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Item 2.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
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The following should be read in conjunction with the consolidated financial statements and notes thereto appearing in Part I - Item 1 of this report.
Forward-Looking Statements
This report, together with other statements and information publicly disseminated by LaSalle Hotel Properties (the “Company”), contains certain 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. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and includes this statement for purposes of complying with these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe the Company’s future plans, strategies and expectations, are generally identifiable by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” “may,” “plan,” “seek,” “should,” “will” or similar expressions. Forward-looking statements in this report include, among others, statements about the Company’s business strategy, including its acquisition and development strategies, industry trends, estimated revenues and expenses, ability to realize deferred tax assets, expected liquidity needs and sources (including capital expenditures and the ability to obtain financing or raise capital) and the Company’s two resorts located in Key West, FL, including the condition of the properties, the estimated cleanup and repair costs related to Hurricane Irma and the timing of re-opening and resumption of full operations at the properties. You should not rely on forward-looking statements since they involve known and unknown risks, uncertainties and other factors that are, in some cases, beyond the Company’s control and which could materially affect actual results,
performances or achievements. Factors that may cause actual results to differ materially from current expectations include, but are not limited to:
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risks associated with the hotel industry, including competition for guests and meetings from other hotels and alternative lodging companies, increases in wages, energy costs and other operating costs, potential unionization or union disruption, actual or threatened terrorist attacks, any type of flu or disease-related pandemic and downturns in general and local economic conditions;
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the availability and terms of financing and capital and the general volatility of securities markets;
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the Company’s dependence on third-party managers of its hotels, including its inability to implement strategic business decisions directly;
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risks associated with the real estate industry, including environmental contamination and costs of complying with the Americans with Disabilities Act of 1990, as amended, and similar laws;
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interest rate increases;
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the possible failure of the Company to maintain its qualification as a real estate investment trust (“REIT”) as defined in the Internal Revenue Code of 1986, as amended (the “Code”) and the risk of changes in laws affecting REITs;
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the possibility of uninsured losses;
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risks associated with redevelopment and repositioning projects, including delays and cost overruns;
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the risk of a material failure, inadequacy, interruption or security failure of the Company’s or the hotel managers’ information technology networks and systems; and
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the risk factors discussed in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2016
, as updated elsewhere in this report.
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Accordingly, there is no assurance that the Company’s expectations will be realized. Any forward-looking statement speaks only as of the date on which it is made. New risks and uncertainties arise over time, and it is not possible for the Company to predict those events or how they may affect the Company. Except as otherwise required by law, the Company disclaims any obligations or undertaking to publicly release any updates or revisions to any forward-looking statement contained herein (or elsewhere) to reflect any change in the Company’s expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. Accordingly, investors should use caution in relying on past forward-looking statements, which were based on results and trends at the time they were made, to anticipate future events or trends.
Overview
The Company, a Maryland real estate investment trust organized on January 15, 1998, primarily buys, owns, redevelops and leases upscale and luxury full-service hotels located in convention, resort and major urban business markets. The Company is a self-administered and self-managed REIT as defined in the Code. As a REIT, the Company is generally not subject to federal corporate income tax on that portion of its net income that is currently distributed to its shareholders. The income of LaSalle Hotel Lessee, Inc. (together with its wholly owned subsidiaries, “LHL”), the Company’s wholly owned taxable REIT subsidiary, is subject to taxation at normal corporate rates.
As of
September 30, 2017
, the Company owned interests in
41
hotels with approximately
10,450
guest rooms located in
seven
states and the District of Columbia. Each hotel is leased to LHL under a participating lease that provides for rental payments equal to the greater of (i) a base rent or (ii) a participating rent based on hotel revenues. The LHL leases expire between
December 2017
and
December 2019
. A third-party non-affiliated hotel operator manages each hotel pursuant to a hotel management agreement.
Substantially all of the Company’s assets are held directly or indirectly by, and all of its operations are conducted through, LaSalle Hotel Operating Partnership, L.P. (the “Operating Partnership”). The Company is the sole general partner of the Operating Partnership. The Company owned, through a combination of direct and indirect interests,
99.9%
of the common units of the Operating Partnership at
September 30, 2017
. The remaining
0.1%
is held by limited partners who held
145,223
common units of the Operating Partnership at
September 30, 2017
.
In addition to measuring the Company’s net income (loss), the Company also measures hotel performance by evaluating financial metrics such as room revenue per available room (“RevPAR”), funds from operations (“FFO”) and earnings before interest, taxes, depreciation and amortization (“EBITDA”). The Company evaluates the hotels in its portfolio and potential acquisitions using these metrics to determine each hotel’s contribution or potential contribution toward reaching the Company’s goals of providing income to its shareholders through increases in distributable cash flow and increasing long-term total returns
to shareholders through appreciation in the value of its common shares. The Company invests in capital improvements throughout the portfolio to continue to increase the competitiveness of its hotels and improve their financial performance. The Company actively seeks to acquire hotel properties, but continues to face significant competition for acquisitions that meet its investment criteria.
During the third quarter of 2017, the Company’s hotels continued to operate within a generally positive environment. All of the economic indicators the Company tracks were encouraging throughout the quarter. On the more positive side, consumer confidence remains at an elevated level and corporate profits reported thus far for the third quarter have been strong. Unemployment remains low at 4.2% and enplanements have been steady, with airline capacity increases expected during calendar year 2017. Similarly, estimates for U.S. GDP growth in 2017 have been stable. The U.S. lodging industry benefited from a positive economic landscape overall, although there were continued signs of moderation in several markets, driven by increased hotel supply. The industry RevPAR grew at a rate of 1.9% during the third quarter, with lodging industry demand up by 2.4% and an offsetting supply increase of 1.9%. Industry-wide pricing was moderate, leading to average daily rate (“ADR”) growth of 1.4%. The Company’s portfolio benefited from the operating environment, with portfolio-wide occupancy of
90.2%
for the quarter, reflecting sustained demand. Despite strong occupancy, the Company’s RevPAR decreased during the quarter by
3.6%
due to lower ADR. The Company’s occupancy, ADR and RevPAR statistics disclosed in this report exclude third quarter results from its two resorts located in Key West, FL due to their temporary closure during and following Hurricane Irma in September 2017. See “Update on Key West Resorts” below.
For the third quarter of 2017, the Company had net income attributable to common shareholders of
$31.1 million
, or
$0.27
per diluted share. FFO attributable to common shareholders and unitholders was
$74.4 million
, or
$0.66
per diluted share/unit (based on
113,528,583
weighted average shares and units outstanding during the three months ended September 30, 2017) and EBITDA was
$90.6 million
. RevPAR for the hotel portfolio was
$219.38
, which was a decrease of
3.6%
compared to the third quarter of 2016. Occupancy remained flat and ADR was down by
3.6%
.
Please refer to “Non-GAAP Financial Measures” for a detailed discussion of the Company’s use of FFO and EBITDA and a reconciliation of FFO and EBITDA to net income or loss, a measurement computed in accordance with U.S. generally accepted accounting principles (“GAAP”).
Update on Key West Resorts
After both resorts closed on September 6, 2017 to comply with all mandatory evacuations of the island ahead of Hurricane Irma, the Southernmost Beach Resort Key West partially re-opened on September 15, 2017 and The Marker Waterfront Resort remains closed. The Company has not identified any structural damage at either of its resorts. While the Company is still assessing the condition of both properties, it currently believes that the damage is not significant and is primarily related to water intrusion. The Company expects both resorts will resume full operations by the end of October 2017.
The Company maintains property, flood, fire and business interruption insurance at its two resorts in Key West. For the combined properties, insurance is subject to deductibles of approximately $5.0 million in total which encompasses both property and business interruption coverage.
Critical Accounting Estimates
Substantially all of the Company’s revenues and expenses are generated by the operations of the individual hotels. The Company records revenues and expenses that are estimated by the hotel operators and reviewed by the Company to produce quarterly financial statements because the management contracts do not require the hotel operators to submit actual results within a time frame that permits the Company to use actual results when preparing its Quarterly Reports on Form 10-Q for filing by the deadline prescribed by the SEC. Generally, the Company records actual revenue and expense amounts for the first two months of each quarter and estimated revenue and expense amounts for the last month of each quarter. Each quarter, the Company reviews the estimated revenue and expense amounts provided by the hotel operators for reasonableness based upon historical results for prior periods and internal Company forecasts. The Company records any differences between recorded estimated amounts and actual amounts in the following quarter; historically, these differences have not been material. The Company believes the quarterly revenues and expenses, recorded on the Company’s consolidated statements of operations and comprehensive income (loss) based on an aggregate estimate, are fairly stated.
The Company’s management has discussed the policy of using estimated hotel operating revenues and expenses with the Audit Committee of its Board of Trustees. The Audit Committee has reviewed the Company’s disclosure relating to the estimates in this “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” section.
See “Critical Accounting Policies” in the “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” section of the Company’s Annual Report on Form 10-K for the year ended
December 31, 2016
for other critical accounting policies and estimates of the Company.
Comparison of the Three Months Ended September 30, 2017 to the Three Months Ended September 30, 2016
The economic environment was positive during the third quarter. Industry demand increased during the third quarter of 2017 and outpaced supply growth. As a result, industry-wide pricing was moderate. With respect to the Company’s hotels, excluding its two resorts located in Key West, occupancy remained flat during the three months ended September 30, 2017 and ADR was down
3.6%
, which resulted in a RevPAR decline of
3.6%
year-over-year.
Hotel Operating Revenues
Hotel operating revenues, including room, food and beverage and other operating department revenues, decreased $41.9 million from $325.4 million in 2016 to $283.5 million in 2017. This decrease is primarily due to the sale of the 2016 and 2017 hotel dispositions, which consist of the sales of Indianapolis Marriott Downtown, Hotel Deca, Lansdowne Resort, Alexis Hotel, Hotel Triton and Westin Philadelphia (collectively, the “2016 and 2017 Disposition Properties”). The 2016 and 2017 Disposition Properties, which are not comparable year-over-year, contributed $29.3 million to the decrease in hotel operating revenues, mostly attributable to the Lansdowne Resort and Westin Philadelphia. Additionally, three of the Company’s markets experienced significant decreases in hotel operating revenues. The six San Francisco hotel properties had a combined $3.4 million decrease primarily due to the Moscone Convention Center’s expansion project, which resulted in lower ADR and RevPAR throughout the market; the nine Washington, DC hotel properties had a combined $2.3 million decrease primarily due to weaker demand in 2017; and lastly, the two Key West hotel properties experienced a decrease of $3.6 million primarily due to the impact of Hurricane Irma.
The following hotels also contributed to the decrease in hotel operating revenues due to decline in group business:
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$1.5 million decrease from Westin Copley Place;
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$1.5 million decrease from Westin Michigan Avenue; and
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$1.1 million decrease from Embassy Suites Philadelphia - Center City, mostly due to the Democratic National Convention held in the third quarter of 2016 in Philadelphia.
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These decreases are partially offset by a $0.9 million increase at San Diego Paradise Point Resort and Spa and $0.8 million increase at The Hilton San Diego Resort and Spa as a result of increased group business and city wide events.
Hotel operating revenues across the remainder of the portfolio remained relatively constant, decreasing a net $0.9 million across the 19 additional hotels in the portfolio.
Other Income
Other income increased $0.8 million from $1.6 million in 2016 to $2.4 million in 2017 primarily due to increased insurance gains from insurance proceeds related to minor property damage at various properties. No insurance proceeds were recognized related to Hurricane Irma damage during the quarter. The Company anticipates filing a claim for lost revenue under its business interruption coverage, which will be recorded when the recovery is probable and the claim is settled.
Hotel Operating Expenses
Hotel operating expenses decreased a net $21.8 million from $186.9 million in 2016 to $165.1 million in 2017. This overall decrease is primarily due to the results of the 2016 and 2017 Disposition Properties, which are not comparable year-over-year. These properties contributed $17.3 million to the decrease in hotel operating expenses, mostly attributable to the Lansdowne Resort and Westin Philadelphia. Additionally, three of the Company’s markets, San Francisco, Key West and Washington, DC had decreases of $1.9 million, $1.2 million and $0.9 million, respectively, that correspond to the lower revenue in each market. Approximately $0.3 million of clean up and repair costs are included in hotel operating expenses for the Key West properties.
Hotel operating expenses across the remainder of the portfolio remained relatively constant, decreasing a net $0.5 million across the 24 additional hotels in the portfolio.
Depreciation and Amortization
Depreciation and amortization expense decreased $4.6 million from $48.0 million in 2016 to $43.4 million in 2017. Depreciation and amortization expense attributable to the 2016 and 2017 Disposition Properties, which are not comparable year-
over-year, decreased $4.3 million. Depreciation and amortization expense across the remainder of the portfolio remained constant, decreasing a net $0.3 million throughout the portfolio.
Real Estate Taxes, Personal Property Taxes and Insurance
Real estate taxes, personal property taxes and insurance expenses increased $2.8 million from $13.9 million in 2016 to $16.7 million in 2017. Of the increase, $1.5 million is the result of credits which the Company received as part of the expense proration process for the Indianapolis Marriott Downtown disposition in 2016. Additionally, a real estate tax true up recognized in 2016 at a Chicago hotel property resulted in a net increase in 2017 of $1.4 million. Real estate taxes and personal property taxes increased by $0.7 million across the remaining hotels in the portfolio primarily due to increased property values or tax rates at certain properties. The increases are partially offset by a combined $0.8 million decrease from the five remaining 2016 and 2017 Disposition Properties. Insurance expense remained constant throughout the portfolio.
Ground Rent
Ground rent increased $0.2 million from $4.6 million in 2016 to $4.8 million in 2017 primarily due to a $0.2 million true-up for credits previously utilized at a San Diego property. Ground rent at the other subject properties remained relatively constant. Certain hotels are subject to ground rent under operating leases which call for either fixed or variable payments based on the hotel’s performance.
General and Administrative
General and administrative expense increased $0.4 million from $6.1 million in 2016 to $6.5 million in 2017 primarily due to $0.4 million increase in compensation costs in 2017.
Other Expenses
Other expenses increased $2.2 million from $1.0 million in 2016 to $3.2 million in 2017. Of the $2.2 million increase, $2.0 million was attributable to estimated clean up and repair costs related to Hurricane Irma for the two Key West hotel properties, which brings the total estimated clean up and repair costs recognized and recorded in the third quarter of 2017 to $2.3 million. The Company’s current estimate of costs to clean up and repair is in the range of $2.0 million to $2.75 million. Based on a review of the Company’s property insurance policies, the insurance deductible for property damage is approximately $3.7 million, which is the Company’s estimated maximum exposure for the loss. The remaining $0.2 million net increase is primarily due to losses from property damage, which are largely covered by insurance proceeds slightly offset by lower management transition expenses, severance and pre-opening costs.
Interest Income
Interest income increased $0.8 million from $0.2 million in 2016 to $1.0 million in 2017 as a result of interest earned on invested funds, which were partially offset by the sale of the Company’s junior mezzanine loan (the “Mezzanine Loan”), which was secured by pledges of equity interests in the entities that own Shutters on the Beach and Casa Del Mar, in July 2016.
Interest Expense
Interest expense decreased $0.3 million from $10.3 million in 2016 to $10.0 million in 2017 due to a decrease in the Company’s weighted average debt outstanding, partially offset by an increase in the weighted average interest rate. The Company’s weighted average debt outstanding decreased from $1.21 billion in 2016 to $1.15 billion in 2017 primarily due to the repayment of all borrowings outstanding on the Company’s senior unsecured credit facility in 2016 with proceeds from the sale of the Indianapolis Marriott Downtown in July 2016 and the sale of the Mezzanine Loan in July 2016. This decrease is also due to the sale of Hotel Triton in April 2017 which was subject to a capital lease obligation.
The Company’s weighted average interest rate, including the effect of capitalized interest, increased from 3.01% in 2016 to 3.12% in 2017. This increase is due in part to a decrease in the Company’s borrowings on its senior unsecured credit facility, which had a weighted average interest rate of 2.17% for the quarter ended September 30, 2016. This increase is also attributable to an increase in the Westin Copley Place’s mortgage loan variable rate from a weighted average interest rate of 2.25% for the quarter ended September 30, 2016 to 2.97% for the quarter ended September 30, 2017. Additionally, this increase is attributable to an increase in the fixed all-in interest rate for the First Term Loan (as defined below) due to the Company entering into new interest rate swap agreements in August 2017 to replace the maturing interest rate swap agreements entered into to hedge the variable interest rate on the First Term Loan. The weighted average interest rates for the First Term Loan were 2.38% and 2.88% for the
quarters ended September 30, 2016 and 2017, respectively. Interest capitalized on renovations increased $0.1 million from $0.1 million in 2016 to $0.2 million in 2017.
Income Tax Expense
Income tax expense decreased $1.1 million from $3.1 million in 2016 to $2.0 million in 2017. This decrease is primarily the result of a decrease in LHL’s net income before income tax expense of $3.0 million from $6.8 million in 2016 to $3.8 million in 2017 and a minimal impact of the finalization and related adjustments of the 2016 federal and state tax returns during the 2017 period. For the quarter ended September 30, 2017, LHL’s income tax expense was calculated using an estimated combined federal and state effective tax rate of 39.2%.
Net Gain on Sale of Properties and Sale of Note Receivable
The gain on sale of property was an immaterial amount in 2017 and relates to the actualization of the gain on sale of Westin Philadelphia, which was sold on June 29, 2017. The net gain on sale of property and sale of note receivable was $104.5 million in 2016 which consists of a $104.8 million gain relating to the sale of Indianapolis Marriott Downtown on July 14, 2016, partially offset by $0.3 million of costs associated with the sale of the Company’s Mezzanine Loan on July 8, 2016.
Noncontrolling Interests in Consolidated Entities
Noncontrolling interests in consolidated entities represent the allocation of income or loss to the outside preferred ownership interests in a subsidiary and the outside ownership interest in a joint venture.
Noncontrolling Interests of Common Units in Operating Partnership
Noncontrolling interests of common units in Operating Partnership represents the allocation of income or loss of the Operating Partnership to the common units held by third parties based on their weighted average percentage ownership throughout the period. At
September 30, 2017
, third party limited partners held 0.1% of the common units in the Operating Partnership.
Distributions to Preferred Shareholders
Distributions to preferred shareholders decreased $1.3 million from $5.4 million in 2016 to $4.1 million in 2017 due to decreased distribution on the 7.5% Series H Cumulative Redeemable Preferred Shares (the “Series H Preferred Shares”), which were redeemed on May 4, 2017.
Comparison of the Nine Months Ended September 30, 2017 to the Nine Months Ended September 30, 2016
Industry travel was stronger during the nine months ended September 30, 2017, compared to the same prior year period. Industry demand grew at a faster rate than industry supply grew, which kept industry occupancy at a high level, and led to moderate pricing power and ADR growth during the period. With respect to the Company’s hotels, excluding its two resorts located in Key West for the third quarter only, occupancy was lower by
0.4%
during the nine months ended September 30, 2017 and ADR decreased
1.1%
, which resulted in a RevPAR decline of
1.5%
year-over-year.
Hotel Operating Revenues
Hotel operating revenues, including room, food and beverage and other operating department revenues, decreased $94.2 million from $932.5 million in 2016 to $838.3 million in 2017. This decrease is primarily due to the sale of the 2016 and 2017 Disposition Properties, which are not comparable year-over-year, and contributed $76.3 million to the decrease in hotel operating revenues, mostly attributable to the Indianapolis Marriott Downtown and Lansdowne Resort. Additionally, two of the Company’s markets experienced significant decreases in hotel operating revenues. The six San Francisco hotel properties had a combined $17.6 million decrease primarily due to the Moscone Convention Center’s expansion project, which resulted in lower ADR and RevPAR throughout the market; and the two Key West hotel properties experienced a decrease of $3.8 million of which $3.6 million was primarily due to the impact of Hurricane Irma in the third quarter of 2017. A decrease of $1.6 million from Park Central Hotel New York and WestHouse Hotel New York further contributed to the overall decrease, which was primarily due to new supply year-over-year in the market.
The following hotels also contributed to the decrease in hotel operating revenues due to decline in group business:
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$3.0 million decrease from Westin Michigan Avenue;
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$1.8 million decrease from Westin Copley Place; and
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$1.3 million decrease from Embassy Suites Philadelphia - Center City, mostly due to the Democratic National Convention held in the third quarter of 2016 in Philadelphia.
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These decreases are partially offset by a $6.8 million increase at the Company’s nine properties located in Washington, DC as a result of the 2017 Presidential Inauguration and the completion of the Mason & Rook Hotel renovation, slightly offset by a weaker third quarter in the market.
The Liberty Hotel, San Diego Paradise Point Resort and Spa and The Hilton San Diego Resort and Spa experienced significant increases in total room, food and beverage and other operating department revenues. The Liberty Hotel had an increase of $1.9 million as a result of the completion of the hotel renovation. Increased group business and city wide events resulted in $2.3 million and $1.9 million increases at the San Diego Paradise Point Resort and Spa and The Hilton San Diego Resort and Spa, respectively.
Hotel operating revenues across the remainder of the portfolio remained relatively constant, decreasing a net $1.7 million across the 16 additional hotels in the portfolio.
Other Income
Other income increased $3.4 million from $5.6 million in 2016 to $9.0 million in 2017 primarily due to increased insurance gains from insurance proceeds related to minor property damage at various properties and higher retail lease income. No insurance proceeds were recognized related to Hurricane Irma damage during the third quarter. The Company anticipates filing a claim for lost revenue under its business interruption coverage, which will be recorded when the recovery is probable and the claim is settled.
Hotel Operating Expenses
Hotel operating expenses decreased a net $50.4 million from $552.0 million in 2016 to $501.6 million in 2017. This overall decrease is primarily due to $44.7 million decrease from the 2016 and 2017 Disposition Properties, which are not comparable year-over-year, again, mostly attributable to the Indianapolis Marriott Downtown and the Lansdowne Resort. Additionally, two of the Company’s markets, San Francisco and Key West had decreases of $9.2 million and $1.2 million, respectively, that correspond to the lower revenue in each market. Approximately $0.3 million of estimated clean up and repair costs are included in hotel operating expenses for the Key West properties.
These decreases are partially offset by a combined $2.8 million increase at the Company’s nine properties located in Washington, DC as a result of the 2017 Presidential Inauguration and the completion of the Mason & Rook Hotel renovation.
Hotel operating expenses across the remainder of the portfolio remained relatively constant, increasing a net $1.9 million across the 24 additional hotels in the portfolio.
Depreciation and Amortization
Depreciation and amortization expense decreased $9.8 million from $144.5 million in 2016 to $134.7 million in 2017. Depreciation and amortization expense attributable to the 2016 and 2017 Disposition Properties, which are not comparable year-over-year, decreased $10.7 million. This decrease was partially offset by a net $0.9 million increase across the remaining hotels in the portfolio due to the depreciation of new assets placed into service reflecting the Company’s recent renovation activity.
Real Estate Taxes, Personal Property Taxes and Insurance
Real estate taxes, personal property taxes and insurance expenses decreased $0.1 million from $47.0 million in 2016 to $46.9 million in 2017. This decrease is primarily due to a net $1.0 million decrease attributable to the 2016 and 2017 Disposition Properties, which are not comparable year-over-year, and a $1.3 million decrease in real estate taxes from a property in San Francisco as a result of an assessment finalization. These decreases are partially offset by a true up recognized in 2016 at a Chicago hotel property which resulted in a net increase of $1.1 million. Real estate taxes and personal property taxes increased by $1.2 million across the remaining hotels in the portfolio primarily due to increased property values or tax rates at certain properties, and decreased real estate taxes capitalized as part of renovations. Insurance expense also remained relatively constant, decreasing by $0.1 million reflecting slightly lower premiums throughout the portfolio.
Ground Rent
Ground rent decreased $0.5 million from $12.5 million in 2016 to $12.0 million in 2017 primarily due to a $0.4 million net credit received at a San Diego property as a result of an operational audit. Ground rent at the other subject properties remained relatively constant, decreasing $0.1 million. Certain hotels are subject to ground rent under operating leases which call for either fixed or variable payments based on the hotel’s performance.
General and Administrative
General and administrative expense increased $0.4 million from $19.5 million in 2016 and $19.9 million in 2017. A $1.6 million charge associated with the departure of the Company’s former Chief Financial Officer in 2016 is offset by a combined $2.0 million increase in compensation costs and professional fees in 2017.
Other Expenses
Other expenses increased $1.2 million from $5.5 million in 2016 to $6.7 million in 2017 primarily due to a net increase of $3.3 million in loss from property damage. Of the $3.3 million increase, $2.0 million was attributable to estimated clean up and repair costs related to Hurricane Irma for the two key West hotel properties, which brings the total estimated clean up and repair costs recognized and recorded in the third quarter of 2017 to $2.3 million. The Company’s current estimate of costs to clean up and repair is in the range of $2.0 million to $2.75 million. Based on a review of the Company’s property insurance policies, the insurance deductible for property damage is approximately $3.7 million, which is the Company’s estimated maximum exposure for the loss. The remaining $1.3 million increase in loss from property damage relates to various properties and is largely covered by insurance proceeds. In addition, miscellaneous other expenses and retail lease expense increased a combined $0.4 million. These increases are partially offset by a $2.5 million decrease in management transition expenses, severance and pre-opening expenses, which are mostly attributable to the grand opening of the Mason & Rook Hotel in 2016.
Interest Income
Interest income decreased $2.1 million from $3.5 million in 2016 to $1.4 million in 2017 as a result of the sale of the Company’s Mezzanine Loan, which was secured by pledges of equity interests in the entities that own Shutters on the Beach and Casa Del Mar, in July 2016, which was partially offset by interest earned on invested funds.
Interest Expense
Interest expense decreased $4.4 million from $33.7 million in 2016 to $29.3 million in 2017 due to a decrease in the Company’s weighted average debt outstanding, partially offset by an increase in the weighted average interest rate. The Company’s weighted average debt outstanding decreased from $1.40 billion in 2016 to $1.16 billion in 2017 due to paydowns on the unsecured credit facilities with net proceeds from the following:
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the issuance of the 6.3% Series J Cumulative Redeemable Preferred Shares (the “Series J Preferred Shares”) in May 2016;
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the sale of Indianapolis Marriott Downtown in July 2016;
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the sale of the Mezzanine Loan in July 2016; and
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positive operating results from the hotel properties.
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The Company’s weighted average interest rate, including the effect of capitalized interest, increased from 2.86% in 2016 to 3.03% in 2017. This increase is due in part to a decrease in the Company’s borrowings on its senior unsecured credit facility, which had a weighted average interest rate of 2.14% for the nine months ended September 30, 2016. This increase is also attributable to an increase in the Westin Copley Place’s mortgage loan variable rate from a weighted average interest rate of 2.20% for the nine months ended September 30, 2016 to 2.76% for the nine months ended September 30, 2017. Interest capitalized on renovations increased $0.1 million from $0.3 million in 2016 to $0.4 million in 2017.
Loss from Extinguishment of Debt
Loss from extinguishment of debt of $1.7 million in 2017 relates to the January 10, 2017 refinancing of the Company’s senior unsecured credit facility and First Term Loan, which were considered substantial modifications. The loss from extinguishment of debt represents a portion of the unamortized debt issuance costs incurred for the senior unsecured credit facility when the original agreement was executed and the debt issuance costs incurred in connection with the refinancing of the First Term Loan.
Income Tax Expense
Income tax expense decreased $2.9 million from $5.1 million in 2016 to $2.2 million in 2017. This decrease is primarily the result of an decrease in LHL’s net income before income tax expense of $6.9 million from $10.1 million in 2016 to $3.2 million in 2017 and a minimal impact of the finalization and related adjustments of the 2016 federal and state tax returns during the 2017 period. For the nine months ended September 30, 2017, LHL’s income tax expense was calculated using an estimated combined federal and state effective tax rate of 39.2%.
Net Gain on Sale of Properties and Sale of Note Receivable
The gain on sale of properties was $85.5 million in 2017, which consists of a $30.7 million gain relating to the sale of Hotel Deca on January 19, 2017, a $10.3 million gain relating to the sale of Lansdowne Resort on March 22, 2017, a $33.4 million gain relating to the sale of Alexis Hotel on March 31, 2017, a $6.7 million gain relating to the sale of Hotel Triton on April 11, 2017 and a $4.4 million gain relating to the sale of Westin Philadelphia on June 29, 2017. The net gain on sale of property and sale of note receivable was $104.5 million in 2016 which consists of a $104.8 million gain relating to the sale of Indianapolis Marriott Downtown on July 14, 2016, partially offset by $0.3 million of costs associated with the sale of the Company’s Mezzanine Loan on July 8, 2016.
Noncontrolling Interests in Consolidated Entities
Noncontrolling interests in consolidated entities represent the allocation of income or loss to the outside preferred ownership interests in a subsidiary and the outside ownership interest in a joint venture.
Noncontrolling Interests of Common Units in Operating Partnership
Noncontrolling interests of common units in Operating Partnership represents the allocation of income or loss of the Operating Partnership to the common units held by third parties based on their weighted average percentage ownership throughout the period. At
September 30, 2017
, third party limited partners held 0.1% of the common units in the Operating Partnership.
Distributions to Preferred Shareholders
Distributions to preferred shareholders increased $1.1 million from $12.8 million in 2016 to $13.9 million in 2017 due to increased distributions on the Series J Preferred Shares, which were issued on May 25, 2016, partially offset by decreased distributions on the Series H Preferred Shares, which were redeemed on May 4, 2017.
Issuance Costs of Redeemed Preferred Shares
Issuance costs of redeemed preferred shares of $2.4 million in 2017 represent the offering costs related to the Series H Preferred Shares, which were redeemed on May 4, 2017. The excess of fair value over carrying value (i.e. offering costs) is included in the determination of net income attributable to common shareholders.
Non-GAAP Financial Measures
FFO and EBITDA
The Company considers the non-GAAP measures of FFO and EBITDA to be key supplemental measures of the Company’s performance and should be considered along with, but not as alternatives to, net income or loss as a measure of the Company’s operating performance. Historical cost accounting for real estate assets implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, most real estate industry investors consider FFO and EBITDA to be helpful in evaluating a real estate company’s operations.
The White Paper on FFO approved by the National Association of Real Estate Investment Trusts (“NAREIT”) in April 2002, as revised in 2011, defines FFO as net income or loss (computed in accordance with GAAP), excluding gains or losses from sales of properties and items classified by GAAP as extraordinary, plus real estate-related depreciation and amortization and impairment writedowns, and after comparable adjustments for the Company’s portion of these items related to unconsolidated entities and joint ventures. The Company computes FFO consistent with standards established by NAREIT, which may not be comparable to FFO reported by other REITs that do not define the term in accordance with the current NAREIT definition or that interpret the current NAREIT definition differently than the Company.
With respect to FFO, the Company believes that excluding the effect of extraordinary items, real estate-related depreciation and amortization and impairments, and the portion of these items related to unconsolidated entities, all of which are based on historical cost accounting and which may be of limited significance in evaluating current performance, can facilitate comparisons of operating performance between periods and between REITs, even though FFO does not represent an amount that accrues directly to common shareholders. However, FFO may not be helpful when comparing the Company to non-REITs.
With respect to EBITDA, the Company believes that excluding the effect of non-operating expenses and non-cash charges, and the portion of these items related to unconsolidated entities, all of which are also based on historical cost accounting and may be of limited significance in evaluating current performance, can help eliminate the accounting effects of depreciation and amortization, and financing decisions and facilitate comparisons of core operating profitability between periods and between REITs, even though EBITDA also does not represent an amount that accrues directly to common shareholders.
FFO and EBITDA do not represent cash generated from operating activities as determined by GAAP and should not be considered as alternatives to net income, cash flows from operations or any other operating performance measure prescribed by GAAP. FFO and EBITDA are not measures of the Company’s liquidity, nor are FFO and EBITDA indicative of funds available to fund the Company’s cash needs, including its ability to make cash distributions. These measurements do not reflect cash expenditures for long-term assets and other items that have been or will be incurred. FFO and EBITDA may include funds that may not be available for management’s discretionary use due to functional requirements to conserve funds for capital expenditures, property acquisitions and other commitments and uncertainties. To compensate for this, management considers the impact of these excluded items to the extent they are material to operating decisions or the evaluation of the Company’s operating performance.
The following is a reconciliation between net income and FFO and FFO attributable to common shareholders and unitholders for the
three and nine months ended
September 30, 2017
and
2016
(in thousands, except share and unit data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended
|
|
For the nine months ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Net income
|
|
$
|
35,272
|
|
|
$
|
157,678
|
|
|
$
|
179,272
|
|
|
$
|
226,372
|
|
Depreciation
|
|
43,205
|
|
|
47,888
|
|
|
134,264
|
|
|
144,088
|
|
Amortization of deferred lease costs
|
|
104
|
|
|
82
|
|
|
274
|
|
|
244
|
|
Less: Gain on sale of properties less costs associated with sale of note receivable
|
|
(31
|
)
|
|
(104,549
|
)
|
|
(85,545
|
)
|
|
(104,549
|
)
|
FFO
|
|
$
|
78,550
|
|
|
$
|
101,099
|
|
|
$
|
228,265
|
|
|
$
|
266,155
|
|
Distributions to preferred shareholders
|
|
(4,116
|
)
|
|
(5,405
|
)
|
|
(13,908
|
)
|
|
(12,802
|
)
|
Issuance costs of redeemed preferred shares
|
|
0
|
|
|
0
|
|
|
(2,401
|
)
|
|
0
|
|
FFO attributable to common shareholders and unitholders
|
|
$
|
74,434
|
|
|
$
|
95,694
|
|
|
$
|
211,956
|
|
|
$
|
253,353
|
|
Weighted average number of common shares and units outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
113,152,698
|
|
|
112,956,626
|
|
|
113,106,588
|
|
|
112,926,955
|
|
Diluted
|
|
113,528,583
|
|
|
113,305,067
|
|
|
113,488,934
|
|
|
113,284,120
|
|
The following is a reconciliation between net income and EBITDA for the
three and nine months ended
September 30, 2017
and
2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended
|
|
For the nine months ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Net income
|
|
$
|
35,272
|
|
|
$
|
157,678
|
|
|
$
|
179,272
|
|
|
$
|
226,372
|
|
Interest expense
|
|
10,026
|
|
|
10,332
|
|
|
29,276
|
|
|
33,681
|
|
Income tax expense
|
|
1,978
|
|
|
3,109
|
|
|
2,208
|
|
|
5,099
|
|
Depreciation and amortization
|
|
43,355
|
|
|
48,022
|
|
|
134,684
|
|
|
144,491
|
|
EBITDA
(1)
|
|
$
|
90,631
|
|
|
$
|
219,141
|
|
|
$
|
345,440
|
|
|
$
|
409,643
|
|
(1)
EBITDA includes the gain on sale of Hotel Deca, Lansdowne Resort, Alexis Hotel, Hotel Triton and Westin Philadelphia of
$30.7 million
,
$10.3 million
,
$33.4 million
,
$6.7 million
and $4.4 million for the
nine months ended
September 30, 2017
, respectively. EBITDA includes the gain on sale of Indianapolis Marriott Downtown of
$104.8 million
for the
three and nine months ended
September 30, 2016
, offset by
$0.3 million
for the
three and nine months ended
September 30, 2016
related to costs associated with the sale of the Mezzanine Loan.
Off-Balance Sheet Arrangements
Reserve Funds for Future Capital Expenditures
Certain of the Company’s agreements with its hotel managers, franchisors and lenders have provisions for the Company to provide funds, generally 4.0% of hotel revenues, sufficient to cover the cost of (i) certain non-routine repairs and maintenance to the hotels and (ii) replacements and renewals to the hotels’ capital assets. Certain of the agreements require that the Company reserve this cash in separate accounts. As of
September 30, 2017
, the Company held a total of
$14.7
million of restricted cash reserves,
$12.9
million of which was available for future capital expenditures. The Company has sufficient cash on hand and
availability on its credit facilities to cover capital expenditures under agreements that do not require that the Company separately reserve cash.
The Company has no other off-balance sheet arrangements.
Liquidity and Capital Resources
The Company’s principal source of cash to meet its cash requirements, including distributions to shareholders, is the operating cash flow from the Company’s hotels. Additional sources of cash are the Company’s senior unsecured credit facility, LHL’s unsecured credit facility, additional unsecured financing, secured financing on one or all of the Company’s
39
unencumbered properties (subject to certain terms and conditions of the credit agreement) as of
September 30, 2017
, the sale of one or more properties (subject to certain conditions of the management agreements at
four
of the Company’s properties), debt or equity issuances available under the Company’s shelf registration statement and issuances of common units in the Operating Partnership.
LHL is a wholly owned subsidiary of the Operating Partnership. Payments to the Operating Partnership are required pursuant to the terms of the lease agreements between LHL and the Operating Partnership relating to the properties owned by the Operating Partnership and leased by LHL. LHL’s ability to make rent payments to the Operating Partnership and the Company’s liquidity, including its ability to make distributions to shareholders, are dependent on the lessees’ ability to generate sufficient cash flow from the operation of the hotels.
Debt Summary
Debt as of
September 30, 2017
and
December 31, 2016
consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Outstanding as of
|
Debt
|
|
Interest
Rate
|
|
Maturity
Date
|
|
September 30,
2017
|
|
December 31,
2016
|
Credit facilities
|
|
|
|
|
|
|
|
|
Senior unsecured credit facility
|
|
Floating
(a)
|
|
January 2021
(a)
|
|
$
|
0
|
|
|
$
|
0
|
|
LHL unsecured credit facility
|
|
Floating
(b)
|
|
January 2021
(b)
|
|
0
|
|
|
0
|
|
Total borrowings under credit facilities
|
|
|
|
|
|
0
|
|
|
0
|
|
Term loans
|
|
|
|
|
|
|
|
|
First Term Loan
|
|
Floating/Fixed
(c)
|
|
January 2022
|
|
300,000
|
|
|
300,000
|
|
Second Term Loan
|
|
Floating/Fixed
(c)
|
|
January 2021
|
|
555,000
|
|
|
555,000
|
|
Debt issuance costs, net
|
|
|
|
|
|
(1,951
|
)
|
|
(2,242
|
)
|
Total term loans, net of unamortized debt issuance costs
|
|
|
|
853,049
|
|
|
852,758
|
|
Massport Bonds
|
|
|
|
|
|
|
|
|
Hyatt Regency Boston Harbor (taxable)
|
|
Floating
(d)
|
|
March 2018
|
|
5,400
|
|
|
5,400
|
|
Hyatt Regency Boston Harbor (tax exempt)
|
|
Floating
(d)
|
|
March 2018
|
|
37,100
|
|
|
37,100
|
|
Debt issuance costs, net
|
|
|
|
|
|
(16
|
)
|
|
(45
|
)
|
Total bonds payable, net of unamortized debt issuance costs
|
|
|
|
42,484
|
|
|
42,455
|
|
Mortgage loan
|
|
|
|
|
|
|
|
|
Westin Copley Place
|
|
Floating
(e)
|
|
August 2018
(e)
|
|
225,000
|
|
|
225,000
|
|
Debt issuance costs, net
|
|
|
|
|
|
(800
|
)
|
|
(1,506
|
)
|
Total mortgage loan, net of unamortized debt issuance costs
|
|
|
|
224,200
|
|
|
223,494
|
|
Total debt
|
|
|
|
|
|
$
|
1,119,733
|
|
|
$
|
1,118,707
|
|
|
|
(a)
|
Borrowings bear interest at floating rates equal to, at the Company’s option, either (i) LIBOR plus an applicable margin, or (ii) an Adjusted Base Rate (as defined in the credit agreement) plus an applicable margin. There were
no
borrowings outstanding at
September 30, 2017
and
December 31, 2016
. The Company has the option, pursuant to certain terms and conditions, to extend the maturity date for
two
six
-month extensions.
|
|
|
(b)
|
Borrowings bear interest at floating rates equal to, at LHL’s option, either (i) LIBOR plus an applicable margin, or (ii) an Adjusted Base Rate (as defined in the credit agreement) plus an applicable margin. There were
no
borrowings outstanding at
September 30, 2017
and
December 31, 2016
. LHL has the option, pursuant to certain terms and conditions, to extend the maturity date for
two
six
-month extensions.
|
|
|
(c)
|
Term loans bear interest at floating rates equal to LIBOR plus an applicable margin. The Company entered into interest rate swaps to effectively fix the interest rates for the First Term Loan (as defined below) and the Second Term Loan (as defined below). At
September 30, 2017
and
December 31, 2016
, the Company had interest rate swaps on the full amounts outstanding. See “Derivative and Hedging Activities” below. At
September 30, 2017
, the fixed all-in interest rates for the First Term Loan and Second Term Loan were
3.23%
and
2.95%
, respectively, at the Company’s current leverage ratio (as defined in the swap agreements). At
December 31, 2016
, the fixed all-in interest rates for the First Term Loan and Second Term Loan were
2.38%
and
2.95%
, respectively, at the Company’s current leverage ratio (as defined in the swap agreements).
|
|
|
(d)
|
The Massport Bonds are secured by letters of credit issued by U.S. Bank National Association and the letters of credit are secured by the Hyatt Regency Boston Harbor. In August 2017, the Company exercised its final extension option to extend the letters of credit through March 1, 2018, the Massport Bonds’ maturity date. The bonds bear interest based on weekly floating rates. The interest rates as of
September 30, 2017
were
1.19%
and
0.98%
for the
$5,400
and
$37,100
bonds, respectively. The interest rates as of
December 31, 2016
were
0.75%
and
0.76%
for the
$5,400
and
$37,100
bonds, respectively. The Company incurs an annual letter of credit fee of
1.35%
.
|
|
|
(e)
|
The mortgage loan matures on August 14, 2018 with
three
options to extend the maturity date to January 5, 2021, pursuant to certain terms and conditions. The interest-only mortgage loan bears interest at a variable rate ranging from LIBOR plus
1.75%
to LIBOR plus
2.00%
, depending on Westin Copley Place’s net cash flow (as defined in the loan agreement). The interest rate as of
September 30, 2017
was LIBOR plus
1.75%
, which equaled
2.99%
. The interest rate as of
December 31, 2016
was LIBOR plus
1.75%
, which equaled
2.46%
. The mortgage loan allows for prepayments without penalty, subject to certain terms and conditions.
|
A summary of the Company’s interest expense and weighted average interest rates for unswapped variable rate debt for the
three and nine months ended
September 30, 2017
and
2016
is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended
|
|
For the nine months ended
|
|
September 30,
|
|
September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Interest Expense:
|
|
|
|
|
|
|
|
Interest incurred
|
$
|
9,561
|
|
|
$
|
9,552
|
|
|
$
|
27,553
|
|
|
$
|
31,421
|
|
Amortization of debt issuance costs
|
669
|
|
|
841
|
|
|
2,098
|
|
|
2,554
|
|
Capitalized interest
|
(204
|
)
|
|
(61
|
)
|
|
(375
|
)
|
|
(294
|
)
|
Interest expense
|
$
|
10,026
|
|
|
$
|
10,332
|
|
|
$
|
29,276
|
|
|
$
|
33,681
|
|
|
|
|
|
|
|
|
|
Weighted Average Interest Rates for Unswapped Variable Rate Debt:
|
|
|
|
|
|
|
Senior unsecured credit facility
|
N/A
|
|
|
2.17
|
%
|
|
N/A
|
|
|
2.14
|
%
|
LHL unsecured credit facility
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
2.13
|
%
|
Massport Bonds
|
0.95
|
%
|
|
0.55
|
%
|
|
0.84
|
%
|
|
0.36
|
%
|
Mortgage loan (Westin Copley Place)
|
2.97
|
%
|
|
2.25
|
%
|
|
2.76
|
%
|
|
2.20
|
%
|
Credit Facilities
On January 10, 2017, the Company refinanced its
$750.0 million
senior unsecured credit facility with a syndicate of banks. As amended, the credit facility now matures on January 8, 2021, subject to
two
six
-month extensions that the Company may exercise at its option, pursuant to certain terms and conditions, including payment of an extension fee. The credit facility, with a current commitment of
$750.0 million
, includes an accordion feature which, subject to certain conditions, entitles the Company to request additional lender commitments, allowing for total commitments of up to
$1.25 billion
. Borrowings under the credit facility bear interest at floating rates equal to, at the Company’s option, either (i) LIBOR plus an applicable margin, or (ii) an Adjusted Base Rate (as defined in the credit agreement) plus an applicable margin. Additionally, the Company is required to pay a variable unused commitment fee of
0.20%
or
0.30%
of the unused portion of the credit facility, depending on the average daily unused portion of the credit facility.
On January 10, 2017, LHL also refinanced its
$25.0 million
unsecured revolving credit facility to be used for working capital and general lessee corporate purposes. As amended, the LHL credit facility matures on January 10, 2021, subject to
two
six
-month extensions that LHL may exercise at its option, pursuant to certain terms and conditions, including payment of an extension fee. Borrowings under the LHL credit facility bear interest at floating rates equal to, at LHL’s option, either (i) LIBOR plus an applicable margin, or (ii) an Adjusted Base Rate (as defined in the credit agreement) plus an applicable margin. Additionally, LHL is required to pay a variable unused commitment fee of
0.20%
or
0.30%
of the unused portion of the credit facility, depending on the average daily unused portion of the LHL unsecured credit facility.
The Company’s senior unsecured credit facility and LHL’s unsecured credit facility contain certain financial and other covenants, including covenants relating to net worth requirements, debt ratios and fixed charge coverage ratios. In addition, pursuant to the terms of the agreements, if a default or event of default occurs or is continuing, the Company may be precluded from paying certain distributions or other payments to its shareholders.
The Company and certain of its subsidiaries guarantee the obligations under the Company’s senior unsecured credit facility. While the senior unsecured credit facility does not initially include any pledges of equity interests in the Company’s subsidiaries, in connection with the January 10, 2017 refinancing, such pledges and additional subsidiary guarantees would be required in the event that the Company’s leverage ratio later exceeds
6.50
:
1.00
for
two
consecutive fiscal quarters. In the event that such pledge and guarantee requirement is triggered, the pledges and additional guarantees would ratably benefit the Company’s senior unsecured credit facility, the First Term Loan and the Second Term Loan. If at any time the Company’s leverage ratio falls below
6.50
:
1.00
for
two
consecutive fiscal quarters, such pledges and additional guarantees may be released.
Term Loans
On January 10, 2017, the Company refinanced its
$300.0 million
unsecured term loan (the “First Term Loan”) that matures on January 10, 2022. The First Term Loan includes an accordion feature, which subject to certain conditions, entitles the Company to request additional lender commitments, allowing for total commitments of up to
$500.0 million
. The First Term Loan bears interest at variable rates.
On January 10, 2017, the Company amended and restated its
$555.0 million
unsecured term loan (the “Second Term Loan”) that matures on January 29, 2021. The Second Term Loan includes an accordion feature, which subject to certain conditions, entitles the Company to request additional lender commitments, allowing for total commitments of up to
$700.0 million
. The Second Term Loan bears interest at variable rates.
The Company has entered into interest rate swap agreements to effectively fix the LIBOR rates for the term loans (see “Derivative and Hedging Activities” below).
The Company’s term loans contain certain financial and other covenants, including covenants relating to net worth requirements, debt ratios and fixed charge coverage ratios. In addition, pursuant to the terms of the agreements, if a default or event of default occurs or is continuing, the Company may be precluded from paying certain distributions or other payments to its shareholders.
The Company and certain of its subsidiaries guarantee the obligations under the Company’s term loans. While the term loans do not initially include any pledges of equity interests in the Company’s subsidiaries, in connection with the January 10, 2017 refinancing, such pledges and additional subsidiary guarantees would be required in the event that the Company’s leverage ratio later exceeds
6.50
:
1.00
for
two
consecutive fiscal quarters. In the event that such pledge and guarantee requirement is triggered, the pledges and additional guarantees would ratably benefit the Company’s senior unsecured credit facility, the First Term Loan and the Second Term Loan. If at any time the Company’s leverage ratio falls below
6.50
:
1.00
for
two
consecutive fiscal quarters, such pledges and additional guarantees may be released.
Derivative and Hedging Activities
The Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. Unrealized gains and losses on the effective portion of hedging instruments are reported in other comprehensive income (loss) (“OCI”). Ineffective portions of changes in the fair value of a cash flow hedge are recognized as interest expense. Amounts reported in accumulated other comprehensive income (loss) (“AOCI”) related to currently outstanding derivatives are recognized as an adjustment to income (loss) as interest payments are made on the Company’s variable rate debt. Effective August 2, 2012, the Company entered into
five
interest rate swap agreements with an aggregate notional amount of
$300.0 million
to hedge the variable interest rate on the First Term Loan through August 2, 2017. Effective August 2, 2017, the Company entered into
six
new interest rate swap agreements with an aggregate notional amount of
$300.0 million
to hedge the variable interest rate on the First Term Loan through January 10, 2022, resulting in a fixed all-in interest rate based on the Company’s current leverage ratio (as defined in the swap agreements), which interest rate was
3.23%
at
September 30, 2017
. As of
September 30, 2017
, the Company has interest rate swaps with an aggregate notional amount of
$555.0 million
to hedge the variable interest rate on the Second Term Loan and, as a result, the fixed all-in interest rate based on the Company’s current leverage ratio (as defined in the swap agreements) is
2.95%
through May 16, 2019. From May 16, 2019 through the term of the Second Term Loan, the Company has interest rate swaps with an aggregate notional amount of
$377.5 million
to hedge a portion of the variable interest rate debt on the Second Term Loan. The Company
has designated its pay-fixed, receive-floating interest rate swap derivatives as cash flow hedges. The interest rate swaps were entered into with the intention of eliminating the variability of the terms loans, but can also limit the exposure to any amendments, supplements, replacements or refinancings of the Company’s debt.
The following tables present the effect of derivative instruments on the Company’s consolidated statements of operations and comprehensive income, including the location and amount of unrealized gain (loss) on outstanding derivative instruments in cash flow hedging relationships, for the
three and nine months ended
September 30, 2017
and
2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain Recognized in OCI on Derivative Instruments
|
|
Location of Loss Reclassified from AOCI into Net Income
|
|
Amount of Loss Reclassified from AOCI into Net Income
|
|
|
(Effective Portion)
|
|
(Effective Portion)
|
|
(Effective Portion)
|
|
|
For the three months ended
|
|
|
|
|
For the three months ended
|
|
|
September 30,
|
|
|
|
|
September 30,
|
|
|
2017
|
|
2016
|
|
|
|
|
2017
|
|
2016
|
Derivatives in cash flow hedging relationships:
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
517
|
|
|
$
|
3,172
|
|
|
Interest expense
|
|
$
|
547
|
|
|
$
|
1,637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Loss Recognized in OCI on Derivative Instruments
|
|
Location of Loss Reclassified from AOCI into Net Income
|
|
Amount of Loss Reclassified from AOCI into Net Income
|
|
|
(Effective Portion)
|
|
(Effective Portion)
|
|
(Effective Portion)
|
|
|
For the nine months ended
|
|
|
|
|
For the nine months ended
|
|
|
September 30,
|
|
|
|
|
September 30,
|
|
|
2017
|
|
2016
|
|
|
|
|
2017
|
|
2016
|
Derivatives in cash flow hedging relationships:
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
(34
|
)
|
|
$
|
(17,051
|
)
|
|
Interest expense
|
|
$
|
2,030
|
|
|
$
|
5,147
|
|
During the
nine months ended
September 30, 2017
and
2016
, the Company did not have any hedge ineffectiveness or amounts that were excluded from the assessment of hedge effectiveness recorded in earnings.
As of
September 30, 2017
, there was
$4.4 million
in cumulative unrealized gain of which
$4.4 million
was included in AOCI and an immaterial amount was attributable to noncontrolling interests. As of
December 31, 2016
, there was
$2.4 million
in cumulative unrealized gain of which
$2.4 million
was included in AOCI and an immaterial amount was attributable to noncontrolling interests. The Company expects that approximately
$3.1 million
will be reclassified from AOCI and noncontrolling interests and recognized as a reduction to income in the next
12 months
, calculated as estimated interest expense using the interest rates on the derivative instruments as of
September 30, 2017
.
Extinguishment of Debt
As discussed above, on January 10, 2017, the Company refinanced its senior unsecured credit facility and First Term Loan and LHL refinanced its unsecured revolving credit facility. The refinancing arrangements for the senior unsecured credit facility and First Term Loan were considered substantial modifications. The Company recognized a loss from extinguishment of debt of
zero
and
$1.7 million
, which is included in the consolidated statements of operations and comprehensive income for the
three and nine months ended
September 30, 2017
, respectively. The loss from extinguishment of debt represents a portion of the unamortized debt issuance costs incurred for the senior unsecured credit facility when the original agreement was executed and the debt issuance costs incurred in connection with the refinancing of the First Term Loan.
Mortgage Loan
The Company’s mortgage loan is secured by the property. The mortgage is non-recourse to the Company except for fraud or misapplication of funds.
The Company’s mortgage loan contains debt service coverage ratio tests related to the mortgaged property. If the debt service coverage ratio for the property fails to exceed a threshold level specified in the mortgage, cash flows from that hotel may automatically be directed to the lender to (i) satisfy required payments, (ii) fund certain reserves required by the mortgage and (iii) fund additional cash reserves for future required payments, including final payment. Cash flows will be directed to the lender
(“cash trap”) until such time as the property again complies with the specified debt service coverage ratio or the mortgage is paid off.
Financial Covenants
Failure of the Company to comply with financial and other covenants contained in its credit facilities, term loans and non-recourse secured mortgage could result from, among other things, changes in its results of operations, the incurrence of additional debt or changes in general economic conditions.
If the Company violates financial and other covenants contained in any of its credit facilities or term loans described above, the Company may attempt to negotiate waivers of the violations or amend the terms of the applicable credit facilities or term loans with the lenders thereunder; however, the Company can make no assurance that it would be successful in any such negotiations or that, if successful in obtaining waivers or amendments, such amendments or waivers would be on terms attractive to the Company. If a default under the credit facilities or term loans were to occur, the Company would possibly have to refinance the debt through additional debt financing, private or public offerings of debt securities, or additional equity financings. If the Company is unable to refinance its debt on acceptable terms, including at maturity of the credit facilities and term loans, it may be forced to dispose of hotel properties on disadvantageous terms, potentially resulting in losses that reduce cash flow from operating activities. If, at the time of any refinancing, prevailing interest rates or other factors result in higher interest rates upon refinancing, increases in interest expense would lower the Company’s cash flow, and, consequently, cash available for distribution to its shareholders.
A cash trap associated with a mortgage loan may limit the overall liquidity for the Company as cash from the hotel securing such mortgage would not be available for the Company to use. If the Company is unable to meet mortgage payment obligations, including the payment obligation upon maturity of the mortgage borrowing, the mortgage securing the specific property could be foreclosed upon by, or the property could be otherwise transferred to, the mortgagee with a consequent loss of income and asset value to the Company.
As of
September 30, 2017
, the Company is in compliance with all debt covenants, current on all loan payments and not otherwise in default under the credit facilities, term loans, bonds payable and mortgage loan.
Fair Value Measurements
In evaluating fair value, GAAP outlines a valuation framework and creates a fair value hierarchy that distinguishes between market assumptions based on market data (observable inputs) and a reporting entity’s own assumptions about market data (unobservable inputs). The hierarchy ranks the quality and reliability of inputs used to determine fair value, which are then classified and disclosed in one of the three categories. The three levels are as follows:
Level 1—Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity has the ability to access at the measurement date.
Level 2—Observable inputs, other than quoted prices included in level 1, such as interest rates, yield curves, quoted prices in active markets for similar assets and liabilities, and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3—Unobservable inputs that are supported by limited market activity. This includes certain pricing models, discounted cash flow methodologies and similar techniques when observable inputs are not available.
The Company estimates the fair value of its financial instruments using available market information and valuation methodologies the Company believes to be appropriate for these purposes. Considerable judgment and subjectivity are involved in developing these estimates and, accordingly, such estimates are not necessarily indicative of amounts that would be realized upon disposition.
Recurring Measurements
For assets and liabilities measured at fair value on a recurring basis, quantitative disclosure of their fair value is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at
|
|
|
|
|
September 30, 2017
|
|
December 31, 2016
|
|
|
|
|
Using Significant Other Observable
|
|
|
|
|
Inputs (Level 2)
|
Description
|
|
Consolidated Balance Sheet Location
|
|
|
|
|
Derivative interest rate instruments
|
|
Prepaid expenses and other assets
|
|
$
|
4,364
|
|
|
$
|
3,295
|
|
Derivative interest rate instruments
|
|
Accounts payable and accrued expenses
|
|
$
|
0
|
|
|
$
|
927
|
|
The fair value of each derivative instrument is based on a discounted cash flow analysis of the expected cash flows under each arrangement. This analysis reflects the contractual terms of the derivative instrument, including the period to maturity, and utilizes observable market-based inputs, including interest rate curves and implied volatilities, which are classified within level 2 of the fair value hierarchy. The Company also incorporates credit value adjustments to appropriately reflect each parties’ nonperformance risk in the fair value measurement, which utilizes level 3 inputs such as estimates of current credit spreads. However, the Company has assessed that the credit valuation adjustments are not significant to the overall valuation of the derivatives. As a result, the Company has determined that its derivative valuations in their entirety are classified within level 2 of the fair value hierarchy.
Financial Instruments Not Measured at Fair Value
The following table represents the fair value, derived using level 2 inputs, of financial instruments presented at carrying value in the Company’s consolidated financial statements as of
September 30, 2017
and
December 31, 2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
December 31, 2016
|
|
Carrying Value
|
|
Estimated Fair Value
|
|
Carrying Value
|
|
Estimated Fair Value
|
Borrowings under credit facilities
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Term loans
|
$
|
855,000
|
|
|
$
|
856,173
|
|
|
$
|
855,000
|
|
|
$
|
857,224
|
|
Bonds payable
|
$
|
42,500
|
|
|
$
|
42,500
|
|
|
$
|
42,500
|
|
|
$
|
42,500
|
|
Mortgage loan
|
$
|
225,000
|
|
|
$
|
224,163
|
|
|
$
|
225,000
|
|
|
$
|
225,224
|
|
The Company estimated the fair value of its borrowings under credit facilities, term loans, bonds payable and mortgage loan using interest rates ranging from
1.5%
to
2.3%
as of
September 30, 2017
and from
1.5%
and
1.8%
as of
December 31, 2016
with a weighted average effective interest rate of
1.6%
and
1.5%
as of
September 30, 2017
and
December 31, 2016
, respectively. The assumptions reflect the terms currently available on similar borrowings to borrowers with credit profiles similar to the Company’s.
At
September 30, 2017
and
December 31, 2016
, the carrying amounts of certain of the Company’s financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued expenses and distributions payable were representative of their fair values due to the short-term nature of these instruments and the recent acquisition of these items.
Equity Repurchases and Redemptions
The Company’s Board of Trustees previously authorized an expanded share repurchase program (the “Repurchase Program”) to acquire up to
$600.0 million
of the Company’s common shares of beneficial interest, with repurchased shares recorded at cost in treasury. As of
September 30, 2017
, the Company has availability under the Repurchase Program to acquire up to
$569.8 million
of common shares of beneficial interest. The timing, manner, price and actual number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements, market conditions, and other corporate liquidity requirements and priorities. The Repurchase Program may be suspended, modified or terminated at any time for any reason without prior notice. The Repurchase Program does not obligate the Company to acquire any specific number of shares, and all open market repurchases will be made in accordance with applicable rules and regulations setting forth certain restrictions on the method, timing, price and volume of open market share repurchases.
On May 4, 2017, the Company redeemed all of the outstanding Series H Preferred Shares for
$68.8 million
(
$25.00
per share) plus
$0.3 million
of accrued and unpaid dividends through the redemption date. The redemption value of the Series H Preferred Shares exceeded their carrying value by
$2.4 million
, which is included in the determination of net income attributable
to common shareholders for the
nine months ended
September 30, 2017
. The
$2.4 million
represents the offering costs related to the redeemed Series H Preferred Shares.
Sources and Uses of Cash
As of
September 30, 2017
, the Company had
$444.3
million of cash and cash equivalents and
$14.7
million of restricted cash reserves,
$12.9
million of which was available for future capital expenditures. Additionally, the Company had
$747.6
million available under the Company’s senior unsecured credit facility, with
$2.4
million reserved for outstanding letters of credit, and
$25.0
million available under LHL’s unsecured credit facility.
Net cash provided by operating activities was
$219.5
million for the
nine months ended
September 30, 2017
primarily due to the operations of the hotels, which were partially offset by payments for real estate taxes, personal property taxes, insurance and ground rent.
Net cash provided by investing activities was
$336.7
million for the
nine months ended
September 30, 2017
primarily due to proceeds from the sale of Hotel Deca, Lansdowne Resort, Alexis Hotel, Hotel Triton and Westin Philadelphia, partially offset by outflows for improvements and additions at the hotels.
Net cash used in financing activities was
$246.6
million for the
nine months ended
September 30, 2017
primarily due to payment of distributions to the common shareholders and unitholders, payment for the redemption of preferred shares, payment of distributions to preferred shareholders and payment of debt issuance costs.
The Company has considered its short-term (one year or less) liquidity needs and the adequacy of its estimated cash flow from operations and other expected liquidity sources to meet these needs. The Company believes that its principal short-term liquidity needs are to fund normal recurring expenses, debt service requirements, distributions on the preferred shares and the minimum distribution required to maintain the Company’s REIT qualification under the Code. The Company anticipates that these needs will be met with available cash on hand, cash flows provided by operating activities, borrowings under the Company’s senior unsecured credit facility or LHL’s unsecured credit facility, additional unsecured financing, secured financing on any of the Company’s
39
unencumbered properties (subject to certain terms and conditions of the credit agreement), potential property sales (subject to certain conditions of the management agreements at
four
of the Company’s properties), debt or equity issuances available under the Company’s shelf registration statement and issuances of common units in the Operating Partnership. The Company also considers capital improvements and property acquisitions as short-term needs that will be funded either with cash flows provided by operating activities, utilizing availability under the Company’s senior unsecured credit facility or LHL’s unsecured credit facility, additional unsecured financing, secured financing on any of the Company’s
39
unencumbered properties (subject to certain terms and conditions of the credit agreement), potential property sales (subject to certain conditions of the management agreements at
four
of the Company’s properties) or the issuance of additional equity securities.
The Company expects to meet long-term (greater than one year) liquidity requirements such as property acquisitions, scheduled debt maturities, major renovations, expansions and other nonrecurring capital improvements utilizing availability under the Company’s senior unsecured credit facility or LHL’s unsecured credit facility, additional unsecured financing, secured financing on any of the Company’s
39
unencumbered properties (subject to certain terms and conditions of the credit agreement), potential property sales (subject to certain conditions of the management agreements at
four
of the Company’s properties), estimated cash flows from operations, debt or equity issuances available under the Company’s shelf registration statement and issuances of common units in the Operating Partnership. The Company expects to acquire or develop additional hotel properties only as suitable opportunities arise, and the Company will not undertake acquisition or development of properties unless stringent acquisition or development criteria have been achieved.
Reserve Funds
The Company is obligated to maintain reserve funds for capital expenditures at the hotels (including the periodic replacement or refurbishment of furniture, fixtures and equipment) as determined pursuant to the operating agreements. Please refer to “Off-Balance Sheet Arrangements” for a discussion of the Company’s reserve funds.
Contractual Obligations
The following is a summary of the Company’s obligations and commitments as of
September 30, 2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Amounts
Committed
|
|
Amount of Commitment Expiration Per Period
|
Obligations and Commitments
|
|
|
Less than
1 year
|
|
1 to 3 years
|
|
4 to 5 years
|
|
Over 5 years
|
Mortgage loan
|
|
$
|
225,000
|
|
|
$
|
225,000
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Mortgage loan interest
(1)
|
|
6,485
|
|
|
6,485
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Borrowings under credit facilities
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Credit facilities interest
(2)
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Capital and operating leases
(3)
|
|
536,609
|
|
|
11,414
|
|
|
23,049
|
|
|
23,739
|
|
|
478,407
|
|
Massport Bonds
|
|
42,500
|
|
|
42,500
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Massport Bonds interest
(2)
|
|
177
|
|
|
177
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Term loans
|
|
855,000
|
|
|
0
|
|
|
0
|
|
|
855,000
|
|
|
0
|
|
Term loans interest
(4)
|
|
96,606
|
|
|
26,438
|
|
|
52,303
|
|
|
17,865
|
|
|
0
|
|
Purchase commitments
(5)
|
|
|
|
|
|
|
|
|
|
|
Purchase orders and letters of commitment
|
|
65,865
|
|
|
65,865
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Total obligations and commitments
|
|
$
|
1,828,242
|
|
|
$
|
377,879
|
|
|
$
|
75,352
|
|
|
$
|
896,604
|
|
|
$
|
478,407
|
|
|
|
(1)
|
Interest expense is calculated based on the variable rate as of
September 30, 2017
for Westin Copley Place.
|
|
|
(2)
|
Interest expense, if applicable, is calculated based on the variable rate as of
September 30, 2017
.
|
|
|
(3)
|
Amounts calculated based on the annual minimum future lease payments that extend through the term of the lease. Rents on ground leases may be subject to adjustments based on future interest rates and hotel performance.
|
|
|
(4)
|
The term loans bear interest at floating rates equal to LIBOR plus applicable margins. The Company entered into separate interest rate swap agreements for the First Term Loan, resulting in a fixed all-in interest rate of
3.23%
, at the Company’s current leverage ratio (as defined in the agreements) through January 10, 2022, the First Term Loan’s maturity date. The Company entered into separate interest rate swap agreements for the Second Term Loan, resulting in a fixed all-in interest rate of
2.95%
at the Company’s current leverage ratio (as defined in the agreements). The $377.5 million portion of the Second Term Loan is fixed through its maturity date of January 29, 2021 and the $177.5 million portion of the Second Term Loan is fixed through May 16, 2019, the interest rate swaps’ maturity date. It is assumed that the outstanding debt as of
September 30, 2017
will be repaid upon maturity with fixed interest-only payments through the swapped periods and interest calculated based on the variable rate as of
September 30, 2017
for the unswapped period of the Second Term Loan.
|
|
|
(5)
|
As of
September 30, 2017
, purchase orders and letters of commitment totaling approximately
$65.9 million
had been issued for renovations at the properties. The Company has committed to these projects and anticipates making similar arrangements in the future with the existing properties or any future properties that it may acquire.
|
The Hotels
The following table sets forth pro forma historical comparative information with respect to occupancy, ADR and RevPAR for the total hotel portfolio owned as of
September 30, 2017
for the
three and nine months ended
September 30, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended
|
|
For the nine months ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2017
|
|
2016
|
|
Variance
|
|
2017
|
|
2016
|
|
Variance
|
Occupancy
|
|
90.2
|
%
|
|
90.2
|
%
|
|
0.0
|
%
|
|
85.3
|
%
|
|
85.7
|
%
|
|
(0.4
|
%)
|
ADR
|
|
$
|
243.31
|
|
|
$
|
252.32
|
|
|
(3.6
|
%)
|
|
$
|
244.35
|
|
|
$
|
247.16
|
|
|
(1.1
|
%)
|
RevPAR
|
|
$
|
219.38
|
|
|
$
|
227.69
|
|
|
(3.6
|
%)
|
|
$
|
208.52
|
|
|
$
|
211.70
|
|
|
(1.5
|
%)
|
For presentation of comparable information, the above hotel statistics exclude (i) Hotel Triton and Westin Philadelphia due to their dispositions during the second quarter of 2017, (ii) Hotel Deca, Lansdowne Resort and Alexis Hotel due to their dispositions during the first quarter of 2017 and (iii) Indianapolis Marriott Downtown due to its disposition in July 2016. For the
three and nine months ended
September 30, 2017
and
2016
, the above hotel statistics exclude third quarter results for The Marker Waterfront Resort and Southernmost Beach Resort Key West due to their closure during Hurricane Irma in early September 2017 and for a period following the storm due to subsequent building repairs and clean up. In addition, for the
nine months ended
September 30, 2017
and
2016
, the above hotel statistics exclude first quarter results for Mason & Rook Hotel due to the hotel’s closure for renovation during the first quarter of 2016.
Inflation
The Company relies entirely on the performance of the hotels and their ability to increase revenues to keep pace with inflation. The hotel operators can change room rates quickly, but competitive pressures may limit the hotel operators’ abilities to raise rates faster than inflation or even at the same rate.
The Company’s expenses (primarily real estate taxes, property and casualty insurance, administrative expenses and hotel operating expenses) are subject to inflation. These expenses are expected to grow at the general rate of inflation, except for energy costs, liability insurance, property taxes (due to increased rates and periodic reassessments), employee benefits and some wages, which are expected to increase at rates higher than inflation.
Seasonality
The Company’s hotels’ operations historically have been seasonal. Taken together, the hotels maintain higher occupancy rates during the second and third quarters of each year. These seasonality patterns can be expected to cause fluctuations in the quarterly hotel operations.
|
|
Item 3.
|
Quantitative and Qualitative Disclosures about Market Risk
|
The Company is exposed to market risk from changes in interest rates. The Company seeks to limit the impact of interest rate changes on earnings and cash flows and to lower the overall borrowing costs by closely monitoring the Company’s variable rate debt and converting such debt to fixed rates when the Company deems such conversion advantageous. From time to time, the Company may enter into interest rate swap agreements or other interest rate hedging contracts. While these agreements are intended to lessen the impact of rising interest rates, they also expose the Company to the risks that the other parties to the agreements will not perform, the Company could incur significant costs associated with the settlement of the agreements, the agreements will be unenforceable and the underlying transactions will fail to qualify as highly effective cash flow hedges under GAAP guidance. As of
September 30, 2017
,
$267.5
million of the Company’s aggregate indebtedness (
23.8%
of total indebtedness) was subject to variable interest rates, excluding amounts outstanding under the First Term Loan and Second Term Loan since the Company hedged their variable interest rates to fixed interest rates.
If market rates of interest on the Company’s variable rate long-term debt fluctuate by 0.25%, interest expense would increase or decrease, depending on rate movement, future earnings and cash flows by
$0.7
million annually. This assumes that the amount outstanding under the Company’s variable rate debt remains at
$267.5
million, the balance as of
September 30, 2017
.
|
|
Item 4.
|
Controls and Procedures
|
Based on the most recent evaluation, the Company’s Chief Executive Officer and Chief Financial Officer believe the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended) were effective as of
September 30, 2017
. There were no changes to the Company’s internal control over financial reporting during the
third
quarter ended
September 30, 2017
that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. Other Information
|
|
Item 1.
|
Legal Proceedings
|
The nature of hotel operations exposes the Company and its hotels to the risk of claims and litigation in the normal course of their business. The Company is not presently subject to any material litigation nor, to the Company’s knowledge, is any litigation threatened against the Company, other than routine actions for negligence or other claims and administrative proceedings arising in the ordinary course of business, some of which are expected to be covered by liability insurance and all of which collectively are not expected to have a material adverse effect on the liquidity, results of operations, business or financial condition of the Company.
There have been no material changes from the risk factors disclosed in the “Risk Factors” section of the Company’s Annual Report on Form 10-K for the year ended
December 31, 2016
.