|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss) Recognized in OCI on Derivative Instruments
|
|
Location of Loss Reclassified from AOCI into Income
|
|
Amount of Loss Reclassified from AOCI into Income
|
|
|
|
|
|
(Effective Portion)
|
|
(Effective Portion)
|
|
(Effective Portion)
|
|
|
For the three months ended
|
|
|
|
|
For the three months ended
|
|
|
June 30,
|
|
|
|
|
June 30,
|
|
|
2013
|
|
2012
|
|
|
|
|
2013
|
|
2012
|
Derivatives in cash flow hedging relationships:
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
11,081
|
|
|
$
|
(4,695
|
)
|
|
Interest expense
|
|
$
|
1,049
|
|
|
$
|
302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss) Recognized in OCI on Derivative Instruments
|
|
Location of Loss Reclassified from AOCI into Income
|
|
Amount of Loss Reclassified from AOCI into Income
|
|
|
|
|
|
(Effective Portion)
|
|
(Effective Portion)
|
|
(Effective Portion)
|
|
|
For the six months ended
|
|
|
|
|
For the six months ended
|
|
|
June 30,
|
|
|
|
|
June 30,
|
|
|
2013
|
|
2012
|
|
|
|
|
2013
|
|
2012
|
Derivatives in cash flow hedging relationships:
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
12,600
|
|
|
$
|
(4,695
|
)
|
|
Interest expense
|
|
$
|
2,081
|
|
|
$
|
302
|
|
During the three and
six months ended
June 30, 2013
and 2012, the Company did not have any hedge ineffectiveness or amounts that were excluded from the assessment of hedge effectiveness recorded in earnings.
As of
June 30, 2013
, there was
$4,841
in cumulative unrealized gain, of which
$4,826
was included in AOCI and
$15
was attributable to noncontrolling interests. As of December 31, 2012, there was
$7,759
in cumulative unrealized loss, of which
$7,735
was included in AOCI and
$24
was attributable to noncontrolling interests. The Company expects that approximately
$4,223
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
June 30, 2013
.
Mortgage Loans
The Company’s mortgage loans are secured by the respective properties. The mortgages are non-recourse to the Company except for fraud or misapplication of funds.
On
June 3, 2013
, the Company repaid without fee or penalty the Hotel Solamar mortgage loan in the amount of
$59,789
plus accrued interest through borrowings on its senior unsecured credit facility. The loan was due to mature in
December 2013
.
The mortgage loans contain debt service coverage ratio tests related to the mortgaged properties. If the debt service coverage ratio for a specific property fails to exceed a threshold level specified in the mortgage, cash flows from that hotel may automatically be directed to the lender to (i) satisfy required payments, (ii) fund certain reserves required by the mortgage and (iii) fund additional cash reserves for future required payments, including final payment. Cash flows may be directed to the lender ("cash trap") until such time as the property again complies with the specified debt service coverage ratio or the mortgage is paid off.
Financial Covenants
Failure to comply with our financial covenants contained in our credit facilities, term loans and non-recourse secured mortgages could result from, among other things, changes in our results of operations, the incurrence of additional debt or changes in general economic conditions.
If the Company violates the financial covenants contained in any of its credit facilities or term loans described above, the Company may attempt to negotiate waivers of the violations or amend the terms of the applicable credit facilities or term loans with the lenders thereunder; however, the Company can make no assurance that it would be successful in any such negotiations or that, if successful in obtaining waivers or amendments, such amendments or waivers would be on terms attractive to the Company. If a default under the credit facilities or term loans were to occur, the Company would possibly have to refinance the debt through additional debt financing, private or public offerings of debt securities, or additional equity financings. If the Company is unable to refinance its debt on acceptable terms, including at maturity of the credit facilities and term loans, it may be forced to dispose of hotel properties on disadvantageous terms, potentially resulting in losses that reduce cash flow from operating activities. If, at the time of any refinancing, prevailing interest rates or other factors result in higher interest rates upon refinancing, increases in interest expense would lower the Company’s cash flow, and, consequently, cash available for distribution to its shareholders.
A cash trap associated with a mortgage loan may limit the overall liquidity for the Company as cash from the hotel securing such mortgage would not be available for the Company to use. If the Company is unable to meet mortgage payment obligations, including the payment obligation upon maturity of the mortgage borrowing, the mortgage securing the specific property could be foreclosed upon by, or the property could be otherwise transferred to, the mortgagee with a consequent loss of income and asset value to the Company.
As of
June 30, 2013
, the Company is in compliance with all debt covenants, current on all loan payments and not otherwise in default under the credit facilities, term loans, bonds payable or mortgage loans.
One
of the mortgaged properties is currently subject to a cash trap as a result of the impact of a recent renovation on hotel operations. This cash trap does not have a material impact on the cash flow or the operations of the property or the Company.
|
|
5.
|
Commitments and Contingencies
|
Ground, Land and Building, and Air Rights Leases
Seven
of the Company’s hotels, San Diego Paradise Point Resort and Spa, Hyatt Boston Harbor (formerly Harborside Hyatt Conference Center & Hotel), Indianapolis Marriott Downtown, The Hilton San Diego Resort and Spa, Hotel Solamar, Viceroy Santa Monica and The Liberty Hotel are subject to ground leases under non-cancelable operating leases expiring from
March 2026
to
December 1, 2102
. The ground lease at Hyatt Boston Harbor expires in
March 2026
, but the Company has options to extend for over
50
years to
2077
.
None
of the remaining ground leases expire prior to
2045
. The Westin Copley Place is subject to a long term air rights lease which expires in
December 2077
and requires
no
payments through maturity. The ground lease related to the Indianapolis Marriott Downtown requires future ground rent payments of
one
dollar per year. The ground leases at Viceroy Santa Monica and The Liberty Hotel are subject to minimum annual rent increases, resulting in noncash straight-line rent expense of
$327
and
$654
for the three and
six months ended
June 30, 2013
, respectively, and
$114
and
$228
for the three and
six months ended
June 30, 2012
, respectively, which is included in total ground rent expense below.
Hotel Roger Williams is subject to a capital lease of land and building which expires in
December 2044
. The fair value of the obligation at acquisition of
$4,892
is amortized and included in accounts payable and accrued expenses in the accompanying consolidated balance sheets.
Total ground rent expense for the three and
six months ended
June 30, 2013
was
$2,791
and
$5,286
, respectively. Total ground rent expense for the three and
six months ended
June 30, 2012
was
$2,210
and
$3,986
, respectively. Certain rent payments are based on the hotel’s performance. Actual payments of rent may exceed the minimum required rent due to meeting specified thresholds.
Future minimum rent payments (without reflecting future applicable Consumer Price Index increases) are as follows:
|
|
|
|
|
2013
|
$
|
3,525
|
|
2014
|
7,060
|
|
2015
|
7,087
|
|
2016
|
7,140
|
|
2017
|
7,153
|
|
Thereafter
|
362,977
|
|
|
$
|
394,942
|
|
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%
to
5.0%
of hotel revenues, sufficient to cover the cost of (a) certain non-routine repairs and maintenance to the hotels and (b) replacements and renewals to the hotels’ capital assets. Certain of the agreements require that the Company reserve this cash in separate accounts. As of
June 30, 2013
,
$9,912
was available in restricted cash reserves for future capital expenditures. The Company has sufficient cash on hand and availability on its credit facilities to cover capital expenditures under agreements that do not require that the Company separately reserve cash.
Restricted Cash Reserves
At
June 30, 2013
, the Company held
$15,766
in restricted cash reserves. Included in such amounts are (i)
$9,912
of reserve funds for future capital expenditures, (ii)
$4,378
deposited in mortgage escrow accounts pursuant to mortgage obligations to pre-fund a portion of certain operating expenses and debt payments and (iii)
$1,476
held by insurance and management companies on the Company’s behalf to be refunded or applied to future liabilities.
Litigation
The nature of hotel operations exposes the Company and its hotels to the risk of claims and litigation in the normal course of their business. The Company is not presently subject to any material litigation nor, to the Company’s knowledge, is any litigation threatened against the Company, other than routine actions for negligence or other claims and administrative proceedings arising in the ordinary course of business, some of which are expected to be covered by liability insurance and all of which collectively are not expected to have a material adverse effect on the liquidity, results of operations, business or financial condition of the Company.
Common Shares of Beneficial Interest
On January 1, 2013, the Company issued
10,332
common shares of beneficial interest and authorized an additional
7,921
deferred shares to the independent members of its Board of Trustees for their earned 2012 compensation pursuant to award arrangements existing on or before January 1, 2012. These common shares of beneficial interest were issued under the 2009 Plan.
On January 30, 2013, the Company issued
81,400
restricted common shares of beneficial interest to the Company’s executives and employees. The restricted shares vest over
three
years, starting January 1, 2014, subject to continued employment. These common shares of beneficial interest were issued under the 2009 Plan.
On February 20, 2013, the Company entered into an equity distribution agreement (the "2013 Agreement") with Raymond James & Associates, Inc. (the "Manager"). Under the terms of the 2013 Agreement, the Company may issue from time to time through or to the Manager, as sales agent or principal, the Company’s common shares of beneficial interest with aggregate gross proceeds totaling up to
$250,000
. The 2013 Agreement replaced the Company's prior equity distribution agreement, under which
$146,024
of aggregate gross proceeds remained. During the
six months ended
June 30, 2013
, the Company incurred offering costs of
$146
related to executing and maintaining the 2013 Agreement.
From May 24, 2013 through May 31, 2013, the Company sold
721,706
common shares of beneficial interest, par value
$0.01
per share, under the 2013 Agreement. After deducting the Manager's discounts and commissions of
$250
, the Company raised net proceeds of
$19,693
. The net proceeds were used to pay down amounts outstanding under the Company's senior unsecured credit facility and for general corporate purposes. As of
June 30, 2013
, the Company had availability under the 2013 Agreement to issue and sell common shares of beneficial interest having an aggregate offering price of up to
$230,057
.
Common Dividends
The Company paid the following dividends on common shares/units during the
six months ended
June 30, 2013
:
|
|
|
|
|
|
|
|
|
|
Dividend per
Share/Unit
|
|
For the Quarter Ended
|
|
Record Date
|
|
Payable Date
|
$
|
0.20
|
|
|
December 31, 2012
|
|
December 31, 2012
|
|
January 15, 2013
|
$
|
0.20
|
|
|
March 31, 2013
|
|
March 28, 2013
|
|
April 15, 2013
|
Treasury Shares
Treasury shares are accounted for under the cost method. During the
six months ended
June 30, 2013
, the Company received
2,414
common shares of beneficial interest related to employees surrendering shares to pay taxes at the time restricted shares vested and forfeiting restricted shares upon resignation.
On August 29, 2011, the Company’s Board of Trustees authorized a share repurchase program (the “Repurchase Program”) to acquire up to
$100,000
of the Company’s common shares of beneficial interest, with repurchased shares recorded at cost in treasury. As of
June 30, 2013
, the Company had availability under the Repurchase Program to acquire up to
$75,498
of common shares of beneficial interest. However, the Company is not currently authorized by its Board of Trustees to repurchase or offer to repurchase any common shares. If authorized by its Board of Trustees, the Company may resume using the Repurchase Program on a future date.
During the
six months ended
June 30, 2013
, the Company re-issued
10,332
treasury shares related to earned 2012 compensation for the Board of Trustees and
24,636
treasury shares related to the grants of restricted common shares of beneficial interest.
At
June 30, 2013
, there were
2,360
common shares of beneficial interest in treasury.
Preferred Shares
On May 21, 2012, the Company redeemed all
3,170,000
outstanding 7 ½% Series D Cumulative Redeemable Preferred Shares ("Series D Preferred Shares") and all
3,500,000
outstanding 8% Series E Cumulative Redeemable Preferred Shares ("Series E Preferred Shares") for
$79,250
and
$87,500
(
$25.00
per share), respectively, plus accrued distributions through May 21, 2012 of
$842
and
$992
, respectively. The redemption values of the Series D Preferred Shares and Series E Preferred Shares exceeded their carrying values by
$2,273
and
$2,144
, respectively, which are included in the determination of net income attributable to common shareholders for the three and six months ended June 30, 2012. The
$2,273
and
$2,144
represent the offering costs related to the Series D Preferred Shares and Series E Preferred Shares, respectively.
On March 4, 2013, the Company issued
4,000,000
6
3
/
8
% Series I Cumulative Redeemable Preferred Shares (
$0.01
par value) ("Series I Preferred Shares") at a price of
$25.00
per share and received net proceeds, after costs, of
$96,667
. On March 12, 2013, the underwriters exercised their rights to cover overallotments and purchased
400,000
additional Series I Preferred Shares, resulting in additional net proceeds to the Company of
$9,685
. The net proceeds were used to redeem a portion of the Company's 7 ¼% Series G Cumulative Redeemable Preferred Shares ("Series G Preferred Shares") on April 5, 2013, to pay down amounts outstanding under the Company's senior unsecured credit facility, and for general corporate purposes.
On April 5, 2013, the Company redeemed
4,000,000
of the
6,348,888
outstanding Series G Preferred Shares for
$100,000
(
$25.00
per share) plus accrued distributions through April 5, 2013 of
$1,913
. The redemption value of the Series G Preferred Shares exceeded their carrying value by
$1,566
, which is included in the determination of net income attributable to common shareholders for the three and
six months ended
June 30, 2013
. The
$1,566
represents the offering costs related to the redeemed Series G Preferred Shares.
The Series G Preferred Shares, 7
½% Series H Cumulative Redeemable Preferred Shares ("Series H Preferred Shares") and the Series I Preferred Shares (collectively, the “Preferred Shares”) rank senior to the common shares of beneficial interest and on parity with each other with respect to payment of distributions; the Company will not pay any distributions, or set aside any funds
for the payment of distributions, on its common shares of beneficial interest unless it has also paid (or set aside for payment) the full cumulative distributions on the Preferred Shares for the current and all past dividend periods. The outstanding Preferred Shares do not have any maturity date, and are not subject to mandatory redemption. The difference between the carrying value and the redemption amount of the Preferred Shares are the offering costs. In addition, the Company is not required to set aside funds to redeem the Preferred Shares. The Company currently has the option to redeem the Series G Preferred Shares, in whole or from time to time in part, by payment of
$25.00
per share, plus any accumulated, accrued and unpaid distributions to and including the date of redemption. The Company may not optionally redeem the Series H Preferred Shares and Series I Preferred Shares prior to January 24, 2016 and March 4, 2018, respectively, except in limited circumstances relating to the Company’s continuing qualification as a REIT or as discussed below. After those dates, the Company may, at its option, redeem the Series H Preferred Shares and Series I Preferred Shares, in whole or from time to time in part, by payment of
$25.00
per share, plus any accumulated, accrued and unpaid distributions to and including the date of redemption. In addition, upon the occurrence of a change of control (as defined in the Company's charter), the result of which the Company’s common shares of beneficial interest and the common securities of the acquiring or surviving entity are not listed on the New York Stock Exchange, the NYSE MKT LLC or the NASDAQ Stock Market, or any successor exchanges, the Company may, at its option, redeem the Series H Preferred Shares and Series I Preferred Shares in whole or in part within
120
days after the change of control occurred, by paying
$25.00
per share, plus any accrued and unpaid distributions to and including the date of redemption. If the Company does not exercise its right to redeem the Series H Preferred Shares and Series I Preferred Shares upon a change of control, the holders of Series H Preferred Shares and Series I Preferred Shares have the right to convert some or all of their shares into a number of the Company’s common shares of beneficial interest based on a defined formula subject to a cap of
4,680,500
common shares and
8,835,200
common shares, respectively.
The following Preferred Shares were outstanding as of
June 30, 2013
:
|
|
|
|
|
Security Type
|
|
Number of
Shares
|
7 ¼% Series G Preferred Shares
|
|
2,348,888
|
|
7 ½% Series H Preferred Shares
|
|
2,750,000
|
|
6
3
/
8
%
Series I Preferred Shares
|
|
4,400,000
|
|
Preferred Dividends
The Company paid the following dividends on preferred shares during the
six months ended
June 30, 2013
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend per
|
|
For the
|
|
|
|
|
Security Type
|
|
Share
(1)
|
|
Quarter Ended
|
|
Record Date
|
|
Payable Date
|
7 ¼% Series G
|
|
$
|
0.45
|
|
|
December 31, 2012
|
|
January 1, 2013
|
|
January 15, 2013
|
7 ½% Series H
|
|
$
|
0.47
|
|
|
December 31, 2012
|
|
January 1, 2013
|
|
January 15, 2013
|
7 ¼% Series G (redemption)
|
|
$
|
0.48
|
|
|
March 31, 2013
|
|
March 28, 2013
|
|
April 5, 2013
|
7 ¼% Series G
|
|
$
|
0.45
|
|
|
March 31, 2013
|
|
March 28, 2013
|
|
April 15, 2013
|
7 ½% Series H
|
|
$
|
0.47
|
|
|
March 31, 2013
|
|
March 28, 2013
|
|
April 15, 2013
|
6
3
/
8
%
Series I
|
|
$
|
0.18
|
|
|
March 31, 2013
|
|
March 28, 2013
|
|
April 15, 2013
|
|
|
(1)
|
Amounts are rounded to the nearest whole cent for presentation purposes.
|
Noncontrolling Interests of Common Units in Operating Partnership
As of
June 30, 2013
, the Operating Partnership had
296,300
common units of limited partnership interest outstanding, representing a
0.3%
partnership interest held by the limited partners. As of
June 30, 2013
, approximately
$7,319
of cash or the equivalent value in common shares, at the Company's option, would be paid to the limited partners of the Operating Partnership if the partnership were terminated. The approximate value of
$7,319
is based on the Company's closing common share price of
$24.70
on
June 30, 2013
, which is assumed to be equal to the value provided to the limited partners upon liquidation of the Operating Partnership. The outstanding common units of limited partnership interest are subject to a required hold period that ends on December 28, 2013, after which they are convertible into a like number of common shares of beneficial interest of the Company.
The following schedule presents the effects of changes in the Company's ownership interest in the Operating Partnership on the Company's equity:
|
|
|
|
|
|
|
|
|
|
For the six months ended
|
|
June 30,
|
|
2013
|
|
2012
|
Net income attributable to common shareholders
|
$
|
27,795
|
|
|
$
|
8,675
|
|
Decrease in additional paid-in capital from adjustments to noncontrolling interests of common units in Operating Partnership
|
(3
|
)
|
|
(778
|
)
|
Change from net income attributable to common shareholders and adjustments to noncontrolling interests
|
$
|
27,792
|
|
|
$
|
7,897
|
|
The common shareholders approved the 2009 Plan, which permits the Company to issue equity-based awards to executives, employees, non-employee members of the Board of Trustees and any other persons providing services to or for the Company and its subsidiaries. The 2009 Plan provides for a maximum of
1,800,000
common shares of beneficial interest to be issued in the form of share options, share appreciation rights, restricted share awards, performance shares, phantom shares and other equity-based awards. In addition, the maximum number of common shares subject to awards of any combination that may be granted under the 2009 Plan during any fiscal year to any one individual is limited to
500,000
shares. The 2009 Plan terminates on
January 28, 2019
. The 2009 Plan authorized, among other things: (i) the grant of share options that qualify as incentive options under the Code, (ii) the grant of share options that do not so qualify, (iii) the grant of common shares in lieu of cash for trustees’ fees, (iv) grants of common shares in lieu of cash compensation, and (v) the making of loans to acquire common shares in lieu of compensation (to the extent permitted by law and applicable provisions of the Sarbanes Oxley Act of 2002). The exercise price of share options is determined by the Compensation Committee of the Board of Trustees, but may not be less than
100%
of the fair value of the common shares on the date of grant. Restricted share awards and options under the 2009 Plan vest over a period determined by the Compensation Committee of the Board of Trustees, generally a
three
to
five
year period, with certain awards vesting over periods of up to
nine
years. The duration of each option is also determined by the Compensation Committee, subject to applicable laws and regulations. There were
no
stock options outstanding as of
June 30, 2013
. At
June 30, 2013
, there were
1,068,681
common shares available for future grant under the 2009 Plan.
Service Condition Nonvested Share Awards
From time to time, the Company awards nonvested shares under the 2009 Plan to members of the Board of Trustees, executives, and employees. The nonvested shares vest over
three
to
nine
years based on continued service or employment. The Company measures compensation costs for the nonvested shares based upon the fair value of its common shares at the date of grant. Compensation costs are recognized on a straight-line basis over the vesting period and are included in general and administrative expense in the accompanying consolidated statements of operations and comprehensive income.
A summary of the Company’s service condition nonvested shares as of
June 30, 2013
is as follows:
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted -
Average Grant
Date Fair Value
|
Nonvested at January 1, 2013
|
252,772
|
|
|
$
|
29.72
|
|
Granted
|
81,400
|
|
|
27.20
|
|
Vested
|
(165
|
)
|
|
27.18
|
|
Forfeited
|
(2,360
|
)
|
|
27.34
|
|
Nonvested at June 30, 2013
(1)
|
331,647
|
|
|
$
|
29.12
|
|
|
|
(1)
|
Amount excludes
34,318
long-term performance-based shares which were earned but nonvested due to a service condition as of
June 30, 2013
.
|
As of
June 30, 2013
and
December 31, 2012
, there were
$6,583
and
$5,919
, respectively, of total unrecognized compensation costs related to nonvested share awards. As of
June 30, 2013
and
December 31, 2012
, these costs were expected to be recognized over a weighted–average period of
2.4
and
2.7
years, respectively. The total fair value of shares vested (calculated as number of shares multiplied by vesting date share price) during the three and
six months ended
June 30, 2013
was
zero
and
$4
, respectively, and during the three and
six months ended
June 30, 2012
was
zero
and
$1,635
, respectively. The compensation costs (net of forfeitures) that have been included in general and administrative expenses in the accompanying consolidated statements of
operations and comprehensive income were
$710
and
$1,420
for the three and
six months ended
June 30, 2013
, respectively, and
$703
and
$1,392
for the three and
six months ended
June 30, 2012
, respectively.
Long-Term Performance-Based Share Awards
On January 30, 2013, the Company’s Board of Trustees granted a target of
80,559
performance-based awards of nonvested shares to executives (the "January 30, 2013 Awards"). The actual amounts of the awards with respect to
40,280
of the
80,559
shares will be determined on January 1, 2016, based on the performance measurement period of January 1, 2013 through December 31, 2015, in accordance with the terms of the agreements. The actual amounts of the awards with respect to the remaining
40,279
of the
80,559
shares will be determined on July 1, 2016, based on the performance measurement period of July 1, 2013 through June 30, 2016, in accordance with the terms of the agreements. The actual amounts of the awards will range from
0%
to
200%
of the target amounts, depending on the performance analysis stipulated in the agreements, and
none
of the performance shares are outstanding until issued in accordance with award agreements based on performance. After the actual amounts of the awards are determined (or earned) at the end of the respective performance measurement period, all of the earned shares will be issued and outstanding on those dates. The executives will receive cash payments on the earned shares equal to the value of all dividends paid on common shares from the grant date through the respective determination date. Such amounts will be paid to the awardees on or about January 1, 2016 and July 1, 2016, respectively. Thereafter, the executives will be entitled to receive dividends as declared and paid on the earned shares and to vote the shares. Fair value of the January 30, 2013 Awards was estimated on the grant date, January 30, 2013, with revaluation on June 30, 2013 resulting from the return on invested capital (see below) measurement assumption being revised from
100%
to
200%
, and will be amortized into expense over the respective performance measurement period. With respect to
40,280
shares, amortization commenced on January 30, 2013, the beginning of the requisite service period, and, with respect to
40,279
shares, amortization will commence on July 1, 2013, the beginning of the requisite service period.
The fair values of the performance-based awards were determined by the Company using data under the Monte Carlo valuation method provided by a third-party consultant. The measurement of performance for the 2013 awards is substantially the same as the performance measurement for previously granted long-term performance-based share awards, except for "return on invested capital" discussed below. The capital market assumptions used in the valuations consisted of the following:
|
|
•
|
Factors associated with the underlying performance of the Company’s share price and shareholder returns over the term of the performance awards including total share return volatility and risk-free interest.
|
|
|
•
|
Factors associated with the relative performance of the Company’s share price and shareholder returns when compared to those companies which compose the index including beta as a means to breakdown total volatility into market-related and company specific volatilities.
|
|
|
•
|
The valuation has been performed in a risk-neutral framework.
|
|
|
•
|
Return on invested capital is a performance condition award measurement. The estimated value was calculated based on the initial face value at the date of grant. The valuation will be adjusted on a periodic basis as the estimated number of awards expected to vest is revised.
|
The assumptions used were as follows for each performance measure:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volatility
|
|
Interest
Rates
|
|
Dividend
Yield
|
|
Stock
Beta
|
|
Fair Value of
Components
of Award
|
|
Weighting
of Total
Awards
|
January 30, 2013 Awards (performance period starting January 1, 2013)
|
|
|
|
|
|
|
|
|
|
|
Target amounts
|
38.70
|
%
|
|
0.42
|
%
|
|
N/A
|
|
N/A
|
|
|
$
|
29.38
|
|
|
33.40
|
%
|
Return on invested capital
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
N/A
|
|
|
$
|
27.20
|
|
|
33.30
|
%
|
Peer companies
|
38.70
|
%
|
|
0.42
|
%
|
|
N/A
|
|
0.864
|
|
|
$
|
30.51
|
|
|
33.30
|
%
|
January 30, 2013 Awards (performance period starting July 1, 2013)
|
|
|
|
|
|
|
|
|
|
|
Target amounts
|
38.70
|
%
|
|
0.42
|
%
|
|
N/A
|
|
N/A
|
|
|
$
|
27.70
|
|
|
33.40
|
%
|
Return on invested capital
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
N/A
|
|
|
$
|
27.20
|
|
|
33.30
|
%
|
Peer companies
|
38.70
|
%
|
|
0.42
|
%
|
|
N/A
|
|
0.864
|
|
|
$
|
31.34
|
|
|
33.30
|
%
|
A summary of the Company’s long-term performance-based share awards as of
June 30, 2013
is as follows:
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted-
Average Grant
Date Fair Value
|
Nonvested at January 1, 2013
|
208,986
|
|
|
$
|
34.61
|
|
Granted
(2)
|
40,280
|
|
|
29.03
|
|
Vested
|
0
|
|
|
0.00
|
|
Forfeited
|
0
|
|
|
0.00
|
|
Nonvested at June 30, 2013
(1) (2)
|
249,266
|
|
|
$
|
33.71
|
|
|
|
(1)
|
Amount excludes
50,000
shares that have been committed for future performance share grants. Fair value will be estimated at the beginning of the performance measurement period on July 1, 2014.
|
|
|
(2)
|
Amount excludes
40,279
shares awarded on January 30, 2013 for which fair value has been estimated, but amortization into expense has not yet commenced. Amortization of fair value into expense will commence at the beginning of the requisite service period on July 1, 2013.
|
As of
June 30, 2013
and
December 31, 2012
, there were
$5,204
and
$4,883
, respectively, of total unrecognized compensation costs related to long-term performance-based share awards. As of
June 30, 2013
and
December 31, 2012
, these costs were expected to be recognized over a weighted–average period of
2.4
and
2.6
years, respectively. As of
June 30, 2013
and
December 31, 2012
, there were
153,943
long-term performance-based share awards vested. Additionally, there were
34,318
long-term performance-based awards earned but nonvested due to a service condition as of
June 30, 2013
and
December 31, 2012
. The compensation costs (net of forfeitures) related to long-term performance-based share awards that have been included in general and administrative expenses in the accompanying consolidated statements of operations and comprehensive income were
$637
and
$1,214
for the three and
six months ended
June 30, 2013
, respectively, and
$501
and
$1,003
for the three and
six months ended
June 30, 2012
, respectively.
Substantially all of the Company’s revenues are derived from operating revenues generated by the hotels, all of which are leased by LHL.
Other indirect hotel operating expenses consist of the following expenses incurred by the hotels:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended
|
|
For the six months ended
|
|
June 30,
|
|
June 30,
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
General and administrative
|
$
|
18,594
|
|
|
$
|
17,294
|
|
|
$
|
36,321
|
|
|
$
|
32,771
|
|
Sales and marketing
|
13,992
|
|
|
13,119
|
|
|
27,393
|
|
|
25,140
|
|
Repairs and maintenance
|
8,043
|
|
|
7,823
|
|
|
16,217
|
|
|
15,410
|
|
Utilities and insurance
|
6,582
|
|
|
6,350
|
|
|
13,561
|
|
|
12,664
|
|
Management and incentive fees
|
9,500
|
|
|
8,457
|
|
|
14,908
|
|
|
13,104
|
|
Franchise fees
|
2,148
|
|
|
1,772
|
|
|
3,839
|
|
|
3,340
|
|
Other expenses
|
330
|
|
|
337
|
|
|
685
|
|
|
764
|
|
Total other indirect expenses
|
$
|
59,189
|
|
|
$
|
55,152
|
|
|
$
|
112,924
|
|
|
$
|
103,193
|
|
As of
June 30, 2013
, LHL leased all
40
hotels owned by the Company as follows:
|
|
|
|
|
|
|
|
1.
|
|
Hyatt Boston Harbor (formerly Harborside Hyatt Conference Center & Hotel)
|
|
21.
|
|
Westin Michigan Avenue
|
2.
|
|
Hotel Viking
|
|
22.
|
|
Hotel Sax Chicago
|
3.
|
|
Topaz Hotel
|
|
23.
|
|
Alexis Hotel
|
4.
|
|
Hotel Rouge
|
|
24.
|
|
Hotel Solamar
|
5.
|
|
Hotel Madera
|
|
25.
|
|
Gild Hall
|
6.
|
|
Hotel Helix
|
|
26.
|
|
Hotel Amarano Burbank
|
7.
|
|
The Liaison Capitol Hill
|
|
27.
|
|
San Diego Paradise Point Resort and Spa
|
8.
|
|
Lansdowne Resort
|
|
28.
|
|
Le Montrose Suite Hotel
|
9.
|
|
Hotel George
|
|
29.
|
|
Sofitel Washington, DC Lafayette Square
|
10.
|
|
Indianapolis Marriott Downtown
|
|
30.
|
|
Hotel Monaco San Francisco
|
11.
|
|
Hilton Alexandria Old Town
|
|
31.
|
|
Westin Philadelphia
|
12.
|
|
Chaminade Resort and Conference Center
|
|
32.
|
|
Embassy Suites Philadelphia - Center City
|
13.
|
|
Hilton San Diego Gaslamp Quarter
|
|
33.
|
|
Hotel Roger Williams
|
14.
|
|
The Grafton on Sunset
|
|
34.
|
|
Chamberlain West Hollywood
|
15.
|
|
Onyx Hotel
|
|
35.
|
|
Viceroy Santa Monica
|
16.
|
|
Westin Copley Place
|
|
36.
|
|
Villa Florence
|
17.
|
|
Hotel Deca
|
|
37.
|
|
Park Central Hotel
|
18.
|
|
The Hilton San Diego Resort and Spa
|
|
38.
|
|
Hotel Palomar, Washington, DC
|
19.
|
|
Donovan House
|
|
39.
|
|
L'Auberge Del Mar
|
20.
|
|
Le Parc Suite Hotel
|
|
40.
|
|
The Liberty Hotel
|
Income tax expense (benefit) was comprised of the following for the three and
six months ended
June 30, 2013
and
2012
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended
|
|
For the six months ended
|
|
June 30,
|
|
June 30,
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
LHL’s income tax expense (benefit)
|
$
|
4,615
|
|
|
$
|
5,434
|
|
|
$
|
(645
|
)
|
|
$
|
2,267
|
|
Operating Partnership's income tax expense (benefit)
|
319
|
|
|
(465
|
)
|
|
562
|
|
|
(290
|
)
|
Total income tax expense (benefit)
|
$
|
4,934
|
|
|
$
|
4,969
|
|
|
$
|
(83
|
)
|
|
$
|
1,977
|
|
The Company has estimated LHL’s income tax benefit for the
six months ended
June 30, 2013
by applying an estimated combined federal and state tax rate of
38.2%
to LHL's net loss of
$1,796
. From time to time, the Company may be subject to federal, state or local tax audits in the normal course of business.
|
|
10.
|
Fair Value Measurements
|
In evaluating fair value, GAAP outlines a valuation framework and creates a fair value hierarchy that distinguishes between market assumptions based on market data (observable inputs) and a reporting entity’s own assumptions about market data (unobservable inputs). The hierarchy ranks the quality and reliability of inputs used to determine fair value, which are then classified and disclosed in one of the three categories. The three levels are as follows:
Level 1—Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity has the ability to access at the measurement date.
Level 2—Observable inputs, other than quoted prices included in level 1, such as interest rates, yield curves, quoted prices in active markets for similar assets and liabilities, and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3—Unobservable inputs that are supported by limited market activity. This includes certain pricing models, discounted cash flow methodologies and similar techniques when observable inputs are not available.
The Company estimates the fair value of its financial instruments using available market information and valuation methodologies the Company believes to be appropriate for these purposes. Considerable judgment and subjectivity are involved in developing these estimates and, accordingly, such estimates are not necessarily indicative of amounts that would be realized upon disposition.
Recurring Measurements
For assets and liabilities measured at fair value on a recurring basis, quantitative disclosure of their fair value is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at
|
|
|
|
|
June 30, 2013
|
|
December 31, 2012
|
|
|
|
|
Using Significant Other Observable
|
|
|
|
|
Inputs (Level 2)
|
Description
|
|
Consolidated Balance Sheet Location
|
|
|
|
|
Derivative interest rate instruments
|
|
Prepaid expenses and other assets
|
|
$
|
4,841
|
|
|
$
|
0
|
|
Derivative interest rate instruments
|
|
Accounts payable and accrued expenses
|
|
$
|
0
|
|
|
$
|
7,759
|
|
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 is 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
June 30, 2013
and
December 31, 2012
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2013
|
|
December 31, 2012
|
|
Carrying Value
|
|
Estimated Fair Value
|
|
Carrying Value
|
|
Estimated Fair Value
|
Note receivable
|
$
|
69,698
|
|
|
$
|
69,698
|
|
|
$
|
68,490
|
|
|
$
|
68,490
|
|
Borrowings under credit facilities
|
$
|
180,000
|
|
|
$
|
179,535
|
|
|
$
|
153,000
|
|
|
$
|
153,719
|
|
Term loans
|
$
|
477,500
|
|
|
$
|
470,438
|
|
|
$
|
477,500
|
|
|
$
|
475,752
|
|
Bonds payable
|
$
|
42,500
|
|
|
$
|
42,500
|
|
|
$
|
42,500
|
|
|
$
|
42,500
|
|
Mortgage loans
|
$
|
516,782
|
|
|
$
|
536,513
|
|
|
$
|
579,220
|
|
|
$
|
607,109
|
|
The Company estimates the fair value of its borrowings under credit facilities, term loans, bonds payable and mortgage loans using a weighted average effective interest rate of
2.9%
as of
June 30, 2013
and
December 31, 2012
. The assumptions reflect the terms currently available on similar borrowings to borrowers with credit profiles similar to the Company's. The Company estimates that the fair value of its note receivable approximates its carrying value due to the relatively short period until maturity.
At
June 30, 2013
and
December 31, 2012
, the carrying amounts of certain of the Company's financial instruments, including cash and cash equivalents, restricted cash, accounts receivable and accounts payable and accrued expenses were representative of their fair values due to the short-term nature of these instruments and the recent acquisition of these items.
|
|
11.
|
Earnings Per Common Share
|
The limited partners' outstanding common units in the Operating Partnership (which may be converted to common shares of beneficial interest) have been excluded from the diluted earnings per share calculation as there would be no effect on the amounts since the limited partners' share of income or loss would also be added back to net income or loss. Any anti-dilutive shares have been excluded from the diluted earnings per share calculation. Unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. Accordingly, distributed and undistributed earnings attributable to unvested restricted shares (participating securities) have been excluded, as applicable, from net income or loss attributable to
common shareholders used in the basic and diluted earnings per share calculations. Net income or loss figures are presented net of noncontrolling interests in the earnings per share calculations.
The computation of basic and diluted earnings per common share is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended
|
|
For the six months ended
|
|
June 30,
|
|
June 30,
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
Numerator:
|
|
|
|
|
|
|
|
Net income attributable to common shareholders
|
$
|
35,190
|
|
|
$
|
24,792
|
|
|
$
|
27,795
|
|
|
$
|
8,675
|
|
Dividends paid on unvested restricted shares
|
(73
|
)
|
|
(87
|
)
|
|
(147
|
)
|
|
(135
|
)
|
Undistributed earnings attributable to unvested restricted shares
|
(61
|
)
|
|
(38
|
)
|
|
0
|
|
|
0
|
|
Net income attributable to common shareholders excluding amounts attributable to unvested restricted shares
|
$
|
35,056
|
|
|
$
|
24,667
|
|
|
$
|
27,648
|
|
|
$
|
8,540
|
|
Denominator:
|
|
|
|
|
|
|
|
Weighted average number of common shares - basic
|
95,465,464
|
|
|
85,451,978
|
|
|
95,316,742
|
|
|
84,975,917
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
Stock options and compensation-related shares
|
164,602
|
|
|
165,873
|
|
|
157,117
|
|
|
161,916
|
|
Weighted average number of common shares - diluted
|
95,630,066
|
|
|
85,617,851
|
|
|
95,473,859
|
|
|
85,137,833
|
|
Earnings per Common Share - Basic:
|
|
|
|
|
|
|
|
Net income attributable to common shareholders excluding amounts attributable to unvested restricted shares
|
$
|
0.37
|
|
|
$
|
0.29
|
|
|
$
|
0.29
|
|
|
$
|
0.10
|
|
Earnings per Common Share - Diluted:
|
|
|
|
|
|
|
|
Net income attributable to common shareholders excluding amounts attributable to unvested restricted shares
|
$
|
0.37
|
|
|
$
|
0.29
|
|
|
$
|
0.29
|
|
|
$
|
0.10
|
|
|
|
12.
|
Supplemental Information to Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
For the six months ended
|
|
June 30,
|
|
2013
|
|
2012
|
Interest paid, net of capitalized interest
|
$
|
27,110
|
|
|
$
|
23,732
|
|
Interest capitalized
|
431
|
|
|
232
|
|
Income taxes paid, net
|
1,317
|
|
|
1,189
|
|
Increase in distributions payable on common shares
|
162
|
|
|
8,066
|
|
Decrease in distributions payable on preferred shares
|
(59
|
)
|
|
(3,236
|
)
|
Write-off of fully amortized deferred financing costs
|
203
|
|
|
162
|
|
Increase (decrease) in accrued capital expenditures
|
4,090
|
|
|
(1,007
|
)
|
Grant of restricted shares and awards to employees and executives, net
|
3,749
|
|
|
4,744
|
|
Issuance of common shares for Board of Trustees compensation
|
277
|
|
|
494
|
|
In conjunction with the acquisition of properties, the Company assumed
|
|
|
|
assets and liabilities as follows:
|
|
|
|
Investment in properties (after credits at closing)
|
$
|
0
|
|
|
$
|
(143,721
|
)
|
Deposits on potential acquisitions
|
(3,000
|
)
|
|
0
|
|
Other assets
|
0
|
|
|
(565
|
)
|
Liabilities
|
0
|
|
|
1,342
|
|
Acquisition of properties
|
$
|
(3,000
|
)
|
|
$
|
(142,944
|
)
|
The Company paid the following common and preferred dividends subsequent to
June 30, 2013
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend per
|
|
For the Quarter
|
|
Record
|
|
Payable
|
Security Type
|
|
Share/Unit
(1)
|
|
Ended
|
|
Date
|
|
Date
|
Common Shares/Units
|
|
$
|
0.20
|
|
|
June 30, 2013
|
|
June 28, 2013
|
|
July 15, 2013
|
7 ¼% Series G Preferred Shares
|
|
$
|
0.45
|
|
|
June 30, 2013
|
|
July 1, 2013
|
|
July 15, 2013
|
7 ½% Series H Preferred Shares
|
|
$
|
0.47
|
|
|
June 30, 2013
|
|
July 1, 2013
|
|
July 15, 2013
|
6
3
/
8
%
Series I Preferred Shares
|
|
$
|
0.40
|
|
|
June 30, 2013
|
|
July 1, 2013
|
|
July 15, 2013
|
|
|
(1)
|
Amounts are rounded to the nearest whole cent for presentation purposes.
|