XNYS:SHO Sunstone Hotel Investors Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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Table of Contents

 

 

 

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 June 30, 2012

 

OR

 

o         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 001-32319

 


 

Sunstone Hotel Investors, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 


 

Maryland

 

20-1296886

(State or Other Jurisdiction of
Incorporation or Organization)

 

(I.R.S. Employer
Identification Number)

 

120 Vantis, Suite 350

 

 

Aliso Viejo, California

 

92656

(Address of Principal Executive Offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code: (949) 330-4000

 


 

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  o

 

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  o

 

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.

 

Large accelerated filer  x

 

Accelerated filer  o

 

 

 

Non-accelerated filer  o

 

Smaller reporting company  o

(Do not check if a 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  o  No  x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

136,777,892 shares of Common Stock, $0.01 par value, as of August 1, 2012

 

 

 



Table of Contents

 

SUNSTONE HOTEL INVESTORS, INC.

QUARTERLY REPORT ON

FORM 10-Q

 

For the Quarterly Period Ended June 30, 2012

 

TABLE OF CONTENTS

 

 

 

 

 

Page

 

 

PART I—FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Financial Statements:

 

 

 

 

 

 

 

 

 

Consolidated Balance Sheets as of June 30, 2012 (unaudited) and December 31, 2011

 

1

 

 

 

 

 

 

 

Unaudited Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2012 and 2011

 

2

 

 

 

 

 

 

 

Consolidated Statement of Equity as of June 30, 2012 (unaudited) and December 31, 2011

 

3

 

 

 

 

 

 

 

Unaudited Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2012 and 2011

 

4

 

 

 

 

 

 

 

Notes to Unaudited Consolidated Financial Statements

 

5

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

24

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

 

45

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

45

 

 

 

 

 

 

 

PART II—OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

46

 

 

 

 

 

Item 1A.

 

Risk Factors

 

46

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

46

 

 

 

 

 

Item 3

 

Defaults Upon Senior Securities

 

46

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

46

 

 

 

 

 

Item 5.

 

Other Information

 

46

 

 

 

 

 

Item 6.

 

Exhibits

 

47

 

 

 

 

 

SIGNATURES

 

48

 

i



Table of Contents

 

PART I—FINANCIAL INFORMATION

 

Item 1.   Financial Statements

 

SUNSTONE HOTEL INVESTORS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

 

 

 

June 30, 2012

 

December 31, 2011

 

 

 

(unaudited)

 

 

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

204,549

 

$

150,533

 

Restricted cash

 

73,306

 

66,230

 

Accounts receivable, net

 

36,259

 

32,127

 

Inventories

 

2,666

 

2,608

 

Prepaid expenses

 

9,382

 

10,189

 

Investment in hotel property of discontinued operations, net

 

39,122

 

38,958

 

Other current assets of discontinued operations, net

 

2,861

 

2,223

 

 

 

 

 

 

 

Total current assets

 

368,145

 

302,868

 

Investment in hotel properties, net

 

2,810,409

 

2,738,868

 

Other real estate, net

 

12,057

 

11,859

 

Deferred financing fees, net

 

12,622

 

14,594

 

Goodwill

 

13,088

 

13,088

 

Other assets, net

 

20,083

 

19,963

 

 

 

 

 

 

 

Total assets

 

$

3,236,404

 

$

3,101,240

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable and accrued expenses

 

$

25,509

 

$

26,800

 

Accrued payroll and employee benefits

 

18,662

 

20,863

 

Due to Third-Party Managers

 

9,252

 

9,227

 

Dividends payable

 

7,437

 

7,437

 

Other current liabilities

 

37,474

 

28,177

 

Current portion of notes payable

 

78,912

 

53,325

 

Note payable of discontinued operations

 

47,159

 

47,460

 

Other current liabilities of discontinued operations

 

224

 

342

 

 

 

 

 

 

 

Total current liabilities

 

224,629

 

193,631

 

Notes payable, less current portion

 

1,396,980

 

1,469,692

 

Capital lease obligations, less current portion

 

15,636

 

 

Other liabilities

 

13,810

 

12,623

 

 

 

 

 

 

 

Total liabilities

 

1,651,055

 

1,675,946

 

Commitments and contingencies (Note 14)

 

 

 

 

 

Preferred stock, Series C Cumulative Convertible Redeemable Preferred Stock, $0.01 par value, 4,102,564 shares authorized, issued and outstanding at June 30, 2012 and December 31, 2011, liquidation preference of $24.375 per share

 

100,000

 

100,000

 

Equity:

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Preferred stock, $0.01 par value, 100,000,000 shares authorized.

 

 

 

 

 

8.0% Series A Cumulative Redeemable Preferred Stock, 7,050,000 shares issued and outstanding at June 30, 2012 and December 31, 2011, stated at liquidation preference of $25.00 per share

 

176,250

 

176,250

 

8.0% Series D Cumulative Redeemable Preferred Stock, 4,600,000 shares issued and outstanding at June 30, 2012 and December 31, 2011, stated at liquidation preference of $25.00 per share

 

115,000

 

115,000

 

Common stock, $0.01 par value, 500,000,000 shares authorized, 135,229,303 shares issued and outstanding at June 30, 2012 and 117,265,090 shares issued and outstanding at December 31, 2011

 

1,352

 

1,173

 

Additional paid in capital

 

1,491,639

 

1,312,566

 

Retained earnings

 

108,600

 

110,580

 

Cumulative dividends

 

(460,270

)

(445,396

)

Accumulated other comprehensive loss

 

(4,799

)

(4,916

)

 

 

 

 

 

 

Total stockholders’ equity

 

1,427,772

 

1,265,257

 

Non-controlling interest in consolidated joint ventures

 

57,577

 

60,037

 

 

 

 

 

 

 

Total equity

 

1,485,349

 

1,325,294

 

 

 

 

 

 

 

Total liabilities and equity

 

$

3,236,404

 

$

3,101,240

 

 

See accompanying notes to consolidated financial statements.

 

1



Table of Contents

 

SUNSTONE HOTEL INVESTORS, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(In thousands, except per share data)

 

 

 

 

Three Months Ended
June 30, 2012

 

Three Months Ended
June 30, 2011

 

Six Months Ended
June 30, 2012

 

Six Months Ended
June 30, 2011

 

 

 

 

 

 

 

 

 

 

 

REVENUES

 

 

 

 

 

 

 

 

 

Room

 

$

164,398

 

$

148,140

 

$

298,536

 

$

252,451

 

Food and beverage

 

56,202

 

49,786

 

106,534

 

87,820

 

Other operating

 

17,240

 

16,648

 

33,803

 

29,654

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

237,840

 

214,574

 

438,873

 

369,925

 

 

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES

 

 

 

 

 

 

 

 

 

Room

 

38,958

 

35,296

 

75,806

 

63,809

 

Food and beverage

 

37,169

 

35,136

 

72,908

 

63,855

 

Other operating

 

6,618

 

6,101

 

13,412

 

11,943

 

Advertising and promotion

 

11,135

 

10,190

 

22,043

 

18,589

 

Repairs and maintenance

 

8,642

 

8,080

 

17,090

 

15,171

 

Utilities

 

6,845

 

7,089

 

13,998

 

13,797

 

Franchise costs

 

8,320

 

7,396

 

14,967

 

12,558

 

Property tax, ground lease and insurance

 

18,338

 

14,316

 

34,851

 

28,092

 

Property general and administrative

 

26,565

 

24,515

 

51,256

 

44,031

 

Corporate overhead

 

7,686

 

6,305

 

12,983

 

13,958

 

Depreciation and amortization

 

34,793

 

32,287

 

69,079

 

58,155

 

 

 

 

 

 

 

 

 

 

 

Total operating expenses

 

205,069

 

186,711

 

398,393

 

343,958

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

32,771

 

27,863

 

40,480

 

25,967

 

Equity in earnings of unconsolidated joint ventures

 

 

 

 

21

 

Interest and other income

 

74

 

1,319

 

137

 

1,427

 

Interest expense

 

(20,873

)

(20,462

)

(41,691

)

(37,560

)

Loss on extinguishment of debt

 

 

 

(191

)

 

Gain on remeasurement of equity interests

 

 

 

 

69,230

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

11,972

 

8,720

 

(1,265

)

59,085

 

Income (loss) from discontinued operations

 

(117

)

30,209

 

152

 

31,179

 

 

 

 

 

 

 

 

 

 

 

NET INCOME (LOSS)

 

11,855

 

38,929

 

(1,113

)

90,264

 

 

 

 

 

 

 

 

 

 

 

Income from consolidated joint venture attributable to non-controlling interest

 

(307

)

(244

)

(867

)

(244

)

Distributions to non-controlling interest

 

(8

)

(7

)

(16

)

(14

)

Preferred stock dividends

 

(7,437

)

(7,310

)

(14,874

)

(12,447

)

Undistributed income allocated to unvested restricted stock compensation

 

(47

)

(291

)

 

(717

)

 

 

 

 

 

 

 

 

 

 

INCOME AVAILABLE (LOSS ATTRIBUTABLE) TO COMMON STOCKHOLDERS

 

$

4,056

 

$

31,077

 

$

(16,870

)

$

76,842

 

 

 

 

 

 

 

 

 

 

 

COMPREHENSIVE INCOME (LOSS)

 

$

11,972

 

$

38,929

 

$

(996

)

$

90,264

 

 

 

 

 

 

 

 

 

 

 

Basic per share amounts:

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations available (attributable) to common stockholders

 

$

0.03

 

$

0.01

 

$

(0.14

)

$

0.39

 

Income from discontinued operations

 

0.00

 

0.26

 

0.00

 

0.27

 

 

 

 

 

 

 

 

 

 

 

Basic income available (loss attributable) to common stockholders per common share

 

$

0.03

 

$

0.27

 

$

(0.14

)

$

0.66

 

 

 

 

 

 

 

 

 

 

 

Diluted per share amounts:

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations available (attributable) to common stockholders

 

$

0.03

 

$

0.01

 

$

(0.14

)

$

0.39

 

Income from discontinued operations

 

0.00

 

0.26

 

0.00

 

0.27

 

 

 

 

 

 

 

 

 

 

 

Diluted income available (loss attributable) to common stockholders per common share

 

$

0.03

 

$

0.27

 

$

(0.14

)

$

0.66

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

120,029

 

117,227

 

118,728

 

117,151

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

120,029

 

117,227

 

118,728

 

117,151

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

 

$

 

$

 

$

 

 

See accompanying notes to consolidated financial statements.

 

2



Table of Contents

 

SUNSTONE HOTEL INVESTORS, INC.

CONSOLIDATED STATEMENT OF EQUITY

(In thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Controlling

 

 

 

 

 

Preferred Stock

 

Common Stock

 

 

 

 

 

 

 

Accumulated

 

Interest in

 

 

 

 

 

Series A

 

Series D

 

 

 

 

 

Additional

 

 

 

 

 

Other

 

Consolidated

 

 

 

 

 

Number of

 

 

 

Number of

 

 

 

Number of

 

 

 

Paid In

 

Retained

 

Cumulative

 

Comprehensive

 

Joint

 

 

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Shares

 

Amount

 

Capital

 

Earnings

 

Dividends

 

Loss

 

Ventures

 

Total

 

Balance at December 31, 2011

 

7,050,000

 

$

176,250

 

4,600,000

 

$

115,000

 

117,265,090

 

$

1,173

 

$

1,312,566

 

$

110,580

 

$

(445,396

)

$

(4,916

)

$

60,037

 

$

1,325,294

 

Issuance of common stock, net (unaudited)

 

 

 

 

 

17,597,437

 

176

 

177,086

 

 

 

 

 

177,262

 

Vesting of restricted common stock (unaudited)

 

 

 

 

 

366,776

 

3

 

1,987

 

 

 

 

 

1,990

 

Distributions to non-controlling interest (unaudited)

 

 

 

 

 

 

 

 

 

 

 

(3,327

)

(3,327

)

Series A preferred dividends and dividends payable at $1.00 per share year to date (unaudited)

 

 

 

 

 

 

 

 

 

(7,050

)

 

 

(7,050

)

Series C preferred dividends and dividends payable at $0.786 per share year to date (unaudited)

 

 

 

 

 

 

 

 

 

(3,224

)

 

 

(3,224

)

Series D preferred dividends and dividends payable at $1.00 per share year to date (unaudited)

 

 

 

 

 

 

 

 

 

(4,600

)

 

 

(4,600

)

Net income (loss) (unaudited)

 

 

 

 

 

 

 

 

(1,980

)

 

 

867

 

(1,113

)

Pension liability adjustment (unaudited)

 

 

 

 

 

 

 

 

 

 

117

 

 

117

 

Comprehensive loss (unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

(996

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2012 (unaudited)

 

7,050,000

 

$

176,250

 

4,600,000

 

$

115,000

 

135,229,303

 

$

1,352

 

$

1,491,639

 

$

108,600

 

$

(460,270

)

$

(4,799

)

$

57,577

 

$

1,485,349

 

 

See accompanying notes to consolidated financial statements.

 

3



Table of Contents

 

SUNSTONE HOTEL INVESTORS, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

 

 

Six Months Ended
June 30, 2012

 

Six Months Ended
June 30, 2011

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

Net income (loss)

 

$

(1,113

)

$

90,264

 

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

Bad debt expense (recovery)

 

(55

)

87

 

Gain on sales of hotel properties and other assets, net

 

(188

)

(14,074

)

(Gain) loss on extinguishment of debt

 

191

 

(18,145

)

Gain on remeasurement of equity interests

 

 

(69,230

)

Loss on derivatives

 

499

 

1,004

 

Depreciation

 

62,854

 

56,988

 

Amortization of franchise fees and other intangibles

 

9,260

 

5,780

 

Amortization and write-off of deferred financing fees

 

1,932

 

1,431

 

Amortization of loan discounts

 

524

 

522

 

Amortization of deferred stock compensation

 

1,842

 

1,473

 

Impairment loss

 

 

1,495

 

Equity in earnings of unconsolidated joint ventures

 

 

(21

)

Changes in operating assets and liabilities:

 

 

 

 

 

Restricted cash

 

(2,364

)

16,511

 

Accounts receivable

 

(3,405

)

(8,376

)

Inventories

 

(44

)

(16

)

Prepaid expenses and other assets

 

2,945

 

5,064

 

Accounts payable and other liabilities

 

9,733

 

4,502

 

Accrued payroll and employee benefits

 

(2,201

)

(1,426

)

Due to Third-Party Managers

 

142

 

(1,618

)

Discontinued operations

 

 

2,058

 

Net cash provided by operating activities

 

80,552

 

74,273

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

Proceeds from sales of hotel properties and other assets

 

11

 

39,929

 

Restricted cash — replacement reserve

 

(5,177

)

(6,628

)

Acquisition deposits

 

(3,000

)

 

Acquisitions of hotel properties and other assets

 

(29,694

)

(263,264

)

Renovations and additions to hotel properties and other real estate

 

(48,483

)

(64,700

)

Payment for interest rate derivative

 

 

(133

)

Net cash used in investing activities

 

(86,343

)

(294,796

)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

Proceeds from preferred stock offering

 

 

115,000

 

Payment of preferred stock offering costs

 

 

(4,062

)

Proceeds from common stock offering

 

126,533

 

 

Payment of common stock offering costs

 

(431

)

 

Proceeds from note payable and credit facility

 

15,000

 

240,000

 

Payments on notes payable and credit facility

 

(58,524

)

(246,603

)

Payment for repurchase of notes payable and related costs

 

(4,570

)

 

Payments of deferred financing costs

 

 

(4,830

)

Dividends paid

 

(14,874

)

(10,274

)

Distributions to non-controlling interest

 

(3,327

)

(14

)

Net cash provided by financing activities

 

59,807

 

89,217

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

54,016

 

(131,306

)

Cash and cash equivalents, beginning of period

 

150,533

 

276,034

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$

204,549

 

$

144,728

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

 

 

 

 

 

Cash paid for interest

 

$

40,371

 

$

35,155

 

NONCASH INVESTING ACTIVITY

 

 

 

 

 

Accounts payable related to renovations and additions to hotel properties and other real estate

 

$

6,210

 

$

9,491

 

Amortization of deferred stock compensation — construction activities

 

$

148

 

$

128

 

Amortization of deferred stock compensation — unconsolidated joint venture

 

$

 

$

2

 

NONCASH FINANCING ACTIVITY

 

 

 

 

 

Issuance of note receivable

 

$

 

$

90,000

 

Issuance of common stock in connection with acquisition of hotel property

 

51,160

 

 

Assumption of debt in connection with acquisitions of hotel properties

 

$

 

$

545,952

 

Dividends payable

 

$

7,437

 

$

7,310

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

 

SUNSTONE HOTEL INVESTORS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1. Organization and Description of Business

 

Sunstone Hotel Investors, Inc. (the “Company”) was incorporated in Maryland on June 28, 2004 in anticipation of an initial public offering of common stock, which was consummated on October 26, 2004.  The Company, through its 100% controlling interest in Sunstone Hotel Partnership, LLC (the “Operating Partnership”), of which the Company is the sole managing member, and the subsidiaries of the Operating Partnership, including Sunstone Hotel TRS Lessee, Inc. (the “TRS Lessee”) and its subsidiaries, is currently engaged in acquiring, owning, asset managing and renovating hotel properties. The Company may also sell certain hotel properties from time to time. The Company operates as a real estate investment trust (“REIT”) for federal income tax purposes.

 

As a REIT, certain tax laws limit the amount of “non-qualifying” income the Company can earn, including income derived directly from the operation of hotels. As a result, the Company leases all of its hotels to its TRS Lessee, which in turn enters into long-term management agreements with third parties to manage the operations of the Company’s hotels. As of June 30, 2012, the Company had interests in 33 hotels, including the Marriott Del Mar, which was classified as held for sale as of June 30, 2012 and included in discontinued operations due to its probable sale within the next year, leaving 32 hotels (the “32 hotels”) held for investment. The Company’s third-party managers included subsidiaries of Marriott International, Inc. or Marriott Hotel Services, Inc. (collectively, “Marriott”), managers of 11 of the Company’s 32 hotels; a subsidiary of Interstate Hotels & Resorts, Inc., manager of 11 of the Company’s 32 hotels; Highgate Hotels, manager of three of the Company’s 32 hotels; Davidson Hotels & Resorts and Hilton Worldwide, each a manager of two of the Company’s 32 hotels; and Fairmont Hotels & Resorts (U.S.), Hyatt Corporation, and Sage Hospitality Resources, each a manager of one of the Company’s 32 hotels.  In addition, the Company owns 100% of BuyEfficient, LLC (“BuyEfficient”), an electronic purchasing platform that allows members to procure food, operating supplies, furniture, fixtures and equipment.

 

2. Summary of Significant Accounting Policies

 

Basis of Presentation

 

The accompanying consolidated financial statements as of June 30, 2012 and December 31, 2011, and for the three and six months ended June 30, 2012 and 2011, include the accounts of the Company, the Operating Partnership, the TRS Lessee and their subsidiaries. All significant intercompany balances and transactions have been eliminated. The Company consolidates subsidiaries when it has the ability to direct the activities that most significantly impact the economic performance of the entity. The Company also evaluates its subsidiaries to determine if they should be considered variable interest entities (“VIEs”). Typically, the entity that has the power to direct the activities that most significantly impact economic performance would consolidate the VIE. The Company considers an entity a VIE if equity investors own an interest therein that does not have the characteristics of a controlling financial interest or if such investors do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. In accordance with the Consolidation Topic of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”), the Company reviewed its subsidiaries to determine if (i) they should be considered VIEs, and (ii) whether the Company should change its consolidation determination based on changes in the characteristics of these entities.

 

Non-controlling interests at both June 30, 2012 and December 31, 2011 represent the outside equity interests in various consolidated affiliates of the Company.

 

The accompanying interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and in conformity with the rules and regulations of the Securities and Exchange Commission. In the Company’s opinion, the interim financial statements presented herein reflect all adjustments, consisting solely of normal and recurring adjustments, which are necessary to fairly present the interim financial statements. These financial statements should be read in conjunction with the financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011, filed with the Securities and Exchange Commission on February 28, 2012.

 

Certain prior year amounts have been reclassified in the consolidated financial statements in order to conform to the current year presentation.

 

The Company has evaluated subsequent events through the date of issuance of these financial statements.

 

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Table of Contents

 

Use of Estimates

 

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates.

 

Reporting Periods

 

The results the Company reports in its consolidated statements of operations and comprehensive income (loss) are based on results reported to the Company by its hotel managers.  These hotel managers use different reporting periods.  Marriott uses a fiscal year ending on the Friday closest to December 31 and reports twelve weeks of operations each for the first three quarters of the year, and sixteen or seventeen weeks of operations for the fourth quarter of the year. The Company’s other hotel managers report operations on a standard monthly calendar.  The Company has elected to adopt quarterly close periods of March 31, June 30 and September 30, and an annual year end of December 31. As a result, the Company’s 2012 results of operations for the Marriott-managed hotels include results from December 31 through March 23 for the first quarter, March 24 through June 15 for the second quarter, June 16 through September 7 for the third quarter, and September 8 through December 28 for the fourth quarter. The Company’s 2011 results of operations for the Marriott-managed hotels include results from January 1 through March 25 for the first quarter, March 26 through June 17 for the second quarter, June 18 through September 9 for the third quarter, and September 10 through December 30 for the fourth quarter.

 

Fair Value of Financial Instruments

 

As of June 30, 2012 and December 31, 2011, the carrying amount of certain financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued expenses were representative of their fair values due to the short-term maturity of these instruments.

 

The Company follows the requirements of the Fair Value Measurements and Disclosure Topic of the FASB ASC, which establishes a framework for measuring fair value and disclosing fair value measurements by establishing a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:

 

Level 1

 

Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

 

 

 

Level 2

 

Inputs reflect quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the asset or the liability; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.

 

 

 

Level 3

 

Unobservable inputs reflecting the Company’s own assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.

 

As discussed in Note 7, during 2011, the Company entered into interest rate protection agreements to manage, or hedge, interest rate risks in conjunction with its acquisitions of the outside 62.0% equity interests in the Doubletree Guest Suites Times Square, the JW Marriott New Orleans, a 75.0% majority interest in the entity that owns the Hilton San Diego Bayfront and the refinancing of the debt secured by the Doubletree Guest Suites Times Square. The Company records interest rate protection agreements on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in the consolidated statements of operations and comprehensive income (loss) as they are not designated as hedges. In accordance with the Fair Value Measurements and Disclosure Topic of the FASB ASC, the Company estimates the fair value of its interest rate protection agreements based on quotes obtained from the counterparties, which are based upon the consideration that would be required to terminate the agreements. The Company has valued the derivative interest rate cap agreements related to the Doubletree Guest Suites Times Square and the Hilton San Diego Bayfront using Level 2 measurements as an asset of $0.1 million and $0.4 million as of June 30, 2012 and December 31, 2011, respectively. The interest rate cap agreements are included in other assets, net, on the accompanying consolidated balance sheets. The Company has valued the derivative interest rate swap agreement related to the JW Marriott New Orleans using Level 2 measurements as a liability of $1.8 million and $1.6 million as of June 30, 2012 and December 31, 2011, respectively. The interest rate swap agreement is included in other liabilities on the accompanying consolidated balance sheets.

 

The Company is responsible for paying the premiums, if any, for a $5.0 million split life insurance policy for its former Executive Chairman and Chief Executive Officer, Robert A. Alter. The Company has valued this policy using Level 2 measurements at $1.7 million and $1.9 million as of June 30, 2012 and December 31, 2011, respectively. These amounts are included in other assets, net in the accompanying consolidated balance sheets, and will be used to reimburse the Company for payments made to Mr. Alter

 

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Table of Contents

 

associated with a Retirement Benefit Agreement. The Company has valued the Retirement Benefit Agreement using Level 2 measurements at $1.7 million as of both June 30, 2012 and December 31, 2011. The agreement calls for the balance of the Retirement Benefit Agreement to be paid out to Mr. Alter in 10 annual installments, beginning in 2011. As such, the Company paid Mr. Alter $0.2 million in 2011, which was reimbursed to the Company in April 2012 using funds from the split life insurance policy. These amounts are included in accrued payroll and employee benefits in the accompanying consolidated balance sheets.

 

On an annual basis and periodically when indicators of impairment exist, the Company has analyzed the carrying values of its hotel properties and other assets using Level 3 measurements, including a discounted cash flow analysis to estimate the fair value of its hotel properties and other assets taking into account each property’s expected cash flow from operations, holding period and estimated proceeds from the disposition of the property. The factors addressed in determining estimated proceeds from disposition included anticipated operating cash flow in the year of disposition and terminal capitalization rate. The Company did not identify any properties or other assets with indicators of impairment during the six months ended June 30, 2012. In June 2011, the Company recognized a $1.5 million impairment on its commercial laundry facility located in Salt Lake City, Utah based on proceeds received from its sale in July 2011.

 

On an annual basis and periodically when indicators of impairment exist, the Company also analyzes the carrying value of its goodwill using Level 3 measurements including a discounted cash flow analysis to estimate the fair value of its reporting units. For the three and six months ended June 30, 2012 and 2011, the Company did not identify any goodwill with indicators of impairment.

 

As of June 30, 2012 and December 31, 2011, 71.8% and 72.6%, respectively, of the Company’s outstanding debt included in continuing operations had fixed interest rates, including the effect of an interest rate swap agreement. The Company’s carrying value of its debt secured by properties not classified as discontinued operations totaled $1.5 billion as of both June 30, 2012 and December 31, 2011. Using Level 3 measurements, including the Company’s weighted average cost of debt ranging between 6.0% and 7.0%, the Company estimates that the fair market value of its debt included in continuing operations as of June 30, 2012 and December 31, 2011 totaled $1.4 billion and $1.5 billion, respectively.

 

The following table presents our assets measured at fair value on a recurring and non-recurring basis at June 30, 2012 and December 31, 2011 (in thousands):

 

 

 

 

 

Fair Value Measurements at Reporting Date

 

 

 

Total

 

Level 1

 

Level 2

 

Level 3

 

June 30, 2012 (unaudited):

 

 

 

 

 

 

 

 

 

Interest rate cap derivative agreements

 

$

72

 

$

 

$

72

 

$

 

Life insurance policy

 

1,689

 

 

1,689

 

 

 

 

 

 

 

 

 

 

 

 

Total assets at June 30, 2012

 

$

1,761

 

$

 

$

1,761

 

$

 

 

 

 

 

 

 

 

 

 

 

December 31, 2011:

 

 

 

 

 

 

 

 

 

Interest rate cap derivative agreements

 

$

386

 

$

 

$

386

 

$

 

Life insurance policy

 

1,877

 

 

1,877

 

 

 

 

 

 

 

 

 

 

 

 

Total assets at December 31, 2011

 

$

2,263

 

$

 

$

2,263

 

$

 

 

 

 

 

 

 

 

 

 

 

 

The following table presents our liabilities measured at fair value on a recurring and non-recurring basis at June 30, 2012 and December 31, 2011 (in thousands):

 

 

 

 

 

Fair Value Measurements at Reporting Date

 

 

 

Total

 

Level 1

 

Level 2

 

Level 3

 

June 30, 2012 (unaudited):

 

 

 

 

 

 

 

 

 

Interest rate swap derivative agreement

 

$

1,753

 

$

 

$

1,753

 

$

 

Retirement benefit agreement

 

1,689

 

 

1,689

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities at June 30, 2012

 

$

3,442

 

$

 

$

3,442

 

$

 

 

 

 

 

 

 

 

 

 

 

December 31, 2011:

 

 

 

 

 

 

 

 

 

Interest rate swap derivative agreement

 

$

1,567

 

$

 

$

1,567

 

$

 

Retirement benefit agreement

 

1,687

 

 

1,687

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities at December 31, 2011

 

$

3,254

 

$

 

$

3,254

 

$

 

 

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Table of Contents

 

The following table presents the gains and impairment charges included in earnings as a result of applying Level 3 measurements for the three and six months ended June 30, 2012 and 2011 (in thousands):

 

 

 

Three Months
Ended

June 30, 2012

 

Three Months
Ended

June 30, 2011

 

Six Months
Ended

June 30, 2012

 

Six Months
Ended

June 30, 2011

 

 

 

(unaudited)

 

(unaudited)

 

(unaudited)

 

(unaudited)

 

Gains:

 

 

 

 

 

 

 

 

 

Investment in unconsolidated joint ventures (1)

 

$

 

$

 

$

 

$

69,230

 

 

 

 

 

 

 

 

 

 

 

Impairment charges:

 

 

 

 

 

 

 

 

 

Other real estate of discontinued operations, net

 

 

(1,495

)

 

(1,495

)

 

 

 

 

 

 

 

 

 

 

Total Level 3 measurement charges included in earnings

 

$

 

$

(1,495

)

$

 

$

67,735

 

 


(1)                        Includes the gains recorded by the Company on the remeasurements of the Company’s equity interests in its Doubletree Guest Suites Times Square and BuyEfficient joint ventures.

 

Accounts Receivable

 

Accounts receivable primarily represents receivables from hotel guests who occupy hotel rooms and utilize hotel services. Accounts receivable also includes, among other things, receivables from customers who utilize the Company’s commercial laundry facility in Rochester, Minnesota, receivables from customers who utilize purchase volume rebates through BuyEfficient, as well as tenants who lease space in the Company’s hotels. The Company maintains an allowance for doubtful accounts sufficient to cover potential credit losses. The Company’s accounts receivable at both June 30, 2012 and December 31, 2011 includes an allowance for doubtful accounts of $0.2 million.

 

Acquisitions of Hotel Properties and Other Entities

 

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. During 2011 and the first six months of 2012, the Company used all available information to make these fair value determinations, and engaged an independent valuation specialist to assist in the fair value determination of the long-lived assets acquired and the liabilities assumed in the Company’s purchases of the Hyatt Chicago Magnificent Mile, the outside 62.0% equity interests in the Doubletree Guest Suites Times Square joint venture, the outside 50.0% equity interests in the BuyEfficient joint venture, the JW Marriott New Orleans and the 75.0% majority interest in the entity that owns the Hilton San Diego Bayfront. Due to the inherent subjectivity in determining the estimated fair value of long-lived assets, the Company believes that the recording of acquired assets and liabilities is a critical accounting policy.

 

Goodwill

 

The Company follows the requirements of the Intangibles — Goodwill and Other Topic of the FASB ASC, which states that goodwill and intangible assets deemed to have indefinite lives are subject to annual impairment tests. As a result, the carrying value of goodwill allocated to the hotel properties and other assets is reviewed at least annually for impairment. In addition, when facts and circumstances suggest that the Company’s goodwill may be impaired, an interim evaluation of goodwill is prepared. Such review entails comparing the carrying value of the individual hotel property or other asset (the reporting unit) including the allocated goodwill to the fair value determined for that reporting unit (see Fair Value of Financial Instruments for detail on the Company’s valuation methodology). If the aggregate carrying value of the reporting unit exceeds the fair value, the goodwill of the reporting unit is impaired to the extent of the difference between the fair value and the aggregate carrying value, not to exceed the carrying amount of the allocated goodwill. The Company’s annual impairment evaluation is performed each year as of December 31.

 

During the first quarter ended March 31, 2011, the Company recorded additional goodwill of $8.4 million related to its purchase of the outside 50.0% equity interest in its BuyEfficient joint venture.

 

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Table of Contents

 

Deferred Financing Fees

 

Deferred financing fees consist of loan fees and other financing costs related to the Company’s outstanding indebtedness and are amortized to interest expense over the terms of the related debt. Upon repayment or refinancing of the underlying debt, any related unamortized deferred financing fee is charged to interest expense. Upon any loan modification, any related unamortized deferred financing fee is amortized over the remaining terms of the modified loan.

 

The Company did not incur or pay any deferred financing fees during either the three or six months ended June 30, 2012. During the three and six months ended June 30, 2011, the Company incurred and paid deferred financing fees of approximately $4.5 million and $4.8 million, respectively, related to new debt and debt refinancings. Such costs are being amortized over the related terms of the loans.

 

In April 2012, the Company wrote off $3,000 in deferred financing fees related to its repayment of the non-recourse mortgage secured by the Renaissance Long Beach.

 

Total amortization and write off of deferred financing fees for the three and six months ended June 30, 2012 and 2011 was as follows (in thousands):

 

 

 

Three Months Ended
June 30, 2012

 

Three Months Ended
June 30, 2011

 

Six Months Ended
June 30, 2012

 

Six Months Ended
June 30, 2011

 

 

 

(unaudited)

 

(unaudited)

 

(unaudited)

 

(unaudited)

 

Continuing operations:

 

 

 

 

 

 

 

 

 

Amortization of deferred financing fees

 

$

959

 

$

809

 

$

1,922

 

$

1,418

 

Write-off of deferred financing fees

 

3

 

 

3

 

 

Total deferred financing fees — continuing operations

 

962

 

809

 

1,925

 

1,418

 

 

 

 

 

 

 

 

 

 

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

Amortization of deferred financing fees

 

3

 

6

 

7

 

13

 

 

 

 

 

 

 

 

 

 

 

Total amortization of deferred financing fees

 

$

965

 

$

815

 

$

1,932

 

$

1,431

 

 

Earnings Per Share

 

The Company applies the two-class method when computing its earnings per share as required by the Earnings Per Share Topic of the FASB ASC, which requires the net income per share for each class of stock (common stock and convertible preferred stock) to be calculated assuming 100% of the Company’s net income is distributed as dividends to each class of stock based on their contractual rights. To the extent the Company has undistributed earnings in any calendar quarter, the Company will follow the two-class method of computing earnings per share.

 

The Company follows the requirements of the Earnings Per Share Topic of the FASB ASC, which states that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. For the three and six months ended June 30, 2012, $47,000 and zero, respectively were allocated to the participating securities. For the three and six months ended June 30, 2011, $0.3 million and $0.7 million, respectively, were allocated to the participating securities.

 

In accordance with the Earnings Per Share Topic of the FASB ASC, basic earnings available (loss attributable) to common stockholders per common share is computed based on the weighted average number of shares of common stock outstanding during each period. Diluted earnings available (loss attributable) to common stockholders per common share is computed based on the weighted average number of shares of common stock outstanding during each period, plus potential common shares considered outstanding during the period, as long as the inclusion of such awards is not anti-dilutive. Potential common shares consist of unvested restricted stock awards, the incremental common shares issuable upon the exercise of stock options and the conversion of the Company’s Series C Cumulative Convertible Redeemable Preferred Stock (“Series C preferred stock”), using the more dilutive of either the two-class method or the treasury stock method.

 

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Table of Contents

 

The following table sets forth the computation of basic and diluted earnings (loss) per common share (in thousands, except per share data):

 

 

 

Three Months Ended
June 30, 2012

 

Three Months Ended
June 30, 2011

 

Six Months Ended
June 30, 2012

 

Six Months Ended
June 30, 2011

 

 

 

(unaudited)

 

(unaudited)

 

(unaudited)

 

(unaudited)

 

Numerator:

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

11,855

 

$

38,929

 

$

(1,113

)

$

90,264

 

Income from consolidated joint venture attributable to non-controlling interest

 

(307

)

(244

)

(867

)

(244

)

Distributions to non-controlling interest

 

(8

)

(7

)

(16

)

(14

)

Preferred stock dividends

 

(7,437

)

(7,310

)

(14,874

)

(12,447

)

Undistributed income allocated to unvested restricted stock compensation

 

(47

)

(291

)

 

(717

)

 

 

 

 

 

 

 

 

 

 

Numerator for basic and diluted earnings available (loss attributable) to common stockholders

 

$

4,056

 

$

31,077

 

$

(16,870

)

$

76,842

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

Weighted average basic and diluted common shares outstanding

 

120,029

 

117,227

 

118,728

 

117,151

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted earnings available (loss attributable) to common stockholders per common share

 

$

0.03

 

$

0.27

 

$

(0.14

)

$

0.66

 

 

The Company’s shares of Series C preferred stock issuable upon conversion, unvested restricted shares associated with its long-term incentive plan and shares associated with common stock options have been excluded from the above calculation of earnings (loss) per share for the three and six months ended June 30, 2012 and 2011, as their inclusion would have been anti-dilutive.

 

Segment Reporting

 

The Company reports its consolidated financial statements in accordance with the Segment Reporting Topic of the FASB ASC. Currently, the Company operates in one segment, operations held for investment.

 

3. Investment in Hotel Properties

 

Investment in hotel properties, net consisted of the following (in thousands):

 

 

 

June 30,
2012

 

December 31,
2011

 

 

 

(unaudited)

 

 

 

Land

 

$

262,009

 

$

262,009

 

Buildings and improvements

 

2,710,028

 

2,600,212

 

Furniture, fixtures and equipment

 

352,567

 

339,598

 

Intangibles

 

163,997

 

162,267

 

Franchise fees

 

1,282

 

1,068

 

Construction in process

 

35,545

 

18,681

 

 

 

3,525,428

 

3,383,835

 

Accumulated depreciation and amortization

 

(715,019

)

(644,967

)

 

 

 

 

 

 

 

 

$

2,810,409

 

$

2,738,868

 

 

In June 2012, the Company purchased the leasehold interest in the 417-room Wyndham Chicago for a contractual purchase price of $88.425 million. The Company funded the acquisition with $29.7 million of cash on hand (including $0.3 million of proration credits) and the issuance of 5,454,164 shares of the Company’s common stock, the “Wyndham stock consideration.” The Wyndham stock consideration was determined by dividing $58.425 million by the product of (1) the closing price of $10.71 on the NYSE of the Company’s common stock on May 2, 2012 and (2) 1.03. In connection with this acquisition, the Company entered into a registration rights agreement requiring the Company to register the Wyndham stock consideration. The Company prepared the registration statement on Form S-3, which was filed with the SEC as required on June 4, 2012. Based on the $9.38 closing price of the Company’s common stock on the NYSE on June 4, 2012, the total purchase price of the Wyndham Chicago hotel for accounting purposes was

 

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Table of Contents

 

$81.16 million, excluding prorations and closing costs. Immediately upon acquisition, the Company rebranded the hotel the Hyatt Chicago Magnificent Mile. The Company recorded the acquisition at fair value using an independent third-party analysis, with the purchase price allocated to investment in hotel properties, hotel working capital assets and liabilities, obligations under capital lease and the Company’s common stock. The Company recognized acquisition-related costs of $1.3 million for both the three and six months ended June 30, 2012, which are included in corporate overhead on the Company’s consolidated statements of operations and comprehensive income (loss). The results of operations for the Hyatt Chicago Magnificent Mile have been included in the Company’s consolidated statements of operations and comprehensive income (loss) from the acquisition date of June 4, 2012 through the second quarter ended June 30, 2012.

 

The fair values of the assets acquired and liabilities assumed at the date of acquisition for the Hyatt Chicago Magnificent Mile were allocated based on an independent third-party analysis. The following table summarizes the fair values of assets acquired and liabilities assumed in this acquisition (in thousands):

 

Assets:

 

 

 

Investment in hotel properties (1)

 

$

96,827

 

Cash

 

21

 

Accounts receivable

 

844

 

Other assets

 

69

 

 

 

 

 

Total assets acquired

 

97,761

 

 

 

 

 

Liabilities:

 

 

 

Capital lease obligation (2)

 

15,579

 

Other current liabilities

 

1,307

 

 

 

 

 

Total liabilities acquired

 

16,886

 

 

 

 

 

Stockholders’ equity (3)

 

51,160

 

 

 

 

 

Total cash paid for acquisition

 

$

29,715

 

 


(1)          Investment in hotel properties was allocated to buildings and improvements ($90.9 million), furniture, fixtures and equipment ($4.2 million) and intangibles related to advanced bookings at the hotel which will be amortized completely over the next six months ($1.7 million). The Company recognized $0.3 million in amortization expense in June 2012 related to these intangibles. The hotel is subject to a building lease, which the Company determined should be accounted for as a capital lease. Accordingly, at acquisition, the Company recorded a capital asset related to its leasehold interest of $58.8 million which has been allocated to buildings and improvements, based upon the estimated fair value of the right to use the leased property for the remaining term of 85.6 years. The capital asset, net of accumulated depreciation of $0.1 million for the three and six months ended June 30, 2012 is included in investment in hotel properties, net, in the accompanying consolidated balance sheet as of June 30, 2012.

 

(2)          The Hyatt Chicago Magnificent Mile is subject to a building lease which expires in December 2097 (see Note 14). The Company evaluated the terms of the lease agreement and determined the lease to be a capital lease pursuant to the Leases Topic of the FASB ASC. At acquisition, the fair value of the remaining rent payments of $15.6 million was recorded as a capital lease obligation. The current portion of this obligation is included in accounts payable and accrued expenses, and the long-term portion of this obligation, net of amortization, is included in capital lease obligations, less current portion in the accompanying consolidated balance sheet as of June 30, 2012.

 

(3)          In accordance with the Fair Value Measurements and Disclosure Topic of the FASB ASC, the Wyndham stock consideration was recorded by the Company based on the $9.38 closing price of the Company’s common stock on the NYSE on June 4, 2012.

 

Acquired properties are included in the Company’s results of operations from the date of acquisition. The following unaudited pro forma results of operations reflect the Company’s results as if the acquisitions of the Hyatt Chicago Magnificent Mile in June 2012, the Doubletree Guest Suites Times Square in January 2011, the JW Marriott New Orleans in February 2011 and the 75.0% majority interest in the entity that owns the Hilton San Diego Bayfront in April 2011 had occurred on January 1, 2011. In the Company’s opinion, all significant adjustments necessary to reflect the effects of the acquisitions have been made (in thousands, except per share data):

 

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Table of Contents

 

 

 

Three Months Ended
June 30, 2012

 

Three Months Ended
June 30, 2011

 

Six Months Ended
June 30, 2012

 

Six Months Ended
June 30, 2011

 

 

 

(unaudited)

 

(unaudited)

 

(unaudited)

 

(unaudited)

 

Revenues

 

$

242,314

 

$

226,160

 

$

447,161

 

$

419,545

 

 

 

 

 

 

 

 

 

 

 

Income available (loss attributable) to common stockholders from continuing operations

 

$

12,296

 

$

10,255

 

$

(2,421

)

$

61,582

 

 

 

 

 

 

 

 

 

 

 

Income (loss) per diluted share available (attributable) to common stockholders from continuing operations

 

$

0.04

 

$

0.02

 

$

(0.15

)

$

0.41

 

 

For both the three and six months ended June 30, 2012, the Company has included $2.7 million of revenues, and $0.9 million of net loss in its consolidated statements of operations and comprehensive income (loss) related to the Company’s 2012 acquisition. For the three and six months ended June 30, 2011, the Company has included $48.3 million and $62.2 million of revenues, respectively, and net income of $2.0 million and a net loss of $3.2 million, respectively, in its consolidated statements of operations and comprehensive income (loss) related to the Company’s 2011 acquisitions.

 

4. Discontinued Operations

 

In June 2012, the Company classified the Marriott Del Mar located in San Diego, California as held for sale due to its probable sale within the next year. The Company classified the hotel as held for sale as of the end of Marriott’s fiscal second quarter, June 15, 2012. As such, the Company reclassified the hotel’s assets and liabilities as of June 15, 2012 and December 30, 2011 (Marriott’s fiscal year end) to discontinued operations on its balance sheets, and the hotel’s results of operations for the three and six fiscal periods ended June 15, 2012 and June 17, 2011 to discontinued operations on its consolidated statements of operations and comprehensive income (loss).

 

In April 2011, the Company sold the Royal Palm Miami Beach for net proceeds of $129.8 million, including $39.8 million in cash and a $90.0 million note receivable from the buyer of the hotel, and recognized a gain on the sale of $14.0 million. The Company reclassified the hotel’s results of operations for the three and six months ended June 30, 2011, to discontinued operations on its consolidated statements of operations and comprehensive income (loss). The Company retained an earn-out right on the Royal Palm hotel which will enable it to receive future payments of up to $20.0 million in the event the hotel achieves certain hurdles.

 

Prior to its acquisition of the Royal Palm Miami Beach in August 2010, the Company purchased a portion of the hotel’s subordinate debt with a principal amount of $17.1 million for $3.0 million. In conjunction with the purchase of the hotel, the Company received $5.4 million, net of related costs, as a partial payment of this subordinate debt, and recorded a receivable of $3.1 million for additional amounts to be received in 2012 related to this subordinate debt. In addition, the Company recorded a receivable of $0.9 million related to prior owner real estate taxes paid by the Company which were to be reimbursed. During the first quarter of 2012, the Company received a total of $4.2 million from the special servicer, which included the $4.0 million expected payment related to the hotel’s subordinate debt and real estate taxes, along with an additional $0.2 million as reimbursement for certain transaction related invoices. The Company recorded a $0.2 million gain on the sale of the hotel in March 2012 to discontinued operations on its consolidated statements of operations and comprehensive income (loss). Also during the first quarter of 2012, the Company received notice regarding real estate and personal property tax refunds totaling $0.3 million due to the Company relating to its ownership periods during the 2010 and 2011 tax years. The Company has included the $0.3 million in discontinued operations on its consolidated statements of operations and comprehensive income (loss).

 

In June 2011, the Company recorded an $18.1 million gain on extinguishment of debt due to the resolution of all contingencies relating to five hotels which the Company deeded back to the lender in 2010 as part of its 2009 secured debt restructuring program.

 

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Table of Contents

 

In July 2011, the Company sold its commercial laundry facility located in Salt Lake City, Utah for net proceeds of $0.1 million, and recognized a loss on the sale of $0.1 million. In anticipation of this sale, the Company recorded an impairment loss of $1.5 million to discontinued operations in June 2011. The Company reclassified the laundry’s results of operations for the three and six months ended June 30, 2011 to discontinued operations on its consolidated statements of operations and comprehensive income (loss).

 

In October 2011, the Company sold the Valley River Inn located in Eugene, Oregon for net proceeds of $16.1 million, including the assumption of the existing mortgage secured by the hotel which totaled $11.5 million on the date of sale, and recognized a gain on the sale of $0.9 million. The Company reclassified the hotel’s results of operations for the three and six months ended June 30, 2011 to discontinued operations on its consolidated statements of operations and comprehensive income (loss).

 

The following sets forth the discontinued operations for the three and six months ended June 30, 2012 and 2011, related to the hotel property classified as held for sale as of June 30, 2012, the two hotel properties and the commercial laundry facility sold in 2011, as well as the five hotel properties deeded back to the lender during 2010 (in thousands):

 

 

 

Three Months Ended
June 30, 2012

 

Three Months Ended
June 30, 2011

 

Six Months Ended
June 30, 2012

 

Six Months Ended
June 30, 2011

 

 

 

(unaudited)

 

(unaudited)

 

(unaudited)

 

(unaudited)

 

Operating revenues

 

$

4,135

 

$

7,757

 

$

8,323

 

$

21,863

 

Operating expenses

 

(3,074

)

(6,735

)

(6,015

)

(16,978

)

Interest expense

 

(683

)

(851

)

(1,368

)

(1,697

)

Depreciation and amortization expense

 

(495

)

(630

)

(965

)

(2,677

)

Impairment loss

 

 

(1,495

)

 

(1,495

)

Gain on extinguishment of debt

 

 

18,145

 

 

18,145

 

Gain on sale of hotels

 

 

14,018

 

177

 

14,018

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from discontinued operations

 

$

(117

)

$

30,209

 

$

152

 

$

31,179

 

 

5. Other Real Estate

 

Other real estate, net consisted of the following (in thousands):

 

 

 

June 30,
2012

 

December 31,
2011

 

 

 

(unaudited)

 

 

 

Land

 

$

2,768

 

$

2,768

 

Buildings and improvements

 

9,503

 

9,481

 

Furniture, fixtures and equipment

 

6,078

 

5,904

 

Construction in process

 

541

 

62

 

 

 

18,890

 

18,215

 

Accumulated depreciation

 

(7,021

)

(6,544

)

 

 

11,869

 

11,671

 

Land held for investment

 

188

 

188

 

 

 

 

 

 

 

 

 

$

12,057

 

$

11,859

 

 

As of June 30, 2012, other real estate, net included a commercial laundry facility, an office building and a vacant parcel of land.

 

6. Investments in Unconsolidated Joint Ventures

 

In December 2006, the Company entered into a joint venture agreement to obtain a 38.0% interest in the Doubletree Guest Suites Times Square located in New York City, New York. The Company accounted for its ownership interest in the hotel using the equity method, and its accounting policies were consistent with those of the unconsolidated joint venture. In January 2011, the Company purchased the outside 62.0% equity interests in its Doubletree Guest Suites Times Square joint venture for $37.5 million, and, as a result, became the sole owner of the entity that owns the hotel. In conjunction with this purchase, the Company recognized a gain of $30.1 million on the remeasurement of the Company’s equity interest in this joint venture to its fair market value, and a gain of $30.4 million on the remeasurement of the Company’s investment in a $30.0 million, 8.5% mezzanine loan secured by the hotel which it purchased in April 2010 for $3.45 million to its fair market value. Subsequent to this acquisition, the Company has consolidated the results of operations of the Doubletree Guest Suites Times Square with its continuing operations, and the mezzanine loan was eliminated in consolidation on the Company’s balance sheet until the mezzanine loan was satisfied in conjunction with the Company’s refinancing of the debt secured by the Doubletree Guest Suites Times Square in October 2011.

 

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Table of Contents

 

In December 2007, the Company entered into a joint venture agreement with Strategic Hotels & Resorts, Inc. (“Strategic”) to own and operate BuyEfficient. Under the terms of the agreement, Strategic acquired a 50.0% interest in BuyEfficient from the Company. The Company accounted for its ownership interest in BuyEfficient using the equity method, and its accounting policies were consistent with those of the unconsolidated joint venture. In January 2011, the Company repurchased Strategic’s 50.0% share in BuyEfficient for $9.0 million. The Company recorded the acquisition at fair value using an independent third-party analysis, with the purchase price allocated to intangibles (which are included in other assets, net on the Company’s consolidated balance sheets as of June 30, 2012 and December 31, 2011), goodwill and other working capital assets and liabilities. In conjunction with this purchase, the Company recognized a gain of $8.7 million on the remeasurement of the Company’s equity interest in this joint venture to its fair market value. Subsequent to this acquisition, the Company is now the sole owner of BuyEfficient, and has consolidated BuyEfficient’s results of operations with its continuing operations.

 

7. Interest Rate Derivative Agreements

 

At June 30, 2012, the Company held two interest rate cap agreements and one interest rate swap agreement to manage its exposure to the interest rate risks related to its floating rate debt. The first interest rate cap agreement was purchased in connection with the Company’s acquisition of the 75.0% majority interest in the entity that owns the Hilton San Diego Bayfront. Concurrent with the acquisition, the joint venture replaced the hotel’s $233.8 million construction loan (which was scheduled to mature in April 2011) with a new $240.0 million mortgage secured by the hotel which bears a floating rate of interest of 3-month LIBOR plus 325 basis points. The Company paid $0.1 million for this interest rate cap agreement. The notional amount of the related debt totaled $120.0 million at June 30, 2012. The interest rate cap strike rate is 3.75%, and the maturity date is in April 2013. The second interest rate cap agreement was acquired in connection with the Company’s refinancing of debt secured by the Doubletree Guest Suites Times Square. The Company’s purchase of the outside 62.0% equity interests in its Doubletree Guest Suites Times Square joint venture in January 2011 included the assumption of $270.0 million of non-recourse senior mortgage and mezzanine debt with a blended interest rate of 3-month LIBOR plus 115 basis points, along with an interest rate cap agreement which the Company valued at $0.1 million at the acquisition date. The Company refinanced this debt in October 2011 with a new $180.0 million non-recourse mortgage which matures in October 2018, and bears interest at a floating rate of 3-month LIBOR plus 325 basis points. In conjunction with this refinancing, the Company entered into an interest rate protection agreement which caps the 3-month LIBOR rate on the new mortgage at 4.0% until October 2015. The Company paid $0.9 million for this interest rate cap agreement. The notional amount of the related debt totaled $180.0 million at June 30, 2012.

 

The interest rate swap agreement was acquired in connection with the Company’s purchase of the JW Marriott New Orleans, which included the assumption of $42.2 million of floating rate debt which was swapped to a fixed rate of 5.45%. The Company valued this interest rate swap agreement at $0.3 million at the acquisition date. The notional amount of the related debt totaled $41.1 million as of June 30, 2012. The interest rate swap agreement caps the LIBOR interest rate on the underlying debt at a total interest rate of 5.45%, and the maturity date is in September 2015.

 

None of the interest rate derivative agreements qualify for effective hedge accounting treatment. Accordingly, changes in the fair value of the Company’s interest rate derivative agreements resulted in net losses of $0.4 million and $1.0 million for the three months ended June 30, 2012 and 2011, respectively, and $0.5 million and $1.0 million for the six months ended June 30, 2012 and 2011, respectively. These net losses have been reflected as increases in interest expense for the three and six months ended June 30, 2012 and 2011. As of June 30, 2012 and December 31, 2011, the fair values of the interest rate cap agreements totaled an asset of $0.1 million and $0.4 million, respectively. The interest rate cap agreements are included in other assets, net on the Company’s consolidated balance sheets. The fair value of the interest rate swap agreement was a liability of $1.8 million and $1.6 million as of June 30, 2012 and December 31, 2011, respectively, and is included in other liabilities on the Company’s consolidated balance sheets.

 

8. Other Assets

 

Other assets, net consisted of the following (in thousands):

 

 

 

June 30,
2012

 

December 31,
2011

 

 

 

(unaudited)

 

 

 

Deposits on potential acquisitions

 

$

3,000

 

$

 

Property and equipment, net

 

2,327

 

2,318

 

Intangibles, net

 

8,177

 

8,476

 

Interest rate cap derivative agreements

 

72

 

386

 

Note receivable

 

305

 

394

 

Other receivables

 

2,898

 

4,950

 

Other

 

3,304

 

3,439

 

 

 

$

20,083

 

$

19,963

 

 

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Table of Contents

 

During the first six months ended June 30, 2012, the Company paid a total of $3.0 million in deposits related to its acquisition in July 2012 of the Hilton Garden Inn Downtown/Magnificent Mile.

 

Due to the purchase of the outside 50.0% equity interest in its BuyEfficient joint venture (see Footnote 6), the Company’s other assets, net as of June 30, 2012 and December 31, 2011, include BuyEfficient’s intangible assets totaling $8.2 million and $8.5 million, respectively, net of accumulated amortization related to certain trademarks, customer and supplier relationships and intellectual property related to internally developed software. These intangibles are amortized using the straight-line method over the remaining useful lives of between seven to 20 years. Accumulated amortization totaled $0.9 million and $0.6 million at June 30, 2012 and December 31, 2011, respectively. Amortization expense totaled $0.2 million for both the three months ended June 30, 2012 and 2011, and $0.3 million for both the six months ended June 30, 2012 and 2011.

 

In April 2010, the Company paid $250,000 to purchase one-half of a $5.0 million 8.075% subordinate note maturing in November 2010 secured by the 101-room boutique hotel known as Twelve Atlantic Station in Atlanta, Georgia. In November 2010, the Company purchased the remaining half of the Twelve Atlantic Station subordinate note for an additional $250,000. In November 2010, the subordinate note was modified to provide for monthly interest only payments of 3.5%, with the remaining interest due at maturity, and the maturity date was extended to November 2012. As the subordinate note was in default, the borrower was required to bring the subordinate note current. As of June 30, 2012, the subordinate note secured by the Twelve Atlantic Station was not in default, however, the Company will continue to account for the Twelve Atlantic Station loan using the cost recovery method until such time as the expected cash flows from the loan are reasonably probable and estimable. The Company received $45,000 and $0.1 million during the three and six months ended June 30, 2012, respectively, and $0.1 million during the year ended December 31, 2011, which payments were applied to the subordinate note’s principal balance in accordance with the cost recovery method.

 

9. Notes Payable

 

Notes payable consisted of the following (in thousands):

 

 

 

June 30,
2012

 

December 31,
2011

 

 

 

(unaudited)

 

 

 

Notes payable requiring payments of interest and principal, with fixed rates ranging from 4.97% to 9.88%; maturing at dates ranging from June 2013 through May 2021. The notes are collateralized by first deeds of trust on 17 hotel properties and one commercial laundry facility at June 30, 2012, and 18 hotel properties and one commercial laundry facility at December 31, 2011.

 

$

1,002,140

 

$

1,043,846

 

Note payable requiring payments of interest and principal, bearing a blended rate of 3-month LIBOR plus 325 basis points; maturing in April 2016. The note is collateralized by a first deed of trust on one hotel property.

 

236,288

 

237,806

 

Note payable requiring payments of interest only through October 2013, and interest and principal thereafter, with a blended interest rate of 3-month LIBOR plus 325 basis points; maturing in October 2018. The note is collateralized by a first deed of trust on one hotel property.

 

180,000

 

180,000

 

Senior Notes, with a fixed interest rate of 4.60%, maturing in July 2027. The notes are guaranteed by the Company and certain of its subsidiaries.

 

58,000

 

62,500

 

 

 

1,476,428

 

1,524,152

 

Less: discount on Senior Notes

 

(536

)

(1,135

)

 

 

1,475,892

 

1,523,017

 

Less: current portion

 

(78,912

)

(53,325

)

 

 

$

1,396,980

 

$

1,469,692

 

 

In April 2012, the Company used existing cash to repay the remaining balance on its $32.2 million non-recourse mortgage secured by the Renaissance Long Beach, which was scheduled to mature in July 2012. The Company wrote off $3,000 in deferred financing fees in connection with the repayment of this debt.

 

In February 2012, the Company repurchased $4.5 million in aggregate principal amount of the Senior Notes for $4.57 million, including $13,000 in interest, using its existing cash.  After the repurchase, such Senior Notes were cancelled.  The Company wrote off $47,000 in deferred financing fees and $0.1 million of the Senior Notes discount, and recognized a loss of $0.2 million on this early extinguishment of debt.

 

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Table of Contents

 

As of June 30, 2012 and December 31, 2011, the Company has $58.0 million and $62.5 million, respectively, in outstanding Senior Notes, which have a maturity date of July 2027 and a stated interest rate of 4.60%. The Company follows the requirements of the Debt Topic of the FASB ASC which states that the liability and equity components of convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) be separately accounted for in a manner that reflects an issuer’s non-convertible debt borrowing rate at the time of issuance. As a result, the liability component is recorded at a discount reflecting its below market interest rate. The liability component is subsequently accreted to its par value over its expected life based on a rate of interest that reflects the issuer’s non-convertible debt borrowing rate at the time of issuance, and is reflected in the results of operations as interest expense. Under the guidelines of the Debt Topic of the FASB ASC, the implicit interest rate for the Senior Notes is 6.5% based on the Company’s non-convertible debt borrowing rate at the time of issuance. Interest expense included accretion of the Senior Notes of $0.3 million for both the three months ended June 30, 2012 and 2011, and $0.5 million for both the six months ended June 30, 2012 and 2011. Interest on the notes is payable semi-annually in arrears on January 15 and July 15 of each year. The notes, subject to specified events and other conditions, are exchangeable into, at the Company’s option, cash, the Company’s common stock, or a combination of cash and the Company’s common stock. The initial exchange rate for each $1,000 principal amount of notes was 28.9855 shares of the Company’s common stock, representing an exchange price of approximately $34.50 per common share. The initial exchange rate is subject to adjustment under certain circumstances, and was adjusted in 2008 as a result of the Company’s modified “Dutch Auction” tender offer, as well as its 2008 year-end dividend consisting of both cash and stock. Currently, the exchange rate for each $1,000 principal amount of notes is 32.9179 shares of the Company’s common stock, representing an exchange price of approximately $30.38 per common share. The Operating Partnership does not have the right to redeem the notes, except to preserve the Company’s REIT status, before January 20, 2013, and may redeem the notes, in whole or in part, thereafter at a redemption price equal to 100% of the principal amount of the notes to be redeemed, plus any accrued and unpaid interest. Upon specified change in control events as well as on specified dates, holders of the notes may require the Operating Partnership to repurchase their notes, in whole or in part, for cash equal to 100% of the principal amount of the notes to be repurchased, plus any accrued and unpaid interest. The notes are the senior unsecured obligations of the Operating Partnership. The Company and several of its subsidiaries have guaranteed the Operating Partnership’s obligations under the notes. The notes do not qualify as a derivative or an equity instrument.

 

In February 2011, the Company purchased the JW Marriott New Orleans for approximately $93.8 million. The acquisition included the assumption of a $42.2 million floating-rate, non-recourse senior mortgage. Interest on the mortgage has been swapped to a fixed rate of 5.45%. The mortgage matures in September 2015, and is subject to a 25-year amortization schedule.

 

In April 2011, the Company paid $182.8 million to acquire a 75.0% majority interest in the joint venture that owns the Hilton San Diego Bayfront. Concurrent with the acquisition, the joint venture replaced the hotel’s $233.8 million construction loan (which was scheduled to mature in April 2011) with a new $240.0 million mortgage secured by the hotel. The new mortgage bears a floating interest rate of 3-month LIBOR plus 325 basis points, matures in April 2016, and is subject to a 30-year amortization schedule.

 

In October 2011, the Company refinanced the $270.0 million non-recourse senior mortgage and mezzanine debt which the Company assumed in connection with its acquisition of the outside 62.0% equity interests in its Doubletree Guest Suites Times Square joint venture in January 2011. The $270.0 million non-recourse senior mortgage and mezzanine debt was scheduled to mature in January 2012, and bore a blended rate of 3-month LIBOR plus 115 basis points. The Company refinanced this debt in October 2011 with a new $180.0 million non-recourse mortgage which matures in October 2018, and bears a floating interest rate of 3-month LIBOR plus 325 basis points. The new mortgage requires payments of interest only for the first 24 months of the term, and is subject to a 30-year amortization schedule. The Company funded the remainder of the repayment of the prior loan with approximately $90.0 million of its unrestricted cash.

 

Total interest incurred and expensed on the notes payable was as follows (in thousands):

 

 

 

Three Months Ended
June 30, 2012

 

Three Months Ended
June 30, 2011

 

Six Months Ended
June 30, 2012

 

Six Months Ended
June 30, 2011

 

 

 

(unaudited)

 

(unaudited)

 

(unaudited)

 

(unaudited)

 

Interest expense

 

$

19,230

 

$

18,432

 

$

38,743

 

$

34,616

 

Loss on derivatives

 

423

 

960

 

499

 

1,004

 

Accretion of Senior Notes

 

258

 

261

 

524

 

522

 

Amortization of deferred financing fees

 

959

 

809

 

1,922

 

1,418

 

Write-off of deferred financing fees

 

3

 

 

3

 

 

 

 

$

20,873

 

$

20,462

 

$

41,691

 

$

37,560

 

 

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Table of Contents

 

10. Other Current Liabilities and Other Liabilities

 

Other current liabilities consisted of the following (in thousands):

 

 

 

June 30,
2012

 

December 31,
2011

 

 

 

(unaudited)