresponding risk of default on our mortgage loans and other debt and potential inability to refinance or extend the maturity of existing indebtedness;
●
levels of spending in the business, travel and leisure industries, as well as consumer confidence;
●
declines in occupancy, average daily rate and RevPAR and other hotel operating metrics;
●
hostilities, including future terrorist attacks, or fear of hostilities that affect travel;
●
financial condition of, and our relationships with, our joint venture partners, third-party property managers, franchisors and hospitality joint venture partners;
●
increased interest rates and operating costs;
●
ability to complete development and redevelopment projects;
●
risks associated with potential acquisitions, including the ability to ramp up and stabilize newly acquired hotels with limited or no operating history, and dispositions of hotel properties;
●
availability of and our ability to retain qualified personnel;
●
decreases in tourism due to geopolitical instability or changes in foreign exchange rates;
●
our failure to maintain our qualification as a real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended;
●
environmental uncertainties and risks related to natural disasters;
●
changes in real estate and zoning laws and increases in real property tax rates; and
●
the factors discussed in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 201
5
under the heading “Risk Factors” and in other reports we file with the SEC from time to time.
These factors are not necessarily all of the important factors that could cause our actual results, performance or achievements to differ materially from those expressed in or implied by any of our forward-looking statements. Other unknown or unpredictable factors, many of which are beyond our control, also could harm our results, performance or achievements.
All forward-looking statements contained in this report are expressly qualified in their entirety by the cautionary statements set forth above. Forward-looking statements speak only as of the date they are made, and we do not undertake or assume any obligation to update publicly any of these statements to reflect actual results, new information or future events, changes in assumptions or changes in other factors affecting forward-looking statements, except to the extent required by applicable laws. If we update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.
BACKGROUND
As of
June 30, 2016
, we owned interests in 55
hotels in major urban gateway markets including New York, Washington DC, Boston, Philadelphia, San Diego, Los Angeles and Miami, including
43
wholly-owned hotels and interests in
12
hotels owned through unconsolidated joint ventures.
We have elected to be taxed as a REIT for federal income tax purposes, beginning with the taxable year ended December 31, 1999. For purposes of the REIT qualification rules, we cannot directly operate any of our hotels. Instead, we must lease our hotels to a third party lessee or to a TRS, provided that the TRS engages an eligible independent co
ntractor to manage the hotels.
As of
June 30, 2016
, we have leased all of our hotels to a wholly-owned TRS, a joint venture owned TRS, or an entity owned by our wholly-owned TRS. Each of these TRS entities will pay qualifying rent, and the TRS entities have entered into management contracts with qualified independent managers, including HHMLP, with respect to our hotels. We intend to lease all newly acquired hotels to a TRS. The TRS structure enables us to participate more directly in the operating performance of our hotels. The TRS directly receives all revenue from, and funds all expenses relating to, hotel operations. The TRS is also subject to income tax on its earnings.
OVERVIEW
We believe the
changes
in our equity and debt capitalization and repositioning of our portfolio better enables us to capitalize on further improvement in lodging fundamentals. During 201
6
thus far, we continued to see improvements in ADR, RevPAR and operating margins, led by hotels in most of our major locations. We continue to seek acquisition opportunities in urban centers and central business districts. In addition, we will continue to look for att
ractive opportunities to divest certain
of
our
properties at favorable prices, potentially redeploying that capital in our focus markets
or opportunistically repurchasing our common shares
.
W
e may seek to buy out, or sell our joint venture interests to select existing joint venture partners.
W
e expect continued stabilization and improvement in consumer and commercial spending and lodging demand during
2016. Industry wide occupancy has surpassed peak occupancy from the previous cycle which should allow hotel operators to increase ADR across the United States (“U.S.”). International visitation to the U.S. is expected to grow at a compound annual growth rate of 4.0% through 2019, according to the National Travel and Tourism Office. However
, the manner in which the economy will continue to grow, if at all, is not predictable. In addition, the availability of hotel-level financing for the acquisition of new hotels is not within our control. As a result, there can be no assurances that we will be able to grow hotel revenues, occupancy, ADR or RevPAR at our properties as we hope.
Factors that might contribute to less-than-anticipated performance include those described under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 201
5
and other documents that we may file with the SEC in the future. We will continue to cautiously monitor lodging demand and rates, our third-party hotel managers, and our performance generally.
SUMMARY OF OPERATING RESULTS
The following table outlines operating results for the Company’s portfolio of wholly owned hotels and those owned through joint venture interests that are consolidated in our financial statements for the three
and six
months ended
June 30, 2016
and 201
5
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED HOTELS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
June 30,
|
|
|
|
2016
|
|
2015
|
|
% Variance
|
|
2016
|
|
2015
|
|
% Variance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Occupancy
|
|
87.9%
|
|
|
87.8%
|
|
0.1%
|
|
|
82.5%
|
|
|
83.4%
|
|
-0.9%
|
Average Daily Rate (ADR)
|
$
|
211.89
|
|
$
|
207.76
|
|
2.0%
|
|
$
|
197.47
|
|
$
|
192.66
|
|
2.5%
|
Revenue Per Available Room (RevPAR)
|
$
|
186.25
|
|
$
|
182.39
|
|
2.1%
|
|
$
|
162.93
|
|
$
|
160.65
|
|
1.4%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Room Revenues
|
$
|
113,163
|
|
$
|
114,797
|
|
-1.4%
|
|
$
|
207,635
|
|
$
|
200,750
|
|
3.4%
|
Total Revenues
|
$
|
127,629
|
|
$
|
127,000
|
|
0.5%
|
|
$
|
234,476
|
|
$
|
222,688
|
|
5.3%
|
RevPAR for the three
and six
months ended
June 30, 2016
increased 2.1% and
1.4% respectively
for our consolidated hotels when compared to the same period in 201
5
. This increase represents a continued growth trend in RevPAR, which is primarily due to the improving economic conditions since
June 30, 2015
and the acquisition of hotel properties consummated in 201
5
and 2016 that are accretive to RevPAR.
Results were hindered by ongoing renovations at five of our hotels and new supply which inhibited rate growth in some of our properties in New York City and the South Florida markets. As mentioned previously, we also contributed seven consolidated hotel properties located in New York City to Owner JV on April 29, 2016. Consolidated results subsequent to this date will not include the operations of these seven properties.
The following table outlines operating results for hotels we own through an unconsolidated joint venture interest. These operating results reflect 100% of the operating results of the property including our interest and the interests of our joint venture partners and other noncontrolling interest holders.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UNCONSOLIDATED JOINT VENTURES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
June 30,
|
|
|
|
2016
|
|
2015
|
|
% Variance
|
|
2016
|
|
2015
|
|
% Variance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Occupancy
|
|
80.3%
|
|
|
72.8%
|
|
7.5%
|
|
|
73.7%
|
|
|
70.0%
|
|
3.7%
|
Average Daily Rate (ADR)
|
$
|
202.53
|
|
$
|
175.82
|
|
15.2%
|
|
$
|
187.18
|
|
$
|
165.10
|
|
13.4%
|
Revenue Per Available Room (RevPAR)
|
$
|
162.65
|
|
$
|
127.95
|
|
27.1%
|
|
$
|
137.92
|
|
$
|
115.50
|
|
19.4%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Room Revenues
|
$
|
31,578
|
|
$
|
15,939
|
|
98.1%
|
|
$
|
43,958
|
|
$
|
28,621
|
|
53.6%
|
Total Revenues
|
$
|
38,367
|
|
$
|
22,070
|
|
73.8%
|
|
$
|
55,450
|
|
$
|
39,821
|
|
39.2%
|
The increase in occupancy, ADR, RevPAR, room revenues and total revenues for the three and six months ended June 30, 2016 over the same periods in 2015 is primarily driven by the contribution of seven consolidated hotel properties located in New York City to Owner JV on April 29, 2016. The addition of these seven hotels, located in a market that typically has higher occupancy and ADR then the markets of our existing unconsolidated joint venture hotel properties, contributed $15,244 in total revenue to our unconsolidated joint venture hotel portfolio during the three and six months ended June 30, 2016. For the remainder of
our unconsolidated joint venture hotels, despite RevPar growth of 5.5% at our Courtyard South Boston, MA property, our unconsolidated joint venture portfolio’s results were hindered by renovation disruption at one of our hotel properties located in Hartford, CT.
We define a same store consolidated hotel as one that is currently consolidated, that we have owned in whole or in part for the entirety of the periods being presented, and is deemed fully operational. Based on this definition, for the three
and six
months ended
June 30, 2016
and 201
5
there ar
e 38 same store hotels
. The following table outlines operating results for the three
and six
months ended
June 30, 2016
and 201
5
, for our same store consolidated hotels:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SAME STORE CONSOLIDATED HOTELS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(includes 38 hotels in both years)
|
|
(includes 38 hotels in both years)
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
June 30,
|
|
|
|
2016
|
|
2015
|
|
% Variance
|
|
2016
|
|
2015
|
|
% Variance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Occupancy
|
|
87.7%
|
|
|
86.8%
|
|
0.9%
|
|
|
82.3%
|
|
|
82.4%
|
|
-0.1%
|
Average Daily Rate (ADR)
|
$
|
205.13
|
|
$
|
203.14
|
|
1.0%
|
|
$
|
195.76
|
|
$
|
192.72
|
|
1.6%
|
Revenue Per Available Room (RevPAR)
|
$
|
179.92
|
|
$
|
176.25
|
|
2.1%
|
|
$
|
161.04
|
|
$
|
158.78
|
|
1.4%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Room Revenues
|
$
|
92,927
|
|
$
|
91,021
|
|
2.1%
|
|
$
|
166,360
|
|
$
|
163,091
|
|
2.0%
|
Total Revenues
|
$
|
104,809
|
|
$
|
102,616
|
|
2.1%
|
|
$
|
188,464
|
|
$
|
184,021
|
|
2.4%
|
Results for the three and six months ended June 30, 2016 compared to 2015 were hindered by ongoing renovations at five of our hotels and new supply which inhibited rate growth in some of our properties in New York City and the South Florida markets.
COMPARISON OF THE
THREE
MONTHS ENDED
JUNE 30, 2016
AND 201
5
(dollars in thousands, except ADR, RevPAR, and per share data)
Revenue
Our total revenues for the
three
months ended
June 30, 2016
consisted of hotel operating revenues and other revenue. Hotel operating revenues were approximately 100% of total revenues for the
three
months ended
June 30, 2016
and 201
5
. Hotel operating revenues are recorded for who
lly-
owned hotels that are leased to our wholly owned TRS and hotels owned through joint venture
or other
interests that are consolidated in our financial statements. Hotel operating revenues increased $
629
, or
0.5
%, to $
127,629
for the
three
months ended
June 30, 2016
compared to $
127,000
for the same period in 201
5
. This increase in hotel operating revenues was primarily attributable to the
acquisition of hotel properties, c
ontinued growth and stabi
lization of our existing assets, offset by the impact of the hotels contributed to the Cindat joint venture. Acquisitions contributed $16,347 in incremental revenue during the three months ended June 30, 2016 when compared to the same period in 2015, while the contribution of seven hotels to our joint venture with Cindat caused a decrease in revenue by $17,104 during the same period.
Since
June 30, 2015
, w
e have acquired interests in five
consolidated hotel
s. The Envoy Hotel, Boston, MA was acquired on July 27, 2016, subsequent to June 30, 2016. These
h
otel
s acquired prior to June 30, 2016
contributed the following operating revenues for the
three
months ended
June 30, 2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brand
|
|
Location
|
|
Acquisition Date
|
|
Rooms
|
|
|
Three Months Ended June 30, 2016
|
TownePlace Suites
|
|
Sunnyvale, CA
|
|
August 25, 2015
|
|
94
|
|
|
1,469
|
Ritz Carlton Georgetown
|
|
Washington, DC
|
|
December 29, 2015
|
|
86
|
|
|
5,616
|
Sanctuary Beach Resort
|
|
Monterey Bay, CA
|
|
January 27, 2016
|
|
60
|
|
|
1,662
|
Hilton Garden Inn M Street
|
|
Washington, DC
|
|
March 8, 2016
|
|
238
|
|
|
4,903
|
|
|
|
|
|
|
478
|
|
$
|
13,650
|
Revenues for all hotels were recorded from the date of acquisition as hotel operating revenues. Further, hotel operating revenues for the three months ended June 30, 2016 included revenues for a full three months related to the one hotel that was purchased during the three months ended June 30, 2015. We acquired interests in the following hotel during the three months ended June 30, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
Brand
|
|
Location
|
|
Acquisition Date
|
|
Rooms
|
|
|
Three Months Ended June 30, 2016
|
|
|
Three Months Ended June 30, 2015
|
St. Gregory Hotel
|
|
Washington, DC
|
|
June 16, 2015
|
|
155
|
|
$
|
3,193
|
|
$
|
496
|
Offsetting these acquisitions is our contribution of the seven properties to the joint venture with Cindat. These seven hotels contributed the following operating revenues to our consolidated hotel portfolio for the three months ended June 30, 2016 compared to the three months ended June 30, 2015.
|
|
|
|
|
|
|
|
|
|
|
|
|
Brand
|
|
Location
|
|
Disposition Date (Contribution to JV)
|
|
Rooms
|
|
|
Three Months Ended June 30, 2016
|
|
|
Three Months Ended June 30, 2015
|
Hampton Inn Herald Square
|
|
New York, NY
|
|
April 29, 2016
|
|
136
|
|
|
723
|
|
|
2,945
|
Hampton Inn Chelsea
|
|
New York, NY
|
|
April 29, 2016
|
|
144
|
|
|
843
|
|
|
3,245
|
Hampton Inn Times Square
|
|
New York, NY
|
|
April 29, 2016
|
|
184
|
|
|
938
|
|
|
3,969
|
Holiday Inn Express Times Square
|
|
New York, NY
|
|
April 29, 2016
|
|
210
|
|
|
1,079
|
|
|
4,529
|
Candlewood Suites Times Square
|
|
New York, NY
|
|
April 29, 2016
|
|
188
|
|
|
905
|
|
|
3,686
|
Holiday Inn Express Water Street
|
|
New York, NY
|
|
April 29, 2016
|
|
112
|
|
|
517
|
|
|
2,079
|
Holiday Inn Wall Street
|
|
New York, NY
|
|
April 29, 2016
|
|
113
|
|
|
510
|
|
|
2,166
|
|
|
|
|
|
|
1,087
|
|
$
|
5,515
|
|
$
|
22,619
|
Expenses
Total hotel operating expenses increased
2.8
% to approximately $
65,900
for the
three
months ended
June 30, 2016
from $
64,134
for the
three
months ended
June 30, 2015
.
Offsetting increases in operating expenses due to hotel properties acquired in our existing portfolio was a decrease of approximately $7,189 in operating expenses recognized for the seven properties we contributed to the joint venture with Cindat for the three months ended June 30, 2016 compared to June 30, 2015. D
epreciation and amortization
increased by
0.9
%, or $
167,
to $
18,495
for the
three
months ended
June 30, 2016
from $
18
,328
for the
three
months ended
June 30, 2015
.
The increase in depreciation and amortization was partially offset by a decrease of $1,139 in depreciation and amortization recorded for the seven hotel properties contributed to the joint venture with Cindat for the three months ended June 30, 2016 compared to June 30, 2015.
Real estate and personal property tax and
property insurance de
creased $
273,
or
3.3
%, for the
three
months ended
June 30, 2016
when compared to the same period in 201
5
.
This was primarily attributable to a decrease of $1,856 in real estate and property insurance recognized for the seven hotel properties contributed to the joint venture with Cindat for the three months ended June 30, 2016 compared to June 30, 2015. We otherwise typically experience
increase
s
in tax assessments and tax rates as the economy improves
which are
offset by reductions resulting from our management of this expense.
Gener
al and administrative expense increased
by 19.0%, or
approximately $
1,032,
from $
5,423
in the
three
months ended
June 30, 2015
to $
6
,455
for the same period in 201
6
. General and administrative expense includes expense related to non-cash share based payments issued as incentive compensation to the Company’s trustees, executives, and employees. Expense
s
related to share based compensation
increased $218
when comparing the three
months ended
June 30, 2016
to the same period in 201
5
.
Please refer to “Note 8 – Share Based Payments” of the notes to the consolidated financial statements for
more information about our share
based compensation.
Amounts recorded on our consolidated statement of operations for acquisition and terminated transaction costs will fluctuate from period to period based on our acquisition activities. Acquisition and terminated transaction costs typically consist of transfer taxes, legal fees and other costs associated with acquiring a hotel property and transactions that were terminated during the year. Acquisition and
terminated transaction costs de
creased
$
135
from
$
190
for the
three
months ended
June 30, 2015
to
$
55
for the same period in 201
6.
Operating Income
Operating income for the three months ended June 30, 2016 was $2
7
,
977
compared to operating income of $30,006 during the same period in 2015. O
perating income was
negatively
impacted by the
dispositions of the hotel properties noted above.
Interest Expense
Interest expense increased $59
3
from $10,688 for the three months ended June 30, 2015 to $11,28
1
for the three months ended June 30, 2016. Our borrowings have increased in total between June 30, 2015 and
June 30
, 2016, as we have entered into a Second Term Loan and also have increased draws from
our
Line of Credit primarily for acquisitions and to repay secured mortgage indebtedness. We used our Credit Facility and Second Term Loan to pay down mortgage debt which bore a higher interest rate of interest, which partially offset the increase in interest expense.
A partial amount of o
ur consolidated mortgage debt, Line of Credit outstanding draws and a partial amount of our First Term Loan were all repaid w
ith proceeds from the disposition and simultaneous contribution of seven hotel properties to the joint venture with Cindat. This reduced our interest expense for the period from April 29, 2016 to June 30, 2016.
Gain on Disposition of Hotel Properties
During the three
months ended June 30, 2016, the Company recorded a gain of $
95
,
276
related to the Cindat
joint v
enture transaction
and the sale of the Hyatt Place, King of Prussia, PA
. Please refer to “Note 3 – Investment in Unconsolidated Joint Ventures” of the notes to the consolidated financial statements for more information about the joint venture
with Cindat
.
Unconsolidated Joint Venture Investments
The income
from unconsolidated joint ventures consists of our interest in the operating results of the properties
we own in joint ventures. Income
from our
unconsolidated joint ventures in
creased by $
995
to $
1,521
for the three months ended
June 30, 2016 compared to income
of $
526
during the same period in 201
5 due to the income we recognized on our preferred equity interest in the joint venture with Cindat.
Income Tax Benefit
During the
three
months ended
June 30, 2016, the Company
recorded an income tax benefit
of $
3,070
compared to an income tax benefit of $109
for the
three
months ended
June 30, 2015.
Net Income
Applicable to Common Shareholders
Net income
applicable to common shareholders for the
three
months ended
June 30, 2016
was
$102,190 compared to income
of $
15,632
during the same
period in 201
5
.
This increase in net
income
was
primarily caused by
the gain of $95,276 realized on the Cindat joint venture transaction and the sale of Hyatt Place, King of Prussia, PA, offset by a decrease in net operating income due to the loss of contributions from hotel properties that were sold.
Comprehensive Income
Attributable to Common Shareholders
Comprehensive income attributable to common shareholders for the three months ended June 30,
Comprehensive income attributable to
common shareholders for the three
months ended June 30, 201
6
was $
102,206 compared to comprehensive income
of $
15,567
for the same period in 201
5
. For the three months ended
June 30, 2016
, we rec
orded comprehensive income
of $
114,975
compared to $
19,561
for the three months ended
June 30,
2015. The
increase in other comprehensive income
was prim
arily due to the $95,333 increase
in net
income.
COMPARISON OF THE
SIX
MONTHS ENDED
JUNE 30, 2016
AND 201
5
(dollars in thousands, except ADR, RevPAR, and per share data)
Revenue
Our total revenues for the
six
months ended
June 30, 2016 consisted of hotel operating revenues and other revenue. Hotel operating revenues were approximately 100% of total revenues for the
six
months ended
June 30, 2016 and 2015. Hotel operating revenues are recorded for wholly owned hotels that are leased to our wholly owned TRS and hotels owned through joint venture interests that are consolidated in our financial statements. Hotel operating revenues increased $11,788, or
5
.3%, to $234,476
for the
six
months ended
June 30, 2016 compared to $222,688
for the same period in 2015. This increase in hotel operating revenues was primarily attributable to the acquisition of hotel properties consummated during or subsequent to the
six
months ended
June 30, 2015 and the continued growth and stabilization of our existing assets offset by the impact of the hotels contributed to the joint venture with Cindat. Acquisitions contributed $25,946 in incremental revenue during the six months ended June 30, 2016 when compared to the same period in 2015, while the contribution of seven hotels to our joint venture with Cindat caused a decrease in revenue by $17,912 during the same period.
Since
June 30, 2015
, w
e have acquired interests in five
consolidated hotel
s. The Envoy Hotel, Boston, MA was acquired on July 27, 2016, subsequent to June 30, 2016. These
h
otel
s
acquired prior to June 30, 2016
contributed the following operating revenues for the
six
months ended
June 30, 2016
.
|
|
|
|
|
|
|
|
|
|
Brand
|
|
Location
|
|
Acquisition Date
|
|
Rooms
|
|
|
Six Months Ended June 30, 2016
|
TownePlace Suites
|
|
Sunnyvale, CA
|
|
August 25, 2015
|
|
94
|
|
|
2,898
|
Ritz Carlton Georgetown
|
|
Washington, DC
|
|
December 29, 2015
|
|
86
|
|
|
9,383
|
Sanctuary Beach Resort
|
|
Monterey Bay, CA
|
|
January 27, 2016
|
|
60
|
|
|
2,564
|
Hilton Garden Inn M Street
|
|
Washington, DC
|
|
March 8, 2016
|
|
238
|
|
|
6,132
|
|
|
|
|
|
|
478
|
|
$
|
20,977
|
Revenues for all hotels were recorded from the date of acquisition as hotel operating revenues. Further, hotel operating revenues for the six months ended June 30, 2016 included revenues for a full six months related to the one hotel that was purchased during the six months ended June 30, 2015. We acquired interests in the following hotel during the six months ended June 30, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brand
|
|
Location
|
|
Acquisition Date
|
|
Rooms
|
|
|
Six Months Ended June 30, 2016
|
|
|
Six Months Ended June 30, 2015
|
St. Gregory Hotel
|
|
Washington, DC
|
|
June 16, 2015
|
|
155
|
|
$
|
5,464
|
|
$
|
496
|
Offsetting these acquisitions is our contribution of the seven properties to the joint venture with Cindat. These seven hotels contributed the following operating revenues to our consolidated hotel portfolio for the six months ended June 30, 2016 compared to the six months ended June 30, 2015.
|
|
|
|
|
|
|
|
|
|
|
|
|
Brand
|
|
Location
|
|
Disposition Date (Contribution to JV)
|
|
Rooms
|
|
|
Six Months Ended June 30, 2016
|
|
|
Six Months Ended June 30, 2015
|
Hampton Inn Herald Square
|
|
New York, NY
|
|
April 29, 2016
|
|
136
|
|
|
2,175
|
|
|
4,786
|
Hampton Inn Chelsea
|
|
New York, NY
|
|
April 29, 2016
|
|
144
|
|
|
2,626
|
|
|
5,186
|
Hampton Inn Times Square
|
|
New York, NY
|
|
April 29, 2016
|
|
184
|
|
|
3,029
|
|
|
6,302
|
Holiday Inn Express Times Square
|
|
New York, NY
|
|
April 29, 2016
|
|
210
|
|
|
3,720
|
|
|
7,189
|
Candlewood Suites Times Square
|
|
New York, NY
|
|
April 29, 2016
|
|
188
|
|
|
3,028
|
|
|
5,836
|
Holiday Inn Express Water Street
|
|
New York, NY
|
|
April 29, 2016
|
|
112
|
|
|
1,773
|
|
|
3,297
|
Holiday Inn Wall Street
|
|
New York, NY
|
|
April 29, 2016
|
|
113
|
|
|
1,758
|
|
|
3,425
|
|
|
|
|
|
|
1,087
|
|
$
|
18,109
|
|
$
|
36,021
|
Expenses
Total hotel operating expenses increased
8
.3% to approximately $131,618
for the
six
months ended
June 30, 2016 from $121,489
for the
six
months ended
June 30, 2015. Consistent with the increase in hotel operating revenues, hotel operating expenses increased primarily due to the acquisitions consummated since June 30, 2015, as mentioned above. The acquisitions also resulted in an increase in depreciation and amortization of
5
.4%, or $1,974, to $38,555
for the
six
months ended
June 30, 2016 from $36,581
for the
six
months ended
June 30, 2015. Real estate and personal property tax and property insurance increased $613,
or
3
.7%, for the
six
months ended
June 30, 2016 when compared to the same period in 2015. This increase is due to an overall increase in tax assessments and tax rates as the economy improves, but was partially offset by reductions resulting from our management of this expense.
With the disposition of the hotels contributed to the joint venture with Cindat, hotel operating expenses, depreciation and amortization, and real estate and property insurance decreased by $7,401, $1,871 and
$1,357, respectively
.
General and administrative expense increased
21
.3%, or
by approximately $2,085,
from $9,770
in the
six
months ended
June 30, 2015 to $11,855
for the same period in 2016. General and administrative expense includes expense related to non-cash share based payments issued as incentive compensation to the Company’s trustees, executives, and employees. Expense related to
share based compensation increased $1,085
when comparing the six months ended June 30, 2016 to the same period in 2015.
This increase in share based compensation expense is primarily related to the issuance of share awards under the 2013 Multi-Year LTIP during the six months ended June 30, 2016 as the performance period ended December 31, 2015.
Please refer to “Note 8 – Share Based Payments” of the notes to the consolidated financial statements for more information about our stock based compensation.
Amounts recorded on
our consolidated statement of operations for acquisition and terminated transaction costs will fluctuate from period to period based on our acquisition activities. Acquisition and terminated transaction costs typically consist of transfer taxes, legal fees and other costs associated with acquiring a hotel property and transactions that were terminated during the year. Acquisition and
terminated transaction costs increased
$1,25
5
from
$308
for the
six
months ended
June 30, 2015 to
$1,56
3
for the same period in 2016. The costs incurred in 2016 were primarily related to our acquisition of the
Sanctuary Beach Resort, Marina, CA, and the Hilton Garden Inn M Street in Washington, DC, while the costs incurred in 2015 primarily related to our acquisition of St. Gregory Hotel in Washington, DC. Also included
in acquisition and terminated transactions costs are charges related to transactions that were terminated during the period.
Operating Income
Operating income for the
six
months ended
June 30, 2016 was $32,095
compared to operating income of $36,647
during the same period in 2015.
O
perating income was
negatively
impacted by the
dispositions of the hotel properties noted above.
Interest Expense
Interest expense increased $2,179
from $21,323
for the
six
months ended
June 30, 2015 to $23,502
for the
six
months ended
June 30, 2016. The increase in interest expense is primarily due to increased borrowings drawn on our unsecured credit facilities and increased mortgage payables. As mentioned previously, we paid down approximately $289,133 in consolidated mortgage and credit facility debt with proceeds of the
disposition and simultaneous contribution of seven hotel properties to the joint venture with Cindat. This reduced interest expense for the period from April 29, 2016 to June 30, 2016.
Gain on Disposition of Hotel Properties
During the six months ended June 30, 2016, the Company recorded a gain of $
95,276 related to the Cindat joint v
enture transaction
and the sale of the Hyatt Place, King of Prussia, PA
. Please refer to “Note 3 – Investment in Unconsolidated Joint Ventures” of the notes to the consolidated financial statements for more information about the Cindat joint venture.
Unconsolidated Joint Venture Investments
The income from unconsolidated joint ventures consists of our interest in the operating results of the properties we own in joint ventures. Income from our unconsolidated joint ventures increased by
$1,055
to $1,307
for the six months ended June 30, 2016 compared to $252 during the same period in 2015,
due to the income we recognized on our preferred equity interest in the Cindat joint venture, and
by improvements in the markets of the hotels owned by our unconsolidated joint venture investments, particularly the Boston market where two of these hotels are located.
Income Tax Benefit
During the
six
months ended
June 30, 2016, the Company
recorded an income tax benefit
of $
3,070
compared to an income tax benefit of $109
for the
six
months ended
June 30, 2015.
Net Income
Applicable to Common Shareholders
Net income
applicable to common shareholders for the
six
months ended
June 30, 201
6
was
$
90,869
compared to
income
of $
8
,
097
during the same
period in 201
5
.
This increase in net
income
was
primarily caused by
the gain of $95,276 realized on the Cindat joint venture transaction and the sale of the Hyatt Place, King of Prussia, PA.
Please refer to “Note
3
–
Investment in Unconsolidated Joint Ventures
” of the notes to the consolidated financial statements for
more information about the Cindat joint venture
.
Comprehensive Income Attributable to Common Shareholders
Comprehensive income attributable to common shareholders for the six months ended June 30, 201
6
was $
90,648
compared to comprehensive income of $
7
,
476
for the same period in 201
5
. This amount was primarily attributable to net income offset by gains
on disposition of hotel properties
as more fully described above. For the six months ended June 30, 201
6
, we recorded comprehensive income of $
106
,
319
compared to $
14
,
616
of
c
omprehensive income for the six months ended June 30, 201
5
.
The
increase in comprehensive income
was prim
arily due to the $91,303 increase
in net
income.
LIQUIDITY, CAPITAL RESOURCES, AND EQUITY OFFERINGS
(dollars in thousands, except per share data)
Potential Sources of Capital
Our organizational documents do not limit the amount of indebtedness that we may incur. Our ability to incur additional debt is dependent upon a number of factors, including the current state of the overall credit markets, our degree of leverage and borrowing restrictions imposed by existing lenders. Our ability to raise funds through the issuance of debt and equity securities is dependent upon, among other things, capital market volatility, risk tolerance of investors, general market conditions for REITs and market perceptions related to the Company’s ability to generate cash flow and positive returns on its investments.
In addition, our mortgage indebtedness contains various financial and non-financial covenants customarily found in secured, nonrecourse financing arrangements. If the specified criteria are not satisfied, the lender may be able to escrow cash flow generated by the property securing the applicable mortgage loan. We have determined that certain debt service coverage ratio covenants contained in the loan agreements securing
two
of our hotel properties were not met as of
June 30
, 201
6
. Pursuant to the loan agreements, certain lenders have elected to escrow the operating cash flow for these properties. However, these covenants do not constitute an event of default for these loans. Future deterioration in market conditions could cause restrictions in our access to the cash flow of additional properties.
We maintain a Credit Facility with Citigroup Global Markets Inc. and various other lenders. The credit agreement provides for a $500,000 senior unsecured credit facility consisting of a $250,000 senior unsecured revolving line of credit and a $250,000 senior unsecured term loan. The Credit Facility expires on February 28, 2018 and, provided no event of default has occurred, we may request that the lenders renew the credit facility for an additional one-year period. The Credit Facility is also expandable to $850,000 at our request, subject to the satisfaction of certain conditions. On August 10, 2015, we entered into a $300,000 Second Term Loan with Citigroup Global Markets I
nc. and various other lenders.
As of June 30, 2016, the outstanding balance under the First Term Loan was $210,520, under the Second Term Loan was $300,000
and we had no
outstanding borrowings under the Line of Credit. As of June 30, 2016, our remaining borrowing capacity under
the Credit Facility and Second Term Loan w
as $
246,710
wh
ich is based on certain operating metrics of unencumbered hotel properties designated as borrowing base
assets. We intend to repay indebtedness incurred under the Credit Facility and the Second Term Loan
out of cash flow and from the proceeds of issuances of additional common and preferred shares and potentially other securities and from proceeds from dispositions.
We will continue to monitor our debt maturities to manage our liquidity needs. However, no assurances can be given that we will be successful in refinancing all or a portion of our future debt obligations due to factors beyond our control or that, if refinanced, the terms of such debt will not vary from the existing terms. As of June 30, 2016, we
have $92,807 of ind
ebtedness maturing on or before December 31, 2016. We currently expect that cash requirements for all debt that is not refinanced by our existing lenders for which the maturity date is not extended will be met through a combination of cash on hand, refinancing the existing debt with new lenders, draws on the Line of Credit and the issuance of our securities.
In addition to the incurrence of debt and the offering of equity securities, dispositions of property or investment from a joint venture partner may serve as additional capital resources and sources of liquidity. We may recycle capital from stabilized assets, as evidenced by our recently completed transaction involving the Cindat JV Properties, or from sales of non-core hotels in secondary and tertiary markets. Capital from these types of transactions is intended to be redeployed into high growth acquisitions, share buybacks, or to pay down existing debt.
Common Share Repurchase Plan
In October 2015, our Board of Trustees authorized a new share repurchase program for up to $100,000 of common shares which commenced upon the completion of the previous program. The new program will expire on December 31, 2016 unless extended by the Board of Trustees. We may seek Board of Trustee
s
approval to increase the 2016 authorization. For the
six
months ended
June 30
, 2016, the Company repurchased
2,072,007
common shares for an aggregate purchase price of $
39,127
. Upon repurchase by the Company, these common shares ceased to be outstanding and became authori
zed but unissued common shares.
Acquisitions
During the six months ended June 30, 2016, we acquired the following wholly-owned hotel properties:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hotel
|
|
Acquisition Date
|
|
|
Land
|
|
|
Buildings and Improvements
|
|
|
Furniture Fixtures and Equipment
|
|
|
Other Intangibles
|
|
|
Loan Costs
|
|
|
Total Purchase Price
|
|
|
Assumption of Debt
|
|
Sanctuary Beach Resort, Marina, CA
|
|
1/28/2016
|
|
$
|
20,014
|
|
$
|
17,093
|
|
$
|
2,369
|
|
$
|
-
|
|
$
|
198
|
|
$
|
39,674
|
|
$
|
14,750
|
*
|
Hilton Garden Inn M Street, Washington, DC
|
|
3/9/2016
|
|
|
30,131
|
|
|
65,971
|
|
|
9,621
|
|
|
874
|
**
|
|
-
|
|
|
106,597
|
|
|
-
|
|
TOTAL
|
|
|
|
$
|
50,145
|
|
$
|
83,064
|
|
$
|
11,990
|
|
$
|
874
|
|
$
|
198
|
|
$
|
146,271
|
|
$
|
14,750
|
|
*Assumption of debt includes a $50 premium resulting from the determination that the stated rate of interest is above market rates on the date of acquisition
**
Includes a
n intangible asset for a
lease-in-place of $648
,
advance bookings of
$76 a
nd franchise fees of $150.
We intend to invest in additional hotels only as suitable opportunities arise and adequate sources of financing are available. We expect that future investments in hotels will depend upon and will be financed by, in whole or in part, our existing cash, the proceeds from additional issuances of common or preferred shares, proceeds from the sale of assets, issuances of Common Units, issuances of preferred units or other securities or borrowings
secured by hotel assets and under our Line of Credit.
Operating Liquidity and Capital Expenditures
We expect to meet our short-term liquidity requirements generally through net cash provided by operations, existing cash balances and, if necessary, short-term borrowings under the
Line of Credit
. We believe that the net cash provided by operations in the coming year and borrowings drawn on the
Line of Credit
will be adequate to fund the Company’s operating requirements, monthly recurring debt service and the payment of dividends in accordance with REIT requirements of the Internal Revenue Code of 1986, as amended.
To qualify as a REIT, we must distribute annually at least 90% of our taxable income. This distribution requirement limits our ability to retain earnings and requires us to raise additional capital in order to grow our business and acquire additional hotel properties. However, there is no assurance that we will be able to borrow funds or raise additional equity capital on terms acceptable to us, if at all. In addition, we cannot guarantee that we will continue to make distributions to our shareholders at the current rate or at all. Due to the seasonality of our business, cash provided by operating activities fluctuates significantly from quarter to quarter. However, we
believe that, based on our current estimates, which include the addition of cash
from operations
provided by hotels acquired during 201
6
, our cash provided by operating activities will be sufficient over the next 12 months to fund the payment of our dividend at its current level. However, our Board of Trustees continues to evaluate the dividend policy in the context of our overall liquidity and market conditions and may
elect to reduce or suspend these distributions. Net cash provided by operating activities for the six months ended June 30, 2016 was $
42,697
and cash used for the payment of distributions and dividends for the six months ended June 30, 2016 was $
35,474
.
We also project that our operating cash flow and available borrowings under the Line of Credit will be sufficient to satisfy our liquidity and other capital needs over the next twelve to eighteen months.
Our long-term liquidity requirements consist primarily of the costs of acquiring additional hotel properties, renovation and other non-recurring capital expenditures that need to be made periodically with respect to hotel properties and scheduled debt repayments. We will seek to satisfy these long-term liquidity requirements through various sources of capital, including borrowings under the Line of Credit and through secured, non-recourse mortgage financings with respect to our unencumbered hotel properties. In addition, we may seek to raise capital through public or private offerings of our securities. Certain factors may have a material adverse effect on our ability to access these capital sources, including our degree of leverage, the value of our unencumbered hotel properties and borrowing restrictions imposed by lenders or franchisors. We will continue to analyze which source of capital is most advantageous to us at any particular point in time, but financing may not be consistently available to us on terms that are attractive, or at all.
Spending on capital improvements during the
six
months ended June 30, 2016 increased when compared to spending on capital improvements during the
six
months ended
June 30, 2015. During the six
months ended June 30, 2016, we spent $
18,276
on capital expenditures to renovate, improve or replace assets at our hotels. This compares to $
12,168
during the same period in 2015. These capital expenditures were undertaken to comply with brand mandated improvements and to initiate projects that we believe will generate a return on investment to take advantage of the continuing recovery in the lodging sector.
In addition t
o capital reserves required under certain loan agreements and capital expenditures to renovate, improve or replace assets at our hotels, we have opportunistically engaged in hotel development projects. During the
six
months ended June 30, 2016, we spent $0 on hotel development projects compared to $916 during the
same period of 2015.
We may spend additional amounts, if necessary, to comply with the reasonable requirements of any franchise license under which any of our hotels operate and otherwise to the extent we deem such expenditures to be in our best interests. We are also obligated to fund the cost of certain capital improvements to our hotels. We expect to use operating cash flow, borrowings under the Line of Credit, and proceeds from issuances of our securities to pay for the cost of capital improvements and any furniture, fixture and equipment requirements in excess of the set aside referenced above.
CASH FLOW ANALYSIS
(dollars in thousands, except per share data)
Comparison of the
Six
Months
Ended
June 30
, 2016
and 2015
Net cash provided by operating activities
decreas
ed
$
9,590
from $
52,287
for the six months ended June 30, 2015 to
$
42,697
for the com
parable period in 2016. Net income
, adjusted for non-cash items reflected in the statement of cash flows for the six months ende
d
June 30, 2016
and 201
5, decreased
by $
2,820
for the
six
months ended
June 30, 2016
whe
n compared to 2015 partially driven by the disposition and subsequent contribution of seven hotel properties located in New York City to an unconsolidated joint venture with Cindat. Further, a net decrease in working capital assets provided additional cash from operating activities.
Net cash provided by
investing activities for the
six
months ended
June 30, 2016 was $
301,486
compared to net cash used in investing activities of
$
46,627
for the
six
months ended
June 30, 2015. During the six months ended June 30, 2016, we received $
428,811
in proceeds from contributions of seven hotel properties to the Cindat joint venture and disposed of one additional hotel property for $
12,446
. We did not have similar transactions during the six months ended June 30, 2015. Offsetting these sources of funds were $126,245 for the purchase of two hotel properties during the six months ended June 30, 2016 compared to $33,511 for the purchase of one hotel property during the six months ended June 30, 2015.
Net cash used in
financing activities for the
six
months ended
June 30, 2016
was $
136,036
comp
ared to net cash provided by
financing activities for the
six
months ended
June 30, 2015 of $826
. This is primarily due to
$131,190 in repayments in borrowings under the line of credit, unsecured term loan and mortgages payable from proceeds from the disposition of seven hotel properties to the Cindat joint venture during the six months ended June 30, 2016. During the six months ended June 30, 2015, we received proceeds from borrowings under the line of credit of $128,500 and repayments of mortgages payable of $121,113 during the same period in 2015. In addition, we redeemed our Series B Preferred Shares in June 2016 for $115,000. Offsetting this was approximately $186,010 in proceeds from our Series D Preferred Shares offering. In addition,
dividends an
d distributions payable de
creased $
646
during the
six
months ended
June 30, 2016
, compared to 201
5
, due to
the reduction of dividends paid on common shares due to our common share repurchases, but offset by the increase in dividends paid on common shares as a result of our Series D Preferred Shares offering.
OFF BALANCE SHEET ARRANGEMENTS
The Company does not have off balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
FUNDS FROM OPERATIONS
(in thousands, except share data)
The National Association of Real Estate Investment Trusts (“NAREIT”) developed Funds from Operations (“FFO”) as a non-GAAP financial measure of performance of an equity REIT in order to recognize that income-producing real estate historically has not depreciated on the basis determined under GAAP. We calculate FFO applicable to common shares and Common Units in accordance with the April 2002 National Policy Bulletin of NAREIT, which we refer to as the White Paper. The White Paper defines FFO as net income (loss) (computed in accordance with GAAP) excluding extraordinary items as defined under GAAP and gains or losses from sales of previously depreciated assets, plus certain non-cash items, such as loss from impairment of assets and depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Our interpretation of the NAREIT definition is that noncontrolling interest in net income (loss) should be added back to (deducted from) net income (loss) as part of reconciling net income (loss) to FFO. Our FFO computation may not be comparable to FFO reported by other REITs that do not compute FFO in accordance with the NAREIT definition, or that interpret the NAREIT definition differently than we do.
The GAAP measure that we believe to be most directly comparable to FFO, net income (loss) applicable to common shareholders, includes loss from the impairment of certain depreciable assets, our investment in unconsolidated joint ventures and land, depreciation and amortization expenses, gains or losses on property sales, noncontrolling interest and preferred dividends. In computing FFO, we eliminate these items because, in our view, they are not indicative of the results from our property operations. We determined that the loss from the impairment of certain depreciable assets including investments in unconsolidated joint ventures and land, was driven by a measurable decrease in the fair value of certain hotel properties and other assets as determined by our analysis of those assets in accordance with applicable GAAP. As such, these impairments have been eliminated from net loss to determine FFO.
FFO does not represent cash flows from operating activities in accordance with GAAP and should not be considered an alternative to net income as an indication of the Company’s performance or to cash flow as a measure of liquidity or ability to make distributions. We consider FFO to be a meaningful, additional measure of operating performance because it excludes the effects of the assumption that the value of real estate assets diminishes predictably over time, and because it is widely used by industry analysts as a performance measure. We show both FFO from consolidated hotel operations and FFO from unconsolidated joint ventures because we believe it is meaningful for the investor to understand the relative contributions from our consolidated and unconsolidated hotels. The display of both FFO from consolidated hotels and FFO from unconsolidated joint ventures allows for a detailed analysis of the operating performance of our hotel portfolio by management and investors. We present FFO applicable to common shares and Common Units because our Common Units are redeemable for common shares. We believe it is meaningful for the investor to understand FFO applicable to all common shares and Common Units.
The following table reconciles FFO for the periods presented to the most directly comparable GAAP measure, net income, for the same periods
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30, 2016
|
|
|
June 30, 2015
|
|
|
June 30, 2016
|
|
|
June 30, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common shareholders
|
|
$
|
102,190
|
|
$
|
15,632
|
|
$
|
90,869
|
|
$
|
8,097
|
Income allocated to noncontrolling interest
|
|
|
4,748
|
|
|
405
|
|
|
4,061
|
|
|
(38)
|
Income from unconsolidated joint ventures
|
|
|
(1,521)
|
|
|
(526)
|
|
|
(1,307)
|
|
|
(252)
|
Gain on disposition of hotel properties
|
|
|
(95,276)
|
|
|
-
|
|
|
(95,276)
|
|
|
-
|
Depreciation and amortization
|
|
|
18,495
|
|
|
18,328
|
|
|
38,555
|
|
|
36,581
|
Funds from consolidated hotel operations
applicable to common shareholders and Common Units
|
|
|
28,636
|
|
|
33,839
|
|
|
36,902
|
|
|
44,388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from unconsolidated joint ventures
|
|
|
1,521
|
|
|
526
|
|
|
1,307
|
|
|
252
|
Depreciation and amortization of purchase price
in excess of historical cost
(1)
|
|
|
(91)
|
|
|
121
|
|
|
29
|
|
|
241
|
Interest in depreciation and amortization
of unconsolidated joint ventures
(2)
|
|
|
3,434
|
|
|
1,680
|
|
|
4,711
|
|
|
2,773
|
Funds from unconsolidated joint ventures operations
applicable to common shareholders and Common Units
|
|
|
4,864
|
|
|
2,327
|
|
|
6,047
|
|
|
3,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds from Operations
applicable to common shareholders and Common Units
|
|
$
|
33,500
|
|
$
|
36,166
|
|
$
|
42,949
|
|
$
|
47,654
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Common Shares and Common Units
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
43,427,726
|
|
|
48,530,716
|
|
|
43,903,526
|
|
|
49,053,846
|
Diluted
|
|
|
46,047,585
|
|
|
50,940,423
|
|
|
46,505,229
|
|
|
51,443,025
|
(1)
Adjustment made to add depreciation of purchase price in excess of historical cost of the assets in the unconsolidated joint venture at the time of our investment.
(2)
Adjustment made to add our interest in real estate related depreciation and amortization of our unconsolidated joint ventures. Allocation of depreciation and amortization is consistent with allocation of income and loss.
B
ased on guidance provided by NAREIT, we have eliminated loss from the impairment of certain depreciable assets, including investments in unconsolidated joint ventures and land, from net loss to arrive at FFO in each year presented.
INFLATION
Operators of hotel properties, in general, possess the ability to adjust room rates daily to reflect the effects of inflation. However, competitive pressures may limit the ability of our management companies to raise room rates.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The estimates and assumptions made by management in applying critical accounting policies have not changed materially during 201
6
and 201
5
and none of the estimates or assumptions have proven to be materially incorrect or resulted in our recording any significant adjustments relating to prior periods. See Item 7 of our Annual Report on Form 10-K for the year ended December 31, 201
5
for a summary of the accounting policies that management believes are critical to the preparation of the consolidated financial statements.
Revenue Recognition
Approximately 100% of our revenues are derived from hotel room revenues and revenue from other hotel operating departments. We directly recognize revenue and expense for all consolidated hotels as hotel operating revenue and hotel operating expense when earned and incurred. These revenues are recorded net of any sales or occupancy taxes collected from our guests. All revenues are recorded on an accrual basis, as earned. We participate in frequent guest programs sponsored by the brand owners of our hotels and we expense the charges associated with those programs, as incurred.
Other revenues consist primarily of fees earned for asset management services provided to hotels we own through unconsolidated joint ventures. Fees are earned as a percentage of hotel revenue and are recorded in the period earned.
Investment in Hotel Properties
Investments in hotel properties are recorded at cost. Improvements and replacements are capitalized when they extend the useful life of the asset. Costs of repairs and maintenance are expensed as incurred. Depreciation is computed using the straight-line method over the estimated useful life of up to 40 years for buildings and improvements, two to seven years for furniture, fixtures and equipment. We are required to make subjective assessments as to the useful lives of our properties for purposes of determining the amount of depreciation to record on an annual basis with respect to our investments in hotel properties. These assessments have a direct impact on our net income because if we were to shorten the expected useful lives of our investments in hotel properties we would depreciate these investments over fewer years, resulting in more depreciation expense and lower net income on an annual basis.
Most identifiable assets, liabilities,
and
noncon
trolling interests
related to hotel properties acquired in a business combination are recorded at full fair value. Estimating techniques and assumptions used in determining fair values involve significant estimates and judgments. These estimates and judgments have a direct impact on the carrying value of our assets and liabilities which can directly impact the amount of depreciation expense recorded on an annual basis and could have an impact on our assessment of potential impairment of our investment in hotel properties.
P
roperties intended to be sold are designated as “held for sale” on the balance sheet
.
In accordance with
ASU Update No. 2014-08 concerning the classification and reporting of discontinued operations
, we evaluate each disposition to determine whether we need to classify the disposition as discontinued operations.
This amendment defines discontinued operations as a component of an entity that represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial re
sults. W
e anticipate that most of our hotel dispositions will not be classified as discontinued operations as most will not fit this definition.
Based on the occurrence of certain events or changes in circumstances, we review the recoverability of the property’s carrying value. Such events or changes in circumstances include the following:
|
·
|
|
a significant decrease in the market price of a long-lived asset;
|
|
·
|
|
a significant adverse change in the extent or manner in which a long-lived asset is being used or in its physical condition;
|
|
·
|
|
a significant adverse change in legal factors or in the business climate that could affect the value of a long-lived asset, including an adverse action or assessment by a regulator;
|
|
·
|
|
an accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset;
|
|
·
|
|
a current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset; and
|
|
·
|
|
a current expectation that, it is more likely than not that, a long-lived asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life.
|
We review our portfolio on an on-going basis to evaluate the existence of any of the aforementioned events or changes in circumstances that would require us to test for recoverability. In general, our review of recoverability is based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property’s use and eventual disposition. These estimates consider factors such as expected future operating income, market and other applicable trends and residual value expected, as well as the effects of hotel demand, competition and other factors. If impairment exists due to the inability to recover the carrying value of a property, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property. We are required to make subjective assessments as to whether there are impairments in the values of our investments in hotel properties.
As of
June 30, 2016
, based on our analysis, we have determined that the
estimated
future cash flow of each of the properties in our portfolio is sufficient to recover its carrying value.
Investment in Joint Ventures
Properties owned in joint ventures are consolidated if the determination is made that we are the primary beneficiary in a variable interest entity (VIE) or we maintain control of the asset through our voting interest or other rights in the operation of the entity. To determine if we are the primary beneficiary of a VIE, we evaluate whether we have a controlling financial interest in that VIE. An enterprise is deemed to have a controlling financial interest if it has i) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance, and ii) the obligation to absorb losses of the VIE that could be significant to the VIE or the rights to receive benefits from the VIE that could be significant to the VIE. Control can also be demonstrated by the ability of a member to manage day-to-day operations, refinance debt and sell the assets of the partnerships without the consent of the other member and the inability of the members to replace the managing member. This evaluation requires significant judgment.
If it is determined that we do not have a controlling interest in a joint venture, either through our financial interest in a VIE or our voting interest in a voting interest entity, the equity method of accounting is used. Under this method, the investment, originally recorded at cost, is adjusted to recognize our share of net earnings or losses of the affiliates as they occur rather than as dividends or other distributions are received, limited to the extent of our investment in, advances to and commitments for the investee. Pursuant to our joint venture agreements, allocations of profits and losses of some of our investments in unconsolidated joint ventures may be allocated disproportionately as compared to nominal ownership percentages due to specified preferred return rate thresholds.
The Company periodically reviews the carrying value of its investment in unconsolidated joint ventures to determine if circumstances exist indicating impairment to the carrying value of the investment that is other than temporary. When an impairment indicator is present, we will estimate the fair value of the investment. Our estimate of fair value takes into consideration factors such as expected future operating income, trends and prospects, as well as the effects of demand, competition and other factors. This determination requires significant estimates by management, including the expected cash flows to be generated by the assets owned and operated by the joint venture. Subsequent changes in estimates could impact the determination of whether impairment exists. To the extent impairment has occurred, the loss will be measured as the excess of the carrying amount over the fair value of our investment in the unconsolidated joint venture.
Accounting for Derivative Financial Investments and Hedging Activities
We use derivatives to hedge, fix and cap interest rate risk and we account for our derivative and hedging activities by recording all derivative instruments at fair value on the balance sheet. Derivative instruments designated in a hedge relationship to mitigate exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. We formally document all relationships between hedging instruments and hedged items, as well as our risk-management objective and strategy for undertaking each hedge transaction. Cash flow hedges that are considered highly effective are accounted for by recording the fair value of the derivative instrument on the balance sheet as either an asset or liability, with a corresponding amount recorded in other comprehensive income within shareholders’ equity. Amounts are reclassified from other comprehensive income to the income statements in the period or periods the hedged forecasted transaction affects earnings.
Under cash flow hedges, derivative gains and losses not considered highly effective in hedging the change in expected cash flows of the hedged item are recognized immediately in the income statement. For hedge transactions that do not qualify for the short-cut method, at the hedge’s inception and on a regular basis thereafter, a formal assessment is performed to determine whether changes in the cash flows of the derivative instruments have been highly effective in offsetting changes in cash flows of the hedged items and whether they are expected to be highly effective in the future.
New Accounting Pronouncements
In March 2016, the FASB issued ASU No. 2016-09,
Improvements to Employee Share
-Based Award Payment Accounting
, which simplifies various
aspects of how share-based payments are accounted for and presented in the financial statements. This standard requires companies to record all of the tax
effects related to share-based payments through the income statement, allows companies to elect an accounting policy to either estimate the share based
award forfeitures (and expense) or account for forfeitures (and expense) as they occur, and allows companies to withhold
a percentage of
the shares
issuable
upon settlement of an award up to the maximum individual
statutory tax rate without causing the award to be classified as
a
liability. The new standard is effective for the Company
on January 1, 2017. Early adoption is permitted. The Company is evaluating the effect that ASU No. 2016-09 will have on its consolidated financial
statements and related disclosures.
We adopted ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs, on January 1, 2016. This standard requires debt issuance costs to be presented in the balance sheet as a direct deduction from the associated debt liability. Previously, debt issuance costs were recorded as an asset. The issuance costs will continue to be amortized over the life of the debt instrument and recorded in interest expense, as they were prior to the new standard. As part of this adoption, debt issuance costs are now included as an offset to the mortgages, unsecured term loan and unsecured notes payable line items on the consolidated balance sheets for all periods presented. For full reclassification amounts, see “Note 5 – Debt”.
On May 28, 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. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for the Company on January 1, 201
8
. Early adoption
is permitted, but not prior to the original effective date of January 1, 2017
. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU No. 2014-09 will have on its consolidated financial statements and related disclosures.
The Company continues to evaluate this standard and the impact it will have, if any, on our ongoing financial reporting.
On Januar
y 1, 2016, we adopted ASU No. 2015-02, Consolidation – Amendments to the Consolidation Analysis. We
evaluated the application of ASU No. 2015-02 and concluded that no change was required to our accounting of our interests in less than wholly owned joint ventures. However, HHLP, our operating partnership, now meets the criteria as a variable interest entity. The Company’s most significant asset is its investment in HHLP, and consequently, substantially all of the Company’s assets and liabilities represent those assets and liabilities of HHLP.