I
tem 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Statement Regarding Forward Looking Statements
This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including, without limitation, statements containing the words, “believe,” “expect,” “anticipate,” “estimate,” “plan,” “continue,” “intend,” “should,” “may” and words of similar import. Such forward-looking statements relate to future events, our plans, strategies, prospects and future financial performance, and involve known and unknown risks that are difficult to predict, uncertainties and other factors which may cause our actual results, performance or achievements or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Readers should specifically consider the various factors identified in this and other reports filed by us with the SEC, including, but not limited to those discussed in the section entitled “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2016, that could cause actual results to differ. Statements regarding the following subjects are forward-looking by their nature:
● our business or investment strategy;
● our projected operating results;
● our distribution policy;
● our liquidity;
● completion of any pending transactions;
● our ability to obtain future financing arrangements or refinance or extend the maturity of existing financing arrangements as they come due;
● our ability to repurchase shares on attractive terms from time to time;
● our understanding of our competition;
● market trends; and
● projected capital expenditures.
Forward-looking statements are based on our beliefs, assumptions and expectations, taking into account all information currently available to us. These beliefs, assumptions and expectations are subject to risks and uncertainties and can change as a result of many possible events or factors, not all of which are known to us. If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements. Readers should not place undue reliance on forward-looking statements. The following factors could cause actual results to vary from our forward-looking statements:
● general volatility of the capital markets and the market price of our common shares;
● changes in our business or investment strategy;
● availability, terms and deployment of capital;
● availability of qualified personnel;
● changes in our industry and the market in which we operate, interest rates, or the general economy;
● decreased international travel because of geopolitical events, including terrorism and current U.S. government policies;
● the degree and nature of our competition;
● financing risks, including the risk of leverage and the corresponding risk of default on our mortgage loans and other debt and potential inability to refinance or extend the maturity of existing indebtedness;
● levels of spending in the business, travel and leisure industries, as well as consumer confidence;
● declines in occupancy, average daily rate and RevPAR and other hotel operating metrics;
● hostilities, including future terrorist attacks, or fear of hostilities that affect travel;
● financial condition of, and our relationships with, our joint venture partners, third-party property managers, franchisors and hospitality joint venture partners;
● increased interest rates and operating costs;
● ability to complete development and redevelopment projects;
● risks associated with potential acquisitions, including the ability to ramp up and stabilize newly acquired hotels with limited or no operating history, and dispositions of hotel properties;
● availability of and our ability to retain qualified personnel;
● decreases in tourism due to geopolitical instability or changes in foreign exchange rates;
● our failure to maintain our qualification as a real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended;
● environmental uncertainties and risks related to natural disasters;
● changes in real estate and zoning laws and increases in real property tax rates; and
● the factors discussed in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2016 under the heading “Risk Factors” and in other reports we file with the SEC from time to time.
These factors are not necessarily all of the important factors that could cause our actual results, performance or achievements to differ materially from those expressed in or implied by any of our forward-looking statements. Other unknown or unpredictable factors, many of which are beyond our control, also could harm our results, performance or achievements.
All forward-looking statements contained in this report are expressly qualified in their entirety by the cautionary statements set forth above. Forward-looking statements speak only as of the date they are made, and we do not undertake or assume any obligation to update publicly any of these statements to reflect actual results, new information or future events, changes in assumptions or changes in other factors affecting forward-looking statements, except to the extent required by applicable laws. If we update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.
BACKGROUND
As of
June 30, 2017
, we owned interests in 51 hotels in major urban gateway markets including New York, Washington DC, Boston, Philadelphia, San Diego, Los Angeles, Seattle, and Miami, including 42 wholly-owned hotels and interests in 9 hotels owned through unconsolidated joint ventures.
We have elected to be taxed as a REIT for federal income tax purposes, beginning with the taxable year ended December 31, 1999. For purposes of the REIT qualification rules, we cannot directly operate any of our hotels. Instead, we must lease our hotels to a third party lessee or to a TRS, provided that the TRS engages an eligible independent contractor to manage the hotels. As of
June 30, 2017
, we have leased all of our hotels to a wholly-owned TRS, a joint venture owned TRS, or an entity owned by our wholly-owned TRS. Each of these TRS entities will pay qualifying rent, and the TRS entities have entered into management contracts with qualified independent managers, including HHMLP, with respect to our hotels. We intend to lease all newly acquired hotels to a TRS. The TRS structure enables us to participate more directly in the operating performance of our hotels. The TRS directly receives all revenue from, and funds all expenses relating to, hotel operations. The TRS is also subject to income tax on its earnings.
OVERVIEW
We believe the changes in our equity and debt capitalization and repositioning of our portfolio better enables us to capitalize on further improvement in lodging fundamentals.
During 2017 thus far, we continued to see improvements in Occupancy, ADR and RevPAR across most of our markets. We
continue to seek acquisition opportunities of both branded and independent hotels in urban centers and
central
business districts, as well as in select destination markets
.
In addition, we will continue to look for attractive opportunities to divest certain of our properties at favorable prices, potentially redeploying that capital in our focus markets or opportunistically repurchasing our common shares.
We expect continued stability and improvement in consumer and commercial spending and lodging demand in many of our markets during 2017. However some markets, such as New York City and South Florida, are encountering less favorable supply and demand dynamics
, which could affect individual hotel performance
. Industry wide occupancy has surpassed peak occupancy from the previous cycle which should allow hotel operators to increase ADR across the United States (“U.S.”). International visitation to the U.S. is expected to grow at a compound annual growth rate of
3.3%
through 2021, according to the National Travel and Tourism Office. However, the manner in which the economy will continue to grow, if at all, is not predictable. In addition, the availability of hotel-level financing for the acquisition of new hotels is not within our control. As a result, there can be no assurances that we will be able to grow hotel revenues, occupancy, ADR or RevPAR at our properties as we hope.
Factors that might contribute to less-than-anticipated performance include those described under the heading “Risk Factors” in our Annual Report on Form 10-K for
the year ended December 31, 2016
and other documents that we may file with the SEC in the future. We will continue to cautiously monitor lodging demand and rates, our third-party hotel managers, and our performance generally.
SUMMARY OF OPERATING RESULTS
The table below outlines operating results for the Company’s portfolio of wholly owned hotels consolidated in our financial statements for the three and six
months ended June 30, 2017 and 2016.
We define a comparable consolidated hotel as one that is currently consolidated, that we have owned in whole or in part for the entirety of the periods being presented, and is deemed fully operational.
Based on this definition, for the three and six months ended June 30, 2017 and 2016, there are 41 comparable consolidated hotels. The comparable key hotel operating statistics presented in the table below have been computed using pro forma methodology to compute the operating results for the portion of time prior to our ownership of hotels purchased during the comparable period for the three and six months ended June 30, 2017 compared to the three and six months ended June 30, 2016 for our comparable hotels.
For the comparison of June 30, 2017 to June 30, 2016, comparable hotel operating results contain results from our consolidated hotels owned as of June 30, 2017, excluding: (1) The Westin Philadelphia due to the fact that we owned the hotel for two days over the comparable periods and determined its inclusion not meaningful to the analysis; and (2) the results of all hotels sold since December 31, 2015. The comparison of the six months ended June 30, 2017 to June 30, 2016 includes results as reported by the prior owners for the following hotels acquired since December 31, 2015:
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Sanctuary Resort – Monterey, CA (acquired 1/28/2016)
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·
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Hilton Garden Inn M Street – Washington, DC (acquired 3/9/2016)
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·
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The Envoy – Boston, MA (acquired 7/21/2016)
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·
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Courtyard – Sunnyvale, CA (acquired 10/20/2016)
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·
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The Ambrose – Santa Monica, CA (acquired 12/1/2016)
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·
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Mystic Marriott Hotel & Spa – Groton, CT (acquired 1/3/2017)
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·
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The Ritz-Carlton – Coconut Grove, FL (acquired 2/1/2017)
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·
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The Pan Pacific Hotel – Seattle, WA (acquired 2/21/2017)
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The comparison of the three months ended June 30, 2017 to June 30, 2016 includes results as reported by the prior owners for the following hotels acquired since March 31, 2016:
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·
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The Envoy – Boston, MA (acquired 7/21/2016)
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·
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Courtyard – Sunnyvale, CA (acquired 10/20/2016)
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·
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The Ambrose – Santa Monica, CA (acquired 12/1/2016)
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·
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Mystic Marriott Hotel & Spa – Groton, CT (acquired 1/3/2017)
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·
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The Ritz-Carlton – Coconut Grove, FL (acquired 2/1/2017)
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·
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The Pan Pacific Hotel – Seattle, WA (acquired 2/21/2017)
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COMPARABLE CONSOLIDATED HOTELS:
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(includes 41 hotels in both periods)
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Three Months Ended
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Six Months Ended,
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June 30,
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June 30,
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2017
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2016
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Variance
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2017
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2016
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Variance
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Occupancy
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86.4%
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86.9%
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- 49 bps
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82.1%
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82.1%
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- 5 bps
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Average Daily Rate (ADR)
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$
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228.13
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$
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224.69
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1.5%
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$
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214.80
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$
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211.50
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1.6%
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Revenue Per Available Room (RevPAR)
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$
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197.03
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$
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195.16
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1.0%
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$
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176.33
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$
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173.71
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1.5%
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Room Revenues
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$
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110,122
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$
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109,076
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1.0%
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$
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196,024
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$
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194,163
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1.0%
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Total Revenues
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$
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132,230
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$
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130,211
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1.6%
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$
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235,872
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$
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232,648
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1.4%
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RevPAR for the three and six months ended June 30, 2017 increased 1.0% and 1.5%, respectively for our comparable consolidated hotels when compared to the same periods in 2016. The comparable RevPAR increases in 2017 are less than historical comparable hotel gr
owth experienced in 2016, and
can be mostly attributed to the
lagging performance of our South Florida market, which experienced comparable RevPAR decreases of 5.6% and 8.3%, respectively, for the three and six months ended June 30, 2017. Excluding the South Florida market, our comparable RevPAR growth would have been 1.9% and 3.4% for the three and six months ended June 30, 2017, respectively, which falls more in line with historic growth rates. Through six months of 2017, our strongest RevPAR growth from comparable consolidated hotels occurred in our Philadelphia, Boston, and Washington D.C. markets which experienced 6.2%, 7.3%, and 5.4% growth, respectively, when compared to 2016.
The table below outlines operating results for the Company’s portfolio of hotels we own through interests in unconsolidated joint ventures for the three and six
months ended June 30, 2017 and 2016.
We define a comparable unconsolidated joint venture hotel as one that is currently owned by our unconsolidated joint ventures in whole or in part for the entirety of the periods being presented, and is deemed fully operational.
Based on this definition, for the three and six months ended June 30, 2017 and 2016, there are 9 comparable unconsolidated joint venture hotels. The comparable key hotel operating statistics presented in the table below have been computed using pro forma methodology to compute the operating results for the portion of time prior to the joint venture’s ownership of hotels purchased during the comparable period for the three and six months ended June 30, 2017 compared to the three and six months ended June 30, 2016 for our comparable hotels.
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COMPARABLE UNCONSOLIDATED JOINT VENTURES:
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(includes 9 hotels in both periods)
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Three Months Ended
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Six Months Ended,
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June 30,
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June 30,
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2017
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2016
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Variance
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2017
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2016
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Variance
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Occupancy
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94.4%
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91.1%
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326 bps
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87.2%
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87.1%
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5 bps
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Average Daily Rate (ADR)
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$
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219.49
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$
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220.49
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-0.5%
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$
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189.84
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$
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185.07
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2.6%
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Revenue Per Available Room (RevPAR)
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$
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207.19
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$
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200.96
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3.1%
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$
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165.50
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$
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161.25
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2.6%
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Room Revenues
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$
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25,812
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$
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25,035
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3.1%
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$
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41,008
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$
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40,177
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2.1%
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Total Revenues
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$
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26,316
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$
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25,785
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2.1%
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$
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41,961
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$
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41,524
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1.1%
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Driving occupancy results, the Cindat properties experienced occupancy growth of 448 basis points and 148 basis points for the three and six months ended June 30, 2017. The properties within our unconsolidated joint ventures, on a comparable basis, generated 3.1% and 2.6% growth in RevPAR for the three and six months ended June 30, 2017, respectively. The increases in RevPAR are driven by the hotel properties located in New York City within the Cindat joint venture, which
increased
RevPAR growth of 3.6% and 4.0% for the three and six months ended June 30, 2017 over 2016.
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 2017 AND 2016
(dollars in thousands, except ADR, RevPAR, and per share data)
Revenue
Our total revenues for the three months ended June 30, 2017 consisted of hotel operating revenues and other revenue. Hotel operating revenues were approximately 99% of total revenues for the three months ended June 30, 2017 and 2016. Hotel operating revenues are recorded for wholly-owned hotels that are leased to our wholly owned TRS and hotels owned through joint venture or other interests that are consolidated in our financial statements. Hotel operating revenues increased $9,387 or 7.4%, to $
137,
016
for the three months ended June 30, 2017 compared to $127,629 for the same period in 2016. This increase in hotel operating revenues can be explained by the following table (Please note that the results of The Westin Philadelphia were excluded from this analysis as we only owned the hotel for two days during the period presented):
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Hotel Operating Revenue for the three months ended June 30, 2016
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$
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127,629
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Incremental Revenue Additions from Acquisitions (4/1/2016 - 6/30/2017):
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The Envoy - Boston, MA
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6,246
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Courtyard - Sunnyvale, CA
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2,828
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The Ambrose - Santa Monica, CA
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1,882
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Mystic Marriott Hotel & Spa - Groton, CT
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5,814
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The Ritz-Carlton - Coconut Grove, FL
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3,477
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The Pan Pacific Hotel - Seattle, WA
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3,967
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Total Incremental Revenue from Acquisitions
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24,214
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Incremental Revenue Reductions from Dispositions (4/1/2016 - 6/30/2017):
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Cindat Hotel Portfolio (7 hotels)
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(5,515)
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Hyatt Place - King of Prussia, PA
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(462)
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Hawthorn Suites - Franklin, MA
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(876)
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Residence Inn - Framingham, MA
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(1,626)
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Residence Inn - Norwood, MA
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(1,194)
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Residence Inn - Greenbelt, MD
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(1,850)
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Courtyard - Alexandria, VA
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(2,695)
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Hyatt House - Scottsdale, AZ
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(249)
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Hyatt House - Pleasant Hill, CA
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(746)
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Hyatt House - Pleasanton, CA
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(571)
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Total Incremental Revenue from Dispositions
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(15,784)
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Change in Hotel Operating Revenue for Remaining Hotels
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957
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Hotel Operating Revenue for the three months ended June 30, 2017
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$
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137,016
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Expenses
Total hotel operating expenses increased 16.1% to approximately $
76,
522
for the three months ended June 30, 2017 from $65,900 for the three months ended June 30, 2016. This increase in operating expenses is primarily attributable to hotel properties acquired in our existing portfolio, offset by a decrease in hotel operating expenses which were not recognized in the three months ended June 30, 2016 due to hotel dispositions and the contribution of seven hotel properties to the joint venture with Cindat. This increase in hotel operating expenses can be explained by the following table (Please note that the results of The Westin Philadelphia were excluded from this analysis as we only owned the hotel for two days during the period presented):
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Hotel Operating Expenses for the three months ended June 30, 2016
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$
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65,900
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Incremental Expense Additions from Acquisitions (4/1/2016 - 6/30/2017):
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The Envoy - Boston, MA
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3,359
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Courtyard - Sunnyvale, CA
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1,187
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The Ambrose - Santa Monica, CA
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875
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Mystic Marriott Hotel & Spa - Groton, CT
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4,009
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The Ritz-Carlton - Coconut Grove, FL
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3,138
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The Pan Pacific Hotel - Seattle, WA
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2,769
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Total Incremental Expenses from Acquisitions
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15,337
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Incremental Expense Reductions from Dispositions (4/1/2016 - 6/30/2017):
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Cindat Hotel Portfolio (7 hotels)
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(2,761)
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Hyatt Place - King of Prussia, PA
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(346)
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Hawthorn Suites - Franklin, MA
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(497)
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Residence Inn - Framingham, MA
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(777)
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Residence Inn - Norwood, MA
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(577)
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Residence Inn - Greenbelt, MD
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(782)
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Courtyard - Alexandria, VA
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(1,410)
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Hyatt House - Scottsdale, AZ
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(114)
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Hyatt House - Pleasant Hill, CA
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(258)
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Hyatt House - Pleasanton, CA
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(222)
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Total Incremental Expenses from Dispositions
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(7,744)
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Change in Hotel Operating Expenses for Remaining Hotels
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3,029
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Hotel Operating Expenses for the three months ended June 30, 2017
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$
|
76,522
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Depreciation and amortization increased by 8.8%, or $1,619, to $20,114 for the three months ended June 30, 2017 from $18,495 for the three months ended June 30, 2016. The increase in depreciation and amortization was primarily attributable to the depreciation and amortization recorded on the hotels recently acquired offset by the contribution of the seven hotel properties contributed to the joint venture with Cindat and other properties sold. Real estate and personal property tax and property insurance increased $119, or
1.5
%, for the three months ended June 30, 2017 when compared to the same period in 2016. This was primarily attributable to increases from properties acquired since April 1, 2016 which added $936 in expense offset by
$
1,192 in real estate and property insurance recognized for the seven hotel properties contributed to the joint venture with Cindat and other sold properties for the three months ended June 30, 2016 which was not an expense of the Company during the three months ended June 30, 2017. We otherwise typically experience increases in tax assessments and tax rates as the economy improves which are offset by reductions resulting from our management of this expense.
General and administrative expense increased by 2.2%, or approximately $143,
from $6,455 in the three months ended June 30, 2016 to $6,598 for the same period in 2017. General and administrative expense includes expense related to non-cash share based payments issued as incentive compensation to the Company’s trustees, executives, and employees. Expenses related to share based compensation increased $654 when comparing the three months ended June 30, 2017 to the same period in 2016. Please refer
to “Note 8 – Share Based Payments” of
the notes to the consolidated financial statements for more information about our share based compensation.
Amounts recorded on our consolidated statement of operations for acquisition and terminated transaction costs will fluctuate from period to period based on our acquisition activities. Acquisition and terminated transaction costs typically consist of transfer taxes, legal fees and other costs associated with acquiring a hotel property and transactions that were terminated during the year. Acquisition and terminated transaction costs increased $1,069 from $55 for the three months ended June 30, 2016 to $1,124 for the same period in 2017.
Operating Income
Operating income for the three months ended June 30, 2017 was $24,684 compared to operating income of $27,977 during the same period in 2016
. O
perating income was
negatively
impacted by
increased
costs in areas such as
hotel operating expenses
, acquisition expenses
, and depreciation and amortization.
Interest Expense
Interest expense decreased $691 from $11,281 for the three months ended June 30, 2016 to $10,590 for the three months ended June 30, 2017. The balance of
our borrowings have increased by $14,412 in total between June 30, 2016 and June 30, 2017, as we have entered into the Third Term Loan in the amount of $200,000 and assumed the $40,600 mortgage on the Courtyard, Sunnyvale, CA which were partially offset by debt paydowns of $226,188 since June 30, 2016. While the balance of outstanding borrowings has risen since June 30, 2016, the corresponding interest expense has decreased due to a reduction in interest rate on outstanding debt. The debt that was paid off since June 30, 2016 had a weighted average interest rate of 5.94% at June 30, 2016, while the $200,000 borrowing under the Third Term Loan as a fixed weighted average rate of 3.38% resulting
in
the majority of the decrease in interest expense for the three months ended June 30, 2017 when compared to 2016.
Gain on Disposition of Hotel Properties
During the three months ended
June 30
, 2017
, the Company recorded a
gain
of $
70,852
related to the sale
s
of the
Hyatt House, Scottsdale, AZ, the Hyatt House, Pleasanton, CA, and the Hyatt House, Pleasant Hill, CA
.
This is compared to a gain on sale recognized during the three months ended June 30, 2016 of $95,276
related to the contribution of seven properties to the Cindat joint venture and the sale of the Hyatt Place, King of Prussia, PA.
Unconsolidated Joint Venture Investments
The
income
from unconsolidated joint ventures consists of our interest in the operating results of the proper
ties we own in joint ventures. Income
from our
unconsolidated joint ventures de
creased by $
810
from $
1,521
for the three months ended
June 30, 2016
compared to $
711
during the same period in 201
7
.
Income Tax
Expense
During the three months ended
June 30
, 2017, the Company recorded an income tax expense of $
662
compared to an income tax
benefit
of $
3,070
for the three months ended
June 30
, 2016
. The amoun
t of income tax expense or benefit that the Company records depends mostly on the amount of taxable income or loss that is generated by our consolidated taxable REIT subsidiaries (“TRS”). The 2017 taxable income forecasted from our consolidated TRS’s resulted in the Company recording an income tax expense for the three months ended June 30, 2017 compared to 2016 forecasted taxable losses that generated the income tax benefit recorded for the three months June 30, 2016. Despite anticipating taxable income for the year ended 2017 at our consolidated TRS’s the Company anticipates that any federal tax liability will be fully absorbed by the application of net operating loss carryforwards.
Net Income Applicable to Common Shareholders
Net income applicable to common shareholders for the three months ended
June 30
, 2017 was $73,988 compared to $102,190 during the same
period in 2016
.
This de
crease was primarily
related to
the
difference in the
gain recognized on the sale of hotel properties
during the respective periods and the increase in income tax expense for the three months ended June 30, 2017 compared to the same period in 2016
.
Also affecting net income applicable to common shareholders is an increase in dividends declared on preferred shares, which increased approximately $2,000 during the three months ended June 30, 2017 when compared to the same period in 2016 due to the issuance of the Series D Preferred Shares and Series E Preferred Shares during 2016 offset by the redemption of Series B Preferred Shares during 2016.
Comprehensive Income Attributable to Common Shareholders
Comprehensive income attributable to common shareholders for the three months ended
June 30
, 2017
was $76,320 compared to $102,206 for the same period in 2016. For the three months ended
June 30
, 2017, we recorded comprehensive income of $83,479 compared to $114,975 for the three months ended
June 30
, 2016.
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2017 AND 2016
(dollars in thousands, except ADR, RevPAR, and per share data)
Revenue
Our total revenues for the six months ended June 30, 2017 consisted of hotel operating revenues and other revenue. Hotel operating revenues were approximately 99% of total revenues for the six months ended June 30, 2017 and 2016. Hotel operating revenues are recorded for wholly-owned hotels that are leased to our wholly owned TRS and hotels owned through joint venture or other interests that are consolidated in our financial statements. Hotel operating revenues increased $10,492 or 4
.
5%, to $244
,
968
for the six months ended June 30, 2017 compared to $234,476 for the same period in 2016. This increase in hotel operating revenues can be explained by the following table (Please note that the results of The Westin Philadelphia were excluded from this analysis as we only owned the hotel for two days during the period presented):
|
|
|
|
|
|
|
Hotel Operating Revenue for the six months ended June 30, 2016
|
|
|
|
$
|
234,476
|
Incremental Revenue Additions from Acquisitions (1/1/2016 - 6/30/2017):
|
|
|
|
|
|
|
Sanctuary Resort – Monterey, CA
|
|
$
|
317
|
|
|
|
Hilton Garden Inn M Street – Washington, DC
|
|
|
2,456
|
|
|
|
The Envoy - Boston, MA
|
|
|
9,194
|
|
|
|
Courtyard - Sunnyvale, CA
|
|
|
5,425
|
|
|
|
The Ambrose - Santa Monica, CA
|
|
|
3,517
|
|
|
|
Mystic Marriott Hotel & Spa - Groton, CT
|
|
|
10,152
|
|
|
|
The Ritz-Carlton - Coconut Grove, FL
|
|
|
6,531
|
|
|
|
The Pan Pacific Hotel - Seattle, WA
|
|
|
5,309
|
|
|
|
Total Incremental Revenue from Acquisitions
|
|
|
|
|
42,901
|
Incremental Revenue Reductions from Dispositions (1/1/2016 - 6/30/2017):
|
|
|
|
|
|
|
Cindat Hotel Portfolio (7 hotels)
|
|
|
(18,109)
|
|
|
|
Hyatt Place - King of Prussia, PA
|
|
|
(1,460)
|
|
|
|
Hawthorn Suites - Franklin, MA
|
|
|
(1,363)
|
|
|
|
Residence Inn - Framingham, MA
|
|
|
(2,645)
|
|
|
|
Residence Inn - Norwood, MA
|
|
|
(2,074)
|
|
|
|
Residence Inn - Greenbelt, MD
|
|
|
(3,436)
|
|
|
|
Courtyard - Alexandria, VA
|
|
|
(4,159)
|
|
|
|
Hyatt House - Scottsdale, AZ
|
|
|
(425)
|
|
|
|
Hyatt House - Pleasant Hill, CA
|
|
|
(743)
|
|
|
|
Hyatt House - Pleasanton, CA
|
|
|
(406)
|
|
|
|
Total Incremental Revenue from Dispositions
|
|
|
|
|
(34,820)
|
Change in Hotel Operating Revenue for Remaining Hotels
|
|
|
|
|
2,411
|
Hotel Operating Revenue for the six months ended June 30, 2017
|
|
|
|
$
|
244,968
|
Expenses
Total hotel operating expenses increased 9.2% to approximately $143
,
789
for the six months ended June 30, 2017 from $131,618 for the six months ended June 30, 2016. This increase in operating expenses is primarily attributable to hotel properties acquired in our existing portfolio, offset by a decrease in hotel operating expenses which were not recognized in the six months ended June 30, 2016 due to hotel dispositions and the contribution of seven hotel properties to the joint venture with Cindat. This increase in hotel operating expenses can be explained by the following table (Please note that the results of The Westin Philadelphia were excluded from this analysis as we only owned the hotel for two days during the period presented):
|
|
|
|
|
|
|
Hotel Operating Expenses for the six months ended June 30, 2016
|
|
|
|
$
|
131,618
|
Incremental Expense Additions from Acquisitions (1/1/2016 - 6/30/2017):
|
|
|
|
|
|
|
Sanctuary Resort – Monterey, CA
|
|
$
|
399
|
|
|
|
Hilton Garden Inn M Street – Washington, DC
|
|
|
1,361
|
|
|
|
The Envoy - Boston, MA
|
|
|
5,693
|
|
|
|
Courtyard - Sunnyvale, CA
|
|
|
2,321
|
|
|
|
The Ambrose - Santa Monica, CA
|
|
|
1,654
|
|
|
|
Mystic Marriott Hotel & Spa - Groton, CT
|
|
|
7,464
|
|
|
|
The Ritz-Carlton - Coconut Grove, FL
|
|
|
5,406
|
|
|
|
The Pan Pacific Hotel - Seattle, WA
|
|
|
3,872
|
|
|
|
Total Incremental Expenses from Acquisitions
|
|
|
|
|
28,170
|
Incremental Expense Reductions from Dispositions (1/1/2016 - 6/30/2017):
|
|
|
|
|
|
|
Cindat Hotel Portfolio (7 hotels)
|
|
|
(10,948)
|
|
|
|
Hyatt Place - King of Prussia, PA
|
|
|
(1,144)
|
|
|
|
Hawthorn Suites - Franklin, MA
|
|
|
(892)
|
|
|
|
Residence Inn - Framingham, MA
|
|
|
(1,428)
|
|
|
|
Residence Inn - Norwood, MA
|
|
|
(1,094)
|
|
|
|
Residence Inn - Greenbelt, MD
|
|
|
(1,529)
|
|
|
|
Courtyard - Alexandria, VA
|
|
|
(2,485)
|
|
|
|
Hyatt House - Scottsdale, AZ
|
|
|
(113)
|
|
|
|
Hyatt House - Pleasant Hill, CA
|
|
|
(258)
|
|
|
|
Hyatt House - Pleasanton, CA
|
|
|
(134)
|
|
|
|
Total Incremental Expenses from Dispositions
|
|
|
|
|
(20,025)
|
Change in Hotel Operating Expenses for Remaining Hotels
|
|
|
|
|
4,026
|
Hotel Operating Expenses for the six months ended June 30, 2017
|
|
|
|
$
|
143,789
|
Depreciation and amortization increased by 2.6%, or $1,021, to $39,576 for the six months ended June 30, 2017 from $38,555 for the six months ended June 30, 2016. The increase in depreciation and amortization was primarily attributable to the depreciation and amortization recorded on the hotels recently acquired offset by the contribution of the seven hotel properties contributed to the joint venture with Cindat and other properties sold. Real estate and personal property tax and property insurance decreased $1,411, or 8.2%, for the six months ended June 30, 2017 when compared to the same period in 2016. This was primarily attributable to increases from properties acquired since April 1, 2016 which added $2,201 in expense offset by
$
3,946 in real estate and property insurance recognized for the seven hotel properties contributed to the joint venture with Cindat and other sold properties for the six months ended June 30, 2016 which was not an expense of the Company during the six months ended June 30, 2017. We otherwise typically experience increases in tax assessments and tax rates as the economy improves which are offset by reductions resulting from our management of this expense.
General and administrative expense decreased by 5.3%, or approximately $632,
from $11,855 in the six months ended June 30, 2016 to $11,223 for the same period in 2017. General and administrative expense includes expense related to non-cash share based payments issued as incentive compensation to the Company’s trustees, executives, and employees. Expenses related to share based compensation decreased $323 when comparing the six months ended June 30, 2017 to the same period in 2016. Please refer
to “Note 8 – Share Based Payments” of
the notes to the consolidated financial statements for more information about our share based compensation.
Amounts recorded on our consolidated statement of operations for acquisition and terminated transaction costs will fluctuate from period to period based on our acquisition activities. Acquisition and terminated transaction costs typically consist of transfer taxes, legal fees and other costs associated with acquiring a hotel property and transactions that were terminated during the year. Acquisition and terminated transaction costs increased $261 from $1,563 for the six months ended June 30, 2016 to $1,824 for the same period in 2017.
Operating Income
Operating income for the six months ended June 30, 2017 was $32,195 compared to operating income of $32,095 during the same period in 2016
.
The slight increase in o
perating income
can be attributed to decreased
costs in areas such as
real estate taxes and insurance, and general and administrative expenses which were offset by decreased operating margins and increased depreciation and amortization expense.
Interest Expense
Interest expense decreased $3,063 from $23,502 for the six months ended June 30, 2016 to $20,439 for the six months ended June 30, 2017. The balance of
our borrowings have increased by $14,412 in total between June 30, 2016 and June 30, 2017, as we have entered into the Third Term Loan in the amount of $200,000 and assumed the $40,600 mortgage on the Courtyard, Sunnyvale, CA which were partially offset by debt paydowns of $226,188 since June 30, 2016. While the balance of outstanding borrowings has risen since June 30, 2016, the corresponding interest expense has decreased due to a reduction in interest rate on outstanding debt. The debt that was paid off since June 30, 2016 had a weighted average interest rate of 5.94% at June 30, 2016, while the $200,000 borrowing under the Third Term Loan as a fixed weighted average rate of 3.38% resulting
in
the majority of the decrease in interest expense for the
six
months ended June 30, 2017 when compared to 2016.
Gain on Disposition of Hotel Properties
During the
six
months ended
June 30
, 2017
, the Company recorded a
gain
of $
89,583
related to the sale
s
of the
Residence Inn, Greenbelt, MD, Courtyard, Alexandria, VA,
Hyatt House, Scottsdale, AZ, the Hyatt House, Pleasanton, CA, and the Hyatt House, Pleasant Hill, CA
.
This is compared to a gain on sale recognized during the six months ended June 30, 2016 of $95,276
related to the contribution of seven properties to the Cindat joint venture transaction and the sale of the Hyatt Place, King of Prussia, PA.
Unconsolidated Joint Venture Investments
The
income
from unconsolidated joint ventures consists of our interest in the operating results of the proper
ties we own in joint ventures. Income
from our
unconsolidated joint ventures de
creased by $
4,482
from
income of
$
1,307
for the
six
months ended
June 30, 2016
compared to
a loss of
$
3,175
during the same period in 201
7
.
We recognized a $16,239 gain on the remeasurement of investment in unconsolidated joint ventures related to our transfer and redemption of our joint venture interest in Mystic Partners, LLC. In exchange for our interest in the partnership, we received 100% ownership of the Mystic Marriott Hotel & Spa and $11,623 in cash proceeds.
Income Tax
Expense
During the
six
months ended
June 30
, 2017, the Company recorded an income tax expense of $
2,905
compared to an income tax
benefit
of $
3,070
for the
six
months ended
June 30
, 2016
.
The amoun
t of income tax expense or benefit that the Company records depends mostly on the amount of taxable income or loss that is generated by our consolidated taxable REIT subsidiaries (“TRS”). The 2017 taxable income forecasted from our consolidated TRS’s resulted in the Company recording an income tax expense for the six months ended June 30, 2017 compared to 2016 forecasted taxable losses that generated the income tax benefit recorded for the six months June 30, 2016. Despite anticipating taxable income for the year ended 2017 at our consolidated TRS’s the Company anticipates that any federal tax liability will be fully absorbed by the application of net operating loss carryforwards.
Net Income Applicable to Common Shareholders
Net income applicable to common shareholders for the six months ended
June 30
, 2017 was $92,720 compared to $90,869 during the same
period in 2016
.
This in
crease was primarily
related to an increase in income from unconsolidated joint venture investments, offset partially by an increase in income tax expense and a greater allocation of net income to noncontrolling interests and preferred shareholders
.
An increase in dividends declared on preferred shares, which increased approximately $4,500 during the three months ended June 30, 2017 when compared to the same period in 2016, is due to the issuance of the Series D Preferred Shares and Series E Preferred Shares during 2016 offset by the redemption of Series B Preferred Shares during 2016.
Comprehensive Income Attributable to Common Shareholders
Comprehensive income attributable to common shareholders for the six months ended
June 30
, 2017
was $91,555 compared to $90,648 for the same period in 2016. For the six months ended
June 30
, 2017, we recorded comprehensive income of $109,504 compared to $106,319 for the six months ended
June 30
, 2016.
LIQUIDITY, CAPITAL RESOURCES, AND EQUITY OFFERINGS
(dollars in thousands, except per share data)
Potential Sources of Capital
Our organizational documents do not limit the amount of indebtedness that we may incur. Our ability to incur additional debt is dependent upon a number of factors, including the current state of the overall credit markets, our degree of
leverage and borrowing restrictions imposed by existing lenders. Our ability to raise funds through the issuance of debt and equity securities is dependent upon, among other things, capital market volatility, risk tolerance of investors, general market conditions for REITs and market perceptions related to the Company’s ability to generate cash flow and positive returns on its investments.
In addition, our mortgage indebtedness contains various financial and non-financial covenants customarily found in secured, nonrecourse financing arrangements. If the specified criteria are not satisfied, the lender may be able to escrow cash flow generated by the property securing the applicable mortgage loan.
We have determined that all covenants contained in the loan agreements securing our hotel properties were met as of June 30, 2017.
We have unsecured debt fa
cilities in the aggregate of $96
0,
52
0 which is comprised of a $
46
0,
52
0 senior unsecured credit facility and two unsecured term loans totaling $500,000.
The unsecured credit facility (“C
redit Facility”) contains a $210
,
52
0 unsecured term loan (“First Term Loan”) and a $250,000 unsecured revolving line of credit (“Line of Credit”). This Credit Facility expires on February 28, 2018 and, provided no event of default has occurred, we may request that the lenders renew the credit facility for an additional one-year period. The Credit Facility is also expandable
by $3
50,000 at our request, subject to the satisfaction of certain conditions. Our two additional unsecured term loans are $300,000 (“Second Term Loan”) and $200,000 (“Third Term Loan”), which mature on August 10, 2020 and August 2, 2021, respectively.
As of
June 30
, 2017, the outstanding balance under the First Term Loan was $210,520, under the Second Term Loan was $300,000, under the Third Term Loan was $200,000 and we had no outstanding borrowings under the Line of Credit. As of
June 30
, 2017, our remaining borrowing capacity under the Credit Facility, Second Term Loan and Third Term Loan was $
140,485
which is based on certain operating metrics of unencumbered hotel properties designated as borrowing base assets.
We will continue to monitor our debt maturities to manage our liquidity needs. However, no assurances can be given that we will be successful in refinancing all or a portion of our future debt obligations due to factors beyond our control or that, if refinanced, the terms of such debt will not vary from the existing terms. As of
June 30
, 2017, we have
$36,080
of indebtedness maturing on or before December 31, 2017. We currently expect that cash requirements for all debt that is not refinanced by our existing lenders for which the maturity date is not extended will be met through a combination of cash on hand, refinancing the existing debt with new lenders, draws on the Line of Credit and the issuance of our securities.
In addition to the incurrence of debt and the offering of equity securities, dispositions of property or investment from a joint venture partner may serve as additional capital resources and sources of liquidity. We may recycle capital from stabilized assets, as evidenced by our transaction involving the Cindat JV properties, or from sales of non-core hotels in secondary and tertiary markets. Capital from these types of transactions is intended to be redeployed into high growth acquisitions, share buybacks, or to pay down existing debt.
Common Share Repurchase Plan
In October 2016, our Board of Trustees authorized a new share repurchase program for up to $100,000 of common shares which commenced upon the completion of the existing repurchase program. The new program will expire on December 31, 2017, unless extended by our Bo
ard of Trustees. For the six
months ended
June 30
, 2017, the Company repurchased no common shares.
Acquisitions
During the six months ended
June 30
, 2017, we acquired the following wholly-owned hotel properties:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hotel
|
|
Acquisition Date
|
|
|
Land
|
|
|
Buildings and Improvements
|
|
|
Furniture, Fixtures and Equipment
|
|
|
Other Intangibles
|
|
|
Total Purchase Price
|
|
|
Assumption of Debt
|
|
Mystic Marriott Hotel & Spa, Groton, CT
(1)
|
|
1/3/2017
|
|
$
|
1,420
|
|
$
|
40,440
|
|
$
|
7,240
|
|
$
|
899
|
*
|
$
|
49,999
|
|
$
|
41,333
|
|
The Ritz-Carlton, Coconut Grove, FL
|
|
2/1/2017
|
|
|
5,185
|
|
|
30,742
|
|
|
1,064
|
|
|
(291)
|
**
|
|
36,700
|
|
|
3,150
|
|
The Pan Pacific Hotel, Seattle, WA
|
|
2/21/2017
|
|
|
13,079
|
|
|
59,256
|
|
|
6,665
|
|
|
-
|
|
|
79,000
|
|
|
-
|
|
The Westin, Philadelphia, PA
|
|
6/29/2017
|
|
|
33,048
|
|
|
91,462
|
|
|
10,490
|
|
|
-
|
|
|
135,000
|
|
|
-
|
|
TOTAL
|
|
|
|
$
|
52,732
|
|
$
|
221,900
|
|
$
|
25,459
|
|
$
|
608
|
|
$
|
300,699
|
|
$
|
44,483
|
|
|
(1)
|
|
The Mystic Marriott Hotel & Spa was acquired as partial consideration within the transaction to redeem and transfer our joint venture interest in Mystic Partners, LLC.
|
*
Consists entirely of $899 of advanced bookings.
** Includes an intangible asset for a lease-in-place of $229, a
nd a below market lease liability of $520.
We intend to invest in additional hotels only as suitable opportunities arise and adequate sources of financing are available. We expect that future investments in hotels will depend upon and will be financed by, in whole or in part, our existing cash, the proceeds from additional issuances of common or preferred shares, proceeds from the sale of assets, issuances of Common Units, issuances of preferred units or other securities or borrowings secured by hotel assets and under our Line of Credit.
Operating Liquidity and Capital Expenditures
We expect to meet our short-term liquidity requirements generally through net cash provided by operations, existing cash balances and, if necessary, short-term borrowings under the Line of Credit. We believe that the net cash provided by operations in the coming year and borrowings drawn on the Line of Credit will be adequate to fund the Company’s operating requirements, monthly recurring debt service and the payment of dividends in accordance with REIT requirements of the Internal Revenue Code of 1986, as amended.
To qualify as a REIT, we must distribute annually at least 90% of our taxable income. This distribution requirement limits our ability to retain earnings and requires us to raise additional capital in order to grow our business and acquire additional hotel properties. However, there is no assurance that we will be able to borrow funds or raise additional equity capital on terms acceptable to us, if at all. In addition, we cannot guarantee that we will continue to make distributions to our shareholders at the current rate of $0.28 per common share per quarter or at all. Due to the seasonality of our business, cash provided by operating activities fluctuates significantly from quarter to quarter. However, we believe that, based on our current estimates, which include the addition of cash from operations provided by hotels acquired during 2017, our cash provided by operating activities will be sufficient over the next 12 months to fund the payment of our dividend at its current level. However, our Board of Trustees continues to evaluate the dividend policy in the context of our overall liquidity and market conditions and may elect to reduce or suspend these distributions.
Net cash provided by operating activities for the
six
months ended
June 30
, 2017 was $
67,538
and cash used for the payment of distributions and dividends for the
six
months ended
June 30
, 2017 was $
45
,
830
, which included a special dividend of $8,343 that was funded by a portion of our proceeds from 2016 d
ispositions.
We also project that our operating cash flow and available borrowings under the Line of Credit will be sufficient to satisfy our liquidity and other capital needs over the next twelve to eighteen months.
Our long-term liquidity requirements consist primarily of the costs of acquiring additional hotel properties, renovation and other non-recurring capital expenditures that need to be made periodically with respect to hotel properties and scheduled debt repayments. We will seek to satisfy these long-term liquidity requirements through various sources of capital, including borrowings under the Line of Credit and through secured, non-recourse mortgage financings with respect to our unencumbered hotel properties. In addition, we may seek to raise capital through public or private offerings of our securities. Certain factors may have a material adverse effect on our ability to access these capital sources, including our degree of leverage, the value of our unencumbered hotel properties and borrowing restrictions imposed by lenders or franchisors. We will continue to analyze
which source of capital is most advantageous to us at any particular point in time, but financing may not be consistently available to us on terms that are attractive, or at all.
Spending on capital improvements during the
six
months ended
June 30
, 2017 in
creased when compared to spending on capital improvements during the
six
months ended
June 30
, 2016
. During the
six
months ended
June 30,
2017
, we spent $
22,015
on capital expenditures to renovate, improve or replace assets at our hotels. This compares to $
18,276
during the same perio
d in 2016
. These capital expenditures were undertaken to comply with brand mandated improvements and to initiate projects that we believe will
generate a return on investment
.
We may spend additional amounts, if necessary, to comply with the requirements of any franchise license under which any of our hotels operate and otherwise to the extent we deem such expenditures to be prudent. We are also obligated to fund the cost of certain capital improvements to our hotels.
In addition to capital reserves required under certain loan agreements and capital expenditures to renovate, improve or replace assets at our hotels, we have opportunistically engaged in hotel development projects. During the
six
months ended
June 30
, 2017
, we spent $
1,005
on hotel deve
lopment projects compared to $0 during the same period of 2016
.
We expect to use operating cash flow, borrowings under the Line of Credit, and proceeds from issuances of our securities to pay for the cost of capital improvements and any furniture, fixture and equipment requirements in excess of the set aside referenced above.
CASH FLOW ANALYSIS
(dollars in thousands, except per share data)
Comparison of the Six Months Ended June 30, 2017 and 2016
Net cash provided by operating activities increased
$24,841
from $42,697 for the six months ended
June 30
, 2016 to
$67,538
for the comparable period in 2017. Net income, adjusted for non-cash items reflected in the statement of cash flows for the six months ended
June 30
, 2017 and 2016, increased by $2,666 for the six months ended
June 30
, 2017 when compared to 2016,
partially driven
by reduced costs in areas such as real estate taxe
s, and stock compensation expenses
. Further
, a net decrease in working capital assets provided additional cash from operating activities.
Net cash used in investing activities for the six months ended
June 30
, 2017 was $69,078 compared to net cash provided by investing activities of $301,486 for the six months ended
June 30
, 2016. During the six months ended
June 30
, 2017, we received $188,651 in proceeds from the disposition of five hotel properties. Additionally, we received $11,623 in proceeds from the sale of our joint venture interest in Mystic Partners. This is compared to $12,446 in proceeds from the disposition of one hotel
and $428,811 in proceeds received from the contribution of seven hotels to the Cindat joint venture
during the
six
months ended
June 30
, 2016. Offsetting these sources of funds were $
249
,
2
9
1
for the purchase of
three
hotel properties during the
six
months ended
June 30
, 2017 compared to $126,2
45
for the purchase of two hotel properties during the
six
months ended
June 30
, 2016.
Net cash used in financing activities for the
six
months ended
June 30
, 2017 was $
124,504
compared to net cash
used in
financing activities for the
six
months ended
June 30
, 2016 of $13
6
,
0
3
6
. This is primarily due to $121,
852
in repayments of mortgages payable offset partially by $43,900 in borrowings under the unsecured term loan facility during the
six
months ended
June 30
, 2017. During the
six
months ended
June 30
, 2016, we repa
id amounts on the line of credit, unsecured term loan, and
mortgages payable of $
131
,
19
0.
Also during the six months ended June 30, 2016 we redeemed our Series B Preferred Shares in June 2016 for $115,000 and repurchased $39,127 of our Class A Common Shares, which were offset by $186,010 in proceeds from our Series D Preferred Shares.
In addition, dividends and distributions paid during the
six
months ended
June 30
, 2017 increased $10,
3
5
6
when compared to the same period in 2016, due to the increased number of preferred shares outstan
ding over the comparable period
, and the special dividend declared on common shares during the fourth quarter of 2016 that was paid
during the first three months of 2017.
OFF BALANCE SHEET ARRANGEMENTS
The Company does not have off balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
FUNDS FROM OPERATIONS
(in thousands, except share data)
The National Association of Real Estate Investment Trusts (“NAREIT”) developed Funds from Operations (“FFO”) as a non-GAAP financial measure of performance of an equity REIT in order to recognize that income-producing real estate historically has not depreciated on the basis determined under GAAP. We calculate FFO applicable to common shares and Common Units in accordance with the April 2002 National Policy Bulletin of NAREIT, which we refer to as the White Paper. The White Paper defines FFO as net income (loss) (computed in accordance with GAAP) excluding extraordinary items as defined under GAAP and gains or losses from sales of previously depreciated assets, plus certain non-cash items, such as loss from impairment of assets and depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Our interpretation of the NAREIT definition is that noncontrolling interest in net income (loss) should be added back to (deducted from) net income (loss) as part of reconciling net income (loss) to FFO. Our FFO computation may not be comparable to FFO reported by other REITs that do not compute FFO in accordance with the NAREIT definition, or that interpret the NAREIT definition differently than we do.
The GAAP measure that we believe to be most directly comparable to FFO, net income (loss) applicable to common shareholders, includes loss from the impairment of certain depreciable assets, our investment in unconsolidated joint ventures and land, depreciation and amortization expenses, gains or losses on property sales, noncontrolling interest and preferred dividends. In computing FFO, we eliminate these items because, in our view, they are not indicative of the results from our property operations. We determined that the loss from the impairment of certain depreciable assets including investments in unconsolidated joint ventures and land, was driven by a measurable decrease in the fair value of certain hotel properties and other assets as determined by our analysis of those assets in accordance with applicable GAAP. As such, these impairments have been eliminated from net loss to determine FFO.
FFO does not represent cash flows from operating activities in accordance with GAAP and should not be considered an alternative to net income as an indication of the Company’s performance or to cash flow as a measure of liquidity or ability to make distributions. We consider FFO to be a meaningful, additional measure of operating performance because it excludes the effects of the assumption that the value of real estate assets diminishes predictably over time, and because it is widely used by industry analysts as a performance measure. We show both FFO from consolidated hotel operations and FFO from unconsolidated joint ventures because we believe it is meaningful for the investor to understand the relative contributions from our consolidated and unconsolidated hotels. The display of both FFO from consolidated hotels and FFO from unconsolidated joint ventures allows for a detailed analysis of the operating performance of our hotel portfolio by management and investors. We present FFO applicable to common shares and Common Units because our Common Units are redeemable for common shares. We believe it is meaningful for the investor to understand FFO applicable to all common shares and Common Units.
The following table reconciles FFO for the periods presented to the most directly comparable GAAP measure, net income, for the same periods
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30, 2017
|
|
|
June 30, 2016
|
|
|
June 30, 2017
|
|
|
June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common shareholders
|
|
$
|
73,988
|
|
$
|
102,190
|
|
$
|
92,720
|
|
$
|
90,869
|
Income allocated to noncontrolling interest
|
|
|
4,758
|
|
|
4,748
|
|
|
5,939
|
|
|
4,061
|
(Income) from unconsolidated joint ventures
|
|
|
(711)
|
|
|
(1,521)
|
|
|
(13,064)
|
|
|
(1,307)
|
Gain on disposition of hotel properties
|
|
|
(70,852)
|
|
|
(95,276)
|
|
|
(89,583)
|
|
|
(95,276)
|
Depreciation and amortization
|
|
|
20,114
|
|
|
18,495
|
|
|
39,576
|
|
|
38,555
|
Funds from consolidated hotel operations applicable to common shareholders and Common Units
|
|
|
27,297
|
|
|
28,636
|
|
|
35,588
|
|
|
36,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from unconsolidated joint ventures
|
|
|
711
|
|
|
1,521
|
|
|
13,064
|
|
|
1,307
|
Gain from remeasurement of investment in unconsolidated joint ventures
|
|
|
-
|
|
|
-
|
|
|
(16,239)
|
|
|
-
|
Depreciation and amortization of difference between purchase price and historical cost
(1)
|
|
|
(302)
|
|
|
(91)
|
|
|
(604)
|
|
|
29
|
Interest in depreciation and amortization of unconsolidated joint ventures
(2)
|
|
|
2,305
|
|
|
3,433
|
|
|
6,439
|
|
|
4,039
|
Funds from unconsolidated joint ventures operations applicable to common shareholders and Common Units
|
|
|
2,714
|
|
|
4,863
|
|
|
2,660
|
|
|
5,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds from Operations applicable to common shareholders and Common Units
|
|
$
|
30,011
|
|
$
|
33,499
|
|
$
|
38,248
|
|
$
|
42,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Common Shares and Common Units
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
41,737,044
|
|
|
43,427,726
|
|
|
41,727,056
|
|
|
43,903,526
|
Diluted
|
|
|
44,923,792
|
|
|
46,047,585
|
|
|
44,874,865
|
|
|
46,505,229
|
(1) Adjustment made to add depreciation of purchase price in excess of historical cost of the assets in the unconsolidated joint venture at the time of our investment.
(2) Adjustment made to add our interest in real estate related depreciation and amortization of our unconsolidated joint ventures. Allocation of depreciation and amortization is consistent with allocation of income and loss.
Based on guidance provided by NAREIT, we have eliminated loss from the impairment of certain depreciable assets, including investments in unconsolidated joint ventures and land, from net loss to arrive at FFO in each year presented.
INFLATION
Operators of hotel properties, in general, possess the ability to adjust room rates daily to reflect the effects of inflation. However, competitive pressures may limit the ability of our management companies to raise room rates.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The estimates and assumptions made by management in applying critical accounting policies have not changed materially during 2017 and 2016 and none of the estimates or assumptions have proven to be materially incorrect or resulted in our recording any significant adjustments relating to prior periods. See Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2016 for a summary of the accounting policies that management believes are critical to the preparation of the consolidated financial statements.
Revenue Recognition
Approximately 100% of our revenues are derived from hotel room revenues and revenue from other hotel operating departments. We directly recognize revenue and expense for all consolidated hotels as hotel operating revenue and hotel operating expense when earned and incurred. These revenues are recorded net of any sales or occupancy taxes collected from our guests. All revenues are recorded on an accrual basis, as earned. We participate in frequent guest programs sponsored by the brand owners of our hotels and we expense the charges associated with those programs, as incurred.
Other revenues consist primarily of fees earned for asset management services provided to hotels we own through unconsolidated joint ventures. Fees are earned as a percentage of hotel revenue and are recorded in the period earned.
Investment in Hotel Properties
Investments in hotel properties are recorded at cost. Improvements and replacements are capitalized when they extend the useful life of the asset. Costs of repairs and maintenance are expensed as incurred. Depreciation is computed using the straight-line method over the estimated useful life of up to 40 years for buildings and improvements, two to seven years for furniture, fixtures and equipment. We are required to make subjective assessments as to the useful lives of our properties for purposes of determining the amount of depreciation to record on an annual basis with respect to our investments in hotel properties. These assessments have a direct impact on our net income because if we were to shorten the expected useful lives of our investments in hotel properties we would depreciate these investments over fewer years, resulting in more depreciation expense and lower net income on an annual basis.
Identifiable assets, liabilities, and noncontrolling interests related to hotel properties acquired in a business combination are recorded at full fair value. Estimating techniques and assumptions used in determining fair values involve significant estimates and judgments. These estimates and judgments have a direct impact on the carrying value of our assets and liabilities which can directly impact the amount of depreciation expense recorded on an annual basis and could have an impact on our assessment of potential impairment of our investment in hotel properties.
Properties intended to be sold are designated as “held for sale” on the balance sheet. In accordance with ASU Update No. 2014-08 concerning the classification and reporting of discontinued operations, we evaluate each disposition to determine whether we need to classify the disposition as discontinued operations. This amendment defines discontinued operations as a component of an entity that represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. We anticipate that most of our hotel dispositions will not be classified as discontinued operations as most will not fit this definition.
Based on the occurrence of certain events or changes in circumstances, we review the recoverability of the property’s carrying value. Such events or changes in circumstances include the following:
|
·
|
|
a significant decrease in the market price of a long-lived asset;
|
|
·
|
|
a significant adverse change in the extent or manner in which a long-lived asset is being used or in its physical condition;
|
|
·
|
|
a significant adverse change in legal factors or in the business climate that could affect the value of a long-lived asset, including an adverse action or assessment by a regulator;
|
|
·
|
|
an accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset;
|
|
·
|
|
a current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset; and
|
|
·
|
|
a current expectation that, it is more likely than not that, a long-lived asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life.
|
We review our portfolio on an on-going basis to evaluate the existence of any of the aforementioned events or changes in circumstances that would require us to test for recoverability. In general, our review of recoverability is based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property’s use and eventual disposition. These estimates consider factors such as expected future operating income, market and other applicable trends and residual value expected, as well as the effects of hotel demand, competition and other factors. If impairment exists due to the inability to recover the carrying value of a property, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property. We are required to make subjective assessments as to whether there are impairments in the values of our investments in hotel properties.
As of June 30, 2017, based on our analysis, we have determined that the estimated future cash flow of each of the properties in our portfolio is sufficient to recover its carrying value.
Investment in Joint Ventures
Properties owned in joint ventures are consolidated if the determination is made that we are the primary beneficiary in a variable interest entity (VIE) or we maintain control of the asset through our voting interest or other rights in the operation of the entity. To determine if we are the primary beneficiary of a VIE, we evaluate whether we have a controlling financial interest in that VIE. An enterprise is deemed to have a controlling financial interest if it has i) the power to direct the activities of a VIE
that most significantly impact the entity’s economic performance, and ii) the obligation to absorb losses of the VIE that could be significant to the VIE or the rights to receive benefits from the VIE that could be significant to the VIE. Control can also be demonstrated by the ability of a member to manage day-to-day operations, refinance debt and sell the assets of the partnerships without the consent of the other member and the inability of the members to replace the managing member. This evaluation requires significant judgment.
If it is determined that we do not have a controlling interest in a joint venture, either through our financial interest in a VIE or our voting interest in a voting interest entity, the equity method of accounting is used. Under this method, the investment, originally recorded at cost, is adjusted to recognize our share of net earnings or losses of the affiliates as they occur rather than as dividends or other distributions are received, limited to the extent of our investment in, advances to and commitments for the investee. Pursuant to our joint venture agreements, allocations of profits and losses of some of our investments in unconsolidated joint ventures may be allocated disproportionately as compared to nominal ownership percentages due to specified preferred return rate thresholds.
The Company periodically reviews the carrying value of its investment in unconsolidated joint ventures to determine if circumstances exist indicating impairment to the carrying value of the investment that is other than temporary. When an impairment indicator is present, we will estimate the fair value of the investment. Our estimate of fair value takes into consideration factors such as expected future operating income, trends and prospects, as well as the effects of demand, competition and other factors. This determination requires significant estimates by management, including the expected cash flows to be generated by the assets owned and operated by the joint venture. Subsequent changes in estimates could impact the determination of whether impairment exists. To the extent impairment has occurred, the loss will be measured as the excess of the carrying amount over the fair value of our investment in the unconsolidated joint venture.
Accounting for Derivative Financial Investments and Hedging Activities
We use derivatives to hedge, fix and cap interest rate risk and we account for our derivative and hedging activities by recording all derivative instruments at fair value on the balance sheet. Derivative instruments designated in a hedge relationship to mitigate exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. We formally document all relationships between hedging instruments and hedged items, as well as our risk-management objective and strategy for undertaking each hedge transaction. Cash flow hedges that are considered highly effective are accounted for by recording the fair value of the derivative instrument on the balance sheet as either an asset or liability, with a corresponding amount recorded in other comprehensive income within shareholders’ equity. Amounts are reclassified from other comprehensive income to the income statements in the period or periods the hedged forecasted transaction affects earnings.
Under cash flow hedges, derivative gains and losses not considered highly effective in hedging the change in expected cash flows of the hedged item are recognized immediately in the income statement. For hedge transactions that do not qualify for the short-cut method, at the hedge’s inception and on a regular basis thereafter, a formal assessment is performed to determine whether changes in the cash flows of the derivative instruments have been highly effective in offsetting changes in cash flows of the hedged items and whether they are expected to be highly effective in the future.
New Accounting Pronouncements
In February 2017, the FASB issued ASU No. 2017-05,
Other Income – Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20)
. The update defines the term “in substance nonfinancial asset” as it is presented in Subtopic 610-20 as a “financial asset promised to a counterparty in a contract if substantially all of the fair value of the assets that are promised to the counterparty in the contract is concentrated in nonfinancial assets.” As it relates to the Company, real estate, such as land and building, would be considered an example of a nonfinancial asset. Additionally, the update provides guidance over partial sale transactions, particularly, when an entity should derecognize a distinct nonfinancial asset or in substance nonfinancial asset in a partial sale transaction, and the extent of gain that should be recognized as a result of the partial sale transaction. This standard is effective in conjunction with ASU No. 2014-09 (presented below), which is effective for periods beginning after December 15, 2017, however early adoption is permitted. The provisions of this update must be applied at the same time as the adoption of ASU No. 2014-09. The Company is currently evaluating how the provisions of this update affect our adoption of ASU No. 2014-09. See below for our discussion of ASU No. 2014-09 and the effect
it
will have on our consolidated financial statements and related disclosures.
In January 2017, the FASB issued ASU No. 2017-01,
Business Combinations (Topic 805):
Clarifying the Definition of a
Business
, which clarifies the definition of a business as it relates to acquisitions and business combinations. The update adds further guidance that assists preparers in evaluating whether a transaction will be accounted for as an acquisition of an asset or a business. We expect most of our hotel property acquisitions to qualify as asset acquisitions under the standard which permits the capitalization of acquisition costs to the underlying assets.
For the six months ended June 30, 2017, the Company incurred
$1,824 in acquisition costs that would have been subject to capitalization under this ASU.
This standard is effective for periods beginning after December 31, 2017, however early adoption is permitted. The Company is evaluating the ultimate effect that ASU No. 2017-01 will have on our consolidated financial statements and related disclosures.
We adopted ASU No. 2016-09,
Improvements to Employee Share-Based Award Payment Accounting
, which simplifies various aspects of how share-based payments are accounted for and presented in the financial statements. This standard requires companies to record all of the tax effects related to share-based payments through the income statement, allows companies to elect an accounting policy to either estimate the share based award forfeitures (and expense) or account for forfeitures (and expense) as they occur, and allows companies to withhold a percentage of the shares issuable upon settlement of an award up to the maximum individual statutory tax rate without causing the award to be classified as a liability.
The Company has elected to expense forfeitures of share-based award as they occur as our accounting policy.
The adoption of ASU No. 2016-09 had no material impact on our consolidated financial statements and related disclosures.
In November 2016, the FASB issued ASU No. 2016-18,
Statement of Cash Flows (Topic 230)
, which provides guidance on the presentation of restricted cash or restricted cash equivalents within the statement of cash flows
.
Accordingly
, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows
.
This standard is effective
for the Company
for per
iods beginning after December 15
, 2017
. The adoption of ASU No. 2016-18 will change the presentation of the statement of cash flows for the Company and we will utilize a retrospective transition method for each period presented within financial statements for periods subsequent to the date of adoption
In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842),
which provides the principles for the recognition, measurement, presentation and disclosure of leases. The accounting for lessors will remain largely unchanged from current GAAP; however, the standard requires that certain initial direct costs be expensed rather than capitalized. Under the standard, lessees apply a dual approach, classifying leases as either finance or operating leases. A lessee is required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months, regardless of their lease classification. Based on the review of our leases, we are a lessee on ground leases in certain markets
, hotel equipment leases,
and office space leases.
We are also a lessor in certain office space and retail lease agreements related to our hotels. While wwe do not anticipate any material change to the accounting for leases under which we are a lessor, we are still evaluating the impact, if any, this ASU will have on the accounting for our leasing arrangements as well as our disclosures within the notes to our financial statements.
This standard will be effective for the first annual reporting period beginning after December 15, 2018. The Company is evaluating the effect that ASU No. 2016-02 will have on its consolidated financial statements and related disclosures
.
On May 28, 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers
, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. We are evaluating each of our revenue streams and related accounting policy under the standard. The new standard is effective for the Company on January 1, 2018. Early adoption is permitted, but not prior to the original effective date of January 1, 2017. The standard permits the use of either the retrospective or cumulative effect transition method. Based on our analysis to date, we do not expect the new revenue recognition model to have a material impact on our hotel operating revenue, including room revenue, food and beverage, and other revenue, however, our final evaluation has not been concluded. Our evaluation under the standard also includes sales to third parties, primarily a result of dispositions of real estate. Our evaluation over sales of real estate
is continuing and
will be
impacted by
the FASB
definition of
a business
and in substance nonfinancial assets
, which ha
ve
recently been addressed through
the issuance of ASU No. 2017-01 and ASU No. 2017-05, respectively
. The Company continues to evaluate the ultimate effect that ASU No. 2014-09 will have on its consolidated financial statements and related disclosures.