XNYS:LHO LaSalle Hotel Properties Quarterly Report 10-Q Filing - 9/30/2012

Effective Date 9/30/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________
FORM 10-Q 
___________________________________
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2012
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             .
Commission file number 1-14045 
___________________________________
LASALLE HOTEL PROPERTIES
(Exact name of registrant as specified in its charter) 
___________________________________
Maryland
 
36-4219376
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification No.)
 
 
 
3 Bethesda Metro Center, Suite 1200
Bethesda, Maryland
 
20814
(Address of principal executive offices)
 
(Zip Code)
(301) 941-1500
(Registrant’s telephone number, including area code) 
___________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Check one:
Large accelerated filer
x
  
Accelerated filer
¨
 
 
 
 
 
Non-accelerated filer
¨  (Do not check if a smaller reporting company)
  
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
Indicate the number of shares outstanding of each of the issuer’s classes of common and preferred shares as of the latest practicable date.
Class
 
Outstanding at October 17, 2012
Common Shares of Beneficial Interest ($0.01 par value)
 
86,260,744

7 ¼% Series G Cumulative Redeemable Preferred Shares ($0.01 par value)
 
6,348,888

7 ½% Series H Cumulative Redeemable Preferred Shares ($0.01 par value)
 
2,750,000




LASALLE HOTEL PROPERTIES
INDEX




PART I.
Financial Information
 
Item 1.
Financial Statements
LASALLE HOTEL PROPERTIES
Consolidated Balance Sheets
(in thousands, except share data)
 
September 30,
2012
 
December 31,
2011
 
(unaudited)
 
 
Assets:
 
 
 
Investment in hotel properties, net (Note 3)
$
2,826,053

 
$
2,712,174

Note receivable (net of unamortized discount of $4,093) (Note 3)
67,907

 
0

Property under development
7,208

 
21,346

Cash and cash equivalents
5,683

 
20,225

Restricted cash reserves (Note 5)
16,716

 
16,969

Hotel receivables (net of allowance for doubtful accounts of $403 and $321, respectively)
40,360

 
23,760

Deferred financing costs, net
8,823

 
6,235

Deferred tax assets (Note 9)
1,469

 
5,250

Prepaid expenses and other assets
34,190

 
27,316

Total assets
$
3,008,409

 
$
2,833,275

Liabilities:
 
 
 
Borrowings under credit facilities (Note 4)
$
209,586

 
$
265,000

Term loans (Note 4)
377,500

 
0

Bonds payable (Note 4)
42,500

 
42,500

Mortgage loans (including unamortized premium of $138 and $195, respectively) (Note 4)
580,548

 
643,897

Accounts payable and accrued expenses
99,424

 
78,407

Advance deposits
15,903

 
12,085

Accrued interest
3,869

 
3,492

Distributions payable
21,478

 
16,651

Total liabilities
1,350,808

 
1,062,032

Commitments and contingencies (Note 5)

 

Equity:
 
 
 
Shareholders’ Equity:
 
 
 
Preferred shares, $0.01 par value (liquidation preference of $227,472 and $394,222, respectively), 40,000,000 shares authorized; 9,098,888 and 15,768,888 shares issued and outstanding, respectively (Note 6)
91

 
158

Common shares of beneficial interest, $0.01 par value, 200,000,000 shares authorized; 86,280,358 shares issued and 86,264,876 outstanding, and 85,176,506 shares issued and 83,786,932 shares outstanding, respectively (Note 6)
863

 
851

Treasury shares, at cost (Note 6)
(451
)
 
(24,543
)
Additional paid-in capital, net of offering costs of $62,707 and $66,146, respectively
1,908,755

 
2,029,145

Accumulated other comprehensive loss (Note 4)
(8,505
)
 
0

Distributions in excess of retained earnings
(248,857
)
 
(239,998
)
Total shareholders’ equity
1,651,896

 
1,765,613

Noncontrolling Interests:
 
 
 
Noncontrolling interests in consolidated entity
9

 
17

Noncontrolling interests of common units in Operating Partnership (Notes 2 and 6)
5,696

 
5,613

Total noncontrolling interests
5,705

 
5,630

Total equity
1,657,601

 
1,771,243

Total liabilities and equity
$
3,008,409

 
$
2,833,275

The accompanying notes are an integral part of these consolidated financial statements.

1


LASALLE HOTEL PROPERTIES
Consolidated Statements of Operations and Comprehensive Income
(in thousands, except share data)
(unaudited)

 
For the three months ended
 
For the nine months ended
 
September 30,
 
September 30,
 
2012
 
2011
 
2012
 
2011
Revenues:
 
 
 
 
 
 
 
Hotel operating revenues:
 
 
 
 
 
 
 
Room
$
167,437

 
$
133,152

 
$
449,315

 
$
356,070

Food and beverage
52,896

 
50,554

 
156,298

 
142,999

Other operating department
15,410

 
14,256

 
42,105

 
37,374

Total hotel operating revenues
235,743

 
197,962

 
647,718

 
536,443

Other income
1,254

 
1,166

 
3,693

 
3,585

Total revenues
236,997

 
199,128

 
651,411

 
540,028

Expenses:
 
 
 
 
 
 
 
Hotel operating expenses:
 
 
 
 
 
 
 
Room
39,662

 
30,920

 
112,203

 
86,893

Food and beverage
37,751

 
34,669

 
111,488

 
99,249

Other direct
5,659

 
5,895

 
15,843

 
15,737

Other indirect (Note 8)
54,532

 
48,411

 
157,725

 
136,465

Total hotel operating expenses
137,604

 
119,895

 
397,259

 
338,344

Depreciation and amortization
31,480

 
27,765

 
92,911

 
83,572

Real estate taxes, personal property taxes and insurance
11,254

 
9,199

 
32,930

 
26,470

Ground rent (Note 5)
2,627

 
2,485

 
6,613

 
5,861

General and administrative
5,172

 
4,185

 
14,635

 
12,919

Acquisition transaction costs (Note 3)
156

 
153

 
4,057

 
574

Other expenses
922

 
668

 
2,391

 
1,749

Total operating expenses
189,215

 
164,350

 
550,796

 
469,489

Operating income
47,782

 
34,778

 
100,615

 
70,539

Interest income
2,060

 
8

 
2,086

 
22

Interest expense
(14,110
)
 
(9,856
)
 
(38,391
)
 
(29,566
)
Income before income tax expense and discontinued operations
35,732

 
24,930

 
64,310

 
40,995

Income tax expense (Note 9)
(4,943
)
 
(3,125
)
 
(6,920
)
 
(5,670
)
Income from continuing operations
30,789

 
21,805

 
57,390

 
35,325

Discontinued operations (Note 3):
 
 
 
 
 
 
 
Income from operations of property disposed of
0

 
760

 
0

 
441

Income tax expense (Note 9)
0

 
(244
)
 
0

 
(112
)
Net income from discontinued operations
0

 
516

 
0

 
329

Net income
30,789

 
22,321

 
57,390

 
35,654

Noncontrolling interests:
 
 
 
 
 
 
 
Redeemable noncontrolling interest in loss of consolidated entity
0

 
0

 
0

 
2

Noncontrolling interests of common units in Operating Partnership (Notes 2 and 6)
(116
)
 
0

 
(224
)
 
0

Net (income) loss attributable to noncontrolling interests
(116
)
 
0

 
(224
)
 
2

Net income attributable to the Company
30,673

 
22,321

 
57,166

 
35,656

Distributions to preferred shareholders
(4,166
)
 
(7,402
)
 
(17,567
)
 
(22,550
)
Issuance costs of redeemed preferred shares (Note 6)
0

 
0

 
(4,417
)
 
(731
)
Net income attributable to common shareholders
$
26,507

 
$
14,919

 
$
35,182

 
$
12,375


2



LASALLE HOTEL PROPERTIES
Consolidated Statements of Operations and Comprehensive Income - Continued
(in thousands, except share data)
(unaudited)

 
For the three months ended
 
For the nine months ended
 
September 30,
 
September 30,
 
2012
 
2011
 
2012
 
2011
Earnings per Common Share - Basic:
 
 
 
 
 
 
 
Net income attributable to common shareholders before discontinued operations and excluding amounts attributable to unvested restricted shares
$
0.31

 
$
0.17

 
$
0.41

 
$
0.15

Discontinued operations
0.00

 
0.01

 
0.00

 
0.00

Net income attributable to common shareholders excluding amounts attributable to unvested restricted shares
$
0.31

 
$
0.18

 
$
0.41

 
$
0.15

Earnings per Common Share - Diluted:
 
 
 
 
 
 
 
Net income attributable to common shareholders before discontinued operations and excluding amounts attributable to unvested restricted shares
$
0.31

 
$
0.17

 
$
0.41

 
$
0.15

Discontinued operations
0.00

 
0.01

 
0.00

 
0.00

Net income attributable to common shareholders excluding amounts attributable to unvested restricted shares
$
0.31

 
$
0.18

 
$
0.41

 
$
0.15

Weighted average number of common shares outstanding:
 
 
 
 
 
 
 
Basic
85,876,584

 
84,640,196

 
85,278,331

 
80,392,686

Diluted
86,056,957

 
84,752,112

 
85,449,543

 
80,559,299

 
 
 
 
 
 
 
 
Comprehensive Income:
 
 
 
 
 
 
 
Net income
$
30,789

 
$
22,321

 
$
57,390

 
$
35,654

Other comprehensive loss:
 
 
 
 
 
 
 
Unrealized loss on interest rate derivative instruments (Note 4)
(3,839
)
 
0

 
(8,534
)
 
0

Comprehensive income
26,950

 
22,321

 
48,856

 
35,654

Noncontrolling interests:
 
 
 
 
 
 
 
Redeemable noncontrolling interest in loss of consolidated entity
0

 
0

 
0

 
2

Noncontrolling interests of common units in Operating Partnership (Notes 2 and 6)
(103
)
 
0

 
(195
)
 
0

Comprehensive (income) loss attributable to noncontrolling interests
(103
)
 
0

 
(195
)
 
2

Comprehensive income attributable to the Company
$
26,847

 
$
22,321

 
$
48,661

 
$
35,656

The accompanying notes are an integral part of these consolidated financial statements.

3


LASALLE HOTEL PROPERTIES
Consolidated Statements of Equity
(in thousands, except per share/unit data)
(unaudited)
 
Preferred
Shares
 
Common
Shares of
Beneficial
Interest
 
Treasury
Shares
 
Additional
Paid-In
Capital
 
Accumulated Other Comprehensive Loss
 
Distributions
in Excess of
Retained
Earnings
 
Total
Shareholders'
Equity
 
Noncontrolling
Interest in
Consolidated
Entity
 
Noncontrolling Interests of Common Units in Operating Partnership
 
Total Noncontrolling Interests
 
Total Equity
Balance, December 31, 2010
$
141

 
$
731

 
$
(28
)
 
$
1,659,258

 
$
0

 
$
(216,635
)
 
$
1,443,467

 
$
33

 
$
0

 
$
33

 
$
1,443,500

Issuance of shares, net of offering costs
28

 
120

 
258

 
393,601

 
0

 
0

 
394,007

 
0

 
0

 
0

 
394,007

Redemption of preferred shares
(11
)
 
0

 
0

 
(26,758
)
 
0

 
(731
)
 
(27,500
)
 
0

 
0

 
0

 
(27,500
)
Repurchase of common shares into treasury
0

 
0

 
(21,588
)
 
0

 
0

 
0

 
(21,588
)
 
0

 
0

 
0

 
(21,588
)
Options exercised
0

 
0

 
0

 
83

 
0

 
0

 
83

 
0

 
0

 
0

 
83

Deferred compensation, net
0

 
0

 
2,828

 
291

 
0

 
0

 
3,119

 
0

 
0

 
0

 
3,119

Redeemable noncontrolling interest
0

 
0

 
0

 
0

 
0

 
2

 
2

 
0

 
0

 
0

 
2

Distributions on issued long-term performance-based share awards
0

 
0

 
0

 
0

 
0

 
(38
)
 
(38
)
 
0

 
0

 
0

 
(38
)
Distributions on common shares ($0.33 per share)
0

 
0

 
0

 
0

 
0

 
(27,000
)
 
(27,000
)
 
0

 
0

 
0

 
(27,000
)
Distributions on preferred shares
0

 
0

 
0

 
0

 
0

 
(22,550
)
 
(22,550
)
 
(8
)
 
0

 
(8
)
 
(22,558
)
Net income
0

 
0

 
0

 
0

 
0

 
35,654

 
35,654

 
0

 
0

 
0

 
35,654

Balance, September 30, 2011
$
158

 
$
851

 
$
(18,530
)
 
$
2,026,475

 
$
0

 
$
(231,298
)
 
$
1,777,656

 
$
25

 
$
0

 
$
25

 
$
1,777,681

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2011
$
158

 
$
851

 
$
(24,543
)
 
$
2,029,145

 
$
0

 
$
(239,998
)
 
$
1,765,613

 
$
17

 
$
5,613

 
$
5,630

 
$
1,771,243

Issuance of shares, net of offering costs
0

 
12

 
22,847

 
41,444

 
0

 
0

 
64,303

 
0

 
0

 
0

 
64,303

Redemption of preferred shares
(67
)
 
0

 
0

 
(162,266
)
 
0

 
(4,417
)
 
(166,750
)
 
0

 
0

 
0

 
(166,750
)
Repurchase of common shares into treasury
0

 
0

 
(1,210
)
 
0

 
0

 
0

 
(1,210
)
 
0

 
0

 
0

 
(1,210
)
Options exercised
0

 
0

 
0

 
74

 
0

 
0

 
74

 
0

 
0

 
0

 
74

Adjustments to issuance of units
0

 
0

 
0

 
0

 
0

 
0

 
0

 
0

 
(746
)
 
(746
)
 
(746
)
Deferred compensation, net
0

 
0

 
2,455

 
1,143

 
0

 
0

 
3,598

 
0

 
0

 
0

 
3,598

Adjustments to noncontrolling interests
0

 
0

 
0

 
(785
)
 
0

 
0

 
(785
)
 
0

 
785

 
785

 
0

Distributions on issued long-term performance-based share awards
0

 
0

 
0

 
0

 
0

 
(56
)
 
(56
)
 
0

 
0

 
0

 
(56
)
Distributions on common shares/units ($0.51 per share/unit)
0

 
0

 
0

 
0

 
0

 
(43,985
)
 
(43,985
)
 
0

 
(151
)
 
(151
)
 
(44,136
)
Distributions on preferred shares
0

 
0

 
0

 
0

 
0

 
(17,567
)
 
(17,567
)
 
(8
)
 
0

 
(8
)
 
(17,575
)
Net income
0

 
0

 
0

 
0

 
0

 
57,166

 
57,166

 
0

 
224

 
224

 
57,390

Other comprehensive loss:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized loss on interest rate derivative instruments
0

 
0

 
0

 
0

 
(8,505
)
 
0

 
(8,505
)
 
0

 
(29
)
 
(29
)
 
(8,534
)
Balance, September 30, 2012
$
91

 
$
863


$
(451
)

$
1,908,755


$
(8,505
)

$
(248,857
)

$
1,651,896


$
9


$
5,696


$
5,705


$
1,657,601

The accompanying notes are an integral part of these consolidated financial statements.

4


LASALLE HOTEL PROPERTIES
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
 
For the nine months ended
 
September 30,
 
2012
 
2011
Cash flows from operating activities:
 
 
 
Net income
$
57,390

 
$
35,654

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
92,911

 
83,572

Amortization of deferred financing costs, mortgage premium and note receivable discount
806

 
515

Gain on sale of property
0

 
(760
)
Deferred compensation
3,598

 
3,119

Allowance for doubtful accounts
82

 
(801
)
Changes in assets and liabilities:
 
 
 
Restricted cash reserves
(877
)
 
1,289

Hotel receivables
(16,418
)
 
(6,059
)
Deferred tax assets
3,781

 
4,335

Prepaid expenses and other assets
(6,938
)
 
(2,392
)
Accounts payable and accrued expenses
14,225

 
4,473

Advance deposits
3,608

 
4,928

Accrued interest
377

 
(147
)
Net cash provided by operating activities
152,545

 
127,726

Cash flows from investing activities:
 
 
 
Improvements and additions to properties
(51,425
)
 
(34,387
)
Acquisition of properties
(142,944
)
 
(102,335
)
Purchase of office furniture and equipment
(63
)
 
(86
)
Acquisition of note receivable
(67,416
)
 
0

Restricted cash reserves
1,130

 
(1,805
)
Proceeds from sale of property
0

 
19,727

Net cash used in investing activities
(260,718
)
 
(118,886
)
Cash flows from financing activities:
 
 
 
Borrowings under credit facilities
386,920

 
164,183

Repayments under credit facilities
(442,334
)
 
(284,376
)
Borrowings on term loans
377,500

 
0

Repayments of mortgage loans
(63,292
)
 
(1,191
)
Payment of deferred financing costs
(4,202
)
 
0

Purchase of treasury shares
(1,210
)
 
(21,588
)
Proceeds from exercise of stock options
74

 
83

Proceeds from issuance of preferred shares
0

 
68,750

Payment of preferred offering costs
0

 
(2,380
)
Proceeds from issuance of common shares
64,786

 
331,030

Payment of common offering costs
(977
)
 
(3,559
)
Distributions on issued long-term performance-based share awards
(56
)
 
(38
)
Redemption of preferred shares
(166,750
)
 
(27,500
)
Distributions on preferred shares
(20,811
)
 
(21,845
)
Distributions on common shares/units
(36,017
)
 
(25,746
)
Net cash provided by financing activities
93,631

 
175,823

Net change in cash and cash equivalents
(14,542
)
 
184,663

Cash and cash equivalents, beginning of period
20,225

 
13,000

Cash and cash equivalents, end of period
$
5,683

 
$
197,663

The accompanying notes are an integral part of these consolidated financial statements.

5


LASALLE HOTEL PROPERTIES
Notes to Consolidated Financial Statements
(in thousands, except share/unit data)
(unaudited)
1.
Organization
LaSalle Hotel Properties (the “Company”), a Maryland real estate investment trust (“REIT”) organized on January 15, 1998, primarily buys, owns, redevelops and leases upscale and luxury full-service hotels located in convention, resort and major urban business markets. The Company is a self-administered and self-managed REIT as defined in the Internal Revenue Code of 1986, as amended (the “Code”). As a REIT, the Company is generally not subject to federal corporate income tax on that portion of its net income that is currently distributed to shareholders. The income of LaSalle Hotel Lessee, Inc. (“LHL”), the Company’s wholly owned taxable-REIT subsidiary, is subject to taxation at normal corporate rates.
As of September 30, 2012, the Company owned interests in 38 hotels with approximately 10,200 guest rooms located in nine states and the District of Columbia. Each hotel is leased to LHL (see Note 8) or a wholly owned subsidiary of LHL under a participating lease that provides for rental payments equal to the greater of (i) a base rent or (ii) a participating rent based on hotel revenues. The LHL leases expire between December 2012 and December 2015. Lease revenue from LHL and its wholly owned subsidiaries is eliminated in consolidation. A third-party or non-affiliated hotel operator manages each hotel, which is also subject to a hotel management agreement.
Substantially all of the Company’s assets are held by, and all of its operations are conducted through, LaSalle Hotel Operating Partnership, L.P. (the “Operating Partnership”). The Company is the sole general partner of the Operating Partnership. The Company owned, through a combination of direct and indirect interests, 99.7% of the common units in the Operating Partnership at September 30, 2012. The remaining 0.3% is held by limited partners who held 296,300 common units in the Operating Partnership at September 30, 2012. See Note 6 for additional disclosures on common units in the Operating Partnership.
2.
Summary of Significant Accounting Policies
The accompanying unaudited interim consolidated financial statements and related notes have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and in conformity with the rules and regulations of the Securities and Exchange Commission (“SEC”) applicable to interim financial information. As such, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted in accordance with the rules and regulations of the SEC. These unaudited consolidated financial statements, in the opinion of management, include all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the consolidated balance sheets, consolidated statements of operations and comprehensive income, consolidated statements of equity and consolidated statements of cash flows for the periods presented. Operating results for the three and nine months ended September 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012 due to seasonal and other factors. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.
Basis of Presentation
The consolidated financial statements include the accounts of the Company, the Operating Partnership, LHL and their subsidiaries in which they have a controlling interest, including joint ventures. All significant intercompany balances and transactions have been eliminated.
Use of Estimates
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and the amounts of contingent assets and liabilities at the balance sheet date and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Substantially all of the Company’s revenues and expenses are generated by the operations of the individual hotels. The Company records revenues and expenses that are estimated by the hotel operators to produce quarterly financial statements because the management contracts do not require the hotel operators to submit actual results within a time frame that permits the Company to use actual results when preparing its Quarterly Reports on Form 10-Q for filing by the deadline prescribed by the SEC. Generally, the Company records actual revenue and expense amounts for the first two months of each quarter and revenue and expense estimates for the last month of each quarter. Each quarter, the Company reviews the estimated revenue and expense amounts provided by the hotel operators for reasonableness based upon historical results for prior periods and internal Company forecasts.

6


The Company records any differences between recorded estimated amounts and actual amounts in the following quarter; historically, these differences have not been material. The Company believes the quarterly revenues and expenses, recorded on the Company’s consolidated statements of operations and comprehensive income based on an aggregate estimate, are fairly stated.
Share-Based Compensation
From time to time, the Company awards nonvested shares under the 2009 Equity Incentive Plan (“2009 Plan”), which has approximately six years remaining, as compensation to officers, employees and non-employee trustees (see Note 7). The shares issued to officers and employees vest over three to nine years. The Company recognizes compensation expense for nonvested shares on a straight-line basis over the vesting period based upon the fair market value of the shares on the date of issuance, adjusted for forfeitures.
Noncontrolling Interests
Noncontrolling interest is the portion of equity (net assets) in a subsidiary not attributable, directly or indirectly, to a parent. The ownership interests in the subsidiary that are held by owners other than the parent are noncontrolling interests. Under this guidance, such noncontrolling interests are reported on the consolidated balance sheets within equity, separately from the Company’s equity. On the consolidated statements of operations and comprehensive income, revenues, expenses and net income or loss from less-than-wholly-owned subsidiaries are reported at the consolidated amounts, including both the amounts attributable to the Company and noncontrolling interests. Consolidated statements of equity include beginning balances, activity for the period and ending balances for shareholders’ equity, noncontrolling interests and total equity.
However, the Company’s securities that are redeemable for cash or other assets at the option of the holder, not solely within the control of the issuer, must be classified outside of permanent equity. The Company makes this determination based on terms in applicable agreements, specifically in relation to redemption provisions. Additionally, with respect to noncontrolling interests for which the Company has a choice to settle the contract by delivery of its own shares, the Company evaluates whether the Company controls the actions or events necessary to issue the maximum number of shares that could be required to be delivered under share settlement of the contract.
As of September 30, 2012, the consolidated results of the Company include the following ownership interests held by owners other than the Company: (i) the outside preferred ownership interests in a subsidiary and (ii) the common units in the Operating Partnership held by third parties.
Fair Value Measurements
In evaluating fair value, GAAP outlines a valuation framework and creates a fair value hierarchy that distinguishes between market assumptions based on market data (observable inputs) and a reporting entity’s own assumptions about market data (unobservable inputs). The hierarchy ranks the quality and reliability of inputs used to determine fair value, which are then classified and disclosed in one of the three categories. The three levels are as follows:
Level 1 – Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2 – Inputs include quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, and model-derived valuations whose inputs are observable.
Level 3 – Model-derived valuations with unobservable inputs.
As required by the guidance, the Company classifies assets and liabilities based on the lowest level of input that is significant to the fair value measurement.
Derivatives and Hedging Activities
In the normal course of business, the Company is exposed to the effects of interest rate changes. The Company limits the risks associated with interest rate changes by following established risk management policies and procedures which may include the use of derivative instruments. The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management objectives and strategies for undertaking various hedge transactions. The Company assesses, both at the inception of the hedge and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in the cash flows of the hedged items. Instruments that meet these hedging criteria are formally designated as hedges at the inception of the derivative contract and are recorded on the balance sheet at fair value, with offsetting changes recorded to other comprehensive income (loss). Ineffective portions of changes in the fair value of a cash flow hedge are recognized as interest expense. The Company incorporates credit valuation adjustments to reflect both its own nonperformance

7


risk and the respective counterparty's nonperformance risk in the fair value measurements. The Company does not use derivatives for trading or speculative purposes and currently does not have any derivatives that are not designated as hedging instruments under the accounting requirements for derivatives and hedging. The Company entered into derivative instruments during the second and third quarters of 2012 (see Note 4).
Notes Receivable
Notes receivable are carried at cost, net of any premiums or discounts which are recognized as an adjustment of yield over the remaining life of the note using the effective interest method. Interest income is recorded on the accrual basis consistent with the terms of the notes receivable. A note is deemed to be impaired when, based on current information and events, it is probable that the Company will be unable to collect all principal and interest contractually due. Interest previously accrued but not collected becomes part of the Company's recorded investment in the note receivable for purposes of assessing impairment. The Company applies interest payments received on non-accrual notes receivable first to accrued interest and then as interest income. Notes receivable return to accrual status when contractually current and the collection of future payments is reasonably assured. The Company has no notes receivable that are impaired or in non-accrual status. The Company acquired a note receivable during the third quarter of 2012 (see Note 3).
3.
Investment in Hotel Properties
Investment in hotel properties is net of accumulated depreciation of $800,919 and $708,436 as of September 30, 2012 and December 31, 2011, respectively.
On March 8, 2012, the Company acquired a 100% fee simple interest in the Hotel Palomar, Washington, DC, a 335-room urban, full-service hotel located in Washington, DC, for $143,839. The sources of the funding for the acquisition were proceeds from prior issuances of common shares of beneficial interest under the 2011 Agreement (as defined below in Note 6) and borrowings under the Company’s senior unsecured credit facility. The property is leased to LHL and managed by Kimpton Hotel & Restaurant Group, L.L.C. The Company recorded the acquisition at fair value using model-derived valuations, with the purchase price allocated to investment in hotel properties and hotel working capital assets and liabilities. In connection with this acquisition, the Company incurred acquisition transaction costs of zero and $3,594 that were expensed as incurred during the three and nine months ended September 30, 2012, respectively, which expenses are included in the accompanying consolidated statements of operations and comprehensive income.
During the first quarter of 2012, the Company finalized its allocation of the purchase price of Park Central Hotel, which was acquired on December 29, 2011, upon receiving certain valuation-related information. The final determination resulted in a decrease of $746 to investment in hotel properties and noncontrolling interests of common units in Operating Partnership. In connection with this acquisition, the Company incurred acquisition transaction costs of $65 and $304 that were expensed as incurred during the three and nine months ended September 30, 2011, respectively, which expenses are included in the accompanying consolidated statements of operations and comprehensive income.
In connection with the acquisition of Viceroy Santa Monica on March 16, 2011, the Company incurred acquisition transaction costs of zero and $182 that were expensed as incurred during the three and nine months ended September 30, 2011, respectively, and zero and $100 during the three and nine months ended September 30, 2012, respectively, related to the finalization of acquisition accounting, which expenses are included in the accompanying consolidated statements of operations and comprehensive income.
In connection with the acquisition of Villa Florence on October 5, 2011, the Company incurred acquisition transaction costs of $88 that were expensed as incurred during the three and nine months ended September 30, 2011, which expenses are included in the accompanying consolidated statements of operations and comprehensive income.
Note Receivable
On July 13, 2012, the Company acquired a performing mezzanine loan secured by pledges of ownership interests of the entities that own the underlying hotel properties, Shutters on the Beach and Casa Del Mar, in Santa Monica, CA. The Company acquired the note at a discount of $4,584 for a total purchase price of $67,416 before closing costs. The loan bears interest at 9.76% with interest-only payments to be received monthly through the maturity date of May 11, 2014. The mezzanine loan is subordinate to a $310,000 first mortgage loan secured by the properties that also matures on May 11, 2014. In connection with the acquisition of the mezzanine loan, the Company incurred acquisition transaction costs of $156 and $363 during the three and nine months ended September 30, 2012, respectively, which expenses are included in the accompanying consolidated statements of operations and comprehensive income. The carrying amount of the mezzanine loan approximates fair value.

8


Condensed Pro Forma Financial Information
The results of operations of acquired properties are included in the consolidated statements of operations and comprehensive income beginning on their respective acquisition dates. The following unaudited condensed pro forma financial information is presented as if the following 2011 acquisitions had been consummated prior to January 1, 2010, the beginning of the reporting period prior to acquisition. In addition, for purposes of the unaudited condensed pro forma financial information only, the January 21, 2011 through February 16, 2011 issuance of 2,619,811 common shares of beneficial interest, the March 24, 2011 through April 11, 2011 issuance of 1,436,881 common shares of beneficial interest, the April 29, 2011 issuance of 7,896,612 common shares of beneficial interest and the July 7, 2011 issuance of 8,016 common shares of beneficial interest are presented as if the issuances had occurred as of January 1, 2011. No adjustments have been made to the unaudited condensed pro forma financial information presented below for the March 8, 2012 acquisition of Hotel Palomar, Washington, DC, as the acquisition was not significant to the Company’s consolidated financial statements, or the 2011 preferred share issuance and redemption, the 2011 common share repurchases or the 2012 common share issuances, since those transactions have no relation to the 2011 acquisitions. The unaudited condensed pro forma financial information is for comparative purposes only and not necessarily indicative of what actual results of operations of the Company would have been had the acquisitions been consummated on January 1, 2010, nor does it purport to represent the results of operations for future periods. The unaudited condensed pro forma financial information has not been adjusted for property sales.
Adjustments have been made to the unaudited pro forma financial information for the following acquisitions:
Property                                                                          
 
Acquisition Date
Viceroy Santa Monica
 
March 16, 2011
Villa Florence
 
October 5, 2011
Park Central Hotel
 
December 29, 2011
The unaudited condensed pro forma financial information for the three and nine months ended September 30, 2011 is as follows:
 
For the three months ended
 
For the nine months ended
 
September 30, 2011
 
September 30, 2011
 
(unaudited)
 
(unaudited)
Total revenues
$
223,790

 
$
610,703

Net income
$
23,737

 
$
37,521

Net income attributable to common shareholders
$
16,335

 
$
14,242

Earnings per common share - basic
$
0.19

 
$
0.17

Earnings per common share - diluted
$
0.19

 
$
0.17

Weighted average number of common shares outstanding:
 
 
 
Basic
84,652,730

 
84,687,289

Diluted
84,764,646

 
84,853,902

Discontinued Operations
On January 12, 2011, the Company sold the Sheraton Bloomington Hotel Minneapolis South for $20,000. Since the property was under contract for sale during the fourth quarter of 2010, it was considered held for sale as of December 31, 2010 and the related impairment loss of $3,223 was included in fourth quarter 2010 results. Accordingly, the operating results of the property from the Company’s period of ownership are included in discontinued operations for the nine months ended September 30, 2011.
On September 1, 2010, the Company sold the Seaview Resort, but retained responsibility for the repair of its roof and recorded a liability for related costs, the majority of which were covered by insurance proceeds. During the third quarter of 2011, the Company entered into a settlement agreement with the purchaser of the Seaview Resort, which released the Company of any future responsibility for the repair of the roof, and recognized a gain of $760 representing the unpaid liability balance after settlement.

9


The following is a summary of the results of the properties classified in discontinued operations:
 
For the three months ended
 
For the nine months ended
 
September 30, 2011
 
September 30, 2011
Operating revenues
$
0

 
$
495

Operating expenses
 
0

 
814

Loss from operations before gain
 
0

 
(319
)
Gain on sale
 
760

 
760

Income from operations
 
760

 
441

Income tax expense
 
(244
)
 
(112
)
Net income from discontinued operations
$
516

 
$
329

4.
Long-Term Debt
Debt Summary
Debt as of September 30, 2012 and December 31, 2011 consisted of the following:
 
 
 
 
 
 
Balance Outstanding as of
Debt                                                                                  
 
Interest
Rate
 
Maturity
Date
 
September 30,
2012
 
December 31,
2011
Credit facilities
 
 
 
 
 
 
 
 
Senior unsecured credit facility
 
Floating (a)
 
January 2016 (a)
 
$
201,000

 
$
265,000

LHL unsecured credit facility
 
Floating (b)
 
January 2016 (b)
 
8,586

 
0

Total borrowings under credit facilities
 
 
 
 
 
209,586

 
265,000

Term loans
 
 
 
 
 
 
 
 
First Term Loan
 
Floating (c)
 
May 2019
 
177,500

 
0

Second Term Loan
 
Floating (c)
 
August 2017
 
200,000

 
0
Total term loans
 
 
 
 
 
377,500

 
0
Massport Bonds
 
 
 
 
 
 
 
 
Harborside Hyatt Conference
 
 
 
 
 
 
 
 
Center & Hotel (taxable)
 
Floating (d)
 
March 2018
 
5,400

 
5,400

Harborside Hyatt Conference
 
 
 
 
 
 
 
 
Center & Hotel (tax exempt)
 
Floating (d)
 
March 2018
 
37,100

 
37,100

Total bonds payable
 
 
 
 
 
42,500

 
42,500

Mortgage loans
 
 
 
 
 
 
 
 
Hilton San Diego Gaslamp Quarter
 
5.35%
 
July 2012 (e)
 
0

 
59,600

Hotel Solamar
 
5.49%
 
December 2013
 
60,334

 
60,900

Hotel Deca
 
6.28%
 
August 2014
 
9,183

 
9,392

Westin Copley Place
 
5.28%
 
September 2015
 
210,000

 
210,000

Westin Michigan Avenue
 
5.75%
 
April 2016
 
137,625

 
138,902

Indianapolis Marriott Downtown
 
5.99%
 
July 2016
 
100,452

 
101,319

Hotel Roger Williams
 
6.31%
 
August 2016
 
62,816

 
63,589

Mortgage loans at stated value
 
 
 
 
 
580,410

 
643,702

Unamortized loan premium (f)
 
 
 
 
 
138

 
195

Total mortgage loans
 
 
 
 
 
580,548

 
643,897

Total debt
 
 
 
 
 
$
1,210,134

 
$
951,397


(a) 
Borrowings bear interest at floating rates equal to, at the Company’s option, either (i) LIBOR plus an applicable margin, or (ii) an Adjusted Base Rate plus an applicable margin. As of September 30, 2012, the rates, including the applicable margin, for the Company’s outstanding LIBOR borrowings of $157,000 and $44,000 were 2.22% and 2.23%, respectively. As of December 31, 2011, the rate, including the applicable margin, for the Company's outstanding LIBOR borrowing of $265,000 was 2.30%. The Company has the option, pursuant to certain terms and conditions, to extend the maturity date to January 2017.

10


(b) 
Borrowings bear interest at floating rates equal to, at LHL’s option, either (i) LIBOR plus an applicable margin, or (ii) an Adjusted Base Rate plus an applicable margin. As of September 30, 2012, the rate, including the applicable margin, for LHL's outstanding LIBOR borrowings of $8,586 was 2.21%. There were no borrowings outstanding at December 31, 2011. LHL has the option, subject to certain terms and conditions, to extend the maturity date to January 2017.
(c) 
Term loans bear interest at floating rates equal to LIBOR plus an applicable margin. The Company entered into separate interest rate swap agreements for the full seven-year term of the First Term Loan and the full five-year term, including a one-year extension subject to certain conditions, of the Second Term Loan, resulting in fixed all-in interest rates of 3.87% and 2.68%, respectively, at the Company's current leverage ratio (as defined in the agreements).
(d) 
The Massport Bonds are secured by letters of credit issued by the Royal Bank of Scotland that expire in February 2014, pursuant to an amendment to the agreement governing the letters of credit. The Royal Bank of Scotland letters of credit also have three one-year extension options and are secured by the Harborside Hyatt Conference Center & Hotel. The bonds bear interest based on weekly floating rates. The interest rates as of September 30, 2012 were 0.61% and 0.20% for the $5,400 and $37,100 bonds, respectively. The interest rates as of December 31, 2011 were 0.75% and 0.12% for the $5,400 and $37,100 bonds, respectively. The Company also incurs an annual letter of credit fee, which effective February 14, 2012 changed from a flat 2.00% to a variable rate based on an applicable margin as defined in the Company's senior unsecured credit agreement.
(e) 
The Company repaid the mortgage loan on March 30, 2012 through borrowings on its senior unsecured credit facility.
(f) 
Mortgage debt includes an unamortized loan premium on the mortgage loan on Hotel Deca of $138 as of September 30, 2012 and $195 as of December 31, 2011.
A summary of the Company’s interest expense and weighted average interest rates for variable rate debt for the three and nine months ended September 30, 2012 and 2011 is as follows:
 
 
For the three months ended
 
 
For the nine months ended
 
 
September 30,
 
 
September 30,
 
 
2012
 
 
2011
 
 
2012
 
 
2011
Interest Expense:
 
 
 
 
 
 
 
 
 
 
 
Interest incurred
$
13,611
 
$
9,781
 
$
37,296
 
$
29,251
Amortization of deferred financing costs
 
526
 
 
170
 
 
1,354
 
 
570
Capitalized interest
 
(27)
 
 
(95)
 
 
(259)
 
 
(255)
Interest expense
$
14,110
 
$
9,856
 
$
38,391
 
$
29,566
 
 
 
 
 
 
 
 
 
 
 
 
Weighted Average Interest Rates for Variable Rate Debt:
 
 
 
 
 
 
 
 
 
 
 
Senior unsecured credit facility
 
2.3
%
 
 
N/A

 
 
2.2
%
 
 
1.1
%
LHL unsecured credit facility
 
2.2
%
 
 
N/A

 
 
2.1
%
 
 
1.1
%
Massport Bonds
 
0.2
%
 
 
0.2
%
 
 
0.3
%
 
 
0.2
%
The Company estimates the fair value of its fixed rate debt and the credit spreads over variable market rates on its variable rate debt by discounting the future cash flows of each instrument at estimated market rates or credit spreads consistent with the maturity of the debt obligation with similar credit policies, which is classified within level 2 of the fair value hierarchy (see Note 2). Rates and credit spreads take into consideration general market conditions and maturity.
The carrying value and estimated fair value of the Company’s debt as of September 30, 2012 and December 31, 2011 were as follows:
 
September 30,
 
December 31,
 
2012
 
2011
Carrying value
$
1,210,134

 
$
951,397

Estimated fair value
$
1,228,640

 
$
954,299

See Note 3 for consideration of the fair value of the Company's note receivable. The carrying amounts of the Company’s other financial instruments approximate fair value because of the relatively short maturities of these instruments.
As of September 30, 2012, the Company is in compliance with all debt covenants, current on all loan payments and not otherwise in default under the credit facilities, term loan, bonds or mortgage loans. Depending on operating results and lender requirements, one of the mortgaged properties may be subject to a cash trap (see "Mortgage Loans" below) as a result of the impact

11


of a recent renovation on hotel operations. This cash trap will not have a material impact on the cash flow or the operations of the Company.
Credit Facilities
On December 14, 2011, the Company entered into a new $750,000 senior unsecured credit facility with a syndicate of banks that replaced the Company's $450,000 credit facility that was scheduled to mature on April 13, 2012. The new credit facility matures on January 30, 2016, subject to a one-year extension that the Company may exercise at its option, pursuant to certain terms and conditions, including payment of an extension fee. The new credit facility includes an accordion feature which, subject to certain conditions, entitles the Company to request additional lender commitments, allowing for total commitments up to $1,000,000. Borrowings under the credit facility bear interest at floating rates equal to, at the Company’s option, either (i) LIBOR plus an applicable margin, or (ii) an Adjusted Base Rate plus an applicable margin. Additionally, the Company is required to pay a variable unused commitment fee of 0.30% or 0.40% of the unused portion of the credit facility, depending on the average daily unused portion of the credit facility.
LHL has a $25,000 unsecured revolving credit facility to be used for working capital and general lessee corporate purposes. On December 14, 2011, LHL refinanced its credit facility that was scheduled to mature on April 13, 2012, extending the maturity date to January 30, 2016, subject to a one-year extension that LHL may exercise at its option, pursuant to certain terms and conditions, including payment of an extension fee. Borrowings under the LHL credit facility bear interest at floating rates equal to, at LHL’s option, either (i) LIBOR plus an applicable margin, or (ii) an Adjusted Base Rate plus an applicable margin. Additionally, LHL is required to pay a variable unused commitment fee of 0.30% or 0.40% of the unused portion of the credit facility, depending on the average daily unused portion of the LHL credit facility.
The Company's senior unsecured credit facility and LHL's unsecured credit facility contain certain financial covenants relating to net worth requirements, debt ratios and fixed charge coverage and other limitations that restrict the Company's ability to make distributions or other payments to its shareholders upon events of default.
Term Loans
On May 16, 2012, the Company entered into a new $177,500 unsecured loan with a seven-year term maturing on May 16, 2019 (the “First Term Loan”). The First Term Loan bears interest at a variable rate, but was hedged to a fixed interest rate for the full seven-year term (see “Derivative and Hedging Activities” below). The proceeds were used to redeem the Company's Series D Preferred Shares and Series E Preferred Shares on May 21, 2012 (see Note 6) and for general corporate purposes.
On August 2, 2012, the Company entered into a new $300,000 unsecured loan with a five-year term maturing on August 2, 2017, including a one-year extension subject to certain conditions (the "Second Term Loan"). At closing, $200,000 of the Second Term Loan proceeds were funded. The Company has the flexibility to draw the remaining $100,000 of proceeds anytime during the 95-day post closing period. The Second Term Loan bears interest at a variable rate, but was hedged to a fixed interest rate for the full five-year term (see "Derivative and Hedging Activities below"). The proceeds were used to reduce amounts outstanding under the Company's senior unsecured facility and for general corporate purposes.
The Company's term loans contain certain financial covenants relating to net worth requirements, debt ratios and fixed charge coverage and other limitations that restrict the Company's ability to make distributions or other payments to its shareholders upon events of default.
Derivative and Hedging Activities
The Company enters into interest rate swap agreements to hedge against interest rate fluctuations. Unrealized gains and losses on the effective portion of hedging instruments are reported in other comprehensive income (loss) ("OCL"). Ineffective portions of changes in the fair value of a cash flow hedge are recognized as interest expense. Amounts reported in accumulated other comprehensive income (loss) ("AOCL") related to currently outstanding derivatives are recognized as an adjustment to income (loss) as interest payments are made on the Company's variable rate debt. Effective May 16, 2012, the Company entered into three interest rate swap agreements with an aggregate notional amount of $177,500 for the First Term Loan's full seven-year term, resulting in a fixed all-in interest rate of 3.87% at the Company's current leverage ratio (as defined in the agreement). Effective August 2, 2012, the Company entered into five interest rate swap agreements with an aggregate notional amount of $300,000, of which $200,000 was drawn as of September 30, 2012, for the Second Term Loan's full five-year term, including a one-year extension subject to certain conditions, resulting in a fixed all-in interest rate of 2.68% at the Company's current leverage ratio (as defined in the agreement). The Company has designated its pay-fixed, receive-floating interest rate swap derivatives as cash flow hedges.

12


The following table presents the effect of derivative instruments on the Company's consolidated statements of operations and comprehensive income, including the location and amount of unrealized loss on outstanding derivative instruments in cash flow hedging relationships, for the three and nine months ended September 30, 2012:
 
 
 
Amount of Loss Recognized in OCL on Derivative Instruments
 
Location of Loss Reclassified from AOCL into Income
 
Amount of Loss Reclassified from AOCL into Income
 
 
 
 
 
 
 (Effective Portion)
 
 (Effective Portion)
 
 (Effective Portion)
 
 
For the three months ended
 
For the nine months ended
 
 
 
 
For the three months ended
 
For the nine months ended
 
 
September 30, 2012
 
September 30, 2012
 
 
 
 
September 30, 2012
 
September 30, 2012
Derivatives in cash flow hedging relationships:
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
$
3,839

 
$
8,534

 
Interest expense
 
$
780

 
$
1,082

During the three and nine months ended September 30, 2012, the Company did not have any hedge ineffectiveness or amounts that were excluded from the assessment of hedge effectiveness recorded in earnings.
The Company records all derivative instruments at fair value in the consolidated balance sheets. The fair value of each derivative instrument is based on a discounted cash flow analysis of the expected cash flows. This analysis reflects the contractual terms of the derivative instrument, including the period to maturity, and utilizes observable market-based inputs, including interest rate curves and implied volatilities, which is classified within level 2 of the fair value hierarchy (see Note 2). As of September 30, 2012, there was $8,534 in cumulative unrealized loss, of which $8,505 was included in AOCL and $29 was attributable to noncontrolling interests. The Company expects that approximately $3,508 will be reclassified from AOCL and noncontrolling interests and recognized as a reduction to income in the next 12 months.
The following table presents the location and fair value of the Company's derivative financial instruments as reported in the consolidated balance sheets as of September 30, 2012:
 
 
 
 
 
Fair Value
 
Consolidated Balance Sheet Location
 
September 30, 2012
Derivatives designated as hedging instruments:
 
 
 
 
 
Liability derivatives:
 
 
 
 
 
Interest rate swaps
Accounts payable and accrued expenses
 
$
8,534

Mortgage Loans
On March 30, 2012, the Company repaid without fee or penalty the Hilton San Diego Gaslamp Quarter mortgage loan in the amount of $59,600 plus accrued interest through borrowings on its senior unsecured credit facility. The loan was due to mature in July 2012.
The mortgage loans contain debt service coverage ratio thresholds related to the mortgaged properties. If the debt service coverage ratio for a specific property fails to exceed a threshold level specified in the mortgage, cash flows from that hotel will automatically be directed to the lender to (i) satisfy required payments, (ii) fund certain reserves required by the mortgage and (iii) fund additional cash reserves for future required payments, including final payment. Cash flows will be directed to the lender ("cash trap") until such time as the property again complies with the specified debt service coverage ratio or the mortgage is paid off.
5.
Commitments and Contingencies
Ground, Land and Building, and Air Rights Leases
Six of the Company’s hotels, San Diego Paradise Point Resort and Spa, Harborside Hyatt Conference Center & Hotel, Indianapolis Marriott Downtown, The Hilton San Diego Resort and Spa, Hotel Solamar and Viceroy Santa Monica are subject to ground leases under non-cancelable operating leases expiring from March 2026 to December 2102. The ground lease at Harborside Hyatt Conference Center & Hotel expires in 2026, but the Company has options to extend for over 50 years to 2077. None of the remaining ground leases expire prior to 2045. The Westin Copley Place is subject to a long term air rights lease which expires on December 14, 2077 and requires no payments through maturity. The ground lease related to the Indianapolis Marriott Downtown requires future ground rent payments of one dollar per year. The ground lease at Viceroy Santa Monica is subject to minimum annual rent increases, resulting in noncash straight-line rent expense of $114 and $342 for the three and nine months ended

13


September 30, 2012, respectively, and $116 and $232 for the three and nine months ended September 30, 2011, respectively, which is included in total ground rent expense below.
Hotel Roger Williams, acquired on October 6, 2010, is subject to a lease of land and building which expires on December 31, 2044. The Company evaluated the terms of the lease agreement and determined the lease to be a capital lease pursuant to applicable GAAP guidance. At acquisition, the fair value of the remaining rent payments of $4,892 was recorded as a capital lease obligation. This obligation, net of amortization, is included in accounts payable and accrued expenses in the accompanying consolidated balance sheets.
Total ground rent expense for the three and nine months ended September 30, 2012 was $2,627 and $6,613, respectively. Total ground rent expense for the three and nine months ended September 30, 2011 was $2,485 and $5,871, respectively, of which zero and $10, respectively, is related to part of the parking lot at Sheraton Bloomington Hotel Minneapolis South, which is included in discontinued operations for all periods presented. Certain rent payments are based on the hotel’s performance. Actual payments of rent may exceed the minimum required rent due to meeting specified thresholds. Future minimum rent payments (without reflecting future applicable Consumer Price Index increases) are as follows:
2012
$
1,416

2013
5,671

2014
5,684

2015
5,696

2016
5,738

Thereafter
224,683

 
$
248,888

Reserve Funds for Capital Expenditures
Certain of the Company’s agreements with its hotel managers, franchisors and lenders have provisions for the Company to provide funds, generally 4.0% to 5.0% of hotel revenues, sufficient to cover the cost of (a) certain non-routine repairs and maintenance to the hotels and (b) replacements and renewals to the hotels’ furniture, fixtures and equipment. Certain of the agreements require that the Company reserve this cash in separate accounts. As of September 30, 2012, $10,455 was available in restricted cash reserves for future capital expenditures. The Company has sufficient cash on hand and availability on its credit facilities to cover required capital expenditures under the agreements that do not necessitate that the Company separately reserve cash.
Restricted Cash Reserves
At September 30, 2012, the Company held $16,716 in restricted cash reserves. Included in such amounts are (i) $10,455 of reserve funds relating to the hotels with leases or operating agreements requiring the Company to maintain restricted cash to fund future capital expenditures, (ii) $5,182 deposited in mortgage escrow accounts pursuant to mortgage obligations to pre-fund a portion of certain operating expenses and debt payments and (iii) $1,079 held by insurance companies on the Company’s behalf to be refunded or applied to future liabilities.
Litigation
The nature of hotel operations exposes the Company and its hotels to the risk of claims and litigation in the normal course of their business. The Company is not presently subject to any material litigation nor, to the Company’s knowledge, is any litigation threatened against the Company, other than routine actions for negligence or other claims and administrative proceedings arising in the ordinary course of business, some of which are expected to be covered by liability insurance and all of which collectively are not expected to have a material adverse effect on the liquidity, results of operations, business or financial condition of the Company.
6.
Equity
Common Shares of Beneficial Interest
On January 1, 2012, the Company issued 8,928 common shares of beneficial interest and authorized an additional 8,928 deferred shares to the independent members of its Board of Trustees for their earned 2011 compensation pursuant to award arrangements existing on or before January 1, 2011. These common shares of beneficial interest were issued under the 2009 Plan.

14


On January 1, 2012, the Company issued 69,899 restricted common shares of beneficial interest to an executive related to long-term performance-based awards granted on April 28, 2009 (see Note 7 for additional details including vesting information). These common shares of beneficial interest were issued under the 2009 Plan.
On January 19, 2012, the Company issued 10,535 common shares of beneficial interest related to the resignation of Kelly Kuhn from its Board of Trustees for accumulated deferred shares issued as compensation for years 2007 through 2011. These common shares of beneficial interest were issued under the 2009 Plan.
On January 25 and 26, 2012, the Company issued 70,449 restricted common shares of beneficial interest to the Company’s executives and employees. On July 19, 2012, the Company issued 695 restricted common shares of beneficial interest to the Company’s employees. The restricted shares vest over three years, starting January 1, 2013, subject to continued employment. These common shares of beneficial interest were issued under the 2009 Plan.
From February 1, 2012 through February 14, 2012, the Company sold 1,714,939 common shares of beneficial interest, par value $0.01 per share, under the Company's equity distribution agreement dated March 4, 2011 (the “2011 Agreement”) with Raymond James & Associates, Inc. (the “Manager”). After deducting the Manager’s discounts and commissions of $589, the Company raised net proceeds of $46,566. The net proceeds were used to pay down amounts outstanding under the Company’s senior unsecured credit facility and for general corporate purposes.
On February 27, 2012, a member of the Board of Trustees exercised 5,000 options to purchase common shares of beneficial interest. These common shares of beneficial interest were issued under the 1998 Share Option and Incentive Plan, which was in place prior to the 2009 Plan.
From May 18, 2012 through May 30, 2012, the Company sold 641,069 common shares of beneficial interest, par value $0.01 per share, under the 2011 Agreement. After deducting the Manager's discounts and commissions of $219, the Company raised net proceeds of $17,328. On August 8, 2012, the Company sold 3,100 common shares of beneficial interest, par value $0.01 per share, under the 2011 Agreement. After deducting the Manager's discounts and commissions of $1, the Company raised net proceeds of $83. The net proceeds were used to pay down amounts outstanding under the Company's senior unsecured credit facility and under the LHL unsecured credit facility, and for general corporate purposes. During the nine months ended September 30, 2012, the Company incurred additional offering costs of $168 related to maintaining the 2011 Agreement. As of September 30, 2012, the Company had availability under the 2011 Agreement to issue and sell common shares of beneficial interest having an aggregate offering price of up to $146,024.
Common Dividends
The Company paid the following dividends on common shares/units during the nine months ended September 30, 2012:
Dividend per
Share/Unit
 
For the Quarter Ended
 
Record Date
 
Payable
Date
$
0.11

 
December 31, 2011
 
December 31, 2011
 
January 13, 2012
$
0.11

 
March 31, 2012
 
March 31, 2012
 
April 13, 2012
$
0.20

 
June 30, 2012
 
June 29, 2012
 
July 13, 2012
Treasury Shares
Treasury shares are accounted for under the cost method. During the nine months ended September 30, 2012, the Company received 46,670 common shares of beneficial interest related to executives and employees surrendering shares to pay taxes at the time restricted shares vested.
On August 29, 2011, the Company’s Board of Trustees authorized a share repurchase program (the “Repurchase Program”) to acquire up to $100,000 of the Company’s common shares of beneficial interest, with repurchased shares recorded at cost in treasury. As of September 30, 2012, the Company had availability under the Repurchase Program to acquire up to $75,498 of common shares of beneficial interest. However, the Company is not currently authorized by its Board of Trustees to repurchase or offer to repurchase any common shares. If authorized by its Board of Trustees, the Company may resume using the Repurchase Program on a future date.
During the nine months ended September 30, 2012, the Company re-issued 8,928 treasury shares related to earned 2011 compensation for the Board of Trustees in January 2012, 10,535 treasury shares related to the issuance of common shares of beneficial interest to a member of the Board of Trustees for accumulated deferred shares issued as compensation for years 2007 through 2011 upon her resignation in January 2012, 141,043 treasury shares related to the grants of restricted common shares of

15


beneficial interest in January 2012 and July 2012 and 1,260,256 treasury shares related to the sale of common shares of beneficial interest under the 2011 Agreement in February 2012.
At September 30, 2012, there were 15,482 common shares of beneficial interest in treasury.
Preferred Shares
On March 14, 2011, the Company redeemed all 1,100,000 outstanding 8 3/8% Series B Cumulative Redeemable Preferred Shares ("Series B Preferred Shares") for $27,500 ($25.00 per share) plus accrued distributions through March 14, 2011 of $473. The redemption value of the Series B Preferred Shares exceeded the carrying value of the Series B Preferred Shares by $731, which is included in the determination of net income attributable to common shareholders for the nine months ended September 30, 2011. The $731 represents the offering costs related to the Series B Preferred Shares.
On May 21, 2012, the Company redeemed all 3,170,000 outstanding 7 ½% Series D Cumulative Redeemable Preferred Shares ("Series D Preferred Shares") and all 3,500,000 outstanding 8% Series E Cumulative Redeemable Preferred Shares ("Series E Preferred Shares") for $79,250 and $87,500 ($25.00 per share), respectively, plus accrued distributions through May 21, 2012 of $842 and $992, respectively. The redemption values of the Series D Preferred Shares and Series E Preferred Shares exceeded their carrying values by $2,273 and $2,144, respectively, which are included in the determination of net income attributable to common shareholders for the nine months ended September 30, 2012. The $2,273 and $2,144 represent the offering costs related to the Series D Preferred Shares and Series E Preferred Shares, respectively.
The 7 ¼% Series G Cumulative Redeemable Preferred Shares (“Series G Preferred Shares”) and 7 ½% Series H Cumulative Redeemable Preferred Shares ("Series H Preferred Shares") (collectively, the “Preferred Shares”) rank senior to the common shares of beneficial interest and on parity with each other with respect to payment of distributions; the Company will not pay any distributions, or set aside any funds for the payment of distributions, on its common shares of beneficial interest unless it has also paid (or set aside for payment) the full cumulative distributions on the Preferred Shares for the current and all past dividend periods. The outstanding Preferred Shares do not have any maturity date, and are not subject to mandatory redemption. The difference between the carrying value and the redemption amount of the Preferred Shares are the offering costs. In addition, the Company is not required to set aside funds to redeem the Preferred Shares. The Company currently has the option to redeem the Series G Preferred Shares, in whole or from time to time in part, by payment of $25.00 per share, plus any accumulated, accrued and unpaid distributions to and including the date of redemption. The Company may not optionally redeem the Series H Preferred Shares prior to January 24, 2016, except in limited circumstances relating to the Company’s continuing qualification as a REIT or as discussed below. After that date, the Company may, at its option, redeem the Series H Preferred Shares, in whole or from time to time in part, by payment of $25.00 per share, plus any accumulated, accrued and unpaid distributions to and including the date of redemption. In addition, upon the occurrence of a change of control (as defined in the Company's charter), the result of which the Company’s common shares of beneficial interest and the common securities of the acquiring or surviving entity are not listed on the New York Stock Exchange, the NYSE Amex Equities or the NASDAQ Stock Market, or any successor exchanges, the Company may, at its option, redeem the Series H Preferred Shares in whole or in part within 120 days after the change of control occurred, by paying $25.00 per share, plus any accrued and unpaid distributions to and including the date of redemption. If the Company does not exercise its right to redeem the Series H Preferred Shares upon a change of control, the holders of Series H Preferred Shares have the right to convert some or all of their shares into a number of the Company’s common shares of beneficial interest based on a defined formula subject to a cap of 4,680,500 common shares.
The following Preferred Shares were outstanding as of September 30, 2012:
Security Type                                             
 
Number of
Shares
7 ¼% Series G Preferred Shares
 
6,348,888

7 ½% Series H Preferred Shares
 
2,750,000


16


Preferred Dividends
The Company paid the following dividends on preferred shares during the nine months ended September 30, 2012:
 
 
Dividend per
 
For the
 
 
 
 
Security Type        
 
Share (1)
 
Quarter Ended
 
Record Date
 
Payable Date
7 ½% Series D
 
$
0.47

 
December 31, 2011
 
January 1, 2012
 
January 13, 2012
8% Series E
 
$
0.50

 
December 31, 2011
 
January 1, 2012
 
January 13, 2012
7 ¼% Series G
 
$
0.45

 
December 31, 2011
 
January 1, 2012
 
January 13, 2012
7 ½% Series H
 
$
0.47

 
December 31, 2011
 
January 1, 2012
 
January 13, 2012
7 ½% Series D
 
$
0.47

 
March 31, 2012
 
April 1, 2012
 
April 13, 2012
8% Series E
 
$
0.50

 
March 31, 2012
 
April 1, 2012
 
April 13, 2012
7 ¼% Series G
 
$
0.45

 
March 31, 2012
 
April 1, 2012
 
April 13, 2012
7 ½% Series H
 
$
0.47

 
March 31, 2012
 
April 1, 2012
 
April 13, 2012
7 ½% Series D
 
$
0.27

 
June 30, 2012
 
May 21, 2012
 
May 21, 2012
8% Series E
 
$
0.28

 
June 30, 2012
 
May 21, 2012
 
May 21, 2012
7 ¼% Series G
 
$
0.45

 
June 30, 2012
 
July 1, 2012
 
July 13, 2012
7 ½% Series H
 
$
0.47

 
June 30, 2012
 
July 1, 2012
 
July 13, 2012
(1) 
Amounts are rounded to the nearest whole cent for presentation purposes.
Noncontrolling Interests of Common Units in Operating Partnership
As of September 30, 2012, the Operating Partnership had 296,300 common units of limited partnership interest outstanding, representing a 0.3% partnership interest held by the limited partners. As of September 30, 2012, approximately $7,908 of cash or the equivalent value in common shares, at the Company's option, would be paid to the limited partners of the Operating Partnership if the partnership were terminated. The approximate value of $7,908 is based on the Company's closing common share price of $26.69 on September 30, 2012, which is assumed to be equal to the value provided to the limited partners upon liquidation of the Operating Partnership. The outstanding common units of limited partnership interest are subject to a required hold period that ends on December 28, 2013, after which they are convertible into a like number of common shares of beneficial interest of the Company.
The following schedule presents the effects of changes in the Company's ownership interest in the Operating Partnership on the Company's equity:
 
For the nine months ended
 
September 30,
 
2012
 
2011
Net income attributable to common shareholders
$
35,182

 
$
12,375

Decrease in additional paid-in capital from adjustments to noncontrolling interests of common units in Operating Partnership
(785
)
 
0

Change in the Company's ownership interest from net income and adjustments to noncontrolling interests
$
34,397

 
$
12,375

7.
Equity Incentive Plan
At the 2009 Annual Meeting of Shareholders held on April 23, 2009, the common shareholders approved the 2009 Plan, under which the Company may issue equity-based awards to executives, employees, non-employee members of the Board of Trustees and any other persons providing services to or for the Company and its subsidiaries. The 2009 Plan provides for a maximum of 1,800,000 common shares of beneficial interest to be issued in the form of share options, share appreciation rights, restricted share awards, performance shares, phantom shares and other equity-based awards. In addition, the maximum number of common shares subject to awards of any combination that may be granted under the 2009 Plan during any fiscal year to any one individual is limited to 500,000 shares. The 2009 Plan terminates on January 28, 2019. The 2009 Plan authorized, among other things: (i) the grant of share options that qualify as incentive options under the Code, (ii) the grant of share options that do not so qualify, (iii) the grant of common shares in lieu of cash for trustees’ fees, (iv) grants of common shares in lieu of cash compensation, and (v) the making of loans to acquire common shares in lieu of compensation (to the extent permitted by law and applicable provisions of the Sarbanes Oxley Act of 2002). The exercise price of share options is determined by the Compensation Committee of the Board of Trustees, but may not be less than 100% of the fair market value of the common shares on the date of grant. Restricted share

17


awards and options under the 2009 Plan vest over a period determined by the Compensation Committee of the Board of Trustees, generally a three to five year period, with certain awards vesting over periods of up to nine years. The duration of each option is also determined by the Compensation Committee, subject to applicable laws and regulations. There were no stock options outstanding as of September 30, 2012. At September 30, 2012, there were 1,428,969 common shares available for future grant under the 2009 Plan.
Service Condition Nonvested Share Awards
From time to time, the Company awards nonvested shares under the 2009 Plan to members of the Board of Trustees, executives, and employees. The nonvested shares vest over three to nine years based on continued service or employment. The Company measures compensation costs for the nonvested shares based upon the fair market value of its common shares at the date of grant. Compensation costs are recognized on a straight-line basis over the vesting period and are included in general and administrative expense in the accompanying consolidated statements of operations and comprehensive income.
A summary of the Company’s service condition nonvested shares as of September 30, 2012 is as follows:
 
Number of
Shares
 
Weighted -
Average Grant
Date Fair Value
Nonvested at January 1, 2012
384,754

 
$
25.07

Granted
71,144

 
27.02

Vested
(118,421
)
 
16.45

Forfeited
0

 
0.00

Nonvested at September 30, 2012 (1)
337,477

 
$
28.50

(1) 
Amount excludes 49,406 long-term performance-based shares which were earned but nonvested due to a service condition as of September 30, 2012.
As of September 30, 2012 and December 31, 2011, there were $6,841 and $7,087, respectively, of total unrecognized compensation costs related to nonvested share awards. As of September 30, 2012 and December 31, 2011, these costs were expected to be recognized over a weighted–average period of 2.8 and 3.3 years, respectively. The total fair value of shares vested (calculated as number of shares multiplied by vesting date share price) during the three and nine months ended September 30, 2012 was $1,483 and $3,118, respectively, and during the three and nine months ended September 30, 2011 was zero and $7,089, respectively. The compensation costs (net of forfeitures) that have been included in general and administrative expenses in the accompanying consolidated statements of operations and comprehensive income were $702 and $2,094 for the three and nine months ended September 30, 2012, respectively, and $610 and $2,076 for the three and nine months ended September 30, 2011, respectively.
Long-Term Performance-Based Share Awards
On April 28, 2009, the Company’s Board of Trustees granted a target of 70,344 performance-based awards of nonvested shares to executives. The actual amounts of the awards were to range from 0% to 200% of the target amounts, depending on performance. On January 20, 2011, the Company's former Chief Financial Officer, upon his termination, earned a net 107.6% of his 32,118 target number of shares, or 34,570 shares, based on the performance period of January 1, 2009 through January 20, 2011. All of his earned shares vested immediately on January 20, 2011. No additional shares were earned or vested related to the former Chief Financial Officer subsequent to this date. The actual amounts of the remaining 38,226 awards held by the Company's Chief Executive Officer were determined on January 1, 2012, based on the performance period of January 1, 2009 through December 31, 2011, in accordance with the terms of his agreement. On January 1, 2012, the executive earned 182.9% of his target number of shares, or 69,899 shares. One-third of the earned shares, or 23,300 shares, vested immediately on January 1, 2012 and the remaining two-thirds of the earned shares, or 46,599 shares, will vest in equal amounts on January 1, 2013 and January 1, 2014 based on continued employment. The executive received a cash payment of $56 on the earned shares equal to the value of all dividends paid on common shares from December 31, 2008 until the determination date, January 1, 2012. As of January 1, 2012, the executive is entitled to receive dividends as declared and paid on the earned shares and to vote the shares, including those shares subject to further vesting.
On January 26, 2012, the Company’s Board of Trustees granted a target of 79,823 performance-based awards of nonvested shares to executives. The actual amounts of the awards will be determined on January 1, 2015, based on the performance period of January 1, 2012 through December 31, 2014, in accordance with the terms of the agreements. The actual amounts of the awards will range from 0% to 200% of the target amounts, depending on the performance analysis stipulated in the agreements, and none of the performance shares are outstanding until issued in accordance with award agreements based on performance. After the actual

18


amounts of the awards are determined (or earned) on January 1, 2015, the earned shares will be issued and outstanding with a portion subject to further vesting based on continued employment. The executives will receive cash payments on the earned shares, including those subject to further vesting, equal to the value of all dividends paid on common shares from December 31, 2011 until the determination date, January 1, 2015. Such amounts will be paid to the awardees on or about January 1, 2015. Thereafter, the executives will be entitled to receive dividends as declared and paid on the earned shares and to vote the shares, including those shares subject to further vesting.
The fair values of the performance-based awards were determined by the Company using data under the Monte Carlo valuation method provided by a third-party consultant. The measurement of performance for the 2012 awards is substantially the same as the performance measurement for previously granted long-term performance-based share awards. The capital market assumptions used in the valuations consisted of the following:
Factors associated with the underlying performance of the Company’s share price and shareholder returns over the term of the performance awards including total share return volatility and risk-free interest.
Factors associated with the relative performance of the Company’s share price and shareholder returns when compared to those companies which compose the index including beta as a means to breakdown total volatility into market-related and company specific volatilities.
The valuation has been performed in a risk-neutral framework.
The assumptions used were as follows for each performance measure:
 
Volatility
 
Interest
Rates
 
Dividend
Yield
 
Stock
Beta
 
Fair Value of
Components
of Award
 
Weighting
of Total
Awards
January 26, 2012 Awards
 
 
 
 
 
 
 
 
 
 
 
Target amounts
65.30
%
 
0.31
%
 
N/A
 
N/A

 
$
36.22

 
33.40
%
NAREIT index
65.30
%
 
0.31
%
 
N/A
 
1.370

 
$
35.25

 
33.30
%
Peer companies
65.30
%
 
0.31
%
 
N/A
 
0.911

 
$
35.33

 
33.30
%
A summary of the Company’s long-term performance-based share awards as of September 30, 2012 is as follows:
 
Number of
Shares
 
Weighted-
Average Grant
Date Fair Value
Nonvested at January 1, 2012
179,338

 
$
31.94

Granted
111,496

 
30.08

Vested
(28,055
)
 
20.27

Forfeited
0

 
0.00

Nonvested at September 30, 2012 (1)
262,779

 
$
32.39

(1) 
Amount excludes 50,000 shares that have been committed for future performance share grants. Fair value will be estimated at the beginning of the performance measurement period on July 1, 2014.
As of September 30, 2012 and December 31, 2011, there were $5,384 and $4,047, respectively, of total unrecognized compensation costs related to long-term performance-based share awards. As of September 30, 2012 and December 31, 2011, these costs were expected to be recognized over a weighted–average period of 2.8 years. As of September 30, 2012 and December 31, 2011, there were 122,325 and 94,270 long-term performance-based share awards vested, respectively. Additionally, there were 49,406 and 7,562 long-term performance-based awards earned but nonvested due to a service condition as of September 30, 2012 and December 31, 2011, respectively. The compensation costs (net of forfeitures) related to long-term performance-based share awards that have been included in general and administrative expenses in the accompanying consolidated statements of operations and comprehensive income were $501 and $1,504 for the three and nine months ended September 30, 2012, respectively, and $382 and $1,043 for the three and nine months ended September 30, 2011, respectively.
8.
LHL
Substantially all of the Company’s revenues are derived from operating revenues generated by the hotels, all of which are leased by LHL.

19


Other indirect hotel operating expenses, including amounts related to discontinued operations, consist of the following expenses incurred by the hotels:
 
For the three months ended
 
For the nine months ended
 
September 30,
 
September 30,
 
2012
 
2011
 
2012
 
2011
General and administrative
$
17,029

 
$
14,774

 
$
49,800

 
$
41,936

Sales and marketing
12,519

 
11,483