NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Organization and Description of Business
Chesapeake Lodging Trust (the “Trust”) is a self-advised real estate investment trust (“REIT”) that was organized in the state of Maryland in June 2009. The Trust is focused on investments primarily in upper-upscale hotels in major business and convention markets and, on a selective basis, premium select-service hotels in urban settings or unique locations in the United States of America (“U.S.”). The Trust completed its initial public offering (“IPO”) in January 2010. The Trust owned no hotels nor had any operations prior to its IPO. As of
March 31, 2017
, the Trust owned
22
hotels with an aggregate of
6,694
rooms in
nine
states and the District of Columbia.
Substantially all of the Trust’s assets are held by, and all of its operations are conducted through, Chesapeake Lodging, L.P., a Delaware limited partnership, which is wholly owned by the Trust (the “Operating Partnership”). For the Trust to qualify as a REIT, it cannot operate hotels. Therefore, the Operating Partnership leases its hotels to taxable REIT subsidiaries (each, a “TRS”), which are wholly owned subsidiaries of the Operating Partnership and are treated as TRSs for federal income tax purposes. The TRSs then engage hotel management companies to operate the hotels pursuant to management agreements.
2. Summary of Significant Accounting Policies
Basis of Presentation
—The interim consolidated financial statements presented herein include all of the accounts of Chesapeake Lodging Trust and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. Certain reclassifications have been made to the prior year financial statements to conform to the current year presentation. These reclassifications had no effect on previously reported results of operations or retained earnings.
The information in these interim consolidated financial statements is unaudited but, in the opinion of management, reflects all adjustments necessary for a fair presentation of the results for the periods covered. All such adjustments are of a normal, recurring nature unless disclosed otherwise. These interim consolidated financial statements, including notes, have been prepared in accordance with the applicable rules of the Securities and Exchange Commission (“SEC”) and do not include all of the information and disclosures required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements. These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Trust’s Form 10-K for the year ended
December 31, 2016
.
Cash and Cash Equivalents
—The Trust considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
Restricted Cash
—Restricted cash includes reserves held in escrow for normal replacements of furniture, fixtures and equipment (“FF&E”), property improvement plans (each, a “PIP”), real estate taxes, and insurance pursuant to certain requirements in the Trust’s hotel management, franchise, and loan agreements.
Investments in Hotels
—The Trust allocates the purchase prices of hotels acquired based on the fair value of the property, FF&E, and identifiable intangible assets acquired and the fair value of the liabilities assumed. In making estimates of fair value for purposes of allocating the purchase price, the Trust utilizes a number of sources of information that are obtained in connection with the acquisition of a hotel, including valuations performed by independent third parties and cost segregation studies. The Trust also considers information obtained about each hotel as a result of its pre-acquisition due diligence in estimating the fair value of the tangible and intangible assets acquired and liabilities assumed. Hotel acquisition costs, such as transfer taxes, title insurance, environmental and property condition reviews, and legal and accounting fees, are expensed in the period incurred.
Property and equipment are depreciated using the straight-line method over the estimated useful lives of the assets, generally
15
to
40
years for buildings and building improvements and
three
to
ten
years for FF&E. Leasehold improvements are amortized over the shorter of the lease term or the useful lives of the related assets. Replacements and improvements at the hotels are capitalized, while repairs and maintenance are expensed as incurred. Upon the sale or retirement of property and equipment, the cost and related accumulated depreciation are removed from the Trust’s accounts and any resulting gain or loss is recognized in the consolidated statements of operations.
Intangible assets and liabilities are recorded on non-market contracts, including air rights, lease, management, and franchise agreements, assumed as part of the acquisition of certain hotels. Above-market and below-market contract values are based on the present value of the difference between contractual amounts to be paid pursuant to the contracts assumed and the Trust’s estimate of the fair market contract rates for corresponding contracts measured over a period equal to the remaining non-cancelable term of the contracts assumed. No value is allocated to market contracts. Intangible assets and liabilities are amortized using the straight-line method over the remaining non-cancelable term of the related contracts.
The Trust reviews its hotels for impairment whenever events or changes in circumstances indicate that the carrying values of the hotels may not be recoverable. Events or circumstances that may cause a review include, but are not limited to, adverse changes in the demand for lodging at the hotels due to declining national or local economic conditions and/or new hotel construction in markets where the hotels are located. When such conditions exist, management performs an analysis to determine if the estimated undiscounted future cash flows from operations and the proceeds from the ultimate disposition of a hotel exceed its carrying value. If the estimated undiscounted future cash flows are less than the carrying amount of the asset, an adjustment to reduce the carrying amount to the related hotel’s estimated fair market value is recorded and an impairment loss is recognized. No impairment losses have been recognized related to any hotels for the
three months
ended
March 31, 2017
and
2016
.
The Trust classifies a hotel as held for sale in the period in which it has made the decision to dispose of the hotel, a binding agreement to purchase the hotel has been signed under which the buyer has committed a significant amount of nonrefundable cash, and no significant financing contingencies exist which could cause the transaction not to be completed in a timely manner. If these criteria are met, depreciation and amortization of the hotel will cease and an impairment loss will be recognized if the fair value of the hotel, less the costs to sell, is lower than the carrying amount of the hotel. If the sale represents a strategic shift that has (or will have) a major effect on the Trust’s operations and financial results, the Trust will classify the loss, together with the related operating results, as discontinued operations in the consolidated statements of operations and will classify the related assets and liabilities as held for sale in the consolidated balance sheets. As of
March 31, 2017
, the Trust had no assets held for sale or liabilities related to assets held for sale.
Revenue Recognition
—Revenues from operations of the hotels are recognized when goods and services are provided. Revenues consist of room sales, food and beverage sales, and other hotel department revenues, such as parking, marina, theater, telephone, and gift shop sales.
Prepaid Expenses and Other Assets
—Prepaid expenses and other assets consist of prepaid real estate taxes, prepaid insurance, deposits on hotel acquisitions and loan applications, deferred franchise costs, inventories, deferred tax assets, and other assets.
Deferred Financing Costs
—Deferred financing costs are recorded at cost and consist of loan fees and other costs incurred in issuing debt. Amortization of deferred financing costs is computed using a method that approximates the effective interest method over the term of the related debt and is included in interest expense in the consolidated statements of operations. Unamortized deferred financing costs are included as a direct deduction from long-term debt in the consolidated balance sheets.
Derivative Instruments
—From time to time, the Trust is a party to interest rate swaps, which are considered derivative instruments, in order to manage its interest rate exposure. The Trust’s interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows. The Trust records derivative instruments at fair value as either assets or liabilities and designates them as cash flow hedging instruments at inception. The Trust evaluates the hedge effectiveness of the designated cash flow hedging instruments on a quarterly basis and records the effective portion of the change in the fair value of the cash flow hedging instruments as other comprehensive income (loss). Amounts reported in accumulated other comprehensive income (loss) related to cash flow hedging instruments are reclassified to interest expense as interest payments are made on the variable-rate debt being hedged. The Trust does not enter into derivative instruments for trading or speculative purposes and monitors the financial stability and credit standing of its counterparties. As of
March 31, 2017
, the Trust had no derivative instruments.
Fair Value Measurements
—The Trust accounts for certain assets and liabilities at fair value. In evaluating the fair value of both financial and non-financial assets and liabilities, GAAP outlines a valuation framework and creates a fair value hierarchy that distinguishes between market assumptions based on market data (observable inputs) and the reporting entity’s own assumptions about market data (unobservable inputs). The three levels of the fair value hierarchy are as follows:
Level 1 – Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that are accessible at the measurement date. An active market is defined as a market in which transactions occur with sufficient frequency and volume to provide pricing on an ongoing basis.
Level 2 – Inputs include quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active (markets with few transactions), inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates, yield curves), and inputs that are derived principally from or corroborated by observable market data correlation or other means.
Level 3 – Unobservable inputs reflect the reporting entity’s own assumptions about the pricing of an asset or liability when observable inputs are not available or when there is minimal, if any, market activity for an identical or similar asset or liability at the measurement date.
Income Taxes
—The Trust has elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code. As a REIT, the Trust generally will not be subject to federal income tax on that portion of its net income that does not
relate to any of the Trust’s TRSs, and that is currently distributed to its shareholders. Our TRSs, which lease the Trust’s hotels from the subsidiaries of the Operating Partnership owning them, are subject to federal and state income taxes.
The Trust accounts for income taxes using the asset and liability method under which deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Valuation allowances are provided if based upon the weight of the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
Share-Based Compensation
—From time to time, the Trust grants restricted share awards to employees and trustees. To date, the Trust has granted two types of restricted share awards: (1) awards that vest solely on continued employment or service (time-based awards) and (2) awards that vest based on the Trust achieving specified levels of relative total shareholder return and continued employment (performance-based awards). The Trust measures share-based compensation expense for the restricted share awards based on the fair value of the awards on the date of grant. The fair value of time-based awards is determined based on the closing price of the Trust’s common shares on the measurement date, which is generally the date of grant. The fair value of performance-based awards is determined using a Monte Carlo simulation performed by an independent third party. For time-based awards, share-based compensation expense is recognized on a straight-line basis over the life of the entire award. For performance-based awards, share-based compensation expense is recognized over the requisite service period for each award. No share-based compensation expense is recognized for awards for which employees or trustees do not render the requisite service.
Earnings Per Share
—Basic earnings per share is computed by dividing net income available to common shareholders, adjusted for dividends declared on and undistributed earnings allocated to unvested time-based awards, by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income available to common shareholders, adjusted for dividends declared on and undistributed earnings allocated to unvested time-based awards, by the weighted-average number of common shares outstanding, plus potentially dilutive securities, such as unvested performance-based awards, during the period. The Trust’s unvested time-based awards are entitled to receive non-forfeitable dividends, if declared. Therefore, unvested time-based awards qualify as participating securities, requiring the allocation of dividends and undistributed earnings under the two-class method to calculate basic earnings per share. The percentage of undistributed earnings allocated to the unvested time-based awards is based on the proportion of the weighted-average unvested time-based awards outstanding during the period to the total of the weighted-average common shares and unvested time-based awards outstanding during the period. No adjustment is made for shares that are anti-dilutive during the period.
Segment Information
—The Trust has determined that its business is conducted in
one
reportable segment, hotel ownership.
Use of Estimates
—The preparation of the interim consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the interim consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
3. Property and Equipment
Property and equipment as of
March 31, 2017
and
December 31, 2016
consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
Land and land improvements
|
|
$
|
319,073
|
|
|
$
|
319,039
|
|
Buildings and leasehold improvements
|
|
1,636,573
|
|
|
1,634,432
|
|
Furniture, fixtures and equipment
|
|
199,259
|
|
|
197,815
|
|
Construction-in-progress
|
|
34,169
|
|
|
21,399
|
|
|
|
2,189,074
|
|
|
2,172,685
|
|
Less: accumulated depreciation and amortization
|
|
(308,603
|
)
|
|
(289,816
|
)
|
Property and equipment, net
|
|
$
|
1,880,471
|
|
|
$
|
1,882,869
|
|
4. Intangible Assets and Liability
Intangible assets and liability as of
March 31, 2017
and
December 31, 2016
consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
Intangible assets:
|
|
|
|
|
Air rights contract
(1)
|
|
$
|
36,105
|
|
|
$
|
36,105
|
|
Favorable ground leases
(2)
|
|
3,568
|
|
|
3,568
|
|
|
|
39,673
|
|
|
39,673
|
|
Less: accumulated amortization
|
|
(3,983
|
)
|
|
(3,838
|
)
|
Intangible assets, net
|
|
$
|
35,690
|
|
|
$
|
35,835
|
|
|
|
|
|
|
Intangible liability:
|
|
|
|
|
Unfavorable contract liability
(2)
|
|
$
|
14,236
|
|
|
$
|
14,236
|
|
Less: accumulated amortization
|
|
(2,159
|
)
|
|
(2,061
|
)
|
Intangible liability, net (included within other liabilities)
|
|
$
|
12,077
|
|
|
$
|
12,175
|
|
|
|
(1)
|
In conjunction with the acquisition of the Hyatt Regency Boston on March 18, 2010, the Trust acquired an air rights contract which expires in
September 2079
and that requires no payments through maturity. The Trust recorded the fair value of the air rights contract of
$36.1 million
as an intangible asset and is amortizing the value over the term of the contract.
|
|
|
(2)
|
In conjunction with the acquisition of the Denver Marriott City Center on October 3, 2011, the Trust assumed
three
lease agreements for land parcels underlying a portion of the hotel with initial terms ending
July 2068
,
February 2072
and
April 2072
. The Trust concluded that the terms of
two
of the
three
ground leases were below market terms and recorded an aggregate of
$4.8 million
of favorable ground lease assets at the time. On July 29, 2014, the Trust terminated
one
of the
two
ground leases with below market terms in connection with acquiring the associated land parcel. The Trust is amortizing the remaining favorable ground lease asset over the life of the respective lease and including within indirect hotel operating expenses in the interim consolidated statements of operations. Also in conjunction with the acquisition of the Denver Marriott City Center, the Trust assumed a management contract with a non-cancelable term ending
December 2047
. The Trust concluded that the management agreement terms were above market terms and recorded a
$14.2 million
unfavorable contract liability, which the Trust is amortizing over the remaining non-cancelable term and including within indirect hotel operating expenses in the interim consolidated statements of operations.
|
5
. Long-Term Debt
Long-term debt as of
March 31, 2017
and
December 31, 2016
consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Origination
|
|
Original Principal Amount
|
|
|
|
Interest Rate
|
|
Principal Amortization Period
|
|
March 31,
|
|
December 31,
|
|
|
|
Maturity
|
|
|
|
2017
|
|
2016
|
Revolving credit facility
(1)
|
July 2010
|
|
n/a
|
|
March 2019
|
|
Floating
|
|
n/a
|
|
$
|
205,000
|
|
|
$
|
60,000
|
|
Term loan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Royal Palm South Beach Miami, a Tribute Portfolio Resort
(2)
|
March 2015
|
|
$
|
125,000
|
|
|
March 2017
|
|
Floating
|
|
n/a
|
|
—
|
|
|
125,000
|
|
Other mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Boston Marriott Newton
|
May 2013
|
|
$
|
60,000
|
|
|
June 2020
|
|
3.63%
|
|
25
|
|
54,195
|
|
|
54,614
|
|
Le Meridien San Francisco
|
July 2013
|
|
$
|
92,500
|
|
|
August 2020
|
|
3.50%
|
|
25
|
|
83,824
|
|
|
84,476
|
|
Denver Marriott City Center
(3)
|
July 2012
|
|
$
|
70,000
|
|
|
August 2022
|
|
4.90%
|
|
30
|
|
64,729
|
|
|
65,048
|
|
Hilton Checkers Los Angeles
|
February 2013
|
|
$
|
32,000
|
|
|
March 2023
|
|
4.11%
|
|
30
|
|
29,726
|
|
|
29,884
|
|
W Chicago – City Center
|
July 2013
|
|
$
|
93,000
|
|
|
August 2023
|
|
4.25%
|
|
25
|
|
85,117
|
|
|
85,720
|
|
Hyatt Herald Square New York/Hyatt Place New York Midtown South
|
July 2014
|
|
$
|
90,000
|
|
|
July 2024
|
|
4.30%
|
|
30
|
|
89,038
|
|
|
89,414
|
|
Hyatt Regency Boston
|
June 2016
|
|
$
|
150,000
|
|
|
July 2026
|
|
4.25%
|
|
30
|
|
148,114
|
|
|
148,749
|
|
|
|
|
|
|
|
|
|
|
|
|
759,743
|
|
|
742,905
|
|
Unamortized deferred financing costs
|
|
|
|
|
|
|
|
|
|
(5,224
|
)
|
|
(5,595
|
)
|
Long-term debt
|
|
|
|
|
|
|
|
|
|
|
$
|
754,519
|
|
|
$
|
737,310
|
|
|
|
(1)
|
The Trust may exercise an option to extend the maturity by
one
year, subject to certain customary conditions. As of
March 31, 2017
, the interest rate in effect was
2.53%
. See below for additional information related to the revolving credit facility.
|
|
|
(2)
|
On March 9, 2015, in connection with the acquisition of the Royal Palm South Beach Miami, a Tribute Portfolio Resort, the Trust assumed an existing loan agreement with an outstanding principal balance of
$125.0 million
. The term loan was amended and restated at the time of assumption and provided for a new
two
-year term. The term loan bore interest equal to one-month LIBOR plus
2.40%
. Contemporaneous with the assumption of the term loan, the Trust entered into an interest rate swap to effectively fix the interest rate on the term loan for the new
two
-year term at
3.34%
per annum. Under the terms of this interest rate swap, the Trust paid fixed interest of
0.94%
per annum on a notional amount of
$125.0 million
and received floating rate interest equal to one-month LIBOR. The effective date of this interest rate swap was
March 9, 2015
and it matured on
March 9, 2017
. The Trust repaid the term loan at maturity on
March 9, 2017
.
|
|
|
(3)
|
The loan has a term of
30
years, but is callable by the lender after
10
years, and the Trust expects the lender to call the loan at that time. The indicated maturity is based on the date the loan is callable by the lender.
|
Revolving credit facility
On March 4, 2015, the Trust entered into an amended credit agreement to (1) convert its revolving credit facility from a secured to an unsecured revolving credit facility, (2) increase the maximum borrowing availability under the revolving credit facility from
$250.0 million
to
$300.0 million
, (3) lower the interest rate to LIBOR plus
1.55%
-
2.30%
(the spread over LIBOR continues to be based on the Trust’s consolidated leverage ratio), and (4) extend the maturity date to
March 2019
. The amended credit agreement provides for the possibility of further future increases, up to a maximum of
$450.0 million
, in accordance with the terms of the amended credit agreement. The amended credit agreement also provides for an extension of the maturity date by
one
year, subject to satisfaction of certain customary conditions.
The amount that the Trust can borrow under the revolving credit facility is based on the value of the Trust’s hotels included in the borrowing base, as defined in the amended credit agreement. As of
March 31, 2017
, the borrowing base included
12
of the Trust’s hotels providing borrowing availability of
$300.0 million
under the revolving credit facility, of which
$95.0 million
remained available. The amended credit agreement contains more favorable financial covenants, including the leverage ratio and minimum tangible net worth requirement, as compared to those in effect prior to the amendment, and has additional financial covenants typically found in similar unsecured revolving credit facilities, including a consolidated secured debt ratio, an unsecured leverage ratio and an unsecured debt service coverage ratio.
Other
Certain of the Trust’s mortgage loan agreements contain standard financial covenants relating to coverage ratios and standard provisions that require loan servicers to maintain escrow accounts for certain items, including real estate taxes, insurance premiums, and normal replacements of FF&E.
As of
March 31, 2017
, the Trust was in compliance with all financial covenants under its borrowing arrangements. As of
March 31, 2017
, the Trust’s weighted-average interest rate on its long-term debt was
3.72%
. Future scheduled principal payments of debt obligations (assuming no exercise of extension options) as of
March 31, 2017
are as follows (in thousands):
|
|
|
|
|
|
Year
|
|
Amounts
|
2017
|
|
$
|
9,275
|
|
2018
|
|
13,178
|
|
2019
|
|
218,732
|
|
2020
|
|
135,316
|
|
2021
|
|
10,233
|
|
Thereafter
|
|
373,009
|
|
|
|
$
|
759,743
|
|
6. Earnings Per Share
The following is a reconciliation of the amounts used in calculating basic and diluted earnings per share (in thousands, except share and per share data):
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2017
|
|
2016
|
Numerator:
|
|
|
|
|
Net income available to common shareholders
|
|
$
|
5,597
|
|
|
$
|
7,648
|
|
Less: Dividends declared on unvested time-based awards
|
|
(124
|
)
|
|
(144
|
)
|
Less: Undistributed earnings allocated to unvested time-based awards
|
|
—
|
|
|
—
|
|
Net income available to common shareholders, excluding amounts attributable to unvested time-based awards
|
|
$
|
5,473
|
|
|
$
|
7,504
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
Weighted-average number of common shares outstanding–basic
|
|
58,995,589
|
|
|
58,681,525
|
|
Effect of dilutive unvested performance-based awards
|
|
—
|
|
|
565,694
|
|
Weighted-average number of common shares outstanding–diluted
|
|
58,995,589
|
|
|
59,247,219
|
|
|
|
|
|
|
Net income available per common share—basic and diluted
|
|
$
|
0.09
|
|
|
$
|
0.13
|
|
For the
three months
ended
March 31, 2017
and
2016
,
761,934
unvested performance-based awards and
278,271
unvested performance-based awards, respectively, were excluded from diluted weighted-average common shares outstanding as the awards had not achieved the specific levels of relative total shareholder return required for vesting at each period end.
7. Shareholders’ Equity
Common Shares
—The Trust is authorized to issue up to
400,000,000
common shares,
$.01
par value per share. Each outstanding common share entitles the holder to
one
vote on all matters submitted to a vote of shareholders. Holders of the Trust’s common shares are entitled to receive distributions when authorized by the Trust’s board of trustees out of assets legally available for the payment of distributions.
On September 6, 2013, the Trust entered into sales agreements with two sales agents, pursuant to which the Trust may issue and sell up to
$100.0 million
in the aggregate of its common shares through a continuous at-the-market offering or other methods (the “ATM program”). The Trust did not sell any common shares under the ATM program during the
three months
ended
March 31, 2017
. As of
March 31, 2017
,
$76.0 million
of common shares remained available for issuance under the ATM program.
On September 29, 2015, the Trust’s board of trustees authorized a share repurchase program pursuant to which the Trust may acquire up to
$100.0 million
of its common shares. The repurchase program authorizes the Trust to repurchase its common shares from time to time through open market purchases, negotiated transactions or other means, in accordance with applicable securities laws and other restrictions. The repurchase program expires in
September 2018
, but may be suspended or discontinued at any time, and does not obligate the Trust to acquire any particular amount of its shares. As of
March 31, 2017
,
$100.0 million
remained available for the repurchase of common shares.
For the
three months
ended
March 31, 2017
, the Trust issued
887
unrestricted common shares and
463,431
restricted common shares to its trustees and employees. For the
three months
ended
March 31, 2017
, the Trust repurchased
39,966
common shares from employees to satisfy the minimum statutory tax withholding requirements related to the vesting of their previously granted restricted common shares. As of
March 31, 2017
, the Trust had
60,096,316
common shares outstanding.
For the
three months
ended
March 31, 2017
, the Trust paid or its board of trustees declared the following dividends per common share:
|
|
|
|
|
|
|
|
|
|
|
|
Record Date
|
|
Payment Date
|
|
Dividend Per Common Share
|
Fourth Quarter 2016
|
|
December 30, 2016
|
|
January 13, 2017
|
|
$
|
0.40
|
|
First Quarter 2017
|
|
March 31, 2017
|
|
April 14, 2017
|
|
$
|
0.40
|
|
Preferred Shares
—The Trust is authorized to issue up to
100,000,000
preferred shares,
$.01
par value per share. The Trust’s board of trustees is required to set for each class or series of preferred shares the terms, preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications, and terms or conditions of redemption. As of
March 31, 2017
, the Trust had
5,000,000
shares of its
7.75%
Series A Cumulative Redeemable Preferred Shares outstanding.
Holders of Series A Cumulative Redeemable Preferred Shares are entitled to receive, when and as authorized by the Trust’s board of trustees, out of funds legally available for the payment of dividends, cumulative cash dividends at the rate of
7.75%
per annum of the
$25.00
per share liquidation preference, equivalent to
$1.9375
per annum per share. Dividends on the Series A Cumulative Redeemable Preferred Shares are cumulative from the date of original issuance and are payable quarterly in arrears on or about the 15th day of each of January, April, July and October. The Series A Cumulative Redeemable Preferred Shares rank senior to the Trust’s common shares with respect to the payment of dividends; the Trust will not declare or pay any dividends, or set aside any funds for the payment of dividends, on its common shares unless the Trust also has declared and either paid or set aside for payment the full cumulative dividends on the Series A Cumulative Redeemable Preferred Shares.
For the
three months
ended
March 31, 2017
, the Trust paid or its board of trustees declared the following dividends per preferred share:
|
|
|
|
|
|
|
|
|
|
|
|
Record Date
|
|
Payment Date
|
|
Dividend Per Series A Cumulative Redeemable Preferred Share
|
Fourth Quarter 2016
|
|
December 30, 2016
|
|
January 13, 2017
|
|
$
|
0.484375
|
|
First Quarter 2017
|
|
March 31, 2017
|
|
April 14, 2017
|
|
$
|
0.484375
|
|
The Trust cannot redeem the Series A Cumulative Redeemable Preferred Shares prior to July 17, 2017, except as described below and in certain limited circumstances related to the ownership limitation necessary to preserve the Trust’s qualification as a REIT. On and after July 17, 2017, the Trust, at its option, can redeem the Series A Cumulative Redeemable Preferred Shares, in whole or from time to time in part, at a redemption price of
$25.00
per share, plus any accrued and unpaid dividends. The holders of Series A Cumulative Redeemable Preferred Shares have no voting rights, except in certain limited circumstances.
Upon the occurrence of a change of control, as defined in the articles supplementary designating the Series A Cumulative Redeemable Preferred Shares, as a result of which the Trust’s common shares and the common securities of the acquiring or surviving entity are not listed or quoted on the New York Stock Exchange, the NYSE MKT or the NASDAQ Stock Market, or any successor exchanges, the Trust may, at its option, redeem the Series A Cumulative Redeemable Preferred Shares in whole or in part within 120 days following the change of control by paying
$25.00
per share, plus any accrued and unpaid dividends through the date of redemption. If the Trust does not exercise its right to redeem the Series A Cumulative Redeemable Preferred Shares upon a change of control, the holders of the Series A Cumulative Redeemable Preferred Shares have the right to convert some or all of their shares into a number of the Trust’s common shares based on a defined formula subject to a share cap. The share cap on each Series A Cumulative Redeemable Preferred Share is
2.9189
common shares.
8. Equity Plan
In January 2010, the Trust established the Chesapeake Lodging Trust Equity Plan (the “Plan”), which provides for the issuance of equity-based awards, including restricted shares, unrestricted shares, share options, share appreciation rights, and other awards based on the Trust’s common shares. Employees and trustees of the Trust and other persons that provide services to the Trust are eligible to participate in the Plan. The compensation committee of the board of trustees administers the Plan and determines the number of awards to be granted, the vesting period, and the exercise price, if any.
Shares that are issued under the Plan to any person pursuant to an award are counted against the aggregate number of shares available for issuance under the Plan as one share for every one share granted. If any shares covered by an award are not purchased or are forfeited, if an award is settled in cash, or if an award otherwise terminates without delivery of any shares, then the number of common shares counted against the aggregate number of shares available under the Plan with respect to the award will, to the extent of any such forfeiture or termination, again be available for making awards under the Plan. As of
March 31, 2017
, subject to increases that may result in the case of any future forfeiture or termination of currently outstanding awards,
675,072
common shares were reserved and available for future issuances under the Plan.
The Trust will make appropriate adjustments to outstanding awards and the number of shares available for issuance under the Plan, including the individual limitations on awards, to reflect share dividends, share splits, spin-offs and other similar events. While the compensation committee can terminate or amend the Plan at any time, no amendment can adversely impair the rights of grantees with respect to outstanding awards. In addition, an amendment will be contingent on approval of the Trust’s common shareholders to the extent required by law or if the amendment would materially increase the benefits accruing to participants under the Plan, materially increase the aggregate number of shares that can be issued under the Plan, or materially modify the requirements as to eligibility for participation in the Plan. Unless terminated earlier, the Plan will terminate in January 2020, but will continue to govern unexpired awards.
For the
three months
ended
March 31, 2017
, the Trust granted
463,431
restricted common shares to certain employees, of which
161,766
shares were time-based awards and
301,665
shares were performance-based awards (the “2017 Performance-Based Awards”). The time-based awards are generally eligible to vest at the annual rate of one-third of the number of restricted shares granted commencing on the first anniversary of their issuance. The 2017 Performance-Based Awards are eligible to vest at
December 31, 2019
. Dividends on the 2017 Performance-Based Awards accrue, but are not paid unless the related shares vest. The fair value of the 2017 Performance-Based Awards was
$9.99
per share and was determined using a Monte Carlo simulation with the following assumptions: volatility of
24.16%
; an expected term equal to the requisite service period for the awards; and a risk-free interest rate of
1.57%
.
The actual number of shares under the 2017 Performance-Based Awards that vest will be based on the Trust’s total shareholder return (“TSR”), as defined in the restricted share agreements, measured over a
three
-year performance period ending
December 31, 2019
, relative to the total return generated by a market-cap weighted index that includes nine lodging REITs (the "Performance Peer Group"). The payout schedule for the 2017 Performance-Based Awards is as follows, with linear interpolation for performance between
67%
and
100%
, and between
100%
and
133%
of the Performance Peer Group:
|
|
|
|
Trust TSR as % of Performance Peer Group Total Return
|
|
Payout (% of Maximum)
|
<67%
|
|
0%
|
67%
|
|
25%
|
100%
|
|
50%
|
≥133%
|
|
100%
|
If the Trust’s TSR is negative for the performance period, no shares under the 2017 Performance-Based Awards will vest. If the Trust’s TSR is positive for the performance period and the total return of the Performance Peer Group is negative,
100%
of the shares subject to vesting under the 2017 Performance-Based Awards will vest.
As of
March 31, 2017
, there was approximately
$12.4 million
of unrecognized share-based compensation expense related to restricted common shares. The unrecognized share-based compensation expense is expected to be recognized over a weighted-average period of
2.2
years.
The following is a summary of the Trust’s restricted common share activity for the
three months
ended
March 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Weighted-Average Grant-Date Fair Value
|
Restricted common shares as of December 31, 2016
|
|
775,984
|
|
|
$
|
18.71
|
|
Granted
|
|
463,431
|
|
|
$
|
15.63
|
|
Vested
|
|
(168,081
|
)
|
|
$
|
26.45
|
|
Forfeited
|
|
—
|
|
|
$
|
—
|
|
Restricted common shares as of March 31, 2017
|
|
1,071,334
|
|
|
$
|
16.16
|
|
9. Fair Value Measurements
The Trust’s financial instruments include cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued expenses, and long-term debt. The carrying values reported in the consolidated balance sheets for cash and cash equivalents, restricted cash, accounts receivable, and accounts payable and accrued expenses approximate fair value. The Trust estimates the fair value of its fixed rate debt by discounting the future cash flows of each instrument using estimated market rates of debt instruments with similar maturities and credit profiles. These inputs are classified as Level 3 within the fair value hierarchy. As of
March 31, 2017
, the carrying value reported in the consolidated balance sheet for the Trust’s long-term debt approximated its fair value.
10. Commitments and Contingencies
Management Agreements
—The Trust’s hotels operate pursuant to management agreements with various third-party management companies. Each management company receives a base management fee generally between
2%
and
4%
of hotel revenues. The management companies are also eligible to receive an incentive management fee if hotel operating income, as defined in the management agreements, exceeds certain performance thresholds. The incentive management fee is generally calculated as a percentage of hotel operating income after the Trust has received a priority return on its investment in the hotel.
Franchise Agreements
—As of
March 31, 2017
,
12
of the Trust’s hotels operated pursuant to franchise agreements with hotel brand companies and
10
hotels operated pursuant to management agreements with hotel brand companies that allowed them to operate under their respective brands. Under the
12
franchise agreements, the Trust generally pays a royalty fee ranging from
3%
to
6%
of room revenues and up to
3%
of food and beverage revenues, plus additional fees for marketing, central reservation systems, and other franchisor costs that amount to between
1%
and
5%
of room revenues.
Ground Lease Agreements
—The Trust leases the land underlying the Hyatt Regency Mission Bay Spa and Marina pursuant to a lease agreement, which has an initial term ending
January 2056
. Rent due under the lease agreement is the greater of base rent or percentage rent. Base rent is currently
$2.3 million
per year. Base rent resets every
three
years over the remaining term of the lease equal to
75%
of the average of the actual rent paid over the
two
years preceding the base rent reset year. The next base rent reset year is 2019. Annual percentage rent is calculated based on various percentages of the hotel’s various sources of revenue, including room, food and beverage, and marina rentals, earned during the period.
The Trust also leases the land underlying the JW Marriott San Francisco Union Square pursuant to a lease agreement, which has a term ending
January 2083
. Rent due under the lease agreement is the greater of base rent or percentage rent. Base rent is currently
$1.7 million
per year. Base rent resets every
five
years over the remaining term of the lease based on the level of inflation, as defined in the agreement, over the preceding
five
years, but in no event resulting in an increase of more than
125%
of the base rent in effect immediately prior to the reset year (nor subject to any decrease). The next base rent reset year is 2019. In
January 2034
, base rent will reset to
10%
of the fair market value of the underlying land as determined by a valuation performed by an independent third party, if such reset results in an increase over the base rent in effect immediately prior to the reset year. Annual percentage rent is calculated based on various percentages of the hotel’s various sources of revenue, including room and food and beverage, earned during the period.
FF&E Reserves
—Pursuant to its management, franchise and loan agreements, the Trust is required to establish a FF&E reserve for each hotel to cover the cost of replacing FF&E. Contributions to the FF&E reserve are based on a percentage of gross revenues at each hotel. The Trust is generally required to contribute between
3%
and
5%
of gross revenues over the term of the agreements.
Litigation
—The Trust is not involved in any material litigation nor, to its knowledge, is any material litigation threatened against the Trust.
11. Subsequent Event
On April 21, 2017, the Trust closed on a
five
-year,
$225.0 million
unsecured term loan with a syndicate of banks. The term loan provides for the possibility of future increases, up to a maximum amount borrowed of
$375.0 million
, in accordance with the terms of the term loan agreement. The loan bears interest equal to LIBOR, plus
1.45%
-
2.20%
(the spread over LIBOR based on the Trust’s consolidated leverage ratio). Contemporaneous with the closing of the unsecured term loan, the Trust entered into an interest rate swap to fix LIBOR at
1.86%
for the
five
-year term. As of April 25, 2017, the effective interest rate on the unsecured term loan was
3.31%
. Proceeds from the term loan were used to repay outstanding borrowings under the revolving credit facility. The term loan agreement contains the same financial covenants as those contained in the Trust's revolving credit facility.