Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Sunstone Hotel Investors, Inc. (the “Company,” “we” or “us”) is a Maryland corporation. We operate as a self-managed and self-administered real estate investment trust (“REIT”). A REIT is a corporation that directly or indirectly owns real estate assets and has elected to be taxable as a real estate investment trust. To qualify for taxation as a REIT, the REIT must meet certain requirements, including regarding the composition of its assets and the sources of its income. REITs generally are not subject to federal income taxes at the corporate level as long as they pay stockholder dividends equivalent to 100% of their REIT taxable income. REITs are required to distribute to stockholders at least 90% of their REIT taxable income. We own, directly or indirectly, 100% of the interests of Sunstone Hotel Partnership, LLC (the “Operating Partnership”), which is the entity that directly or indirectly owns our hotel properties. We also own 100% of the interests of our taxable REIT subsidiary, Sunstone Hotel TRS Lessee, Inc., which leases all of our hotels from the Operating Partnership, and engages independent third-parties to manage our hotels.
We own primarily urban and resort upper upscale hotels in the United States. As of September 30, 2016, we had interests in 28 hotels, which are currently held for investment (the “28 hotels”). Of the 28 hotels, we classify 24 as upper upscale, two as luxury and two as upscale as defined by Smith Travel Research, Inc. All but one (the Boston Park Plaza) of our 28 hotels are operated under nationally recognized brands such as Marriott, Hilton, Hyatt and Fairmont, which are among the most respected and widely recognized brands in the lodging industry. While independent hotels may do well in strong market locations, we believe the largest and most stable segment of travelers prefer the consistent service and quality associated with nationally recognized brands and well-known independent hotels.
We seek to own hotels primarily in urban and resort locations that benefit from significant barriers to entry by competitors and diverse economic drivers. As of September 30, 2016, the hotels comprising our 28 hotel portfolio average 488 rooms in size.
Our mission is to create meaningful value for our stockholders by producing superior long-term returns. Our values include transparency, trust, ethical conduct, communication and discipline. As demand for lodging generally fluctuates with the overall economy, we seek to employ a balanced strategy focused on long-term value creation. Our strategy over the next several years, during what we believe will be the mature/late phase of the lodging cycle, is to maximize stockholder value through focused asset management and disciplined capital recycling, which is likely to include selective acquisitions and dispositions, while maintaining balance sheet flexibility and strength. Our goal is to maintain low leverage and high financial flexibility to position the Company to opportunistically create value throughout the cycle.
2016 Year-To-Date Highlights
In January 2016, we drew the available funds of $100.0 million under an unsecured term loan agreement, and used the proceeds in February 2016, combined with cash on hand, to repay the $114.2 million loan secured by the Boston Park Plaza. The Boston Park Plaza loan was scheduled to mature in February 2018, and was available to be repaid without penalty in February 2016. The $100.0 million unsecured term loan matures in January 2023, and bears interest based on a pricing grid with a range of 180 to 255 basis points over LIBOR, depending on our leverage ratios. We entered into a forward swap agreement in December 2015 that fixed the LIBOR rate at 1.853% for the duration of the $100.0 million term loan. Based on our current leverage and the swap in place, the loan bears interest at an effective rate of 3.653%.
In March 2016, we issued 4,600,000 shares of 6.95% Series E Cumulative Redeemable Preferred Stock (“Series E preferred stock”) with a liquidation preference of $25.00 per share for gross proceeds of $115.0 million. On or after March 11, 2021, the Series E preferred stock will be redeemable at our option, in whole or in part, at any time or from time to time, for cash at a redemption price of $25.00 per share, plus accrued and unpaid dividends up to, but not including, the redemption date.
In April 2016, using the net proceeds from the offering of the Series E preferred stock and cash on hand, we redeemed all 4,600,000 shares of 8.0% Series D Cumulative Redeemable Preferred Stock (“Series D preferred stock”) at a redemption price of $25.00 per share, plus accrued and unpaid dividends up to, but not including, the redemption date.
In May 2016, we issued 3,000,000 shares of 6.45% Series F Cumulative Redeemable Preferred Stock (“Series F preferred stock”) with a liquidation preference of $25.00 per share for gross proceeds of $75.0 million. On or after May 17, 2021, the Series F preferred stock will be redeemable at our option, in whole or in part, at any time or from time to time, for cash at a redemption price of $25.00 per share, plus accrued and unpaid dividends up to, but not including, the redemption date.
In May 2016, we sold the 203-room Sheraton Cerritos for net proceeds of $41.2 million, and recognized a net gain on the sale of $18.2 million. The sale did not represent a strategic shift that had a major impact on our business plan or our primary markets, and, therefore, did not qualify as a discontinued operation.
Additionally in May 2016, we repaid $72.6 million of debt secured by the Renaissance Orlando at SeaWorld®, using proceeds received from our issuance of the Series F preferred stock. The Renaissance Orlando at SeaWorld® loan was scheduled to mature in July 2016, and was available to be repaid without penalty in May 2016.
In June 2016, we purchased the air rights lease associated with our Renaissance Harborplace for $2.4 million, resulting in a $2.4 million intangible asset with an indefinite life.
Operating Activities
Revenues.
Substantially all of our revenues are derived from the operation of our hotels. Specifically, our revenues consist of the following:
|
·
|
|
Room revenue
, which is the product of the number of rooms sold and the ADR;
|
|
·
|
|
Food and beverage revenue
, which is comprised of revenue realized in the hotel food and beverage outlets as well as banquet and catering events; and
|
|
·
|
|
Other operating revenue
, which includes ancillary hotel revenue and other items primarily driven by occupancy such as telephone/internet, parking, spa, resort and other facility fees, entertainment and other guest services. Additionally, this category includes, among other things, attrition revenue and tenant revenue derived from hotel space leased by third parties, as well as operating revenue from our electronic purchasing platform, “BuyEfficient,” prior to its sale in September 2015.
|
Expenses.
Our expenses consist of the following:
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·
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Room expense
, which is primarily driven by occupancy and, therefore, has a significant correlation with room revenue;
|
|
·
|
|
Food and beverage expense
, which is primarily driven by food and beverage sales and banquet and catering bookings and, therefore, has a significant correlation with food and beverage revenue;
|
|
·
|
|
Other operating expense
, which includes the corresponding expense of other operating revenue, advertising and promotion, repairs and maintenance, utilities, and franchise costs;
|
|
·
|
|
Property tax, ground lease and insurance expense
, which includes the expenses associated with property tax, ground lease and insurance payments, each of which is primarily a fixed expense, however property tax is subject to regular revaluations based on the specific tax regulations and practices of each municipality;
|
|
·
|
|
Property general and administrative expense
, which includes our property-level general and administrative expenses, such as payroll and related costs, contract and professional fees, credit and collection expenses, employee recruitment, relocation and training expenses, management fees, and other costs. Additionally, this category includes general and administrative expenses from BuyEfficient prior to its sale in September 2015;
|
|
·
|
|
Corporate overhead expense,
which includes our corporate-level expenses, such as payroll and related costs, amortization of deferred stock compensation, acquisition and due diligence costs, legal expenses, contract and professional fees, entity-level state franchise and minimum taxes, travel expenses, office rent and other costs; and
|
|
·
|
|
Depreciation and amortization expense
, which includes depreciation on our hotel buildings, improvements, furniture, fixtures and equipment, along with amortization on our franchise fees and certain intangibles. Additionally, this category includes depreciation and amortization related to furniture, fixtures and equipment (“FF&E”) for both our corporate office and BuyEfficient, as well as BuyEfficient’s intangible assets prior to its sale in September 2015.
|
Other Revenue and Expense.
Other revenue and expense consists of the following:
|
·
|
|
Interest and other income,
which includes interest we have earned on our restricted and unrestricted cash accounts and the 11.0% preferred equity investment (the “Preferred Equity Investment”) we received from the buyer in conjunction with our 2013 sale of four hotels and a laundry facility in Rochester, Minnesota (the “Rochester Portfolio) prior to its sale in July 2015, as well as any energy rebates we have received or any gains or losses we have recognized on sales or redemptions of assets other than real estate investments;
|
|
·
|
|
Interest expense,
which includes interest expense incurred on our outstanding fixed and variable rate debt and capital lease obligation, gains or losses on derivatives, amortization of deferred financing fees, and any loan fees incurred on our debt;
|
|
·
|
|
Loss on extinguishment of debt,
which includes losses recognized on amendments or early repayments of mortgages or other debt obligations from the accelerated amortization of deferred financing fees, along with any costs incurred;
|
|
·
|
|
Gain on sale of assets
, which includes the gain we recognized on our sales of the Sheraton Cerritos in May 2016 and BuyEfficient in September 2015, as neither of the sales represented a strategic shift that had a major impact on our business plan or our primary markets, and therefore, neither qualified as a discontinued operation;
|
|
·
|
|
Income tax benefit (provision),
which includes federal and state income taxes related to continuing operations charged to the Company net of any refunds received, and any adjustments to unrecognized tax positions, along with any related interest and penalties incurred;
|
|
·
|
|
Income from discontinued operations, net of tax,
which includes the results of operations for any hotels or other real estate investments sold during the reporting period, along with the gain or loss realized on the sale of these assets and any extinguishment of related debt or income tax provisions;
|
|
·
|
|
Income from consolidated joint ventures attributable to noncontrolling interests,
which includes net income attributable to the outside 25.0% interest in the joint venture that owns the Hilton San Diego Bayfront, as well as preferred dividends, including related administrative fees, earned by preferred investors on their $0.1 million preferred equity interest in a subsidiary captive REIT that owned the Doubletree Guest Suites Times Square prior to its sale in December 2015; and
|
|
·
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|
Preferred stock dividends and redemption charge,
which includes dividends earned on our Series D preferred stock until its redemption in April 2016, as well as dividends earned on our Series E preferred stock issued in March 2016, and our Series F preferred stock issued in May 2016, as well as any redemption charges for preferred stock redemptions made in excess of net carrying values.
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Operating Performance Indicators
.
The following performance indicators are commonly used in the hotel industry:
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·
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|
Occupancy
, which is the quotient of total rooms sold divided by total rooms available;
|
|
·
|
|
Average daily room rate,
or ADR, which is the quotient of room revenue divided by total rooms sold;
|
|
·
|
|
Revenue per available room,
or RevPAR, which is the product of occupancy and ADR, and does not include food and beverage revenue, or other operating revenue;
|
|
·
|
|
Comparable RevPAR,
which we define as the RevPAR generated by hotels we owned as of the end of the reporting period, but excluding those hotels that we classified as held for sale, those hotels that are undergoing a material renovation or repositioning and those hotels whose room counts have materially changed during either the current or prior year. For hotels that were not owned for the entirety of the comparison periods, comparable RevPAR is calculated using RevPAR generated during periods of prior ownership. We refer to this subset of our hotels used to calculate comparable RevPAR as our “Comparable Portfolio.” Currently, our Comparable Portfolio includes 27 hotels, and is comprised of our total portfolio as of September 30, 2016, with the exception of the Wailea Beach Marriott Resort & Spa due to its extensive repositioning disruption during the fourth quarter of 2015 as well as all of 2016;
|
|
·
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|
RevPAR index,
which is the quotient of a hotel’s RevPAR divided by the average RevPAR of its competitors, multiplied by 100. A RevPAR index in excess of 100 indicates a hotel is achieving higher RevPAR than the average of its competitors. In addition to absolute RevPAR index, we monitor changes in RevPAR index;
|
|
·
|
|
EBITDA
, which is net income (loss), excluding: noncontrolling interests; interest expense; benefit or provision for income taxes, including income taxes applicable to the sale of assets; and depreciation and amortization;
|
|
·
|
|
Adjusted EBITDA
, which is EBITDA adjusted to exclude: amortization of deferred stock compensation; the impact of any gain or loss from asset sales; impairment charges; prior year property tax assessments or credits; and any other non-recurring identified adjustments;
|
|
·
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|
Funds from operations (“FFO”) attributable to common stockholders
, which is net income (loss), excluding: preferred stock dividends and any redemption charges; noncontrolling interests; gains and losses from sales of property; real estate-related depreciation and amortization (excluding amortization of deferred financing costs); and real estate-related impairment losses; and
|
|
·
|
|
Adjusted FFO attributable to common stockholders
, which is FFO attributable to common stockholders adjusted to exclude: penalties; written-off deferred financing costs; non-real estate-related impairment losses; income tax benefits or
|
provisions associated with the application of net operating loss carryforwards and uncertain tax positions; and any other non-recurring identified adjustments.
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Factors Affecting Our Operating Results.
The primary factors affecting our operating results include overall demand for hotel rooms, the pace of new hotel development, or supply, and the relative performance of our operators in increasing revenue and controlling hotel operating expenses.
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·
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Demand.
The demand for lodging generally fluctuates with the overall economy. In aggregate, demand for our hotels has improved each year since 2010. In 2015, Comparable Portfolio RevPAR increased 5.7% as compared to 2014, with a 50 basis point increase in portfolio occupancy. These improving demand trends continued, albeit at a moderate pace, in the first nine months of 2016. As a result, our first quarter Comparable Portfolio RevPAR increased 1.4% in 2016 even as occupancy decreased 100 basis points as compared to the first quarter of 2015. Our second quarter Comparable Portfolio RevPAR increased 1.3% in 2016, with a 70 basis point increase in occupancy as compared to the second quarter of 2015, and our third quarter Comparable Portfolio RevPAR increased 2.2% in 2016, with a 100 basis point increase in occupancy as compared to the third quarter of 2015.
|
|
·
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|
Supply
. The addition of new competitive hotels affects the ability of existing hotels to absorb demand for lodging and therefore drive RevPAR and profits. The development of new hotels is largely driven by construction costs and expected performance of existing hotels. In aggregate, we expect the U.S. hotel supply to increase over the near term. On a market-by-market basis, some markets may experience new hotel room openings at or greater than historic levels, including in New York City, Washington DC and Chicago where there are currently higher-than-average supplies of new hotel room openings.
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|
·
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|
Revenues and expenses
. We believe that marginal improvements in RevPAR index, even in the face of declining revenues, are a good indicator of the relative quality and appeal of our hotels, and our operators’ effectiveness in maximizing revenues. Similarly, we also evaluate our operators’ effectiveness in minimizing incremental operating expenses in the context of increasing revenues or, conversely, in reducing operating expenses in the context of declining revenues.
|
With respect to improving RevPAR index, we continue to work with our hotel operators to optimize revenue management initiatives while taking into consideration market demand trends and the pricing strategies of competitor hotels in our markets. We also develop capital investment programs designed to ensure each of our hotels is well renovated and positioned to appeal to groups and individual travelers fitting target guest profiles. Increased capital investment in our properties may lead to short-term revenue disruption and negatively impact RevPAR index. Our revenue management initiatives are generally oriented towards maximizing ADR even if the result may be lower occupancy than may be achieved through lower ADR. Increases in RevPAR attributable to increases in ADR may be accompanied by minimal additional expenses, while increases in RevPAR attributable to higher occupancy may result in higher variable expenses such as housekeeping, labor and utilities expense. Our Comparable Portfolio RevPAR index decreased 160 basis points during the first nine months of 2016 as compared to the same period in 2015. The decrease in our Comparable Portfolio RevPAR index was due in part to decreased rate in the first nine months of 2016 at our Chicago hotels due to a weak market in this area and at our Houston hotels due to a weak energy market and loss of contract business, combined with renovation-related revenue disruption at the Marriott Philadelphia.
We continue to work with our operators to identify operational efficiencies designed to reduce expenses while minimally affecting guest experience and hotel employee satisfaction. Key asset management initiatives include optimizing hotel staffing levels, increasing the efficiency of the hotels, such as installing energy efficient management and inventory control systems, and selectively combining certain food and beverage outlets. Our operational efficiency initiatives may be difficult to implement, as most categories of variable operating expenses, such as utilities and housekeeping labor costs, fluctuate with changes in occupancy. Furthermore, our hotels operate with significant fixed costs, such as general and administrative expense, insurance, property taxes, and other expenses associated with owning hotels, over which our operators have little control. We have experienced, either currently or in the past, increases in hourly wages, employee benefits (especially health insurance), utility costs and property insurance, which have negatively affected our operating margins. Moreover, there are limits to how far our operators can reduce expenses without affecting brand standards or the competitiveness of our hotels.
Operating Results.
The following table presents our unaudited operating results for our total portfolio for the three months ended September 30, 2016 and 2015, including the amount and percentage change in the results between the two periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
2016
|
|
2015
|
|
Change $
|
|
Change %
|
|
|
|
(unaudited and in thousands, except statistical data)
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
|
|
|
Room
|
|
$
|
217,672
|
|
$
|
233,787
|
|
$
|
(16,115)
|
|
(6.9)
|
%
|
Food and beverage
|
|
|
68,899
|
|
|
68,371
|
|
|
528
|
|
0.8
|
%
|
Other operating
|
|
|
16,733
|
|
|
22,437
|
|
|
(5,704)
|
|
(25.4)
|
%
|
Total revenues
|
|
|
303,304
|
|
|
324,595
|
|
|
(21,291)
|
|
(6.6)
|
%
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
Hotel operating
|
|
|
172,621
|
|
|
187,116
|
|
|
(14,495)
|
|
(7.7)
|
%
|
Property general and administrative
|
|
|
35,003
|
|
|
37,828
|
|
|
(2,825)
|
|
(7.5)
|
%
|
Corporate overhead
|
|
|
6,392
|
|
|
6,046
|
|
|
346
|
|
5.7
|
%
|
Depreciation and amortization
|
|
|
40,442
|
|
|
41,331
|
|
|
(889)
|
|
(2.2)
|
%
|
Total operating expenses
|
|
|
254,458
|
|
|
272,321
|
|
|
(17,863)
|
|
(6.6)
|
%
|
Operating income
|
|
|
48,846
|
|
|
52,274
|
|
|
(3,428)
|
|
(6.6)
|
%
|
Interest and other income
|
|
|
283
|
|
|
576
|
|
|
(293)
|
|
(50.9)
|
%
|
Interest expense
|
|
|
(11,136)
|
|
|
(16,405)
|
|
|
5,269
|
|
32.1
|
%
|
Gain on sale of assets
|
|
|
—
|
|
|
11,682
|
|
|
(11,682)
|
|
(100.0)
|
%
|
Income before income taxes and discontinued operations
|
|
|
37,993
|
|
|
48,127
|
|
|
(10,134)
|
|
(21.1)
|
%
|
Income tax benefit (provision)
|
|
|
1,434
|
|
|
(938)
|
|
|
2,372
|
|
252.9
|
%
|
Income from continuing operations
|
|
|
39,427
|
|
|
47,189
|
|
|
(7,762)
|
|
(16.4)
|
%
|
Income from discontinued operations, net of tax
|
|
|
—
|
|
|
15,895
|
|
|
(15,895)
|
|
(100.0)
|
%
|
NET INCOME
|
|
|
39,427
|
|
|
63,084
|
|
|
(23,657)
|
|
(37.5)
|
%
|
Income from consolidated joint ventures attributable to noncontrolling interests
|
|
|
(2,053)
|
|
|
(1,982)
|
|
|
(71)
|
|
(3.6)
|
%
|
Preferred stock dividends
|
|
|
(3,207)
|
|
|
(2,300)
|
|
|
(907)
|
|
(39.4)
|
%
|
INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS
|
|
$
|
34,167
|
|
$
|
58,802
|
|
$
|
(24,635)
|
|
(41.9)
|
%
|
The following table presents our unaudited operating results for our total portfolio for the nine months ended September 30, 2016 and 2015, including the amount and percentage change in the results between the two periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
2016
|
|
2015
|
|
Change $
|
|
Change %
|
|
|
|
(unaudited and in thousands, except statistical data)
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
|
|
|
Room
|
|
$
|
629,145
|
|
$
|
666,756
|
|
$
|
(37,611)
|
|
(5.6)
|
%
|
Food and beverage
|
|
|
221,431
|
|
|
219,820
|
|
|
1,611
|
|
0.7
|
%
|
Other operating
|
|
|
49,180
|
|
|
61,671
|
|
|
(12,491)
|
|
(20.3)
|
%
|
Total revenues
|
|
|
899,756
|
|
|
948,247
|
|
|
(48,491)
|
|
(5.1)
|
%
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
Hotel operating
|
|
|
517,624
|
|
|
549,435
|
|
|
(31,811)
|
|
(5.8)
|
%
|
Property general and administrative
|
|
|
107,698
|
|
|
109,384
|
|
|
(1,686)
|
|
(1.5)
|
%
|
Corporate overhead
|
|
|
19,918
|
|
|
27,222
|
|
|
(7,304)
|
|
(26.8)
|
%
|
Depreciation and amortization
|
|
|
121,169
|
|
|
122,911
|
|
|
(1,742)
|
|
(1.4)
|
%
|
Total operating expenses
|
|
|
766,409
|
|
|
808,952
|
|
|
(42,543)
|
|
(5.3)
|
%
|
Operating income
|
|
|
133,347
|
|
|
139,295
|
|
|
(5,948)
|
|
(4.3)
|
%
|
Interest and other income
|
|
|
1,127
|
|
|
3,350
|
|
|
(2,223)
|
|
(66.4)
|
%
|
Interest expense
|
|
|
(47,018)
|
|
|
(51,020)
|
|
|
4,002
|
|
7.8
|
%
|
Loss on extinguishment of debt
|
|
|
(259)
|
|
|
(2)
|
|
|
(257)
|
|
(12,850.0)
|
%
|
Gain on sale of assets
|
|
|
18,223
|
|
|
11,682
|
|
|
6,541
|
|
56.0
|
%
|
Income before income taxes and discontinued operations
|
|
|
105,420
|
|
|
103,305
|
|
|
2,115
|
|
2.0
|
%
|
Income tax benefit (provision)
|
|
|
959
|
|
|
(1,256)
|
|
|
2,215
|
|
176.4
|
%
|
Income from continuing operations
|
|
|
106,379
|
|
|
102,049
|
|
|
4,330
|
|
4.2
|
%
|
Income from discontinued operations, net of tax
|
|
|
—
|
|
|
15,895
|
|
|
(15,895)
|
|
(100.0)
|
%
|
NET INCOME
|
|
|
106,379
|
|
|
117,944
|
|
|
(11,565)
|
|
(9.8)
|
%
|
Income from consolidated joint ventures attributable to non-controlling interests
|
|
|
(5,358)
|
|
|
(6,643)
|
|
|
1,285
|
|
19.3
|
%
|
Preferred stock dividends and redemption charge
|
|
|
(12,756)
|
|
|
(6,900)
|
|
|
(5,856)
|
|
(84.9)
|
%
|
INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS
|
|
$
|
88,265
|
|
$
|
104,401
|
|
$
|
(16,136)
|
|
(15.5)
|
%
|
Operating Statistics
.
The following table includes comparisons of the key operating metrics for both our Total Portfolio (28 hotels) and Comparable Portfolio (27 hotels).
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
2016
|
|
2015
|
|
Change
|
|
|
|
Occ%
|
|
ADR
|
|
RevPAR
|
|
Occ%
|
|
ADR
|
|
RevPAR
|
|
Occ%
|
|
ADR
|
|
RevPAR
|
|
Total Portfolio
|
|
85.8
|
%
|
$
|
202.03
|
|
$
|
173.34
|
|
85.5
|
%
|
$
|
200.84
|
|
$
|
171.72
|
|
30
|
bps
|
0.6
|
%
|
0.9
|
%
|
Comparable Portfolio
|
|
86.9
|
%
|
$
|
200.74
|
|
$
|
174.44
|
|
85.9
|
%
|
$
|
198.66
|
|
$
|
170.65
|
|
100
|
bps
|
1.0
|
%
|
2.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2016
|
|
2015
|
|
Change
|
|
|
|
Occ%
|
|
ADR
|
|
RevPAR
|
|
Occ%
|
|
ADR
|
|
RevPAR
|
|
Occ%
|
|
ADR
|
|
RevPAR
|
|
Total Portfolio
|
|
83.3
|
%
|
$
|
200.78
|
|
$
|
167.25
|
|
83.6
|
%
|
$
|
198.92
|
|
$
|
166.30
|
|
(30)
|
bps
|
0.9
|
%
|
0.6
|
%
|
Comparable Portfolio
|
|
83.7
|
%
|
$
|
198.27
|
|
$
|
165.95
|
|
83.5
|
%
|
$
|
195.61
|
|
$
|
163.33
|
|
20
|
bps
|
1.4
|
%
|
1.6
|
%
|
Room revenue
. Room revenue decreased $16.1 million, or 6.9%, for the three months ended September 30, 2016 as compared to the three months ended September 30, 2015 primarily due to our sale of two hotels, the Sheraton Cerritos sold in May 2016 and the Doubletree Guest Suites Times Square sold in December 2015 (the “Two Sold Hotels”). The Two Sold Hotels generated an additional $18.2 million in room revenue during the third quarter of 2015.
Room revenue generated by the 28 hotels we owned as of September 30, 2016 (our “Existing Portfolio”), increased $2.1 million during the third quarter of 2016 as compared to the same period in 2015 due to increases in both ADR ($1.3 million) and occupancy ($0.8 million). The increase in ADR was primarily driven by strong demand, allowing for double-digit ADR growth in Orlando, San Diego and Washington DC. In addition, both the Renaissance Long Beach and the Renaissance Westchester experienced double digit ADR growth as they implemented revenue management strategies to decrease the availability of lower-rated contract business in order to increase the supply of higher-rated group and business transient rooms. The Boston Park Plaza also experienced double digit ADR growth as the hotel was ramping up following its repositioning during the third quarter of 2015. These increases to ADR were partially offset by a weak energy market and loss of contract business in Houston, increased competition in New York City and displacement from the complete hotel repositioning at the Wailea Beach Marriott Resort & Spa.
The increase in occupancy during the third quarter as compared to the same period in 2015 was caused by 13,139 more group room nights, partially offset by 9,142 fewer transient room nights. Group room nights increased, to the detriment of transient room nights, in Orlando and San Diego due to strong convention activity in these locales. In addition, the Renaissance Harborplace experienced increases in both group and transient room nights as the hotel’s operations were slow to recover from the civil unrest that
occurred during the second quarter of 2015. Overall, transient room nights decreased due to a weak Chicago market, displacement from the complete hotel repositioning at the Wailea Beach Marriott Resort & Spa, and a weak energy market in Houston.
During the third quarter of 2016, the most significant renovation impact to room revenue occurred at the Wailea Beach Marriott Resort & Spa. During the third quarter of 2016, 12,570 room nights were out of service at the hotel, displacing approximately $3.1 million in room revenue based on the hotel achieving a potential 82.7% occupancy rate and RevPAR of $205.72 without the renovation. There was no significant renovation-related displacement during the third quarter of 2015.
Room revenue decreased $37.6 million, or 5.6%, for the nine months ended September 30, 2016 as compared to the nine months ended September 30, 2015, primarily due to the Two Sold Hotels, which generated an additional $44.1 million in room revenue during the first nine months of 2015.
Room revenue generated by our Existing Portfolio increased $6.5 million during the first nine months of 2016 as compared to the same period in 2015 due to an increase in ADR ($8.7 million), partially offset by a decrease in occupancy ($2.2 million). The increase in ADR was primarily driven by strong demand, allowing for double-digit ADR growth in San Francisco (primarily due to the Super Bowl, which took place in the San Francisco Bay Area during the first quarter of 2016), Los Angeles and Orlando. These increases to ADR were partially offset by a weak Chicago market, increased competition in New York City and displacement from the complete hotel repositioning at the Wailea Beach Marriott Resort & Spa, combined with a weak energy market and loss of contract business in Houston.
Although we increased our total number of rooms sold by 3,654 during the first nine months of 2016 as compared to the same period in 2015, occupancy decreased during this period in 2016 compared to 2015 as we increased our total rooms available by 16,763 due to 2016 being a leap year and due to the repositioning and renovation at the Boston Park Plaza and the Hilton Times Square. The overall increase in our total rooms sold during the first nine months of 2016 as compared to the same period in 2015 was comprised of a 25,122 increase in group room nights, partially offset by a 21,468 decrease in transient room nights. As noted above in the discussion regarding the third quarter, group room nights increased, to the detriment of transient room nights, in Orlando and San Diego due to strong convention activity in these locales. Overall, transient room nights decreased due to a weak Chicago market, displacement from the complete hotel repositionings at the Boston Park Plaza and the Wailea Beach Marriott Resort & Spa, and a weak energy market in Houston.
During the first nine months of 2016, the most significant renovation impacts to room revenue occurred at the Boston Park Plaza and the Wailea Beach Marriott Resort & Spa. During the first nine months of 2016, a combined 27,459 room nights were out of service at these two hotels, displacing approximately $6.5 million in room revenue based on the hotels achieving a potential combined 77.6% occupancy rate and combined RevPAR of $165.06 without the renovations. During the first nine months of 2015, the most significant renovation impact to room revenue occurred at the Boston Park Plaza, where 12,535 room nights were out of service during this period, displacing approximately $1.3 million in room revenue based on the hotel achieving a potential 70.2% occupancy rate and RevPAR of $93.23 without the renovation.
Food and beverage revenue
.
Food and beverage revenue increased $0.5 million, or 0.8%, for the three months ended September 30, 2016 as compared to the three months ended September 30, 2015.
Food and beverage revenue generated by our Existing Portfolio increased $3.0 million during the third quarter of 2016 as compared to the same period in 2015 primarily due to increased banquet revenue caused by the increase in group room nights. In addition, outlet revenue increased, the majority of which occurred at the Hyatt Regency San Francisco due to the redesign of certain restaurant and lounge areas and the introduction of a new grab-and-go concept, as well as the Boston Park Plaza due to additional restaurant options available post-repositioning.
The increase in our Existing Portfolio’s food and beverage revenue was partially offset by the Two Sold Hotels, which generated an additional $2.5 million in food and beverage revenue during the third quarter of 2015.
Food and beverage revenue increased $1.6 million, or 0.7%, for the nine months ended September 30, 2016 as compared to the nine months ended September 30, 2015.
Food and beverage revenue generated by our Existing Portfolio increased $6.5 million during the first nine months of 2016 as compared to the same period in 2015 primarily due to increased banquet and outlet revenue for the same reasons as noted above in the discussion regarding the third quarter. In addition, food and beverage revenue increased at the Renaissance Harborplace during the first nine months of 2016 as compared to the same period in 2015, as the hotel’s banquet operations and outlets suffered during 2015 due to civil unrest in Baltimore.
The increase in our Existing Portfolio’s food and beverage revenue was partially offset by the Two Sold Hotels, which generated an additional $4.9 million in food and beverage revenue during the first nine months of 2015.
Other operating revenue
. Other operating revenue decreased $5.7 million, or 25.4%, for the three months ended September 30, 2016 as compared to the three months ended September 30, 2015. This decrease was primarily due to the Two Sold Hotels, which generated an additional $2.0 million in other operating revenue during the third quarter of 2015, as well as BuyEfficient, which we sold in September 2015, and which also generated $2.0 million in other operating revenue during the third quarter of 2015.
Other operating revenue in our Existing Portfolio decreased $1.7 million for the three months ended September 30, 2016 as compared to the same period in 2015, primarily due to decreases in parking revenue, telephone/internet revenue, tenant lease revenue (including the write-off of a $0.2 million above market lease intangible asset due to the renovation-related closure of a tenant’s space at the Wailea Beach Marriott Resort & Spa) and cancellation revenue. Additionally, other operating revenue decreased during the third quarter of 2016 as compared to the same period in 2015 due to our recognition of $0.6 million in business interruption proceeds during the third quarter of 2015 for our Renaissance Harborplace related to a settled claim filed in response to the disruption caused at the hotel during the periods of civil unrest in Baltimore earlier in the year. These decreases in other operating revenue during the third quarter of 2016 as compared to the same period in 2015 were partially offset by increased attrition revenue.
Other operating revenue decreased $12.5 million, or 20.3%, for the first nine months ended September 30, 2016 as compared to the first nine months ended September 30, 2015, primarily due to the Two Sold Hotels, which generated an additional $5.4 million in other operating revenue during the first nine months of 2015, and BuyEfficient, which generated $5.7 million in other operating revenue during the first nine months of 2015.
Other operating revenue in our Existing Portfolio decreased $1.4 million for the nine months ended September 30, 2016 as compared to the same period in 2015, primarily due to the same reasons noted above in the discussion regarding the third quarter. In addition, tenant lease revenue decreased in the first nine months of 2016 as compared to the same period in 2015 as we wrote-off a $0.3 million below market lease intangible liability in the first quarter of 2015 due to the termination of a tenant lease at one of our hotels. These decreases in other operating revenue in the first nine months of 2016 as compared to the same period in 2015 were partially offset by increased resort fees and attrition revenue.
Hotel operating expenses
.
Hotel operating expenses, which are comprised of room, food and beverage, advertising and promotion, repairs and maintenance, utilities, franchise costs, property tax, ground lease and insurance, and other hotel operating expenses decreased $14.5 million, or 7.7%, during the three months ended September 30, 2016 as compared to the three months ended September 30, 2015, primarily due to the Two Sold Hotels, which generated an additional $14.1 million in hotel operating expenses during the third quarter of 2015.
Hotel operating expenses in our Existing Portfolio decreased $0.4 million during the three months ended September 30, 2016 as compared to the same period in 2015 due to the following decreased expenses: telephone/internet expense and parking expense due to the corresponding decreased telephone/internet revenue and parking revenue; utilities; repairs and maintenance due to decreased hotel payroll and related expenses in this department, as well as a $0.2 million elevator maintenance credit received at one of our hotels; and Hawaii general exercise tax (“GET”) due to lower revenue at the Wailea Beach Marriott Resort & Spa while undergoing a complete hotel repositioning. In addition, property taxes decreased during the third quarter of 2016 as compared to the same period in 2015 due to refunds received during the third quarter of 2016 at several of our hotels related to prior years, as compared to increased current year assessments received at several of our hotels during the third quarter of 2015. These decreases were partially offset by higher expenses related to the corresponding increased room revenue and food and beverage revenue. Additionally, hotel operating expenses increased in the third quarter of 2016 as compared to the same period in 2015 due to the following increased expenses: advertising and promotion due to increased hotel payroll and related expenses in this department, as well as additional advertising related to our newly renovated hotels; and ground lease expense due to increased percentage rent at several of our hotels caused by the increase in revenues, as well as the expiration of a ground rent abatement given to the Hilton San Diego Bayfront.
Hotel operating expenses decreased $31.8 million, or 5.8%, for the first nine months ended September 30, 2016 as compared to the first nine months ended September 30, 2015, primarily due to the Two Sold Hotels, which generated an additional $37.1 million in hotel operating expenses during the first nine months of 2015.
Hotel operating expenses in our Existing Portfolio increased $5.3 million for the nine months ended September 30, 2016 as compared to the same period in 2015. This increase in hotel operating expenses is primarily related to the corresponding increased room revenue and food and beverage revenue. In addition, hotel operating expenses in our Existing Portfolio increased in the first nine months of 2016 as compared to the same period in 2015 due to the following increased expenses: food and beverage due to $1.5 million in severance incurred at several hotels in conjunction with the elimination of various outlets and banquet areas; both advertising and promotion and repairs and maintenance due to increased hotel payroll and related expenses in these two departments, including $0.1 million in severance incurred at one of our hotels; and ground lease expense due to increased percentage rent at several of our hotels caused by the increase in revenues as well as the expiration of a ground rent abatement given to the Hilton San Diego Bayfront. These increases were partially offset by decreased telephone/internet expense due to the corresponding decreased telephone/internet revenue, combined with decreased utilities as well as decreased GET due to lower revenue at the Wailea Beach Marriott Resort & Spa while undergoing a complete hotel repositioning. In addition, property taxes decreased during the first nine months of 2016 as compared to the same period in 2015 due to refunds received during the first nine months of 2016 at several of our
hotels related to prior years, as compared to increased current year assessments received at several of our hotels during the same period in 2015.
Property general and administrative expense
.
Property general and administrative expense decreased $2.8 million, or 7.5%, during the three months ended September 30, 2016 as compared to the three months ended September 30, 2015, primarily due to the Two Sold Hotels and BuyEfficient, which generated an additional $1.9 million and $2.8 million, respectively, during the third quarter of 2015.
Property general and administrative expense in our Existing Portfolio increased $1.9 million during the three months ended September 30, 2016 as compared to the same period in 2015, primarily due to increases in the following expenses caused by higher revenue: payroll and related expenses; credit and collection expenses; management fees; and supplies. In addition, legal fees increased during the third quarter of 2016 as compared to the same period in 2015, as well as contract and professional fees. Partially offsetting these increased expenses, both employee training and licenses and permits decreased during the third quarter of 2016 as compared to the same period in 2015.
Property general and administrative expense decreased $1.7 million, or 1.5%, during the nine months ended September 30, 2016 as compared to the nine months ended September 30, 2015, primarily due to the Two Sold Hotels and BuyEfficient, which generated an additional $4.8 million and $5.3 million, respectively, during the first nine months of 2015.
Property general and administrative expense in our Existing Portfolio increased $8.4 million during the nine months ended September 30, 2016 as compared to the same period in 2015, primarily due to increases in the following expenses caused by higher room revenue: payroll and related expenses; management fees; credit and collection expenses; and supplies. In addition, legal fees increased as the $1.0 million lease termination fee recorded in the second quarter of 2016 at one of our hotels offset the $0.3 million in lease termination costs recorded during the first quarter of 2015. Contract and professional fees also increased in the first nine months of 2016 as compared to the same period in 2015. Partially offsetting these increased expenses, both employee training and licenses and permits decreased during the first nine months of 2016 as compared to the same period in 2015.
Corporate overhead expense
.
Corporate overhead expense increased $0.3 million, or 5.7%, during the three months ended September 30, 2016 as compared to the three months ended September 30, 2015, primarily due to increased deferred stock compensation expense ($0.1 million) and employee relations, recruitment and relocation expense ($0.2 million).
Corporate overhead expense decreased $7.3 million, or 26.8%, during the first nine months ended September 30, 2016 as compared to the same period in 2015, primarily due to decreased payroll and related expenses ($4.7 million), deferred stock compensation expense ($2.6 million), due diligence expense ($0.2 million), and legal expense ($0.1 million). The decreases in payroll and related costs and deferred stock compensation expense were primarily due to $6.9 million in costs recognized in January 2015 related to the departure of our former chief executive officer. These decreases were partially offset by increased bad debt expense ($0.2 million), and increased employee relations, recruitment and relocation expense ($0.1 million).
Depreciation and amortization expense
.
Depreciation and amortization expense decreased $0.9 million, or 2.2%, during the three months ended September 30, 2016 as compared to the three months ended September 30, 2015, primarily due to the Two Sold Hotels and BuyEfficient, which generated an additional $2.0 million and $0.2 million, respectively, during the third quarter of 2015.
Depreciation and amortization expense in our Existing Portfolio increased $1.3 million during the three months ended September 30, 2016 as compared to the same period in 2015, due to additional depreciation recognized on hotel renovations and purchases of FF&E for our Existing Portfolio. In addition, depreciation and amortization in our Existing Portfolio increased in the third quarter of 2016 as compared to the same period in 2015 as we wrote-off a $0.1 million in-place lease intangible asset in the third quarter of 2016 due to the renovation-related closure of a tenant’s space at the Wailea Beach Marriott Resort & Spa.
Depreciation and amortization expense decreased $1.7 million, or 1.4%, during the first nine months ended September 30, 2016 as compared to the first nine months ended September 30, 2015, primarily due to the Two Sold Hotels and BuyEfficient, which generated an additional $5.5 million and $0.7 million, respectively, during the first nine months of 2015.
Depreciation and amortization expense in our Existing Portfolio increased $4.5 million during the nine months ended September 30, 2016 as compared to the same period in 2015, due to additional depreciation recognized on hotel renovations and purchases of FF&E for our Existing Portfolio.
Interest and other income
.
Interest and other income totaled $0.3 million for the three months ended September 30, 2016, and $0.6 million for the three months ended September 30, 2015. In the third quarter of 2016, we recognized $0.3 million in interest and miscellaneous income. In the third quarter of 2015, we recognized $0.3 million in energy rebates due to energy efficient renovations at our hotels, $0.2 million in interest income on the Preferred Equity Investment and $0.1 million in other interest and miscellaneous income.
Interest and other income totaled $1.1 million for the nine months ended September 30, 2016, and $3.4 million for the nine months ended September 30, 2015. In the first nine months of 2016, we recognized $0.8 million in interest and miscellaneous income and $0.3 million in energy rebates due to energy efficient renovations at our hotels. In the first nine months of 2015, we recognized $0.6 million in energy rebates due to energy efficient renovations at our hotels, $1.6 million in interest income on the Preferred Equity Investment, and $0.3 million in other interest and miscellaneous income. In addition, we recognized a $0.9 million gain due to our receipt of a payment from an unsecured note on a boutique hotel known as the Twelve Atlantic Station in Atlanta, Georgia.
Interest expense
.
We incurred interest expense as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
Interest expense on debt and capital lease obligations
|
|
$
|
11,966
|
|
$
|
15,711
|
|
$
|
37,560
|
|
$
|
48,536
|
|
(Gain) loss on derivatives, net
|
|
|
(1,374)
|
|
|
2
|
|
|
7,810
|
|
|
12
|
|
Amortization of deferred financing fees
|
|
|
544
|
|
|
692
|
|
|
1,648
|
|
|
2,472
|
|
|
|
$
|
11,136
|
|
$
|
16,405
|
|
$
|
47,018
|
|
$
|
51,020
|
|
Interest expense decreased $5.3 million, or 32.1%, during the three months ended September 30, 2016 as compared to the three months ended September 30, 2015, and $4.0 million, or 7.8%, during the nine months ended September 30, 2016 as compared to the nine months ended September 30, 2015. Interest expense on our debt and capital lease obligations decreased $3.7 million and $11.0 million for the three and nine months ended September 30, 2016, respectively, as compared to the same periods in 2015, as a result of lower balances due to monthly amortization, loan repayments during 2015 and 2016, and lower interest rates from our 2015 and 2016 debt transactions. In addition, interest expense related to the amortization of deferred financing fees decreased $0.1 million and $0.8 million for the three and nine months ended September 30, 2016, respectively, as compared to the same periods in 2015 primarily due to the accelerated amortization of $0.5 million of deferred financing fees related to our prior credit facility during the second quarter of 2015. Interest expense for the third quarter of 2016 further decreased as compared to the same period in 2015 due to a $1.4 million gain we recognized on our derivatives during this time in 2016 as compared to a $2,000 loss recognized during this same time in 2015. Our derivatives increased our interest expense during the nine months ended September 30, 2016 as compared to the same period in 2015, as we recognized a loss of $7.8 million during this time in 2016 versus a loss of $12,000 during this same time in 2015.
Our weighted average interest rate per annum, including our variable rate debt obligations, was approximately 4.4% and 4.5% at September 30, 2016 and 2015, respectively. Approximately 77.8% and 69.4% of our outstanding notes payable had fixed interest rates at September 30, 2016 and 2015, respectively.
For information regarding our 2016 debt transactions, see the discussion included in “
Liquidity and Capital Resources-Debt
.”
Loss on extinguishment of debt
.
Loss on extinguishment of debt totaled zero for both the three months ended September 30, 2016 and 2015, and $0.3 million and $2,000 for the nine months ended September 30, 2016 and 2015, respectively. Year-to-date in 2016, we recognized losses of $0.1 million during the first quarter and $0.2 million during the second quarter related to our repayments of debt secured by the Boston Park Plaza and the Renaissance Orlando at SeaWorld®, respectively. Year-to-date in 2015, we recognized a loss on extinguishment of debt of $2,000 related to our repayments of debt secured by four of our hotels: the Marriott Houston; the Marriott Park City; the Marriott Philadelphia; and the Marriott Tysons Corner.
Gain on sale of assets
.
Gain on sale of assets totaled zero and $11.7 million for the three months ended September 30, 2016 and 2015, respectively, and $18.2 million and $11.7 million for the nine months ended September 30, 2016 and 2015, respectively. In May 2016, we sold the Sheraton Cerritos for net proceeds of $41.2 million, and recognized a net gain on the sale of $18.2 million. In September 2015, we sold BuyEfficient for net proceeds of $26.4 million, and recognized a gain on the sale of $11.7 million. Neither of these two sales represented a strategic shift that had a major impact on our business plan or our primary markets; therefore, neither of these two sales qualified as a discontinued operation.
Income tax benefit (provision)
.
Income tax benefit (provision) totaled a benefit of $1.4 million and a provision of $0.9 million for the three months ended September 30, 2016 and 2015, respectively, and a benefit of $1.0 million and a provision of $1.3 million for the nine months ended September 30, 2016 and 2015, respectively. We lease our hotels to the TRS Lessee and its subsidiaries, which are subject to federal and state income taxes. In addition, the REIT and Operating Partnership may also be subject to various state and local income taxes. As part of our ongoing evaluations of our uncertain tax positions, during the third quarter of 2016, we reversed a $1.5 million income tax accrual that we previously
recorded during 2013, plus $0.1 million in accrued interest, related to the 2012 tax year. The reversal was due to the expiration of the statute of limitations for the 2012 tax year. This income tax benefit was partially offset d
uring the third quarter and first nine months of 2016, as we recognized combined federal and state income tax expense of $0.2 million and $0.6 million, respectively, based on 2016 projected taxable income net of operating loss carryforwards for our taxable entities.
During the third quarter and first nine months of 2015, we recognized combined federal and state income tax expense of $0.2 million and $0.6 million, respectively, based on 2015 projected taxable income net of operating loss carryforwards for our taxable entities. In addition, during both the third quarter and the first nine months of 2015, we recognized combined federal and state income tax expense of $0.7 million related to our sale of BuyEfficient.
Income from discontinued operations, net of tax
.
Income from discontinued operations, net of tax totaled zero for both the three and nine months ended September 30, 2016, and $15.9 million for both the three and nine months ended September 30, 2015. In July 2015, we sold our Preferred Equity Investment and settled our $3.7 million working capital loan provided to the buyer of the Rochester Portfolio for an aggregate payment of $16.0 million, plus accrued interest. Both the Preferred Equity Investment and the working capital loan were carried net of deferred gains, resulting in zero balances on our balance sheet. Accordingly, we recorded a $16.0 million gain on sale during the third quarter of 2015, along with related income tax expense of $0.1 million.
Income from consolidated joint ventures attributable to noncontrolling interests
. Income from consolidated joint ventures attributable to noncontrolling interests totaled $2.1 million and $2.0 million for the three months ended September 30, 2016 and 2015, respectively, and $5.4 million and $6.6 million for the nine months ended September 30, 2016 and 2015, respectively. Consistent with the
Presentation
Topic of the FASB ASC, our net income for both the three and nine months ended September 30, 2016 and 2015 includes 100% of the net income generated by the entity that owns the Hilton San Diego Bayfront. The outside 25.0% interest in the entity that owns the Hilton San Diego Bayfront earned net income of $2.1 million and $2.0 million during the third quarter of 2016 and 2015, respectively, and $5.4 million and $6.6 million for the first nine months of 2016 and 2015, respectively. In addition, prior to our sale of the Doubletree Guest Suites Times Square in December 2015, income from consolidated joint ventures attributable to noncontrolling interests included a nominal amount of preferred dividends earned by preferred investors in the entity that owned the Doubletree Guest Suites Times Square, including related administrative fees.
Preferred stock dividends and redemption charge
.
Preferred stock dividends and a redemption charge were incurred as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Series D preferred stock
|
|
$
|
—
|
|
$
|
2,300
|
|
$
|
2,428
|
|
$
|
6,900
|
Series E preferred stock
|
|
|
1,998
|
|
|
—
|
|
|
4,462
|
|
|
—
|
Series F preferred stock
|
|
|
1,209
|
|
|
—
|
|
|
1,814
|
|
|
—
|
Redemption charge on Series D preferred stock
|
|
|
—
|
|
|
—
|
|
|
4,052
|
|
|
—
|
|
|
$
|
3,207
|
|
$
|
2,300
|
|
$
|
12,756
|
|
$
|
6,900
|
We redeemed all 4,600,000 shares of our Series D preferred stock in April 2016. We recorded a redemption charge of $4.1 million during the second quarter of 2016 related to the original issuance costs of these shares, which were previously included in additional paid in capital. In March 2016, we issued 4,600,000 shares of Series E preferred stock, and in May 2016, we issued 3,000,000 shares of Series F preferred stock.
Non-GAAP Financial Measures
. We use the following “non-GAAP financial measures” that we believe are useful to investors as key supplemental measures of our operating performance: EBITDA, Adjusted EBITDA, FFO attributable to common stockholders, Adjusted FFO attributable to common stockholders and Comparable Portfolio revenues. These measures should not be considered in isolation or as a substitute for measures of performance in accordance with GAAP. EBITDA, Adjusted EBITDA, FFO attributable to common stockholders, Adjusted FFO attributable to common stockholders and Comparable Portfolio revenues, as calculated by us, may not be comparable to other companies that do not define such terms exactly as the Company. These non-GAAP measures are used in addition to and in conjunction with results presented in accordance with GAAP. They should not be considered as alternatives to operating profit, cash flow from operations, or any other operating performance measure prescribed by GAAP. These non-GAAP financial measures reflect additional ways of viewing our operations that we believe, when viewed with our GAAP results and the reconciliations to the corresponding GAAP financial measures, provide a more complete understanding of factors and trends affecting our business than could be obtained absent this disclosure. For example, we believe that Comparable Portfolio revenues are useful to both us and investors in evaluating our operating performance by removing the impact of non-hotel results such as BuyEfficient (which we sold in September 2015) and the amortization of favorable and unfavorable tenant lease contracts. We also believe that our use of Comparable Portfolio revenues is useful to both us and our investors as it facilitates the comparison of our operating results from period to period by removing fluctuations caused by any acquisitions or dispositions, as well as by those hotels that we classify as held for sale, those hotels that are undergoing a material renovation or repositioning and those hotels whose room counts have materially changed during either the current or prior year. We strongly encourage investors to review our financial information in its entirety and not to rely on a single financial measure.
EBITDA and Adjusted EBITDA are commonly used measures of performance in many industries. We believe EBITDA and Adjusted EBITDA are useful to investors in evaluating our operating performance because these measures help investors evaluate and compare the results of our operations from period to period by removing the impact of our capital structure (primarily interest expense) and our asset base (primarily depreciation and amortization) from our operating results. We also believe the use of EBITDA
and Adjusted EBITDA facilitate comparisons between us and other lodging REITs, hotel owners who are not REITs and other capital-intensive companies. In addition, certain covenants included in our indebtedness use EBITDA as a measure of financial compliance. We also use EBITDA and Adjusted EBITDA as measures in determining the value of hotel acquisitions and dispositions.
Historically, we have adjusted EBITDA when evaluating our performance because we believe that the exclusion of certain additional items described below provides useful information to investors regarding our operating performance, and that the presentation of Adjusted EBITDA, when combined with the primary GAAP presentation of net income, is beneficial to an investor’s complete understanding of our operating performance. We adjust EBITDA for the following items, which may occur in any period, and refer to this measure as Adjusted EBITDA:
|
·
|
|
Amortization of deferred stock compensation
: we exclude the noncash expense incurred with the amortization of deferred stock compensation as this expense is based on historical stock prices at the date of grant to our corporate employees and does not reflect the underlying performance of our hotels.
|
|
·
|
|
Amortization of favorable and unfavorable contracts
: we exclude the noncash amortization of the favorable management contract asset recorded in conjunction with our acquisition of the Hilton Garden Inn Chicago Downtown/Magnificent Mile, along with the favorable and unfavorable tenant lease contracts, as applicable, recorded in conjunction with our acquisitions of the Boston Park Plaza, the Hilton Garden Inn Chicago Downtown/Magnificent Mile, the Hilton New Orleans St. Charles, the Hyatt Regency San Francisco and the Wailea Beach Marriott Resort & Spa. We exclude the noncash amortization of favorable and unfavorable contracts because it is based on historical cost accounting and is of lesser significance in evaluating our actual performance for the current period.
|
|
·
|
|
Ground rent adjustments
: we exclude the noncash expense incurred from straight-lining our ground lease obligations as this expense does not reflect the actual rent amounts due to the respective lessors in the current period and is of lesser significance in evaluating our actual performance for the current period. We do, however, include an adjustment for the cash ground lease expense recorded on the Hyatt Chicago Magnificent Mile’s building lease. Upon acquisition of this hotel, we determined that the building lease was a capital lease, and, therefore, we include a portion of the capital lease payment each month in interest expense. We include an adjustment for ground lease expense on capital leases in order to more accurately reflect the actual rent due to the hotel’s lessor in the current period, as well as the operating performance of the Hyatt Chicago Magnificent Mile.
|
|
·
|
|
Real estate transactions
: we exclude the effect of gains and losses on the disposition of depreciable assets because we believe that including them in Adjusted EBITDA is not consistent with reflecting the ongoing performance of our assets. In addition, material gains or losses from the depreciated value of the disposed assets could be less important to investors given that the depreciated asset value often does not reflect its market value.
|
|
·
|
|
Gains or losses from debt transactions
: we exclude the effect of finance charges and premiums associated with the extinguishment of debt, including the acceleration of deferred financing costs from the original issuance of the debt being redeemed or retired because, like interest expense, their removal helps investors evaluate and compare the results of our operations from period to period by removing the impact of our capital structure.
|
|
·
|
|
Acquisition costs
: under GAAP, costs associated with completed acquisitions are expensed in the year incurred. We exclude the effect of these costs because we believe they are not reflective of the ongoing performance of the Company or our hotels.
|
|
·
|
|
Noncontrolling interests
: we deduct the noncontrolling partner’s pro rata share of any EBITDA adjustments related to our consolidated Hilton San Diego Bayfront partnership, as well as any preferred dividends earned by preferred investors in an entity that owned the Doubletree Guest Suites Times Square, including related administrative fees, prior to the hotel’s sale in December 2015.
|
|
·
|
|
Cumulative effect of a change in accounting principle
: from time to time, the FASB promulgates new accounting standards that require the consolidated statement of operations to reflect the cumulative effect of a change in accounting principle. We exclude these one-time adjustments, which include the accounting impact from prior periods, because they do not reflect our actual performance for that period.
|
|
·
|
|
Impairment losses
: we exclude the effect of impairment losses because we believe that including them in Adjusted EBITDA is not consistent with reflecting the ongoing performance of our remaining assets. In addition, we believe that impairment charges, which are based off of historical cost account values, are similar to gains (losses) on dispositions and depreciation expense, both of which are also excluded from Adjusted EBITDA.
|
|
·
|
|
Other adjustments
: we exclude other adjustments that we believe are outside the ordinary course of business because we do not believe these costs reflect our actual performance for that period and/or the ongoing operations of our hotels. Such
|
items may include: executive severance costs; lawsuit settlement costs; prior year property tax assessments or credits; property-level restructuring, severance and management transition costs; lease terminations; and any gains or losses we have recognized on sales or redemptions of assets other than real estate investments.
|
The following table reconciles our unaudited net income to EBITDA and Adjusted EBITDA for our hotel portfolio for the three and nine months ended September 30, 2016 and 2015 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
39,427
|
|
$
|
63,084
|
|
$
|
106,379
|
|
$
|
117,944
|
Operations held for investment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
40,442
|
|
|
41,331
|
|
|
121,169
|
|
|
122,911
|
Amortization of lease intangibles
|
|
|
62
|
|
|
1,027
|
|
|
189
|
|
|
3,084
|
Interest expense
|
|
|
11,136
|
|
|
16,405
|
|
|
47,018
|
|
|
51,020
|
Income tax (benefit) provision
|
|
|
(1,434)
|
|
|
938
|
|
|
(959)
|
|
|
1,256
|
Noncontrolling interests:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from consolidated joint ventures attributable to noncontrolling interests
|
|
|
(2,053)
|
|
|
(1,982)
|
|
|
(5,358)
|
|
|
(6,643)
|
Depreciation and amortization
|
|
|
(872)
|
|
|
(865)
|
|
|
(2,607)
|
|
|
(2,566)
|
Interest expense
|
|
|
(424)
|
|
|
(386)
|
|
|
(1,251)
|
|
|
(1,149)
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision
|
|
|
—
|
|
|
105
|
|
|
—
|
|
|
105
|
EBITDA
|
|
|
86,284
|
|
|
119,657
|
|
|
264,580
|
|
|
285,962
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations held for investment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred stock compensation
|
|
|
1,539
|
|
|
824
|
|
|
5,616
|
|
|
5,505
|
Amortization of favorable and unfavorable contracts, net
|
|
|
327
|
|
|
43
|
|
|
342
|
|
|
(136)
|
Noncash straight-line lease expense
|
|
|
465
|
|
|
496
|
|
|
1,413
|
|
|
1,491
|
Capital lease obligation interest — cash ground rent
|
|
|
(351)
|
|
|
(351)
|
|
|
(1,053)
|
|
|
(1,053)
|
Loss (gain) on sale of assets, net
|
|
|
8
|
|
|
(11,707)
|
|
|
(18,226)
|
|
|
(11,708)
|
Severance costs associated with sale of BuyEfficient
|
|
|
—
|
|
|
1,636
|
|
|
—
|
|
|
1,636
|
Loss on extinguishment of debt
|
|
|
—
|
|
|
—
|
|
|
259
|
|
|
2
|
Gain on redemption of note receivable
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(939)
|
Prior year property tax adjustments, net
|
|
|
(239)
|
|
|
(765)
|
|
|
(4,279)
|
|
|
(865)
|
Property-level restructuring, severance and management transition costs
|
|
|
18
|
|
|
474
|
|
|
1,578
|
|
|
1,157
|
Lease termination costs
|
|
|
—
|
|
|
—
|
|
|
1,000
|
|
|
300
|
Costs associated with CEO severance
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,257
|
Noncontrolling interests:
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncash straight-line lease expense
|
|
|
(113)
|
|
|
(113)
|
|
|
(338)
|
|
|
(338)
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of assets
|
|
|
—
|
|
|
(16,000)
|
|
|
—
|
|
|
(16,000)
|
|
|
|
1,654
|
|
|
(25,463)
|
|
|
(13,688)
|
|
|
(15,691)
|
Adjusted EBITDA
|
|
$
|
87,938
|
|
$
|
94,194
|
|
$
|
250,892
|
|
$
|
270,271
|
Adjusted EBITDA was $87.9 million and $94.2 million for the three months ended September 30, 2016 and 2015, respectively, and $250.9 million and $270.3 million for the nine months ended September 30, 2016 and 2015, respectively. Adjusted EBITDA decreased $6.3 million and $19.4 million in the three and nine months ended September 30, 2016, respectively, as compared to the same periods in 2015 primarily due to the sales of the Sheraton Cerritos, the Doubletree Guest Suites Times Square and BuyEfficient in May 2016, December 2015 and September 2015, respectively. In addition, Adjusted EBITDA was negatively impacted during the three and nine months ended September 30, 2016 by decreased earnings generated by our Chicago hotels due to weak market conditions, along with decreased earnings generated by the Boston Park Plaza and the Wailea Beach Marriott Resort & Spa due to complete hotel repositionings at these hotels, and by our Hilton San Diego Bayfront due to higher ground lease expense. Partially offsetting these decreases, Adjusted EBITDA increased due to strong market conditions and expense management at the Renaissance Orlando at SeaWorld®, Hilton San Diego Bayfront, Hyatt Regency San Francisco and our Los Angeles hotels. In addition, amortization of deferred stock compensation decreased during the first nine months of 2016 as compared to the same period in 2015 as we recognized an additional $1.6 million in deferred stock compensation during 2015 related to CEO severance. The effect of this decrease in deferred stock compensation expense was partially mitigated by a reclassification of a portion of the expense related to deferred stock compensation.
We believe that the presentation of FFO attributable to common stockholders provides useful information to investors regarding our operating performance because it is a measure of our operations without regard to specified noncash items such as real estate depreciation and amortization, amortization of lease intangibles, any real estate impairment loss and any gain or loss on sale of real estate assets, all of which are based on historical cost accounting and may be of lesser significance in evaluating our current performance. Our presentation of FFO attributable to common stockholders conforms to the National Association of Real Estate Investment Trusts’ (“NAREIT”) definition of “FFO applicable to common shares.” Our presentation may not be comparable to FFO reported by other REITs that do not define the terms in accordance with the current NAREIT definition, or that interpret the current NAREIT definition differently than we do.
We also present Adjusted FFO attributable to common stockholders when evaluating our operating performance because we believe that the exclusion of certain additional items described below provides useful supplemental information to investors regarding our ongoing operating performance, and may facilitate comparisons of operating performance between periods and our peer companies. We adjust FFO attributable to common stockholders for the following items, which may occur in any period, and refer to this measure as Adjusted FFO attributable to common stockholders:
|
·
|
|
Amortization of favorable and unfavorable contracts
: we exclude the noncash amortization of the favorable management contract asset recorded in conjunction with our acquisition of the Hilton Garden Inn Chicago Downtown/Magnificent Mile, along with the favorable and unfavorable tenant lease contracts, as applicable, recorded in conjunction with our acquisitions of the Boston Park Plaza, the Hilton Garden Inn Chicago Downtown/Magnificent Mile, the Hilton New Orleans St. Charles, the Hyatt Regency San Francisco and the Wailea Beach Marriott Resort & Spa. We exclude the noncash amortization of favorable and unfavorable contracts because it is based on historical cost accounting and is of lesser significance in evaluating our actual performance for the current period.
|
|
·
|
|
Noncash ground rent adjustments
: we exclude the noncash expense incurred from straight-lining our ground lease obligations as this expense does not reflect the actual rent amounts due to the respective lessors in the current period and is of lesser significance in evaluating our actual performance for the current period.
|
|
·
|
|
Gains or losses from debt transactions
: we exclude the effect of finance charges and premiums associated with the extinguishment of debt, including the acceleration of deferred financing costs from the original issuance of the debt being redeemed or retired, as well as the noncash gains or losses on our derivatives. We believe that these items are not reflective of our ongoing finance costs.
|
|
·
|
|
Acquisition costs
: under GAAP, costs associated with completed acquisitions are expensed in the year incurred. We exclude the effect of these costs because we believe they are not reflective of the ongoing performance of the Company or our hotels.
|
|
·
|
|
Impairment losses
: we exclude the effect of non-real estate impairment losses because we believe that including them in Adjusted FFO attributable to common stockholders is not consistent with reflecting the ongoing performance of our remaining assets.
|
|
·
|
|
Noncontrolling interests
: we deduct the noncontrolling partner’s pro rata share of any FFO adjustments related to our consolidated Hilton San Diego Bayfront partnership, as well as any preferred dividends earned by preferred investors in an entity that owned the Doubletree Guest Suites Times Square, including related administrative fees, prior to the hotel’s sale in December 2015.
|
|
·
|
|
Other adjustments
: we exclude other adjustments that we believe are outside the ordinary course of business because we do not believe these costs reflect our actual performance for that period and/or the ongoing operations of our hotels. Such items may include: executive severance costs; lawsuit settlement costs; prior year property tax assessments or credits; property-level restructuring, severance and management transition costs; lease terminations; any gains or losses we have recognized on redemptions of assets other than real estate investments; and income tax benefits or provisions associated with the application of net operating loss carryforwards, uncertain tax positions or with the sale of assets other than real estate investments.
|
The following table reconciles our unaudited net income to FFO attributable to common stockholders and Adjusted FFO attributable to common stockholders for our hotel portfolio for the three and nine months ended September 30, 2016 and 2015 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
39,427
|
|
$
|
63,084
|
|
$
|
106,379
|
|
$
|
117,944
|
|
Preferred stock dividends and redemption charge
|
|
|
(3,207)
|
|
|
(2,300)
|
|
|
(12,756)
|
|
|
(6,900)
|
|
Operations held for investment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate depreciation and amortization
|
|
|
40,296
|
|
|
40,921
|
|
|
120,715
|
|
|
121,708
|
|
Amortization of lease intangibles
|
|
|
62
|
|
|
1,027
|
|
|
189
|
|
|
3,084
|
|
Loss (gain) on sale of assets, net
|
|
|
8
|
|
|
(11,707)
|
|
|
(18,226)
|
|
|
(11,708)
|
|
Noncontrolling interests:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from consolidated joint ventures attributable to noncontrolling interests
|
|
|
(2,053)
|
|
|
(1,982)
|
|
|
(5,358)
|
|
|
(6,643)
|
|
Real estate depreciation and amortization
|
|
|
(872)
|
|
|
(865)
|
|
|
(2,607)
|
|
|
(2,566)
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of assets
|
|
|
—
|
|
|
(16,000)
|
|
|
—
|
|
|
(16,000)
|
|
FFO attributable to common stockholders
|
|
|
73,661
|
|
|
72,178
|
|
|
188,336
|
|
|
198,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations held for investment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Write-off of deferred financing fees
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
455
|
|
Amortization of favorable and unfavorable contracts, net
|
|
|
327
|
|
|
43
|
|
|
342
|
|
|
(136)
|
|
Noncash straight-line lease expense
|
|
|
465
|
|
|
496
|
|
|
1,413
|
|
|
1,491
|
|
Noncash interest related to (gain) loss on derivatives, net
|
|
|
(1,374)
|
|
|
2
|
|
|
7,810
|
|
|
12
|
|
Loss on extinguishment of debt
|
|
|
—
|
|
|
—
|
|
|
259
|
|
|
2
|
|
Gain on redemption of note receivable
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(939)
|
|
Prior year property tax adjustments, net
|
|
|
(239)
|
|
|
(765)
|
|
|
(4,279)
|
|
|
(865)
|
|
Property-level restructuring, severance and management transition costs
|
|
|
18
|
|
|
474
|
|
|
1,578
|
|
|
1,157
|
|
Lease termination costs
|
|
|
—
|
|
|
—
|
|
|
1,000
|
|
|
300
|
|
Income tax benefit related to reversal of uncertain tax liabilities
|
|
|
(1,596)
|
|
|
—
|
|
|
(1,596)
|
|
|
—
|
|
Preferred stock redemption charge
|
|
|
—
|
|
|
—
|
|
|
4,052
|
|
|
—
|
|
Costs associated with CEO severance
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,257
|
|
Amortization of deferred stock compensation associated with CEO severance
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,623
|
|
Severance costs associated with sale of BuyEfficient
|
|
|
—
|
|
|
1,636
|
|
|
—
|
|
|
1,636
|
|
Income tax provision related to gain on sale of BuyEfficient
|
|
|
—
|
|
|
720
|
|
|
—
|
|
|
720
|
|
Noncontrolling interests:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncash straight-line lease expense
|
|
|
(113)
|
|
|
(113)
|
|
|
(338)
|
|
|
(338)
|
|
Noncash interest related to loss on derivative
|
|
|
—
|
|
|
(1)
|
|
|
—
|
|
|
(3)
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision
|
|
|
—
|
|
|
105
|
|
|
—
|
|
|
105
|
|
|
|
|
(2,512)
|
|
|
2,597
|
|
|
10,241
|
|
|
10,477
|
|
Adjusted FFO attributable to common stockholders
|
|
$
|
71,149
|
|
$
|
74,775
|
|
$
|
198,577
|
|
$
|
209,396
|
|
Adjusted FFO attributable to common stockholders was $71.1 million and $74.8 million for the three months ended September 30, 2016 and 2015, respectively, and $198.6 million and $209.4 million for the nine months ended September 30, 2016 and 2015, respectively. Adjusted FFO attributable to common stockholders decreased $3.6 million and $10.8 million in the three and nine months ended September 30, 2016, respectively, as compared to the same periods in 2015 primarily due to the same reasons noted in the discussion regarding Adjusted EBITDA. These decreases in earnings were partially offset by a decrease in interest expense on our debt and capital lease obligations due to our 2015 repayments of six separate mortgages and refinancing of one mortgage with a lower interest rate unsecured term loan, as well as our refinancing of another mortgage with a lower interest rate unsecured term loan during the first quarter of 2016, and our repayment of one mortgage during the second quarter of 2016.
Investing Activities
Acquisitions
. We did not acquire any hotels during either the three or nine months ended September 30, 2016 or 2015. While our primary focus is on acquiring branded, urban and resort upper upscale hotels, our acquisition program is aimed at generating attractive risk-adjusted returns on our investment dollars, and therefore we may target lodging assets outside of the typical branded,
urban, upper upscale profile represented by our Existing Portfolio in order to capitalize on opportunities which may arise. We intend to select the brands and operators for our hotels that we believe will lead to the highest returns. Additionally, the scope of our acquisitions program may include large hotel portfolios or hotel loans. Future acquisitions, if any, may be funded with cash on hand, by our issuance of additional debt or equity securities, including our common and preferred OP units provided that our stock price is at an attractive level, by draws on our $400.0 million senior unsecured credit facility, or by proceeds received from sales of existing assets, including the proceeds we received from our December 2015 sale of the leasehold interest in the entity that owns the Doubletree Guest Suites Times Square, as well as the proceeds we received from our May 2016 sale of the Sheraton Cerritos.
Dispositions
. We have from time to time divested of assets that no longer fit our target profile, will not offer long-term returns in excess of our cost of capital, will achieve a sale price in excess of our internal valuation, or that have high risk relative to their anticipated returns. In May 2016, we sold the 203-room Sheraton Cerritos for net proceeds of $41.2 million, and recognized a net gain on the sale of $18.2 million. In September 2015, we sold BuyEfficient for net proceeds of $26.4 million, and recognized a gain on the sale of $11.7 million. Neither of these two sales represented a strategic shift that had a major impact on our business plan or our primary markets; therefore, neither of these two sales qualified as a discontinued operation.
Renovations
. We invested $139.8 million and $106.6 million in capital improvements to our hotel portfolio during the nine months ended September 30, 2016 and 2015, respectively. Consistent with our strategy, during the first nine months of 2016 and 2015, we undertook major renovations, repositionings and ordinary course rooms and public space renovations, most significantly at the Boston Park Plaza and the Wailea Beach Marriott Resort & Spa. As a result, we incurred room revenue disruption of approximately $3.1 million and $6.5 million for the three and nine months ended September 30, 2016, respectively, and zero and $1.3 million during the three and nine months ended September 30, 2015, respectively, all of which was in line with our expectations.
Liquidity and Capital Resources
During the periods presented, our sources of cash included our operating activities and working capital, as well as proceeds from our sales of the Sheraton Cerritos, the Doubletree Guest Suites Times Square and BuyEfficient, sales and redemptions of other assets, our term loan agreement drawn in January 2016, our credit facility and our preferred stock offerings. Our primary uses of cash were for capital expenditures for hotels, operating expenses, repayment of notes payable and our credit facility, redemption of our Series D preferred stock, dividends on our common and preferred stock and distributions to our joint venture partners. We cannot be certain that traditional sources of funds will be available in the future.
Operating activities
.
Our net cash provided by or used in operating activities fluctuates primarily as a result of changes in RevPAR and the operating cash flow of our hotels. Our net cash provided by or used in operating activities may also be affected by changes in our portfolio resulting from hotel acquisitions, dispositions or renovations. Net cash provided by operating activities was $228.5 million for the nine months ended September 30, 2016 as compared to $229.0 million for the nine months ended September 30, 2015. The net decrease to cash provided by operating activities during the first nine months of 2016 was primarily due to decreased cash generated by both the Boston Park Plaza and the Wailea Beach Marriott Resort & Spa, which were undergoing complete hotel repositionings during the first nine months of 2016, partially offset by increased cash generated by our other hotels, combined with the release of restricted lender reserves upon our repayments of the loans secured by the Boston Park Plaza and the Renaissance Orlando at SeaWorld®.
Investing activities
. Our net cash provided by or used in investing activities fluctuates primarily as a result of acquisitions, dispositions and renovations of hotels. Net cash used in investing activities during the first nine months of 2016 as compared to the first nine months of 2015 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30, 2016
|
|
September 30, 2015
|
|
Proceeds from sales of assets
|
|
$
|
41,202
|
|
$
|
42,432
|
|
Proceeds from redemption of note receivable
|
|
|
—
|
|
|
1,125
|
|
Restricted cash — replacement reserve
|
|
|
(8,914)
|
|
|
(10,017)
|
|
Acquisition of air rights lease
|
|
|
(2,447)
|
|
|
—
|
|
Renovations and additions to hotel properties
|
|
|
(139,846)
|
|
|
(106,575)
|
|
Payment for interest rate derivative
|
|
|
—
|
|
|
(13)
|
|
Net cash used in investing activities
|
|
$
|
(110,005)
|
|
$
|
(73,048)
|
|
Net cash used in investing activities was $110.0 million during the first nine months of 2016 as compared to $73.0 million for the same period in 2015. During the first nine months of 2016, we received proceeds of $41.2 million from our sales of the Sheraton Cerritos and surplus FF&E. These cash inflows were offset as we increased our restricted cash replacement reserve accounts by $8.9 million, paid $2.4 million to acquire the air rights lease at our Renaissance Harborplace and paid $139.8 million for renovations and additions to our portfolio.
During the first nine months of 2015, we received proceeds of $42.4 million from the sales of assets, including $26.4 million from the sale of BuyEfficient, $16.0 million from the sale of our Preferred Equity Investment and settlement of a working capital loan provided to the buyer of the Rochester Portfolio, and $31,000 from the sale of surplus FF&E. In addition, we received $1.1 million from the redemption of an unsecured note receivable. These cash inflows were offset as we increased our restricted cash replacement reserve accounts by $10.0 million, paid $106.6 million for renovations and additions to our portfolio, and paid $13,000 for an interest rate cap agreement on our Hilton San Diego Bayfront mortgage.
Financing activities
. Our net cash provided by or used in financing activities fluctuates primarily as a result of our issuance of common stock, our issuance and repayment of notes payable and our credit facility, and our issuance and repurchase of other forms of capital, including preferred equity. Net cash used in financing activities during the first nine months of 2016 as compared to the first nine months of 2015 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
Nine Months Ended
|
|
|
September 30, 2016
|
|
September 30, 2015
|
Proceeds from preferred stock offerings
|
|
$
|
190,000
|
|
$
|
—
|
Payment of preferred stock offering costs
|
|
|
(6,640)
|
|
|
—
|
Redemption of preferred stock
|
|
|
(115,000)
|
|
|
—
|
Repurchase of common stock for employee withholding obligations
|
|
|
(2,641)
|
|
|
(9,264)
|
Proceeds from note payable and credit facility
|
|
|
100,000
|
|
|
38,000
|
Payments on notes payable and credit facility
|
|
|
(196,504)
|
|
|
(154,129)
|
Payments for costs related to extinguishment of notes payable
|
|
|
(153)
|
|
|
(2)
|
Payments of deferred financing costs
|
|
|
(85)
|
|
|
(4,908)
|
Dividends and distributions paid
|
|
|
(213,453)
|
|
|
(64,814)
|
Distributions to noncontrolling interests
|
|
|
(5,988)
|
|
|
(6,786)
|
Net cash used in financing activities
|
|
$
|
(250,464)
|
|
$
|
(201,903)
|
Net cash used in financing activities was $250.5 million for the first nine months of 2016 as compared to $201.9 million for the first nine months of 2015. Net cash used in financing activities during the first nine months of 2016 consisted of the following cash outflows: $115.0 million paid to redeem our Series D preferred stock; $2.6 million paid to repurchase common shares to satisfy the statutory minimum federal and state tax obligations of certain employees in connection with the vesting of restricted common shares issued to such employees; $196.5 million in principal payments on our notes payable, including $114.2 million for the loan secured by the Boston Park Plaza, $72.6 million for the loan secured by the Renaissance Orlando at SeaWorld® and $9.7 million in principal payments on our notes payable; $0.2 million in costs paid to extinguish the loan secured by Renaissance Orlando at SeaWorld®; $0.1 million in deferred financing costs related to our new $100.0 million unsecured term loan and our credit facility; $213.5 million in dividends and distributions to our common and preferred stockholders; and $6.0 million in distributions to the noncontrolling interest in the Hilton San Diego Bayfront. These cash outflows were slightly offset by total net proceeds of $183.4 million received from our preferred stock offerings, including $111.0 million from the issuance of our Series E preferred stock and $72.4 million from the issuance of our Series F preferred stock, and $100.0 million in proceeds received from our new unsecured term loan.
Net cash used in financing activities during the first nine months of 2015 consisted of the following cash outflows: $9.3 million paid to repurchase common shares to satisfy the statutory minimum federal and state tax obligations of certain employees in connection with the vesting of restricted common shares issued to such employees; $154.1 million in principal payments on our notes payable and credit facility, including $99.1 million to repay four loans, $38.0 million to repay a draw on our credit facility and $17.0 million in principal payments on our notes payable; $2,000 in fees paid upon our repayment of four loans; $4.9 million in deferred financing costs related to our $400.0 million senior unsecured credit facility which we entered into in April 2015, as well as the new unsecured term loan agreements entered into in September 2015, and the new loans entered into in December 2014 secured by the Embassy Suites La Jolla and the JW Marriott New Orleans; $64.8 million in dividends and distributions to our common and preferred stockholders; and $6.8 million in distributions to the noncontrolling interests in our hotels. These cash outflows were slightly offset by $38.0 million in proceeds received from our credit facility.
Future.
We expect our primary uses of cash to be for operating expenses, capital investments in our hotels, repayment of principal on our notes payable and credit facility, interest expense, dividends on our common and preferred stock, potential repurchases of our common stock, and acquisitions of hotels, including possibly hotel portfolios. We expect our primary sources of cash will continue to be our operating activities, working capital, notes payable and our credit facility, dispositions of hotel properties, and proceeds from public and private offerings of debt securities and common and preferred stock. Our financial objectives include the maintenance of our credit ratios, appropriate levels of liquidity and continued balance sheet strength. Consistent with maintaining our low leverage and balance sheet strength, in the near-term, we expect to fund future acquisitions, if any, largely through cash on hand, the issuance of equity, provided that our stock price is at an attractive level, or by proceeds received from sales of existing assets, including the proceeds we received from our December 2015 sale of the leasehold interest in the entity that owns the Doubletree Guest Suites Times Square, as well as the proceeds we received from our May 2016 sale of the Sheraton Cerritos, in order to selectively grow the quality and scale of our portfolio. Our ability to raise funds through the issuance of equity securities depends on, among other things, general market conditions for hotel companies and REITs and market perceptions about us. We will continue
to analyze alternate sources of capital in an effort to minimize our capital costs and maximize our financial flexibility, including pursuant to the equity distribution agreements we entered into in February 2014. Under the terms of the agreements, we may issue and sell from time to time through or to the managers, as sales agents and/or principals, shares of our common stock having an aggregate offering amount of up to $150.0 million. Through September 30, 2016, we have received $21.6 million in gross proceeds and issued 1,352,703 shares of our common stock in connection with the agreements, leaving $128.4 million available for sale under the agreements. However, when needed, the capital markets may not be available to us on favorable terms or at all.
Cash Balance
. As of September 30, 2016, our unrestricted cash balance was $367.1 million. By minimizing our need to access external capital by maintaining higher than typical cash balances, our financial security and flexibility are meaningfully enhanced because we are able to fund our business needs and debt maturities, specifically those occurring within the next 12 months, partially with our cash on hand.
Debt.
As of September 30, 2016, we had $1.0 billion of consolidated debt, $434.4 million of cash and cash equivalents, including restricted cash, and total assets of $3.7 billion. We believe that by controlling debt levels, staggering maturity dates and maintaining a highly flexible capital structure, we can maintain lower capital costs than more highly leveraged companies, or companies with limited flexibility due to restrictive corporate-level financial covenants.
The weighted average term to maturity of our debt as of September 30, 2016 is approximately 4 years, and 77.8% of our debt, including the effects of interest rate swap agreements, is fixed rate with a weighted average interest rate of 4.8%. Including our variable rate debt obligation based on the variable rate at September 30, 2016, the weighted average interest rate on our debt is 4.4%.
As of September 30, 2016, all of our outstanding debt either had fixed interest rates or had been swapped to fixed interest rates, except the $223.1 million non-recourse mortgage on the Hilton San Diego Bayfront, which is subject to an interest rate cap agreement that caps the interest rate at 4.25% until May 2017. Our mortgage debt is in the form of single asset non-recourse loans rather than cross-collateralized multi-property pools. In addition to our mortgage debt, as of September 30, 2016, we have two unsecured corporate-level term loans. We currently believe this structure is appropriate for the operating characteristics of our business as it isolates risk and provides flexibility for various portfolio management initiatives, including the sale of individual hotels subject to existing debt.
Each of our 2016 year-to-date debt transactions is discussed below.
In January 2016, we drew the available funds of $100.0 million under an unsecured term loan agreement, and used the proceeds, combined with cash on hand in February 2016 to repay the $114.2 million loan secured by the Boston Park Plaza. The Boston Park Plaza loan was scheduled to mature in February 2018, and was available to be repaid without penalty in February 2016. The $100.0 million unsecured term loan matures in January 2023, and bears interest based on a pricing grid with a range of 180 to 255 basis points over LIBOR, depending on our leverage ratios. Additionally, in December 2015, we entered into a forward swap agreement that fixed the LIBOR rate at 1.853% for the duration of the $100.0 million term loan. Based on our current leverage and the swap in place, the loan bears interest at an effective rate of 3.653%.
In May 2016, we repaid $72.6 million of debt secured by the Renaissance Orlando at SeaWorld®, using proceeds received from our issuance of Series F preferred stock in May 2016. The loan was scheduled to mature in July 2016, and was available to be repaid without penalty in May 2016.
We may in the future seek to obtain mortgages on one or all of our 21 unencumbered hotels, 13 of which are currently held by subsidiaries whose interests are pledged to our credit facility entered into in April 2015. Our 21 unencumbered hotels include: Boston Park Plaza, Courtyard by Marriott Los Angeles, Fairmont Newport Beach, Hilton Garden Inn Chicago Downtown/Magnificent Mile, Hilton New Orleans St. Charles, Hilton North Houston, Hyatt Chicago Magnificent Mile, Hyatt Regency Newport Beach, Hyatt Regency San Francisco, Marriott Houston, Marriott Park City, Marriott Philadelphia, Marriott Portland, Marriott Quincy, Marriott Tysons Corner, Wailea Beach Marriott Resort & Spa, Renaissance Harborplace, Renaissance Long Beach, Renaissance Los Angeles Airport, Renaissance Orlando at SeaWorld® and Renaissance Westchester. Should we obtain secured financing on any or all of our unencumbered hotels, the amount of capital available through our credit facility may be reduced.
Contractual Obligations
. The following table summarizes our payment obligations and commitments as of September 30, 2016 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment due by period
|
|
|
|
|
|
|
Less Than
|
|
1 to 3
|
|
3 to 5
|
|
More than
|
|
|
|
Total
|
|
1 year
|
|
years
|
|
years
|
|
5 years
|
|
Notes payable
|
|
$
|
1,004,975
|
|
$
|
252,397
|
|
$
|
235,520
|
|
$
|
196,575
|
|
$
|
320,483
|
|
Interest obligations on notes payable (1)
|
|
|
165,490
|
|
|
38,279
|
|
|
60,803
|
|
|
40,322
|
|
|
26,086
|
|
Capital lease obligations
|
|
|
15,575
|
|
|
1
|
|
|
2
|
|
|
3
|
|
|
15,569
|
|
Interest obligations on capital leases
|
|
|
98,398
|
|
|
1,402
|
|
|
2,804
|
|
|
2,803
|
|
|
91,389
|
|
Operating lease obligations
|
|
|
358,761
|
|
|
10,053
|
|
|
19,961
|
|
|
19,822
|
|
|
308,925
|
|
Construction commitments
|
|
|
55,970
|
|
|
55,970
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Employment obligations
|
|
|
1,148
|
|
|
736
|
|
|
412
|
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
1,700,317
|
|
$
|
358,838
|
|
$
|
319,502
|
|
$
|
259,525
|
|
$
|
762,452
|
|
|
(1)
|
|
Interest on our variable rate debt obligation is calculated based on the variable rate at September 30, 2016, and includes the effect of our interest rate derivative agreements.
|
Capital Expenditures and Reserve Funds
We believe we maintain each of our hotels in good repair and condition and in general conformity with applicable franchise and management agreements, ground, building and air leases, laws and regulations. Our capital expenditures primarily relate to the ongoing maintenance of our hotels and are budgeted in the reserve accounts described in the following paragraph. We also incur capital expenditures for cyclical renovations, hotel repositionings and development. We invested $139.8 million in our portfolio during the first nine months of 2016. As of September 30, 2016, we have contractual construction commitments totaling $56.0 million. If we renovate or develop additional hotels in the future, our capital expenditures will likely increase.
With respect to our hotels that are operated under management or franchise agreements with major national hotel brands and for all of our hotels subject to first mortgage liens, we are obligated to maintain an FF&E reserve account for future planned and emergency-related capital expenditures at these hotels. The amount funded into each of these reserve accounts is determined pursuant to the management, franchise and loan agreements for each of the respective hotels, ranging between zero and 5.0% of the respective hotel’s total annual revenue. As of September 30, 2016, our balance sheet includes restricted cash of $61.8 million, which was held in FF&E reserve accounts for future capital expenditures at the 28 hotels. According to certain loan agreements, reserve funds are to be held by the lenders or managers in restricted cash accounts, and we are not required to spend the entire amount in such reserve accounts each year.
Seasonality and Volatility
As is typical of the lodging industry, we experience some seasonality in our business as indicated in the table below. Revenue for certain of our hotels is generally affected by seasonal business patterns (
e.g
., the first quarter is strong in Orlando, the second quarter is strong for the Mid-Atlantic business hotels, and the fourth quarter is strong for New York City and Hawaii). Quarterly revenue also may be adversely affected by renovations and repositionings, our managers’ effectiveness in generating business and by events beyond our control, such as extreme weather conditions, terrorist attacks or alerts, civil unrest, public health concerns, airline strikes or reduced airline capacity, economic factors and other considerations affecting travel. Revenues for our 27 hotel Comparable Portfolio by quarter for 2015 and 2016 were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
|
|
|
Revenues
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Total
|
|
2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
284,385
|
|
$
|
339,267
|
|
$
|
324,595
|
|
$
|
300,933
|
|
$
|
1,249,180
|
|
Non-comparable hotel revenues (1)
|
|
|
(19,065)
|
|
|
(16,316)
|
|
|
(14,467)
|
|
|
(14,168)
|
|
|
(64,016)
|
|
Sold hotel revenues (2)
|
|
|
(15,449)
|
|
|
(21,156)
|
|
|
(22,627)
|
|
|
(19,152)
|
|
|
(78,384)
|
|
Non-hotel revenues (3)
|
|
|
(2,097)
|
|
|
(2,044)
|
|
|
(2,076)
|
|
|
(1,605)
|
|
|
(7,822)
|
|
Total Comparable Portfolio revenues (4)
|
|
$
|
247,774
|
|
$
|
299,751
|
|
$
|
285,425
|
|
$
|
266,008
|
|
$
|
1,098,958
|
|
Quarterly Comparable Portfolio revenues as a percentage of total annual revenues
|
|
|
22.5
|
%
|
|
27.3
|
%
|
|
26.0
|
%
|
|
24.2
|
%
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
274,292
|
|
$
|
322,160
|
|
$
|
303,304
|
|
|
|
|
|
|
|
Non-comparable hotel revenues (1)
|
|
|
(18,745)
|
|
|
(13,813)
|
|
|
(10,934)
|
|
|
|
|
|
|
|
Sold hotel revenues (2)
|
|
|
(3,355)
|
|
|
(1,491)
|
|
|
—
|
|
|
|
|
|
|
|
Non-hotel revenues (3)
|
|
|
(121)
|
|
|
(99)
|
|
|
210
|
|
|
|
|
|
|
|
Total Comparable Portfolio revenues (4)
|
|
$
|
252,071
|
|
$
|
306,757
|
|
$
|
292,580
|
|
|
|
|
|
|
|
|
(1)
|
|
Non-comparable hotel revenues include those generated by the Wailea Beach Marriott Resort & Spa due to its extensive repositioning disruption during the fourth quarter of 2015 as well as all of 2016.
|
|
(2)
|
|
Sold hotel revenues include those generated by the Sheraton Cerritos and the Doubletree Guest Suites Times Square, which we sold in May 2016 and December 2015, respectively.
|
|
(3)
|
|
Non-hotel revenues include those generated by BuyEfficient before its sale in September 2015, as well as the amortization of favorable and unfavorable tenant lease contracts recorded in conjunction with our acquisitions of the Boston Park Plaza, the Hilton Garden Inn Downtown/Magnificent Mile, the Hilton New Orleans St. Charles, the Hyatt Regency San Francisco and the Wailea Beach Marriott Resort & Spa.
|
|
(4)
|
|
Total Comparable Portfolio revenues include those generated by the 27 hotel Comparable Portfolio.
|
Inflation
Inflation may affect our expenses, including, without limitation, by increasing such costs as labor, food, taxes, property and casualty insurance and utilities.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosure of contingent assets and liabilities.
We evaluate our estimates on an ongoing basis. We base our estimates on historical experience, information that is currently available to us and on various other assumptions that we believe are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect the most significant judgments and estimates used in the preparation of our consolidated financial statements.
|
·
|
|
Impairment of long-lived assets and goodwill
. We periodically review each property and any related goodwill for possible impairment. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment recognized is measured by the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets. We perform a Level 3 analysis of fair value, using a discounted cash flow analysis to estimate the fair value of our properties taking into account each property’s expected cash flow from operations, holding
|
period and proceeds from the disposition of the property. The factors addressed in determining estimated proceeds from disposition include anticipated operating cash flow in the year of disposition and terminal capitalization rate. Our judgment is required in determining the discount rate applied to estimated cash flows, growth rate of the properties, operating income of the properties, the need for capital expenditures, as well as specific market and economic conditions.
|
We account for goodwill in accordance with the
Intangibles — Goodwill and Other
Topic of the FASB ASC, which states that goodwill has an indefinite useful life that should not be amortized but should be reviewed annually for impairment, or more frequently if events or changes in circumstances indicate that goodwill might be impaired, as well as the
Fair Value Measurements and Disclosures
Topic of the FASB ASC for financial and nonfinancial assets and liabilities, which establishes a framework for measuring fair value and expands disclosures about fair value measurements by establishing a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The review of any potential goodwill impairment requires estimates of fair value for our properties and other assets that have goodwill arising from unallocated acquisition costs. These estimates of fair value are prepared using Level 3 measurements.
|
·
|
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Acquisition related assets and liabilities
. Accounting for the acquisition of a hotel property or other entity as a purchase transaction requires an allocation of the purchase price to the assets acquired and the liabilities assumed in the transaction at their respective estimated fair values. The most difficult estimations of individual fair values are those involving long-lived assets, such as property, equipment, intangible assets and capital lease obligations that are assumed as part of the acquisition of a leasehold interest. When we acquire a hotel property or other entity as a purchase transaction, we use all available information to make these fair value determinations, and engage independent valuation specialists to assist in the fair value determinations of the long-lived assets acquired and the liabilities assumed. Due to the inherent subjectivity in determining the estimated fair value of long-lived assets, we believe that the recording of acquired assets and liabilities is a critical accounting policy.
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Depreciation and amortization expense
. Depreciation expense is based on the estimated useful life of our assets. The life of the assets is based on a number of assumptions, including the cost and timing of capital expenditures to maintain and refurbish our hotels, as well as specific market and economic conditions. Hotel properties and other investments are depreciated using the straight-line method over estimated useful lives primarily ranging from five to 35 years for buildings and improvements and three to 12 years for furniture, fixtures and equipment. While we believe our estimates are reasonable, a change in the estimated lives could affect depreciation expense and net income or the gain or loss on the sale of any of our hotels. We have not changed the estimated useful lives of any of our assets during the periods discussed.
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Item 3.
Quantitative and Qualitative Disclosures About Market Risk
To the extent that we incur debt with variable interest rates, our future income, cash flows and fair values relevant to financial instruments are dependent upon prevailing market interest rates. Market risk refers to the risk of loss from adverse changes in market prices and interest rates. We have no derivative financial instruments held for trading purposes. We use derivative financial instruments, which are intended to manage interest rate risks.
As of September 30, 2016, 77.8% of our debt obligations are fixed in nature, which largely mitigates the effect of changes in interest rates on our cash interest payments. If the market rate of interest on our variable rate debt increases or decreases by 100 basis points, interest expense would increase or decrease, respectively, our future earnings and cash flows by approximately $2.1 million based on the variable rate at September 30, 2016. After adjusting for the noncontrolling interest in the Hilton San Diego Bayfront, this increase or decrease in interest expense would increase or decrease, respectively, our future earnings and cash flows by $1.5 million, based on the variable rates at September 30, 2016.
Item 4.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
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Based upon an evaluation of the effectiveness of disclosure controls and procedures, our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) have concluded that as of the end of the period covered by this Quarterly Report on Form 10-Q our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) were effective to provide reasonable assurance that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified by the rules and forms of the Securities and Exchange Commission and is accumulated and communicated to management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting.
During our fiscal quarter to which this Quarterly Report on Form 10-Q relates, there has not occurred any change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.