Debt Summary
Debt as of
September 30, 2016
and
December 31, 2015
consisted of the following:
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Balance Outstanding as of
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Debt
|
|
Interest
Rate
|
|
Maturity
Date
|
|
September 30,
2016
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|
December 31,
2015
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Credit facilities
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|
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Senior unsecured credit facility
|
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Floating
(a)
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|
January 2018
(a)
|
|
$
|
0
|
|
|
$
|
21,000
|
|
LHL unsecured credit facility
|
|
Floating
(b)
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|
January 2018
(b)
|
|
0
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|
|
0
|
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Total borrowings under credit facilities
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|
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|
|
0
|
|
|
21,000
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Term loans
|
|
|
|
|
|
|
|
|
Second Term Loan
|
|
Floating/Fixed
(c)
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|
January 2019
|
|
300,000
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|
300,000
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Third Term Loan
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Floating/Fixed
(c)
|
|
January 2021
|
|
555,000
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|
|
555,000
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Debt issuance costs, net
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|
|
|
|
|
(2,382
|
)
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|
(2,797
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)
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Total term loans, net of unamortized debt issuance costs
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|
|
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852,618
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|
852,203
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Massport Bonds
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Hyatt Regency Boston Harbor (taxable)
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Floating
(d)
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|
March 2018
|
|
5,400
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|
5,400
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|
Hyatt Regency Boston Harbor (tax exempt)
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|
Floating
(d)
|
|
March 2018
|
|
37,100
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|
|
37,100
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Debt issuance costs, net
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|
|
|
|
|
(55
|
)
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|
(184
|
)
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Total bonds payable, net of unamortized debt issuance costs
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|
|
|
42,445
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|
|
42,316
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Mortgage loans
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|
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|
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Westin Michigan Avenue
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|
5.75%
|
|
-
(e)
|
|
0
|
|
|
131,262
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|
Indianapolis Marriott Downtown
|
|
5.99%
|
|
-
(e)
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|
0
|
|
|
96,097
|
|
The Roger
|
|
6.31%
|
|
-
(f)
|
|
0
|
|
|
58,935
|
|
Westin Copley Place
|
|
Floating
(g)
|
|
August 2018
|
|
225,000
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|
|
225,000
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Debt issuance costs, net
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|
|
|
|
|
(1,739
|
)
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|
(2,490
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)
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Total mortgage loans, net of unamortized debt issuance costs
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|
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223,261
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|
508,804
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Total debt
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|
|
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$
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1,118,324
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|
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$
|
1,424,323
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(a)
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Borrowings bear interest at floating rates equal to, at the Company’s option, either (i) LIBOR plus an applicable margin, or (ii) an Adjusted Base Rate (as defined in the credit agreement) plus an applicable margin. There were
no
borrowings outstanding at
September 30, 2016
. As of
December 31, 2015
, the rate, including the applicable margin, for the Company’s outstanding LIBOR borrowing of
$21,000
was
2.13%
. The Company has the option, pursuant to certain terms and conditions, to extend the maturity date for
two
six
-month extensions.
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(b)
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Borrowings bear interest at floating rates equal to, at LHL’s option, either (i) LIBOR plus an applicable margin, or (ii) an Adjusted Base Rate (as defined in the credit agreement) plus an applicable margin. There were
no
borrowings outstanding at
September 30, 2016
and
December 31, 2015
. LHL has the option, pursuant to certain terms and conditions, to extend the maturity date for
two
six
-month extensions.
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|
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(c)
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Term loans bear interest at floating rates equal to LIBOR plus an applicable margin. The Company entered into separate interest rate swap agreements for the full
seven
-year term of the First Term Loan (as defined below) and a
five
-year term ending in August 2017 for the Second Term Loan (as defined below), resulting in fixed all-in interest rates. On November 5, 2015, the Company repaid the First Term Loan and entered into the Third Term Loan (as defined below). The Company entered
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into separate interest rate swap agreements with an aggregate notional amount of
$377,500
for the full term of the Third Term Loan. The interest rate swaps for the First Term Loan continue to be in place and were redesignated as hedging instruments through May 2019 for the Third Term Loan. At
September 30, 2016
and
December 31, 2015
, the fixed all-in interest rates for the Second Term Loan and Third Term Loan were
2.38%
and
2.95%
, respectively, at the Company’s current leverage ratio (as defined in the swap agreements).
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(d)
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The Massport Bonds are secured by letters of credit issued by U.S. Bank National Association that were extended to September 2017. The letters of credit have
two
one
-year extension options, one of which was exercised in July 2016, and are secured by the Hyatt Regency Boston Harbor. The letters of credit cannot be extended beyond the Massport Bonds’ maturity date. The bonds bear interest based on weekly floating rates. The interest rates as of
September 30, 2016
were
0.88%
and
0.89%
for the
$5,400
and
$37,100
bonds, respectively. The interest rates as of
December 31, 2015
were
0.39%
and
0.02%
for the
$5,400
and
$37,100
bonds, respectively. The Company incurs an annual letter of credit fee of
1.35%
.
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|
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(e)
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The Company repaid the mortgage loans on January 4, 2016 through borrowings on its senior unsecured credit facility.
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(f)
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The Company repaid the mortgage loan on February 11, 2016 through borrowings on its senior unsecured credit facility.
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(g)
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The mortgage loan matures on August 14, 2018 with
three
options to extend the maturity date to January 5, 2021, pursuant to certain terms and conditions. The interest-only mortgage loan bears interest at a variable rate ranging from LIBOR plus
1.75%
to LIBOR plus
2.00%
, depending on Westin Copley Place’s net cash flow (as defined in the loan agreement). The interest rate as of
September 30, 2016
was LIBOR plus
1.75%
, which equaled
2.28%
. The interest rate as of
December 31, 2015
was LIBOR plus
1.75%
, which equaled
2.09%
. The mortgage loan allows for prepayments without penalty, subject to certain terms and conditions.
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Future scheduled debt principal payments as of
September 30, 2016
are as follows:
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2016
|
$
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0
|
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2017
|
0
|
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2018
|
267,500
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2019
|
300,000
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|
2020
|
0
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Thereafter
|
555,000
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Total debt
|
$
|
1,122,500
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A summary of the Company’s interest expense and weighted average interest rates for unswapped variable rate debt for the
three and nine months ended
September 30, 2016
and
2015
is as follows:
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For the three months ended
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|
For the nine months ended
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|
September 30,
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September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Interest Expense:
|
|
|
|
|
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|
|
Interest incurred
|
$
|
9,552
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|
|
$
|
12,735
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|
|
$
|
31,421
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|
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$
|
39,479
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|
Amortization of debt issuance costs
|
841
|
|
|
703
|
|
|
2,554
|
|
|
1,799
|
|
Capitalized interest
|
(61
|
)
|
|
(188
|
)
|
|
(294
|
)
|
|
(488
|
)
|
Interest expense
|
$
|
10,332
|
|
|
$
|
13,250
|
|
|
$
|
33,681
|
|
|
$
|
40,790
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|
|
|
|
|
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Weighted Average Interest Rates for Unswapped Variable Rate Debt:
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|
|
|
|
|
|
Senior unsecured credit facility
|
2.17
|
%
|
|
1.89
|
%
|
|
2.14
|
%
|
|
1.89
|
%
|
LHL unsecured credit facility
|
N/A
|
|
|
1.90
|
%
|
|
2.13
|
%
|
|
1.88
|
%
|
Massport Bonds
|
0.55
|
%
|
|
0.05
|
%
|
|
0.36
|
%
|
|
0.06
|
%
|
Mortgage loan (Westin Copley Place)
|
2.25
|
%
|
|
2.20
|
%
|
|
2.20
|
%
|
|
2.20
|
%
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Credit Facilities
On January 8, 2014, the Company refinanced its
$750,000
senior unsecured credit facility with a syndicate of banks. The credit facility matures on January 8, 2018, subject to
two
six
-month extensions that the Company may exercise at its option, pursuant to certain terms and conditions, including payment of an extension fee. The credit facility, with a current commitment of
$750,000
, includes an accordion feature which, subject to certain conditions, entitles the Company to request additional lender
commitments, allowing for total commitments up to
$1,050,000
. Borrowings under the credit facility bear interest at floating rates equal to, at the Company’s option, either (i) LIBOR plus an applicable margin, or (ii) an Adjusted Base Rate (as defined in the credit agreement) plus an applicable margin. Additionally, the Company is required to pay a variable unused commitment fee of
0.25%
or
0.30%
of the unused portion of the credit facility, depending on the average daily unused portion of the credit facility.
On January 8, 2014, LHL also refinanced its
$25,000
unsecured revolving credit facility to be used for working capital and general lessee corporate purposes. The LHL credit facility matures on January 8, 2018, subject to
two
six
-month extensions that LHL may exercise at its option, pursuant to certain terms and conditions, including payment of an extension fee. Borrowings under the LHL credit facility bear interest at floating rates equal to, at LHL’s option, either (i) LIBOR plus an applicable margin, or (ii) an Adjusted Base Rate (as defined in the credit agreement) plus an applicable margin. Additionally, LHL is required to pay a variable unused commitment fee of
0.25%
or
0.30%
of the unused portion of the credit facility, depending on the average daily unused portion of the LHL credit facility.
The Company’s senior unsecured credit facility and LHL’s unsecured credit facility contain certain financial covenants relating to net worth requirements, debt ratios and fixed charge coverage and other limitations that restrict the Company’s ability to make distributions or other payments to its shareholders upon events of default.
Term Loans
On May 16, 2012, the Company entered into a
$177,500
unsecured term loan (the “First Term Loan”) with a
seven
-year term maturing on May 16, 2019. The First Term Loan bears interest at a variable rate, but was hedged to a fixed interest rate. On November 5, 2015, the Company repaid the First Term Loan and redesignated the interest rate swaps as hedging instruments for the Third Term Loan as described below.
On January 8, 2014, the Company refinanced its
$300,000
unsecured term loan (the “Second Term Loan”). The Second Term Loan includes an accordion feature, which subject to certain conditions, entitles the Company to request additional lender commitments, allowing for total commitments up to
$500,000
. The Second Term Loan has a
five
-year term maturing on January 8, 2019 and bears interest at variable rates, but was hedged to a fixed interest rate based on the Company’s current leverage ratio (as defined in the swap agreements), which interest rate was
2.38%
at
September 30, 2016
, through August 2, 2017 (see “Derivative and Hedging Activities” below).
On November 5, 2015, the Company entered into a
$555,000
unsecured term loan (the “Third Term Loan”) with a
five
-year term maturing on January 29, 2021. The Third Term Loan includes an accordion feature, which subject to certain conditions, entitles the Company to request additional lender commitments, allowing for total commitments up to
$700,000
. The Third Term Loan bears interest at a variable rate, but was hedged to a fixed interest rate based on the Company’s current leverage ratio (as defined in the swap agreements), which interest rate was
2.95%
at
September 30, 2016
through May 16, 2019 for
$177,500
of the Third Term Loan and through January 29, 2021 for the remaining
$377,500
of the Third Term Loan (see “Derivative and Hedging Activities” below).
The Company’s term loans contain certain financial covenants relating to net worth requirements, debt ratios and fixed charge coverage and other limitations that restrict the Company’s ability to make distributions or other payments to its shareholders upon events of default.
Derivative and Hedging Activities
The Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. Unrealized gains and losses on the effective portion of hedging instruments are reported in other comprehensive income (loss) (“OCI”). Ineffective portions of changes in the fair value of a cash flow hedge are recognized as interest expense. Amounts reported in accumulated other comprehensive income (loss) (“AOCL”) related to currently outstanding derivatives are recognized as an adjustment to income (loss) as interest payments are made on the Company’s variable rate debt. Effective May 16, 2012, the Company entered into
three
interest rate swap agreements with an aggregate notional amount of
$177,500
for the First Term Loan’s full
seven
-year term, resulting in a fixed all-in interest rate based on the Company’s current leverage ratio (as defined in the swap agreements). As discussed above, the First Term Loan was repaid on November 5, 2015. The interest rate swaps for the First Term Loan continue to be in place and are designated as hedging instruments for the Third Term Loan. Effective August 2, 2012, the Company entered into
five
interest rate swap agreements with an aggregate notional amount of
$300,000
for the Second Term Loan through August 2, 2017, resulting in a fixed all-in interest rate based on the Company’s current leverage ratio (as defined in the swap agreements), which interest rate was
2.38%
at
September 30, 2016
. Effective November 5, 2015, the Company entered into
seven
interest rate
swap agreements with an aggregate notional amount of
$377,500
for the Third Term Loan’s full
five
-year term, resulting in a fixed all-in interest rate based on the Company’s current leverage ratio (as defined in the swap agreements), which interest rate was
2.95%
at
September 30, 2016
. The Company has designated its pay-fixed, receive-floating interest rate swap derivatives as cash flow hedges. The interest rate swaps were entered into with the intention of eliminating the variability of the terms loans, but can also limit the exposure to any amendments, supplements, replacements or refinancings of the Company’s debt.
The following tables present the effect of derivative instruments on the Company’s accompanying consolidated statements of operations and comprehensive income, including the location and amount of unrealized gain (loss) on outstanding derivative instruments in cash flow hedging relationships, for the
three and nine months ended
September 30, 2016
and
2015
:
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Amount of Gain (Loss) Recognized in OCI on Derivative Instruments
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|
Location of Loss Reclassified from AOCL into Net Income
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|
Amount of Loss Reclassified from AOCL into Net Income
|
|
|
(Effective Portion)
|
|
(Effective Portion)
|
|
(Effective Portion)
|
|
|
For the three months ended
|
|
|
|
|
For the three months ended
|
|
|
September 30,
|
|
|
|
|
September 30,
|
|
|
2016
|
|
2015
|
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|
2016
|
|
2015
|
Derivatives in cash flow hedging relationships:
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|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
3,172
|
|
|
$
|
(4,245
|
)
|
|
Interest expense
|
|
$
|
1,637
|
|
|
$
|
1,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Loss Recognized in OCI on Derivative Instruments
|
|
Location of Loss Reclassified from AOCL into Net Income
|
|
Amount of Loss Reclassified from AOCL into Net Income
|
|
|
(Effective Portion)
|
|
(Effective Portion)
|
|
(Effective Portion)
|
|
|
For the nine months ended
|
|
|
|
|
For the nine months ended
|
|
|
September 30,
|
|
|
|
|
September 30,
|
|
|
2016
|
|
2015
|
|
|
|
|
2016
|
|
2015
|
Derivatives in cash flow hedging relationships:
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
(17,051
|
)
|
|
$
|
(8,617
|
)
|
|
Interest expense
|
|
$
|
5,147
|
|
|
$
|
3,210
|
|
During the
nine months ended
September 30, 2016
and
2015
, the Company did not have any hedge ineffectiveness or amounts that were excluded from the assessment of hedge effectiveness recorded in earnings.
As of
September 30, 2016
, there was
$12,001
in cumulative unrealized loss of which
$11,986
was included in AOCL and
$15
was attributable to noncontrolling interests. As of
December 31, 2015
, there was
$97
in cumulative unrealized loss of which
$97
was included in AOCL and
zero
was attributable to noncontrolling interests. The Company expects that approximately
$6,207
will be reclassified from AOCL and noncontrolling interests and recognized as a reduction to income in the next 12 months, calculated as estimated interest expense using the interest rates on the derivative instruments as of
September 30, 2016
.
Mortgage Loans
The Company’s mortgage loans are secured by the respective properties. The mortgages are non-recourse to the Company except for fraud or misapplication of funds.
On January 4, 2016, the Company repaid without fee or penalty the Westin Michigan Avenue mortgage loan in the amount of
$131,262
plus accrued interest through borrowings under its senior unsecured credit facility. The loan was due to mature in April 2016.
On January 4, 2016, the Company repaid without fee or penalty the Indianapolis Marriott Downtown mortgage loan in the amount of
$96,097
plus accrued interest through borrowings under its senior unsecured credit facility. The loan was due to mature in July 2016.
On February 11, 2016, the Company repaid without fee or penalty The Roger mortgage loan in the amount of
$58,831
plus accrued interest through borrowings under its senior unsecured credit facility. The loan was due to mature in August 2016.
The Company’s mortgage loans contain debt service coverage ratio tests related to the mortgaged properties. If the debt service coverage ratio for a specific property fails to exceed a threshold level specified in the mortgage, cash flows from that hotel may automatically be directed to the lender to (i) satisfy required payments, (ii) fund certain reserves required by the mortgage
and (iii) fund additional cash reserves for future required payments, including final payment. Cash flows may be directed to the lender (“cash trap”) until such time as the property again complies with the specified debt service coverage ratio or the mortgage is paid off.
Financial Covenants
Failure of the Company to comply with the financial covenants contained in its credit facilities, term loans and non-recourse secured mortgages could result from, among other things, changes in its results of operations, the incurrence of additional debt or changes in general economic conditions.
If the Company violates the financial covenants contained in any of its credit facilities or term loans described above, the Company may attempt to negotiate waivers of the violations or amend the terms of the applicable credit facilities or term loans with the lenders thereunder; however, the Company can make no assurance that it would be successful in any such negotiations or that, if successful in obtaining waivers or amendments, such amendments or waivers would be on terms attractive to the Company. If a default under the credit facilities or term loans were to occur, the Company would possibly have to refinance the debt through additional debt financing, private or public offerings of debt securities, or additional equity financings. If the Company is unable to refinance its debt on acceptable terms, including at maturity of the credit facilities and term loans, it may be forced to dispose of hotel properties on disadvantageous terms, potentially resulting in losses that reduce cash flow from operating activities. If, at the time of any refinancing, prevailing interest rates or other factors result in higher interest rates upon refinancing, increases in interest expense would lower the Company’s cash flow, and, consequently, cash available for distribution to its shareholders.
A cash trap associated with a mortgage loan may limit the overall liquidity for the Company as cash from the hotel securing such mortgage would not be available for the Company to use. If the Company is unable to meet mortgage payment obligations, including the payment obligation upon maturity of the mortgage borrowing, the mortgage securing the specific property could be foreclosed upon by, or the property could be otherwise transferred to, the mortgagee with a consequent loss of income and asset value to the Company.
As of
September 30, 2016
, the Company is in compliance with all debt covenants, current on all loan payments and not otherwise in default under the credit facilities, term loans, bonds payable or mortgage loan.
|
|
5.
|
Commitments and Contingencies
|
Ground, Land and Building, and Air Rights Leases
A summary of the Company’s hotels subject to non-cancelable operating leases as of
September 30, 2016
is as follows:
|
|
|
|
|
|
Lease Properties
|
|
Lease Type
|
|
Lease Expiration Date
|
Southernmost Beach Resort Key West (Restaurant facility)
|
|
Ground lease
|
|
April 2019
(1)
|
Hyatt Regency Boston Harbor
|
|
Ground lease
|
|
March 2026
(2)
|
The Hilton San Diego Resort and Spa
|
|
Ground lease
|
|
December 2045
|
San Diego Paradise Point Resort and Spa
|
|
Ground lease
|
|
May 2050
|
Hotel Vitale
|
|
Ground lease
|
|
March 2056
(3)
|
Viceroy Santa Monica
|
|
Ground lease
|
|
September 2065
|
Westin Copley Place
(4)
|
|
Air rights lease
|
|
December 2077
|
The Liberty Hotel
|
|
Ground lease
|
|
May 2080
|
Hotel Solamar
|
|
Ground lease
|
|
December 2102
|
(1)
The Company can begin negotiating a renewal one year in advance of the lease expiration date.
(2)
The Company has options, subject to certain terms and conditions, to extend the ground lease for
51
years to 2077.
(3)
The Company has the option, subject to certain terms and conditions, to extend the ground lease for
14
years to 2070.
(4)
No
payments are required through maturity.
The ground leases at Viceroy Santa Monica, The Liberty Hotel and Hotel Vitale are subject to minimum annual rent increases, resulting in noncash straight-line rent expense of
$472
and
$1,420
for the
three and nine months ended
September 30, 2016
, respectively, and
$483
and
$1,463
for the
three and nine months ended
September 30, 2015
, respectively, which is included in total ground rent expense. Total ground rent expense for the
three and nine months ended
September 30, 2016
was
$4,570
and
$12,491
, respectively. Total ground rent expense for the
three and nine months ended
September 30, 2015
was
$4,491
and
$12,164
,
respectively. Certain rent payments are based on the hotel’s performance. Actual payments of rent may exceed the minimum required rent due to meeting specified thresholds.
A summary of the Company’s hotels subject to capital leases of land and building as of
September 30, 2016
is as follows:
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|
|
|
|
|
|
|
Lease Properties
|
|
Estimated Present Value of Remaining Rent Payments
(1)
|
|
Lease Expiration Date
|
The Roger
|
|
$
|
4,892
|
|
|
December 2044
|
Harbor Court Hotel
|
|
$
|
18,424
|
|
|
April 2048
|
Hotel Triton
(2)
|
|
$
|
25,625
|
|
|
December 2049
|
(1)
At acquisition, the estimated present value of the remaining rent payments were recorded as capital lease obligations. These obligations, net of amortization, are included in accounts payable and accrued expenses in the accompanying consolidated balance sheets.
(2)
In 2015, the hotel lease was amended, extending the lease expiration date from January 2048 to December 2049. At acquisition, the estimated present value of the remaining payments recorded as a capital lease obligation was
$27,752
. Due to the lease amendment, the recalculated estimated present value of the remaining rent payments is
$25,625
, which net of amortization, is included in accounts payable and accrued expenses in the accompanying consolidated balance sheets.
Future minimum rent payments, including capital lease payments, (without reflecting future applicable Consumer Price Index increases) are as follows:
|
|
|
|
|
2016
|
$
|
3,213
|
|
2017
|
13,052
|
|
2018
|
13,195
|
|
2019
|
13,172
|
|
2020
|
13,559
|
|
Thereafter
|
600,780
|
|
|
$
|
656,971
|
|
Reserve Funds for Future Capital Expenditures
Certain of the Company’s agreements with its hotel managers, franchisors and lenders have provisions for the Company to provide funds, generally
4.0%
of hotel revenues, sufficient to cover the cost of (a) certain non-routine repairs and maintenance to the hotels and (b) replacements and renewals to the hotels’ capital assets. Certain of the agreements require that the Company reserve this cash in separate accounts. As of
September 30, 2016
,
$13,268
was available in restricted cash reserves for future capital expenditures. The Company has sufficient cash on hand and availability on its credit facilities to cover capital expenditures under agreements that do not require that the Company separately reserve cash.
Restricted Cash Reserves
At
September 30, 2016
, the Company held
$15,219
in restricted cash reserves. Included in such amounts are
$13,268
of reserve funds for future capital expenditures and
$1,951
held by insurance and management companies on the Company’s behalf to be refunded or applied to future liabilities.
Litigation
The nature of hotel operations exposes the Company and its hotels to the risk of claims and litigation in the normal course of their business. The Company is not presently subject to any material litigation nor, to the Company’s knowledge, is any litigation threatened against the Company, other than routine actions for negligence or other claims and administrative proceedings arising in the ordinary course of business, some of which are expected to be covered by liability insurance and all of which collectively are not expected to have a material adverse effect on the liquidity, results of operations, business or financial condition of the Company.
Common Shares of Beneficial Interest
On January 1, 2016, the Company issued
13,864
common shares of beneficial interest and authorized an additional
4,910
deferred shares to the independent members of its Board of Trustees for their 2015 compensation. These common shares of beneficial interest were issued under the 2014 Plan.
On March 1, 2016, the Company issued
36,926
common shares of beneficial interest to executives related to the nonvested share awards with market conditions granted on January 30, 2013 (see Note 7 for additional details including vesting information). These common shares of beneficial interest were issued under the 2009 Plan.
On March 18, 2016, the Company issued
98,787
nonvested shares with service conditions to the Company’s executives and employees. The nonvested shares will vest in
three
annual installments starting January 1, 2017, subject to continued employment. These common shares of beneficial interest were issued under the 2014 Plan.
On April 25, 2016, the Company issued
10,526
nonvested shares with service conditions to one of the Company’s executives. The nonvested shares will vest in
three
annual installments starting January 1, 2017, subject to continued employment. These common shares of beneficial interest were issued under the 2014 Plan.
On May 9, 2016, the Company issued
20,688
common shares of beneficial interest to its former Chief Financial Officer related to the nonvested share awards with market conditions, as a result of the previously announced termination of employment. Pursuant to the terms of the award agreements, a portion of his nonvested share awards with market conditions vested upon termination (see Note 7). Of the common shares of beneficial interest issued,
15,320
shares were issued under the 2009 Plan and
5,368
shares were issued under the 2014 Plan.
On August 11, 2016, the Company issued
42,824
common shares of beneficial interest to executives related to the nonvested share awards with market conditions granted on January 30, 2013 (see Note 7 for additional details including vesting information). These common shares of beneficial interest were issued under the 2009 Plan.
Common Dividends
The Company paid the following dividends on common shares/units during the
nine months ended
September 30, 2016
:
|
|
|
|
|
|
|
|
|
|
Dividend per
Share/Unit
|
|
For the Quarter Ended
|
|
Record Date
|
|
Payable Date
|
$
|
0.45
|
|
|
December 31, 2015
|
|
December 31, 2015
|
|
January 15, 2016
|
$
|
0.45
|
|
|
March 31, 2016
|
|
March 31, 2016
|
|
April 15, 2016
|
$
|
0.45
|
|
|
June 30, 2016
|
|
June 30, 2016
|
|
July 15, 2016
|
Treasury Shares
Treasury shares are accounted for under the cost method. During the
nine months ended
September 30, 2016
, the Company received
96,601
common shares of beneficial interest related to employees surrendering shares to pay minimum withholding taxes at the time nonvested shares vested and forfeiting nonvested shares upon resignation.
The Company’s Board of Trustees previously authorized a share repurchase program (the “Repurchase Program”) to acquire up to
$100,000
of the Company’s common shares of beneficial interest, with repurchased shares recorded at cost in treasury. As of
September 30, 2016
, the Company had availability under the Repurchase Program to acquire up to
$69,807
of common shares of beneficial interest. The timing, manner, price and actual number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements, market conditions, and other corporate liquidity requirements and priorities. The Repurchase Program may be suspended, modified or terminated at any time for any reason without prior notice. The Repurchase Program does not obligate the Company to acquire any specific number of shares, and all open market repurchases will be made in accordance with applicable rules and regulations setting forth certain restrictions on the method, timing, price and volume of open market share repurchases.
During the
nine months ended
September 30, 2016
, the Company re-issued
13,864
treasury shares related to earned 2015 compensation for the Board of Trustees,
100,438
treasury shares related to the earned share awards with market conditions and
109,313
treasury shares related to the grants of nonvested shares with service conditions.
At
September 30, 2016
, there were
28,881
common shares of beneficial interest in treasury.
Preferred Shares
The following preferred shares of beneficial interest were outstanding as of
September 30, 2016
:
|
|
|
|
|
Security Type
|
|
Number of
Shares
|
7.5% Series H Preferred Shares
|
|
2,750,000
|
|
6.375% Series I Preferred Shares
|
|
4,400,000
|
|
6.3% Series J Preferred Shares
|
|
6,000,000
|
|
On May 25, 2016, the Company issued
6,000,000
6.3% Series J Cumulative Redeemable Preferred Shares (the “Series J Preferred Shares”),
$0.01
par value per share (liquidation preference
$25.00
per share), at a public offering price of
$25.00
per share and received net proceeds, after deducting underwriting discounts and other offering costs, of
$145,078
. The net proceeds were used to pay down amounts outstanding under the Company’s senior unsecured credit facility and for general corporate purposes.
The 7.5% Series H Cumulative Redeemable Preferred Shares (the “Series H Preferred Shares”), the 6.375% Series I Cumulative Redeemable Preferred Shares (the “Series I Preferred Shares”) and the Series J Preferred Shares (collectively, the “Preferred Shares”) rank senior to the common shares of beneficial interest and on parity with each other with respect to payment of distributions. The Company will not pay any distributions, or set aside any funds for the payment of distributions, on its common shares of beneficial interest unless it has also paid (or set aside for payment) the full cumulative distributions on the Preferred Shares for all past dividend periods and, with respect to the Series H Preferred Shares, for the current dividend period. The outstanding Preferred Shares do not have any maturity date, and are not subject to mandatory redemption. The difference between the carrying value and the redemption amount of the Preferred Shares are the offering costs. In addition, the Company is not required to set aside funds to redeem the Preferred Shares.
As of January 24, 2016, the Company now may optionally redeem the Series H Preferred Shares. The Company may not optionally redeem the Series I Preferred Shares and the Series J Preferred Shares prior to March 4, 2018 and May 25, 2021, respectively, except in limited circumstances relating to the Company’s continuing qualification as a REIT or as discussed below. After those dates, the Company may, at its option, redeem the Preferred Shares, in whole or from time to time in part, by payment of
$25.00
per share, plus any accumulated, accrued and unpaid distributions. In addition, upon the occurrence of a change of control (as defined in the Company’s charter), the result of which the Company’s common shares of beneficial interest and the common securities of the acquiring or surviving entity are not listed on the New York Stock Exchange, the NYSE MKT LLC or the NASDAQ Stock Market, or any successor exchanges, the Company may, at its option, redeem the Preferred Shares in whole or in part within
120
days after the change of control occurred, by paying
$25.00
per share, plus any accrued and unpaid distributions. If the Company does not exercise its right to redeem the Preferred Shares upon a change of control, the holders of Series H Preferred Shares, Series I Preferred Shares and Series J Preferred Shares have the right to convert some or all of their shares into a number of the Company’s common shares of beneficial interest based on a defined formula subject to a cap of
4,680,500
common shares,
8,835,200
common shares and
12,842,400
common shares, respectively.
Preferred Dividends
The Company paid the following dividends on preferred shares during the
nine months ended
September 30, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
Security Type
|
|
Dividend per Share
(1)
|
|
For the Quarter Ended
|
|
Record Date
|
|
Payable Date
|
7.5% Series H
|
|
$
|
0.47
|
|
|
December 31, 2015
|
|
January 1, 2016
|
|
January 15, 2016
|
6.375% Series I
|
|
$
|
0.40
|
|
|
December 31, 2015
|
|
January 1, 2016
|
|
January 15, 2016
|
7.5% Series H
|
|
$
|
0.47
|
|
|
March 31, 2016
|
|
April 1, 2016
|
|
April 15, 2016
|
6.375% Series I
|
|
$
|
0.40
|
|
|
March 31, 2016
|
|
April 1, 2016
|
|
April 15, 2016
|
7.5% Series H
|
|
$
|
0.47
|
|
|
June 30, 2016
|
|
July 1, 2016
|
|
July 15, 2016
|
6.375% Series I
|
|
$
|
0.40
|
|
|
June 30, 2016
|
|
July 1, 2016
|
|
July 15, 2016
|
6.3% Series J
(2)
|
|
$
|
0.22
|
|
|
June 30, 2016
|
|
July 1, 2016
|
|
July 15, 2016
|
(1)
Amounts are rounded to the nearest whole cent for presentation purposes.
(2)
Partial dividend for newly issued preferred shares.
Noncontrolling Interests of Common Units in Operating Partnership
On May 13, 2015, the Company issued an aggregate of
151,077
common shares of beneficial interest in connection with the redemption of
151,077
common units of limited partnership interest held by certain limited partners of the Operating Partnership.
These common shares of beneficial interest were issued in reliance on an exemption from registration provided by Section 4(a)(2) under the Securities Act of 1933, as amended, and Regulation D promulgated thereunder. The Company relied on the exemption under Section 4(a)(2) based upon factual representations given by the limited partners who received the common shares of beneficial interest.
The following schedule presents the effects of changes in the Company’s ownership interest in the Operating Partnership on the Company’s equity:
|
|
|
|
|
|
For the nine months ended
|
|
September 30,
|
|
2015
|
Net income attributable to common shareholders
|
$
|
99,927
|
|
Increase in additional paid-in capital from adjustments to noncontrolling interests of common units in Operating Partnership
|
14
|
|
Change from net income attributable to common shareholders and adjustments to noncontrolling interests
|
$
|
99,941
|
|
There were
no
redemptions of common units of limited partnership interest held by limited partners of the Operating Partnership in 2016.
As of
September 30, 2016
, the Operating Partnership had
145,223
common units of limited partnership interest outstanding, representing a
0.1%
partnership interest, held by the limited partners. As of
September 30, 2016
, approximately
$3,466
of cash or the equivalent value in common shares, at the Company’s option, would be paid to the limited partners of the Operating Partnership if the partnership were terminated. The approximate value of
$3,466
is based on the Company’s closing common share price of
$23.87
on
September 30, 2016
, which is assumed to be equal to the value provided to the limited partners upon liquidation of the Operating Partnership. Subject to certain limitations, the outstanding common units of limited partnership interest are redeemable for cash, or at the Company’s option, for a like number of common shares of beneficial interest of the Company.
The common shareholders approved the 2014 Plan at the 2014 Annual Meeting of Shareholders held on May 7, 2014, which permits the Company to issue equity-based awards to executives, employees, non-employee members of the Board of Trustees and any other persons providing services to or for the Company and its subsidiaries. The 2014 Plan provides for a maximum of
2,900,000
common shares of beneficial interest to be issued in the form of share options, share appreciation rights, restricted or unrestricted share awards, phantom shares, performance awards, incentive awards, other share-based awards, or any combination of the foregoing. In addition, the maximum number of common shares subject to awards of any combination that may be granted under the 2014 Plan during any fiscal year to any one individual is limited to
500,000
shares. The 2014 Plan terminates on February 17, 2024. The 2014 Plan authorized, among other things: (i) the grant of share options that qualify as incentive options under the Code, (ii) the grant of share options that do not so qualify, (iii) the grant of common shares in lieu of cash for trustees’ fees, (iv) grants of common shares in lieu of cash compensation and (v) the making of loans to acquire common shares in lieu of compensation (to the extent permitted by law and applicable provisions of the Sarbanes Oxley Act of 2002). The exercise price of share options is determined by the Compensation Committee of the Board of Trustees, but may not be less than
100%
of the fair value of the common shares on the date of grant. Restricted share awards and options under the 2014 Plan vest over a period determined by the Compensation Committee of the Board of Trustees, generally a
three
year period. The duration of each option is also determined by the Compensation Committee, subject to applicable laws and regulations. At
September 30, 2016
, there were
2,667,452
common shares available for future grant under the 2014 Plan. Upon the approval of the 2014 Plan by the common shareholders on May 7, 2014, the 2014 Plan replaced the 2009 Plan. The Company will no longer make any grants under the 2009 Plan (although awards previously made under the 2009 Plan that are outstanding will remain in effect in accordance with the terms of that plan and the applicable award agreements).
Nonvested Share Awards with Service Conditions
From time to time, the Company awards nonvested shares under the 2014 Plan to executives, employees and members of the Board of Trustees. The nonvested shares issued to executives and employees generally vest over
three
years based on continued employment. The shares issued to the members of the Board of Trustees vest immediately upon issuance. The Company determines the grant date fair value of the nonvested shares based upon the closing stock price of its common shares on the New York Stock Exchange on the date of grant and number of shares per the award agreements. Compensation costs are recognized on a straight-line basis over the requisite service period and are included in general and administrative expense in the accompanying consolidated statements of operations and comprehensive income.
A summary of the Company’s nonvested share awards with service conditions as of
September 30, 2016
is as follows:
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted -
Average Grant
Date Fair Value
|
Nonvested at January 1, 2016
|
228,835
|
|
|
$
|
33.29
|
|
Granted
|
109,313
|
|
|
25.01
|
|
Vested
(2)
|
(90,191
|
)
|
|
31.70
|
|
Forfeited
|
(12,711
|
)
|
|
27.41
|
|
Nonvested at September 30, 2016
(1)
|
235,246
|
|
|
$
|
30.82
|
|
|
|
(1)
|
Amount excludes
29,376
share awards with market conditions which were earned but nonvested due to a service condition as of
September 30, 2016
.
|
|
|
(2)
|
Amount includes accelerated vesting of the former Chief Financial Officer’s shares.
|
As of
September 30, 2016
and
December 31, 2015
, there were
$3,473
and
$3,914
, respectively, of total unrecognized compensation costs related to nonvested share awards with service conditions. As of
September 30, 2016
and
December 31, 2015
, these costs were expected to be recognized over a weighted-average period of
1.3
and
1.4
years, respectively. The total intrinsic value of shares vested (calculated as number of shares multiplied by vesting date share price) during the
three and nine months ended
September 30, 2016
was
zero
and
$2,256
, respectively, and during the
three and nine months ended
September 30, 2015
was
zero
and
$3,152
, respectively. Compensation costs (net of forfeitures) related to nonvested share awards with service conditions that have been included in general and administrative expense in the accompanying consolidated statements of operations and comprehensive income were
$700
and
$2,289
for the
three and nine months ended
September 30, 2016
, respectively, and
$818
and
$2,505
for the
three and nine months ended
September 30, 2015
, respectively.
On April 9, 2016, the Company finalized the former Chief Financial Officer’s severance package and the termination date was set to be no later than April 29, 2016. Pursuant to the terms of the award agreements, all of his nonvested share awards with service conditions would vest upon termination. Accordingly, the Company accelerated the recognition of previously unrecognized compensation costs related to his nonvested share awards with service conditions over the estimated remaining service period. On May 6, 2016, all of his nonvested share awards with service conditions vested with all remaining previously unrecognized compensation costs recognized. The compensation cost (net of forfeitures) that has been included in general and administrative expense in the accompanying consolidated statements of operations and comprehensive income was
zero
and
$538
for the
three and nine months ended
September 30, 2016
, respectively.
Nonvested Share Awards with Market or Performance Conditions
On January 30, 2013, the Company’s Board of Trustees granted a target of
80,559
nonvested share awards with either market or performance conditions to executives. On March 1, 2016, the executives earned
91.7%
of their
40,280
target number of shares, or
36,926
shares, and all of the earned shares vested immediately. The shares representing the difference between
91.7%
and
100%
of the target, or
3,354
shares, were forfeited on March 1, 2016. The executives also received a cash payment of
$151
on the shares equal to the value of all dividends paid on common shares from January 1, 2013 until the determination date, February 29, 2016. As of March 1, 2016, the executives are entitled to receive dividends as declared and paid on the earned shares and to vote the shares. On August 11, 2016, the executives earned
133.2%
of their
32,117
remaining target shares, or
42,824
shares, and all of the earned shares vested immediately. The executives also received a cash payment of
$214
on the shares equal to the value of all dividends paid on common shares from January 1, 2013 until the determination date, August 11, 2016. As of August 11, 2016, the executives are entitled to receive dividends as declared and paid on the earned shares and to vote the shares.
On March 18, 2016, the Company’s Board of Trustees granted a target of
97,175
nonvested share awards with either market or performance conditions to executives (the “March 18, 2016 Awards”). The actual amounts of the shares awarded with respect to
48,587
of the
97,175
shares will be determined on or about January 1, 2019, based on the performance measurement period of January 1, 2016 through December 31, 2018, in accordance with the terms of the agreements. The actual amounts of the shares awarded with respect to the remaining
48,588
of the
97,175
shares will be determined on or about July 1, 2019, based on the performance measurement period of July 1, 2016 through June 30, 2019, in accordance with the terms of the agreements. The actual amounts of the shares awarded will range from
0%
to
200%
of the target amounts, depending on the performance analysis stipulated in the agreements, and
none
of the shares are outstanding until issued in accordance with award agreements based on performance. After the actual amounts of the awards are determined (or earned) at the end of the respective performance measurement period, all of the earned shares will be issued and outstanding on those dates. The executives will receive cash payments on the earned shares equal to the value of all dividends paid on common shares from the grant date through the respective determination date. Such amounts will be paid to the awardees on or about January 1, 2019 and July 1, 2019, respectively. Thereafter,
the executives will be entitled to receive dividends as declared and paid on the earned shares and to vote the shares. With respect to
48,587
shares, amortization commenced on March 18, 2016, the beginning of the requisite service period, and, with respect to
48,588
shares, amortization commenced on July 1, 2016, the beginning of the requisite service period.
On April 25, 2016, the Company’s Board of Trustees granted a target of
12,632
nonvested share awards with either market or performance conditions to an executive (the “April 25, 2016 Awards”). The actual amounts of the shares awarded with respect to
6,316
of the
12,632
shares will be determined on or about January 1, 2019, based on the performance measurement period of January 1, 2016 through December 31, 2018, in accordance with the terms of the agreements. The actual amounts of the shares awarded with respect to the remaining
6,316
of the
12,632
shares will be determined on or about July 1, 2019, based on the performance measurement period of July 1, 2016 through June 30, 2019, in accordance with the terms of the agreements. The actual amounts of the shares awarded will range from
0%
to
200%
of the target amounts, depending on the performance analysis stipulated in the agreements, and
none
of the shares are outstanding until issued in accordance with award agreements based on performance. After the actual amounts of the awards are determined (or earned) at the end of the respective performance measurement period, all of the earned shares will be issued and outstanding on those dates. The executive will receive cash payments on the earned shares equal to the value of all dividends paid on common shares from the grant date through the respective determination date. Such amounts will be paid to the awardee on or about January 1, 2019 and July 1, 2019, respectively. Thereafter, the executive will be entitled to receive dividends as declared and paid on the earned shares and to vote the shares. With respect to
6,316
shares, amortization commenced on April 25, 2016, the beginning of the requisite service period, and with respect to
6,316
shares, amortization commenced on July 1, 2016, the beginning of the requisite service period.
The terms stipulated in the March 18, 2016 and the April 25, 2016 Awards used to determine the total amount of the shares consist of the following three tranches: (1) a comparison of the Company’s total return to the total returns’ of up to seven companies in a designated peer group of the Company, (2) the Company’s actual total return as compared to a Board-established total return goal and (3) a comparison of the Company’s return on invested capital to the return on invested capital of up to seven companies in a designated peer group of the Company.
The tranches described in (1) and (2) are nonvested share awards with market conditions. For the March 18, 2016 and the April 25, 2016 Awards, the grant date fair value of the awards with market conditions were estimated by the Company using historical data under the Monte Carlo valuation method provided by a third party consultant. The final values were determined during the second quarter of 2016 with an insignificant cumulative adjustment to compensation cost recorded for the March 18, 2016 Awards. The third tranche is based on “return on invested capital” discussed below, which is a performance condition. The grant date fair values of the tranches with performance conditions were calculated based on the targeted awards, and the valuation is adjusted on a periodic basis.
The capital market assumptions used in the valuations consisted of the following:
|
|
•
|
Factors associated with the underlying performance of the Company’s share price and shareholder returns over the term of the awards including total share return volatility and risk-free interest.
|
|
|
•
|
Factors associated with the relative performance of the Company’s share price and shareholder returns when compared to those companies which compose the index including beta as a means to breakdown total volatility into market-related and company specific volatilities.
|
|
|
•
|
The valuation has been performed in a risk-neutral framework.
|
|
|
•
|
Return on invested capital is a performance condition award measurement. The estimated value was calculated based on the initial face value at the date of grant. The valuation will be adjusted on a periodic basis as the estimated number of awards expected to vest is revised.
|
The assumptions used were as follows for each performance measure:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volatility
|
|
Interest
Rates
|
|
Dividend
Yield
|
|
Stock
Beta
|
|
Fair Value of
Components
of Award
|
|
Weighting
of Total
Awards
|
April 25, 2016 Awards (performance period starting January 1, 2016)
|
|
|
|
|
Target amounts
|
26.40
|
%
|
|
1.01
|
%
|
|
N/A
|
|
N/A
|
|
|
$
|
18.61
|
|
|
33.40
|
%
|
Return on invested capital
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
N/A
|
|
|
$
|
23.75
|
|
|
33.30
|
%
|
Peer companies
|
26.40
|
%
|
|
1.01
|
%
|
|
N/A
|
|
1.024
|
|
|
$
|
23.63
|
|
|
33.30
|
%
|
April 25, 2016 Awards (performance period starting July 1, 2016)
|
|
|
|
|
Target amounts
|
26.40
|
%
|
|
1.01
|
%
|
|
N/A
|
|
N/A
|
|
|
$
|
20.47
|
|
|
33.40
|
%
|
Return on invested capital
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
N/A
|
|
|
$
|
23.75
|
|
|
33.30
|
%
|
Peer companies
|
26.40
|
%
|
|
1.01
|
%
|
|
N/A
|
|
1.024
|
|
|
$
|
26.10
|
|
|
33.30
|
%
|
March 18, 2016 Awards (performance period starting January 1, 2016)
|
|
|
|
|
|
|
Target amounts
|
26.40
|
%
|
|
1.00
|
%
|
|
N/A
|
|
N/A
|
|
|
$
|
22.23
|
|
|
33.40
|
%
|
Return on invested capital
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
N/A
|
|
|
$
|
25.14
|
|
|
33.30
|
%
|
Peer companies
|
26.40
|
%
|
|
1.00
|
%
|
|
N/A
|
|
1.023
|
|
|
$
|
25.18
|
|
|
33.30
|
%
|
March 18, 2016 Awards (performance period starting July 1, 2016)
|
|
|
|
|
|
|
Target amounts
|
26.40
|
%
|
|
1.00
|
%
|
|
N/A
|
|
N/A
|
|
|
$
|
21.65
|
|
|
33.40
|
%
|
Return on invested capital
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
N/A
|
|
|
$
|
25.14
|
|
|
33.30
|
%
|
Peer companies
|
26.40
|
%
|
|
1.00
|
%
|
|
N/A
|
|
1.023
|
|
|
$
|
27.81
|
|
|
33.30
|
%
|
A summary of the Company’s nonvested share awards with either market or performance conditions as of
September 30, 2016
is as follows:
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted-
Average Grant
Date Fair Value
|
Nonvested at January 1, 2016
|
348,587
|
|
|
$
|
33.98
|
|
Granted
(1)(2)
|
121,372
|
|
|
24.74
|
|
Vested
(2)
|
(155,463
|
)
|
|
31.89
|
|
Forfeited
(2)
|
(38,313
|
)
|
|
29.26
|
|
Nonvested at September 30, 2016
|
276,183
|
|
|
$
|
27.36
|
|
|
|
(1)
|
Amount includes an additional
10,707
shares issued on August 11, 2016 from the January 30, 2013 grant, which were earned in excess of the target amount.
|
|
|
(2)
|
Amounts include
27,570
shares vested,
858
shares earned in excess of target amount, and
34,959
shares forfeited, respectively, upon termination of the former Chief Financial Officer.
|
As of
September 30, 2016
and
December 31, 2015
, there were
$4,688
and
$5,342
, respectively, of total unrecognized compensation costs related to nonvested share awards with market or performance conditions. As of
September 30, 2016
and
December 31, 2015
, these costs were expected to be recognized over a weighted-average period of
1.9
and
1.7
years, respectively. As of
September 30, 2016
and
December 31, 2015
, there were
463,532
and
308,069
share awards with market or performance conditions vested, respectively. Additionally, there were
29,376
and
84,401
nonvested share awards with market or performance conditions earned but nonvested due to a service condition as of
September 30, 2016
and
December 31, 2015
, respectively. Compensation costs (net of forfeitures) related to nonvested share awards with market or performance conditions that have been included in general and administrative expense in the accompanying consolidated statements of operations and comprehensive income were
$930
and
$2,966
for the
three and nine months ended
September 30, 2016
, respectively, and
$1,154
and
$3,205
for the
three and nine months ended
September 30, 2015
, respectively.
On April 9, 2016, the Company finalized the former Chief Financial Officer’s severance package and the termination date was set to be no later than April 29, 2016. Pursuant to the terms of the award agreements, a portion of his nonvested share awards with market or performance conditions would vest upon termination. Accordingly, the Company accelerated the recognition of previously unrecognized compensation costs on his nonvested share awards with market or performance conditions over the estimated remaining service period. On May 6, 2016 and May 9, 2016, a portion of his nonvested share awards with market or
performance conditions vested, a portion was forfeited and additional shares were earned for awards valued at over
100%
of the target, with all remaining previously unrecognized compensation costs recognized. The compensation cost (net of forfeitures) related to his nonvested share awards with market or performance conditions that has been included in general and administrative expense in the accompanying consolidated statements of operations and comprehensive income was
zero
and
$96
, respectively, for the
three and nine months ended
September 30, 2016
.
For the
three and nine months ended
September 30, 2016
, severance expense related to the former Chief Financial Officer’s termination totaled
zero
and
$1,576
, respectively, and included cash compensation and benefits, compensation for shares with service conditions and shares with market or performance conditions and cash payments related to dividends on restricted shares that vested.
Substantially all of the Company’s revenues are derived from operating revenues generated by the hotels, all of which are leased by LHL.
Other indirect hotel operating expenses consist of the following expenses incurred by the hotels:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended
|
|
For the nine months ended
|
|
September 30,
|
|
September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
General and administrative
|
$
|
26,362
|
|
|
$
|
26,066
|
|
|
$
|
78,004
|
|
|
$
|
75,795
|
|
Sales and marketing
|
18,443
|
|
|
18,445
|
|
|
56,932
|
|
|
56,290
|
|
Repairs and maintenance
|
9,908
|
|
|
10,090
|
|
|
29,655
|
|
|
29,564
|
|
Management and incentive fees
|
11,394
|
|
|
10,570
|
|
|
29,951
|
|
|
29,625
|
|
Utilities and insurance
|
8,914
|
|
|
9,235
|
|
|
25,443
|
|
|
26,341
|
|
Franchise fees
|
2,724
|
|
|
2,802
|
|
|
8,246
|
|
|
7,133
|
|
Other expenses
|
989
|
|
|
862
|
|
|
2,701
|
|
|
2,201
|
|
Total other indirect expenses
|
$
|
78,734
|
|
|
$
|
78,070
|
|
|
$
|
230,932
|
|
|
$
|
226,949
|
|
As of
September 30, 2016
, LHL leased all
46
hotels owned by the Company as follows:
|
|
|
|
|
|
|
|
Hotel Properties
|
|
Location
|
1.
|
|
Hotel Amarano Burbank
|
|
Burbank, CA
|
2.
|
|
L’Auberge Del Mar
|
|
Del Mar, CA
|
3.
|
|
Hilton San Diego Gaslamp Quarter
|
|
San Diego, CA
|
4.
|
|
Hotel Solamar
|
|
San Diego, CA
|
5.
|
|
San Diego Paradise Point Resort and Spa
|
|
San Diego, CA
|
6.
|
|
The Hilton San Diego Resort and Spa
|
|
San Diego, CA
|
7.
|
|
Harbor Court Hotel
|
|
San Francisco, CA
|
8.
|
|
Hotel Triton
|
|
San Francisco, CA
|
9.
|
|
Hotel Vitale
|
|
San Francisco, CA
|
10.
|
|
Park Central San Francisco
|
|
San Francisco, CA
|
11.
|
|
Serrano Hotel
|
|
San Francisco, CA
|
12.
|
|
The Marker San Francisco
|
|
San Francisco, CA
|
13.
|
|
Villa Florence
|
|
San Francisco, CA
|
14.
|
|
Chaminade Resort and Conference Center
|
|
Santa Cruz, CA
|
15.
|
|
Viceroy Santa Monica
|
|
Santa Monica, CA
|
16.
|
|
Chamberlain West Hollywood
|
|
West Hollywood, CA
|
17.
|
|
Le Montrose Suite Hotel
|
|
West Hollywood, CA
|
18.
|
|
Le Parc Suite Hotel
|
|
West Hollywood, CA
|
19.
|
|
The Grafton on Sunset
|
|
West Hollywood, CA
|
20.
|
|
Hotel George
|
|
Washington, D.C.
|
21.
|
|
Hotel Madera
|
|
Washington, D.C.
|
22.
|
|
Hotel Palomar, Washington, DC
|
|
Washington, D.C.
|
23.
|
|
Hotel Rouge
|
|
Washington, D.C.
|
24.
|
|
Mason & Rook Hotel
|
|
Washington, D.C.
|
25.
|
|
Sofitel Washington, DC Lafayette Square
|
|
Washington, D.C.
|
26.
|
|
The Donovan
|
|
Washington, D.C.
|
27.
|
|
The Liaison Capitol Hill
|
|
Washington, D.C.
|
28.
|
|
Topaz Hotel
|
|
Washington, D.C.
|
29.
|
|
Southernmost Beach Resort Key West
|
|
Key West, FL
|
30.
|
|
The Marker Waterfront Resort
|
|
Key West, FL
|
31.
|
|
Hotel Chicago
|
|
Chicago, IL
|
32.
|
|
Westin Michigan Avenue
|
|
Chicago, IL
|
33.
|
|
Hyatt Regency Boston Harbor
|
|
Boston, MA
|
34.
|
|
Onyx Hotel
|
|
Boston, MA
|
35.
|
|
The Liberty Hotel
|
|
Boston, MA
|
36.
|
|
Westin Copley Place
|
|
Boston, MA
|
37.
|
|
Gild Hall
|
|
New York, NY
|
38.
|
|
The Roger
|
|
New York, NY
|
39.
|
|
Park Central Hotel New York (shared lease with WestHouse Hotel New York)
|
|
New York, NY
|
40.
|
|
WestHouse Hotel New York
|
|
New York, NY
|
41.
|
|
The Heathman Hotel
|
|
Portland, OR
|
42.
|
|
Embassy Suites Philadelphia - Center City
|
|
Philadelphia, PA
|
43.
|
|
Westin Philadelphia
|
|
Philadelphia, PA
|
44.
|
|
Lansdowne Resort
|
|
Lansdowne,VA
|
45.
|
|
Alexis Hotel
|
|
Seattle, WA
|
46.
|
|
Hotel Deca
|
|
Seattle, WA
|
Income tax expense (benefit) was comprised of the following for the
three and nine months ended
September 30, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended
|
|
For the nine months ended
|
|
September 30,
|
|
September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
LHL’s income tax expense (benefit)
|
$
|
2,809
|
|
|
$
|
(463
|
)
|
|
$
|
4,182
|
|
|
$
|
(231
|
)
|
Operating Partnership’s income tax expense (benefit)
|
300
|
|
|
(27
|
)
|
|
917
|
|
|
447
|
|
Total income tax expense (benefit)
|
$
|
3,109
|
|
|
$
|
(490
|
)
|
|
$
|
5,099
|
|
|
$
|
216
|
|
The Company has estimated LHL’s income tax expense for the
nine months ended
September 30, 2016
by applying an estimated combined federal and state effective tax rate of
40.0%
to LHL’s net income of
$10,060
. From time to time, the Company may be subject to federal, state or local tax audits in the normal course of business.
|
|
10.
|
Fair Value Measurements
|
In evaluating fair value, GAAP outlines a valuation framework and creates a fair value hierarchy that distinguishes between market assumptions based on market data (observable inputs) and a reporting entity’s own assumptions about market data (unobservable inputs). The hierarchy ranks the quality and reliability of inputs used to determine fair value, which are then classified and disclosed in one of the three categories. The three levels are as follows:
Level 1—Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity has the ability to access at the measurement date.
Level 2—Observable inputs, other than quoted prices included in level 1, such as interest rates, yield curves, quoted prices in active markets for similar assets and liabilities, and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3—Unobservable inputs that are supported by limited market activity. This includes certain pricing models, discounted cash flow methodologies and similar techniques when observable inputs are not available.
The Company estimates the fair value of its financial instruments using available market information and valuation methodologies the Company believes to be appropriate for these purposes. Considerable judgment and subjectivity are involved in developing these estimates and, accordingly, such estimates are not necessarily indicative of amounts that would be realized upon disposition.
Recurring Measurements
For assets and liabilities measured at fair value on a recurring basis, quantitative disclosure of their fair value is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at
|
|
|
|
|
September 30, 2016
|
|
December 31, 2015
|
|
|
|
|
Using Significant Other Observable
|
|
|
|
|
Inputs (Level 2)
|
Description
|
|
Consolidated Balance Sheet Location
|
|
|
|
|
Derivative interest rate instruments
|
|
Prepaid expenses and other assets
|
|
$
|
0
|
|
|
$
|
1,605
|
|
Derivative interest rate instruments
|
|
Accounts payable and accrued expenses
|
|
$
|
12,001
|
|
|
$
|
1,702
|
|
The fair value of each derivative instrument is based on a discounted cash flow analysis of the expected cash flows under each arrangement. This analysis reflects the contractual terms of the derivative instrument, including the period to maturity, and utilizes observable market-based inputs, including interest rate curves and implied volatilities, which are classified within level 2 of the fair value hierarchy. The Company also incorporates credit value adjustments to appropriately reflect each parties’ nonperformance risk in the fair value measurement, which utilizes level 3 inputs such as estimates of current credit spreads. However, the Company has assessed that the credit valuation adjustments are not significant to the overall valuation of the derivatives. As a result, the Company has determined that its derivative valuations in their entirety are classified within level 2 of the fair value hierarchy.
Financial Instruments Not Measured at Fair Value
The following table represents the fair value, derived using level 2 inputs, of financial instruments presented at carrying value in the Company’s consolidated financial statements as of
September 30, 2016
and
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
December 31, 2015
|
|
Carrying Value
|
|
Estimated Fair Value
|
|
Carrying Value
|
|
Estimated Fair Value
|
Note receivable
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
80,000
|
|
|
$
|
80,000
|
|
Borrowings under credit facilities
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
21,000
|
|
|
$
|
21,061
|
|
Term loans
|
$
|
855,000
|
|
|
$
|
857,364
|
|
|
$
|
855,000
|
|
|
$
|
856,038
|
|
Bonds payable
|
$
|
42,500
|
|
|
$
|
42,500
|
|
|
$
|
42,500
|
|
|
$
|
42,500
|
|
Mortgage loans
|
$
|
225,000
|
|
|
$
|
225,234
|
|
|
$
|
511,294
|
|
|
$
|
511,786
|
|
The Company estimated the fair value of its borrowings under credit facilities, term loans, bonds payable and mortgage loans using interest rates ranging from
1.5%
to
1.8%
as of
September 30, 2016
and from
1.5%
to
4.4%
as of
December 31, 2015
with a weighted average effective interest rate of
1.5%
and
2.1%
as of
September 30, 2016
and
December 31, 2015
, respectively. The assumptions reflect the terms currently available on similar borrowings to borrowers with credit profiles similar to the Company’s.
At
September 30, 2016
and
December 31, 2015
, the carrying amounts of certain of the Company’s financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued expenses and distributions payable were representative of their fair values due to the short-term nature of these instruments and the recent acquisition of these items.
|
|
11.
|
Earnings Per Common Share
|
The limited partners’ outstanding common units in the Operating Partnership (which may be converted to common shares of beneficial interest) have been excluded from the diluted earnings per share calculation as there would be no effect on the amounts since the limited partners’ share of income or loss would also be added back to net income or loss. Any anti-dilutive shares have been excluded from the diluted earnings per share calculation. Unvested share-based payment awards expected to vest that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. Accordingly, distributed and undistributed earnings attributable to unvested restricted shares (participating securities) have been excluded, as applicable, from net income or loss attributable to common shareholders used in the basic and diluted earnings per share calculations. Net income or loss figures are presented net of noncontrolling interests in the earnings per share calculations.
The computation of basic and diluted earnings per common share is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended
|
|
For the nine months ended
|
|
September 30,
|
|
September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Numerator:
|
|
|
|
|
|
|
|
Net income attributable to common shareholders
|
$
|
152,070
|
|
|
$
|
44,424
|
|
|
$
|
213,263
|
|
|
$
|
99,927
|
|
Dividends paid on unvested restricted shares
|
(119
|
)
|
|
(141
|
)
|
|
(371
|
)
|
|
(401
|
)
|
Undistributed earnings attributable to unvested restricted shares
|
(237
|
)
|
|
0
|
|
|
(134
|
)
|
|
0
|
|
Net income attributable to common shareholders excluding amounts attributable to unvested restricted shares
|
$
|
151,714
|
|
|
$
|
44,283
|
|
|
$
|
212,758
|
|
|
$
|
99,526
|
|
Denominator:
|
|
|
|
|
|
|
|
Weighted average number of common shares - basic
|
112,811,403
|
|
|
112,731,358
|
|
|
112,781,732
|
|
|
112,702,693
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
Compensation-related shares
|
348,441
|
|
|
405,926
|
|
|
357,165
|
|
|
411,166
|
|
Weighted average number of common shares - diluted
|
113,159,844
|
|
|
113,137,284
|
|
|
113,138,897
|
|
|
113,113,859
|
|
Earnings per Common Share - Basic:
|
|
|
|
|
|
|
|
Net income attributable to common shareholders excluding amounts attributable to unvested restricted shares
|
$
|
1.34
|
|
|
$
|
0.39
|
|
|
$
|
1.89
|
|
|
$
|
0.88
|
|
Earnings per Common Share - Diluted:
|
|
|
|
|
|
|
|
Net income attributable to common shareholders excluding amounts attributable to unvested restricted shares
|
$
|
1.34
|
|
|
$
|
0.39
|
|
|
$
|
1.88
|
|
|
$
|
0.88
|
|
|
|
12.
|
Supplemental Information to Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended
|
|
September 30,
|
|
2016
|
|
2015
|
Interest paid, net of capitalized interest
|
$
|
32,320
|
|
|
$
|
39,911
|
|
Interest capitalized
|
294
|
|
|
488
|
|
Income taxes paid, net
|
4,279
|
|
|
3,272
|
|
Increase in distributions payable on common shares
|
57
|
|
|
8,464
|
|
Increase in distributions payable on preferred shares
|
2,363
|
|
|
0
|
|
Redemption of common units for common shares
|
0
|
|
|
3,400
|
|
Write-off of fully amortized debt issuance costs
|
563
|
|
|
131
|
|
Decrease in accrued capital expenditures
|
(7,019
|
)
|
|
(563
|
)
|
Grant of nonvested shares and awards to employees and executives, net
|
4,793
|
|
|
5,188
|
|
Issuance of common shares for Board of Trustees compensation
|
480
|
|
|
691
|
|
In conjunction with the sale of property, the Company disposed of the following assets and liabilities:
|
|
|
|
Investment in property, net of closing costs
|
$
|
164,165
|
|
|
$
|
0
|
|
Other assets
|
4,226
|
|
|
0
|
|
Liabilities
|
(1,655
|
)
|
|
0
|
|
Sale of property
|
$
|
166,736
|
|
|
$
|
0
|
|
In conjunction with the acquisition of properties, the Company assumed the following assets and liabilities:
|
|
|
|
Investment in properties (after credits at closing)
|
$
|
0
|
|
|
$
|
(445,734
|
)
|
Other assets
|
0
|
|
|
(1,897
|
)
|
Liabilities
|
0
|
|
|
8,474
|
|
Acquisition of properties
|
$
|
0
|
|
|
$
|
(439,157
|
)
|
The Company paid the following common and preferred dividends subsequent to
September 30, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
Security Type
|
|
Dividend per Share/Unit
(1)
|
|
For the Quarter Ended
|
|
Record Date
|
|
Payable Date
|
Common Shares/Units
|
|
$
|
0.45
|
|
|
September 30, 2016
|
|
September 30, 2016
|
|
October 17, 2016
|
7.5% Series H Preferred Shares
|
|
$
|
0.47
|
|
|
September 30, 2016
|
|
September 30, 2016
|
|
October 17, 2016
|
6.375% Series I Preferred Shares
|
|
$
|
0.40
|
|
|
September 30, 2016
|
|
September 30, 2016
|
|
October 17, 2016
|
6.3% Series J Preferred Shares
|
|
$
|
0.39
|
|
|
September 30, 2016
|
|
September 30, 2016
|
|
October 17, 2016
|
(1)
Amounts are rounded to the nearest whole cent for presentation purposes.