UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2014
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 001-32319
Sunstone Hotel Investors, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Maryland |
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20-1296886 |
(State or Other Jurisdiction of |
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(I.R.S. Employer |
Incorporation or Organization) |
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Identification Number) |
120 Vantis, Suite 350 |
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Aliso Viejo, California |
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92656 |
(Address of Principal Executive Offices) |
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(Zip Code) |
Registrant’s telephone number, including area code: (949) 330-4000
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class |
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Name of Each Exchange on Which Registered |
Common Stock, $0.01 par value |
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New York Stock Exchange |
Series D Cumulative Redeemable Preferred Stock, $0.01 par value |
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New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
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, as amended (the “Exchange Act”), 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 ☒ 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 ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).
Large accelerated filer ☒ |
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Accelerated filer ☐ |
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Non-accelerated filer ☐ |
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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 ☒
The aggregate market value of the voting stock held by non-affiliates of the registrant based upon the closing sale price of the registrant’s common stock on June 30, 2014 as reported on the New York Stock Exchange (“NYSE”) was approximately $3.0 billion. The registrant had no non-voting common equity outstanding on such date. This amount excludes 2,147,108 shares of the registrant’s common stock held by the executive officers and directors. Exclusion of such shares should not be construed to indicate that any such person possesses the power, direct or indirect, to direct or cause the direction of the management or policies of the registrant or that such person is controlled by or under common control with the registrant.
The number of shares of the registrant’s common stock outstanding as of February 12, 2015 was 208,512,765.
Documents Incorporated by Reference
Part III of this Report incorporates by reference information from the definitive Proxy Statement for the registrant’s 2015 Annual Meeting of Stockholders.
SUNSTONE HOTEL INVESTORS, INC.
ANNUAL REPORT ON
FORM 10-K
For the Year Ended December 31, 2014
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The “Company” means Sunstone Hotel Investors, Inc., a Maryland corporation, and one or more of its subsidiaries, including Sunstone Hotel Partnership, LLC, or the Operating Partnership, and Sunstone Hotel TRS Lessee, Inc., or the TRS Lessee, and, as the context may require, Sunstone Hotel Investors only or the Operating Partnership only.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report, together with other statements and information publicly disseminated by the Company, contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and includes this statement for purposes of complying with these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe the Company’s future plans, strategies and expectations, are generally identifiable by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions. You should not rely on forward-looking statements because they involve known and unknown risks, uncertainties and other factors that are, in some cases, beyond the Company’s control and which could materially affect actual results, performances or achievements. Factors that may cause actual results to differ materially from current expectations include, but are not limited to the risk factors discussed in this Annual Report on Form 10-K. Accordingly, there is no assurance that the Company’s expectations will be realized. Except as otherwise required by the federal securities laws, the Company disclaims any obligations or undertaking to publicly release any updates or revisions to any forward-looking statement contained herein (or elsewhere) to reflect any change in the Company’s expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.
Our Company
We were incorporated in Maryland on June 28, 2004. We are a real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended (the “Code”). As of December 31, 2014, we had interests in 30 hotels (the “30 hotels”). The 30 hotels are comprised of 14,303 rooms, located in 13 states and in Washington, DC.
Our primary business is to acquire, own, asset manage and renovate full-service hotel and select focus-service hotel properties in the United States. As part of our ongoing portfolio management strategy, we may also sell hotel properties from time to time. All but one (the Boston Park Plaza) of the 30 hotels are operated under nationally recognized brands such as Marriott, Hilton, Hyatt, Fairmont and Sheraton, which are among the most respected and widely recognized brands in the lodging industry. While independent hotels may do well in strong market locations, we believe the largest and most stable segment of travelers prefer the consistent service and quality associated with nationally recognized brands. Our portfolio primarily consists of upper upscale hotels in the United States. As of December 31, 2014, our 30 hotels include two luxury hotels and 28 hotels classified as either upscale or upper upscale. The classifications luxury, upper upscale and upscale are defined by Smith Travel Research, an independent provider of lodging industry statistical data. Smith Travel Research classifies hotel chains into the following segments: luxury; upper upscale; upscale; upper midscale; midscale; economy; and independent.
Our hotels are operated by third-party managers pursuant to long-term management agreements with our TRS Lessee or its subsidiaries. As of December 31, 2014, our third-party managers included: subsidiaries of Marriott International, Inc. or Marriott Hotel Services, Inc. (collectively “Marriott”), managers of 11 of the Company’s 30 hotels; Interstate Hotels & Resorts, Inc. (“IHR”), manager of six of the Company’s 30 hotels; Highgate Hotels L.P. and an affiliate (“Highgate”), manager of four of the Company’s 30 hotels; Davidson Hotels & Resorts (“Davidson”), Hilton Worldwide (“Hilton”) and Hyatt Corporation (“Hyatt”), each a manager of two of the Company’s 30 hotels; and Crestline Hotels & Resorts (“Crestline”), Dimension Development Company (“Dimension”) and Fairmont Hotels & Resorts (U.S.) (“Fairmont”), each a manager of one of the Company’s 30 hotels. In addition, we own BuyEfficient, LLC (“BuyEfficient”), an electronic purchasing platform that allows members to procure food, operating supplies, furniture, fixtures and equipment.
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Competitive Strengths
We believe the following competitive strengths distinguish us from other owners of lodging properties:
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Strong Access to Capital. As a publicly traded REIT, over the long-term, we may benefit from greater access to a variety of forms of capital as compared to non-public investment vehicles. |
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Low Cost of Capital. As a publicly traded REIT, over the long-term, we may benefit from a lower cost of capital as compared to non-public investment vehicles as a result of our liquidity, professional management and portfolio diversification. |
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Significant Cash Position. As of December 31, 2014, we had total cash of $304.2 million, including $82.1 million of restricted cash. As we believe the lodging cycle is in the middle phase of a potentially prolonged cyclical recovery, we expect to deploy a portion of our excess cash balance in 2015 towards dividend distributions, capital investments in our portfolio, debt repayments (specifically our 2015 remaining debt maturities) and selective acquisitions. |
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Flexible Capital Structure. We believe our capital structure provides us with appropriate financial flexibility to execute our strategy. As of December 31, 2014, the weighted average term to maturity of our debt is approximately four years, and 71.6% of our debt is fixed rate with a weighted average interest rate of 5.2%. Including our variable-rate debt obligations based on variable rates at December 31, 2014, the weighted average interest rate on our debt is 4.5%. All of our mortgage debt is in the form of single asset non-recourse loans rather than in cross-collateralized multi-property pools. We currently believe this structure is appropriate for the operating characteristics of our business as it isolates risk and provides flexibility for various portfolio management initiatives, including the sale of individual hotels subject to existing debt. |
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Low Leverage. Over the past three years, we have been committed to thoughtfully and methodically reducing our leverage while maintaining a focus on creating and protecting stockholder value. We believe that by achieving low leverage and high financial flexibility by the time the current cycle peaks, we will position the Company to create value during the next successive cyclical trough by acquiring distressed assets or securities. |
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High Quality Portfolio. |
Presence in Key Markets. We believe that our hotels are located in desirable markets with major demand generators and significant barriers to entry for new supply. In 2014, approximately 87% of the revenues generated by the 30 hotels were earned by hotels located in key gateway markets such as Boston, New York, Washington, DC/Baltimore, Chicago, Orlando, New Orleans, San Francisco, Los Angeles, Orange County and San Diego. Over time, we expect the revenues of hotels located in key gateway markets to grow more quickly than the average for U.S. hotels as a result of stronger and more diverse economic drivers as well as higher levels of international travel.
Upper Upscale and Upscale Concentration. The upper upscale and upscale segments, which represented approximately 94% of the hotel revenue generated by the 30 hotels during 2014, tend to outperform the lodging industry, particularly in the recovery phase of the lodging cycle. As of December 31, 2014, the hotels comprising our 30 hotel portfolio averaged 477 rooms in size. Our total 30 hotel Comparable Portfolio RevPAR was $160.11 for the year ended December 31, 2014.
Nationally Recognized Brands. All but one (the Boston Park Plaza) of the 30 hotels are operated under nationally recognized brands, including Marriott, Hilton, Hyatt, Fairmont and Sheraton. We believe that affiliations with strong brands improve the appeal of our hotels to a broad set of travelers and help to drive business to our hotels.
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Recently Renovated Hotels. From January 1, 2010 through December 31, 2014, we invested $457.5 million in capital renovations throughout the 30 hotels. We believe that these capital renovations have improved the competitiveness of our hotels and have helped to position our portfolio for future growth.
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Seasoned Management Team. Each of our core disciplines, asset management, acquisitions and finance, are overseen by industry leaders with demonstrated track records. |
Asset Management. Our asset management team is responsible for maximizing the long-term value of our real estate investments by achieving above average revenue and profit performance through proactive oversight of hotel operations. Our asset management team leads property-level innovation, benchmarks best practices and aggressively oversees hotel management teams and property plans. We work with our operators to develop hotel-level “master plans,” which include positioning and capital renovation plans. We believe that a proactive asset management program can help to grow the revenues of our hotel portfolio and maximize operational efficiency by leveraging best practices and innovations across our various hotels, and by initiating well-timed and focused capital improvements aimed at improving the appeal of our hotels.
Acquisitions. Our acquisitions team is responsible for enhancing our portfolio quality and scale by executing well-timed acquisitions and dispositions that maximize our risk-adjusted return on invested capital. We believe that our significant acquisition and disposition experience will allow us to continue to execute our cycle-appropriate strategy to redeploy capital from slower growth to higher growth hotels. From the date of our initial public offering through December 31, 2014, we acquired interests in 26 hotel properties and sold 42 hotel properties. Pursuant to our cycle-appropriate strategy, our focus shifted from acquisitions to dispositions in 2007, 2008 and the majority of 2009 as the lodging cycle peaked and experienced a down cycle. Towards the later part of 2009 and into 2010 and 2011, our focus shifted to the selective acquisition of upper upscale hotels as we entered a recovery phase in the lodging cycle. In light of increasing demand for lodging and the generally muted supply of new hotel development, we believe we are currently in the middle phase of a cyclical lodging recovery. Accordingly, during the past four years, we selectively acquired interests in nine hotels: the Doubletree Guest Suites Times Square in January 2011; the JW Marriott New Orleans in February 2011; the Hilton San Diego Bayfront in April 2011; the Hyatt Chicago Magnificent Mile in June 2012; the Hilton Garden Inn Chicago Downtown/Magnificent Mile in July 2012; the Hilton New Orleans St. Charles in May 2013; the Boston Park Plaza in July 2013; the Hyatt Regency San Francisco in December 2013; and the Marriott Wailea in July 2014. We plan to maintain this focus of selective acquisitions in 2015, as we believe our industry relationships may create opportunities for us to acquire individual hotel assets at attractive values relative to our cost of capital. We will also focus on capital recycling, and may selectively sell hotels that we believe have lower growth prospects, have significant ongoing capital needs, or that we can sell at a substantial premium to our internal valuation of the asset.
Finance. We have a highly experienced finance team focused on minimizing our cost of capital and maximizing our financial flexibility by proactively managing our capital structure and opportunistically sourcing appropriate capital for growth, while maintaining a best in class disclosure and investor relations program. Accordingly, our financial objectives include the maintenance of appropriate levels of liquidity through the cyclical recovery phase, with liquidity levels maximized in advance of anticipated cyclical declines. During 2014, we reduced our total mortgage debt by $23.8 million through amortization, as well as an additional $2.1 million through our refinancing of debt secured by the Embassy Suites La Jolla. We also increased our debt by $51.1 million through our refinancing of debt secured by the JW Marriott New Orleans. In total, we refinanced three mortgages during 2014, resulting in reduced interest rates and extended maturity dates. Our refinancing of the $67.1 million mortgage secured by the Embassy Suites La Jolla into a new $65.0 million mortgage reduced the interest rate from a fixed rate of 6.6% to a fixed rate of 4.12%, and extended the maturity date from June 2019 to January 2025. Our refinancing of the $38.9 million mortgage secured by the JW Marriott New Orleans into a new $90.0 million mortgage reduced the interest rate from 5.45% under a related interest rate swap agreement to a fixed rate of 4.15%, and extended the maturity date from September 2015 to December 2024. Lastly, our amendment of the $228.3 million mortgage secured by the Hilton San Diego Bayfront reduced the interest rate from
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three-month LIBOR plus 325 to one-month LIBOR plus 225, while extending the maturity date from April 2016 to August 2019.
Business Strategy
Our mission is to create meaningful value for our stockholders by becoming the premier hotel owner. Our values include transparency, trust, ethical conduct, communication and discipline. As demand for lodging generally fluctuates with the overall economy, we seek to employ a balanced, cycle-appropriate corporate strategy. Our strategy over the next several years, during what we believe will be the middle/mature phase of the lodging cycle, is to maximize stockholder value through disciplined capital recycling, which is likely to include selective acquisitions and dispositions, while maintaining balance sheet flexibility and strength. Our goal is to maintain low leverage and high financial flexibility through the current cycle peak. We believe if we are successful in executing on this strategy, we will position the Company to create value during the next cyclical trough by opportunistically acquiring distressed assets or securities. Our strategic plan encompasses several elements, including proactive portfolio management, intensive asset management, disciplined external growth and continued balance sheet strength as detailed below:
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Proactive Portfolio Management. The leaders of each of our core disciplines function as a portfolio management team. The portfolio management team’s purpose is to strategically maximize the long-term value of our assets by enhancing our portfolio quality and scale, optimizing our exposure to key markets, and improving the effectiveness and efficiency of our decision making. Accordingly, the team is responsible for developing a portfolio-wide strategy related to brand and operator relationships, asset quality and scale, target markets, capital investments, and portfolio capitalizations. Our portfolio strategy may also include the disposition of certain hotels. |
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Intensive Asset Management. Through all phases of the lodging cycle, our strategy emphasizes internal growth and value enhancements through intensive asset management, which entails working closely with our third-party hotel operators to develop and implement long-term strategic plans for each hotel designed to enhance revenues, minimize operational expenses and asset risk, maximize the appeal of our hotels to travelers and maximize our return on invested capital. We also focus on improving the appeal and growth potential of our existing hotels through internally-managed hotel renovations, repositionings and other capital expenditure projects. |
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Disciplined External Growth. Our external growth plan is oriented around investing in institutional-quality hotels that generate returns in excess of our cost of capital, that are additive to the quality of our portfolio, that have attractive growth potential and that may benefit from our asset management competencies. We endeavor to structure our acquisitions in ways that will not only increase the value of our shares of common stock, but also will advance our other corporate objectives, such as maintaining our financial flexibility and our low leverage. During periods of cyclical decline, our strategy may emphasize opportunistically investing in distressed assets and the repurchase of our equity or debt securities. In addition to hotel acquisitions, we may seek to grow our portfolio by making investments in defaulted and/or distressed debt positions in loan-to-own hotel transactions, utilizing our REIT structure to effect strategic combinations with select property owners, effecting portfolio purchases from institutional and other owners seeking portfolio liquidity, and by providing capital solutions to illiquid owners facing debt maturities or capital requirements. |
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Continued Balance Sheet Strength. We believe that a low overall cost of capital and significant financial flexibility are very important to the successful execution of our strategy. Our balance sheet strategy is oriented toward maximizing financial flexibility especially during cyclical declines. Accordingly, our financial objectives include the maintenance of appropriate levels of liquidity through the cyclical recovery phase, with access to multiple sources of attractively priced capital maximized in advance of cyclical declines. Our financial objectives are integral to our overall corporate strategy and, accordingly, we have developed our financial objectives in conjunction with our portfolio management and growth objectives. The lodging industry is economically sensitive. Therefore, our financial objectives are aimed at reducing the potentially negative impact of combining high operating leverage with high financial leverage, while preserving access to multiple capital sources and minimizing our weighted-average cost of capital. We seek to capitalize our acquisitions in a way that will advance our financial objectives. During the mature phase of the lodging cycle, our financial objectives may include increasing our liquidity position as a means to enhance financial
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flexibility in the event of a subsequent period of cyclical decline. Our liquidity improvement objective may be accomplished through selective hotel dispositions, capital raises, paying a portion of our dividends with our stock or by retaining excess cash generated by our operations. |
Through our industry relationships, our knowledge and experience in both real estate and REIT issues, our extensive experience in acquiring and upgrading hotel properties, as well as our financial structuring capabilities, flexible capital structure, strong liquidity position and REIT structure, we believe we are well positioned to create meaningful value to our stockholders.
Competition
The hotel industry is highly competitive. Our hotels compete with other hotels for guests in each of their markets. Competitive advantage is based on a number of factors, including location, quality of accommodations, convenience, brand affiliation, room rates, service levels and amenities, and level of customer service. Competition is often specific to the individual markets in which our hotels are located and includes competition from existing and new hotels operated under brands in the luxury, upper upscale and upscale segments. Increased competition could harm our occupancy or revenues or may lead our operators to increase service or amenity levels, which may reduce the profitability of our hotels.
We believe that competition for the acquisition of hotels is fragmented. We face competition from institutional pension funds, private equity investors, other REITs and numerous local, regional and national owners, including franchisors, in each of our markets. Some of these entities may have substantially greater financial resources than we do and may be able and willing to accept more risk than we believe we can prudently manage. During the recovery phase of the lodging cycle, when we seek to acquire hotels, competition among potential buyers may increase the bargaining power of potential sellers, which may reduce the number of suitable investment opportunities available to us or increase pricing. Similarly, during times when we seek to sell hotels, competition from other sellers may increase the bargaining power of the potential property buyers.
Management Agreements
All of our 30 hotels are managed by third parties pursuant to management agreements with our TRS Lessee or its subsidiaries. As of December 31, 2014, Marriott managed 11 of our hotels, IHR managed six of our hotels, Highgate managed four of our hotels, Davidson, Hilton and Hyatt each managed two of our hotels, and the remaining three hotels were individually managed by Crestline, Dimension and Fairmont. The following is a general description of our third-party management agreements as of December 31, 2014.
Marriott. Our management agreements with Marriott require us to pay Marriott a base management fee equal to 3.0% of total revenue. Inclusive of renewal options and absent prior termination by either party, these management agreements expire between 2031 and 2078. Additionally, six of the aforementioned management agreements require payment of an incentive fee of 20.0% of the excess of gross operating profit over a certain threshold; one management agreement requires payment of an incentive fee of 20% of the excess of gross operating profit over a certain threshold, however the total base and incentive fees were capped at 4.25% of gross revenue for 2012 and 2013 and 4.5% of gross revenue for 2014, and are capped at 4.75% of gross revenue for 2015, 5.0% of gross revenue for the first seven months of 2016, and 5.25% of gross revenue for the remaining term of the agreement; one management agreement requires payment of an incentive fee of 35.0% of the excess of gross operating profit over a certain threshold; two management agreements require payment of a tiered incentive fee ranging from 15.0% to 20.0% of the excess of gross operating profit over certain thresholds; and one management agreement requires payment of an incentive fee of 10.0% of adjusted gross operating profit, limited to 3.0% of gross revenue. The management agreements with Marriott may be terminated earlier than the stated term if certain events occur, including the failure of Marriott to satisfy certain performance standards, a condemnation of, a casualty to, or force majeure event involving a hotel, the withdrawal or revocation of any license or permit required in connection with the operation of a hotel and upon a default by Marriott or us that is not cured prior to the expiration of any applicable cure periods. In certain instances, Marriott has rights of first refusal to either purchase or lease hotels, or to terminate the applicable management agreement in the event we sell the respective hotel.
IHR. Our management agreements with IHR require us to pay a management fee ranging from 2.0% to 2.1% of gross revenue; plus an incentive fee of 10.0% of the excess of net operating income over a certain threshold. The incentive fee,
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however, may not exceed a range of 1.5% to 1.9% of the total revenue for all the hotels managed by IHR for any fiscal year.
With the exception of the IHR management agreement at the Sheraton Cerritos (which agreement is subject to automatic two-year renewal terms, the first of which commenced in 2012), the IHR management agreements expire in 2024 and provide us the right to renew each management agreement for up to two additional terms of five years each, absent a prior termination by either party.
Highgate. Our Boston Park Plaza, Doubletree Guest Suites Times Square, Hilton Times Square and Renaissance Westchester hotels are operated under management agreements with Highgate. The management agreement at the Boston Park Plaza required us to pay Highgate a base management fee of 2.5% of gross revenue until July 1, 2014. From July 2, 2014 to July 1, 2015, the base management fee increases to 2.75% of gross revenue, and thereafter the base management fee is 3.0% of gross revenue. The agreement expires in 2023, absent a prior termination by either party. In addition, the management agreement at the Boston Park Plaza requires us to pay an incentive fee of 15.0% of the excess of net operating income over a certain threshold.
The management agreements at the Doubletree Guest Suites Times Square, the Hilton Times Square and the Renaissance Westchester require us to pay Highgate a base management fee of 3.0% of gross revenue. The management agreement at the Doubletree Guest Suites Times Square expires in 2037, absent a prior termination by either party. In addition, the management agreement at the Doubletree Guest Suites Times Square requires us to pay an incentive fee of 1.0% of annual gross receipts in the event that a certain return threshold is achieved. The management agreement at the Hilton Times Square expires in 2021 and provides Highgate with the right to renew for two additional terms of five years upon the achievement of certain performance thresholds, absent a prior termination by either party. In addition, the management agreement at the Hilton Times Square requires us to pay an incentive fee of 50.0% of the excess of net operating income over a certain threshold, limited to 1.25% of total revenue. The management agreement at the Renaissance Westchester expires in 2022, absent early termination by either party, and does not require payment of an incentive fee.
Davidson. Our Embassy Suites Chicago and Hyatt Chicago Magnificent Mile hotels are operated under management agreements with Davidson. The management agreement at the Embassy Suites Chicago expires in May 2015, and provides us with the right to renew for up to two additional terms of five years each, absent a prior termination by either party. The agreement requires us to pay 2.0% of total revenue as a base management fee and calls for an incentive fee of 15.0% of the excess of net operating income over a certain threshold (capped at 1.0% of total revenue) and an additional incentive fee in the amount of 1.0% of total revenue upon achieving a certain level of net operating income (capped at 1.0% of total revenue). The base and incentive management fees payable to Davidson under the Embassy Suites Chicago management agreement have an aggregate cap of 4.0% of total revenue.
The management agreement at the Hyatt Chicago Magnificent Mile expires in 2019, and provides us with the right to renew for up to two additional terms of five years each, absent a prior termination by either party. The agreement requires us to pay 2.5% of total revenue as a base management fee and calls for an incentive fee of 10.0% of the excess of net operating income over a certain threshold (capped at 1.5% of total revenue). The base and incentive management fees payable to Davidson under the Hyatt Chicago Magnificent Mile management agreement have an aggregate cap of 4.0% of total revenue. In addition to the base and incentive management fees, the Hyatt Chicago Magnificent Mile management agreement required us to pay Davidson a development fee for their assistance in converting the hotel to a Hyatt equal to the lesser of 2.0% of the total development costs we incurred, or $0.5 million. The development fee, which totaled $0.5 million, was paid in full during 2013.
Hilton. Our Embassy Suites La Jolla and Hilton San Diego Bayfront hotels are operated under management agreements with Hilton. The management agreement at the Embassy Suites La Jolla expires in 2016 (absent early termination by either party), and provides no renewal options. The agreement requires us to pay a base management fee of 2.25% of gross revenue. The agreement includes an incentive fee of 15.0% of our net profit at the hotel in excess of certain net profit thresholds. The management agreement at the Hilton San Diego Bayfront expires in 2018 and provides Hilton with the right to renew for up to three additional terms of five years each, absent a prior termination by either party. The agreement requires us to pay a base fee of 2.5% of total revenue and an incentive fee of 15.0% of the excess of operating cash flow over a certain percentage.
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Hyatt. Our Hyatt Regency Newport Beach hotel is operated under a management agreement with Hyatt. The agreement expires in 2019 and provides either party the right to renew for successive periods of 10 years (provided that the term of the agreement shall in no event extend beyond 2039), absent early termination by either party. The agreement requires us to pay 3.5% of total hotel revenue as a base management fee, with an additional 0.5% of total revenue payable to Hyatt based upon the hotel achieving specific operating thresholds. The agreement also requires us to pay an incentive fee equal to 10.0% of the excess of adjusted profit over $2.0 million, and 5.0% of the excess of adjusted profit over $6.0 million.
Our Hyatt Regency San Francisco hotel is operated by Hyatt under an operating lease with economics that follow a typical management fee structure. The lease expires in 2050, and provides no renewal options. Pursuant to the lease, Hyatt retains 3.0% of total revenue as a base management fee. The lease also provides for Hyatt the opportunity to earn an incentive fee if gross operating profit exceeds certain thresholds.
Crestline. Our Hilton Garden Inn Chicago Downtown/Magnificent Mile hotel is operated under a management agreement with Crestline. The agreement expires in 2022 (absent early termination by either party), and provides us with the right to renew for up to two additional terms of five years each. The agreement requires us to pay 2.0% of gross revenue as a base management fee, and requires us to pay an incentive fee of 10.0% of the excess of operating profit over a certain threshold.
Dimension. Our Hilton New Orleans St. Charles hotel is operated under a management agreement with Dimension. The agreement expires at the end of 2017 (absent early termination by either party), and provides for automatic month-to-month renewals thereafter. The agreement requires us to pay 3.0% of gross revenue as a base management fee. The agreement does not require payment of an incentive fee.
Fairmont. Our Fairmont Newport Beach hotel is operated under a management agreement with Fairmont. The agreement expires in 2015 (absent early termination by either party) and provides Fairmont with two extension options, the first option having a term of 20 years and the second option having a term of 10 years. The agreement requires us to pay 3.0% of total revenue as a base management fee and calls for payment of incentive fees ranging from 20.0% to 30.0% of the hotel’s net profit above certain net profit thresholds. The base and incentive management fees payable to Fairmont under the management agreement have an aggregate cap of 6.0% of total revenue.
The existing management agreements with Marriott, Hilton, Hyatt and Fairmont require the manager to furnish chain services that are generally made available to other hotels managed by that operator. Costs for these chain services are reimbursed by us. Such services include: (1) the development and operation of computer systems and reservation services; (2) management and administrative services; (3) marketing and sales services; (4) human resources training services; and (5) such additional services as may from time to time be more efficiently performed on a national, regional or group level.
Franchise Agreements
As of December 31, 2014, 15 of the 30 hotels were operated subject to franchise agreements. Franchisors provide a variety of benefits to franchisees, including nationally recognized brands, centralized reservation systems, national advertising, marketing programs and publicity designed to increase brand awareness, training of personnel and maintenance of operational quality at hotels across the brand system.
The franchise agreements generally specify management, operational, record-keeping, accounting, reporting and marketing standards and procedures with which our subsidiary, as the franchisee, must comply. The franchise agreements obligate the subsidiary to comply with the franchisors’ standards and requirements with respect to training of operational personnel, safety, maintaining specified insurance, the types of services and products ancillary to guest room services that may be provided by the subsidiary, display of signage and the type, quality and age of furniture, fixtures and equipment included in guest rooms, lobbies and other common areas. The franchise agreements for our hotels require that we reserve up to 5.0% of the gross revenues of the hotels into a reserve fund for capital expenditures.
The franchise agreements also provide for termination at the franchisor’s option upon the occurrence of certain events, including failure to pay royalties and fees or to perform other obligations under the franchise license, bankruptcy and abandonment of the franchise or a change in control. The subsidiary that is the franchisee is responsible for making all
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payments under the franchise agreements to the franchisors; however, the Company guaranties certain obligations under a majority of the franchise agreements.
In June 2012, we purchased the Wyndham Chicago and immediately rebranded the hotel the Hyatt Chicago Magnificent Mile. As incentive to rebrand the hotel to a Hyatt, Hyatt Franchising, L.L.C. paid us $6.5 million in June 2013, once the conversion to Hyatt was complete. We are amortizing the $6.5 million on a straightline basis over the remaining 25-years of our franchise agreement with Hyatt, which term ends in 2039.
Tax Status
We have elected to be taxed as a REIT under Sections 856 through 859 of the Code, commencing with our taxable year ended December 31, 2004. Under current federal income tax laws, we are required to distribute at least 90% of our net taxable income to our stockholders. While REITs enjoy certain tax benefits relative to C corporations, as a REIT we may, however, be subject to certain federal, state and local taxes on our income and property. We may also be subject to federal income and excise tax on our undistributed income.
Taxable REIT Subsidiary
Subject to certain limitations, a REIT is permitted to own, directly or indirectly, up to 100% of the stock of a taxable REIT subsidiary, or TRS. The TRS may engage in businesses and earn income that are prohibited to a REIT. In particular, a hotel REIT is permitted to own a TRS that leases hotels from the REIT, rather than requiring the lessee to be an unaffiliated third party. However, a hotel leased to a TRS still must be managed by an unaffiliated third party in the business of managing hotels. The TRS provisions are complex and impose certain conditions on the use of TRSs. This is to assure that TRSs are subject to an appropriate level of federal corporate taxation.
A TRS is a fully taxable corporation that may earn income that would not be qualifying income if earned directly by us. A TRS may perform activities such as development, and other independent business activities. However, a TRS may not directly or indirectly operate or manage any hotels or provide rights to any brand name under which any hotel is operated.
We and the TRS Lessee must make a joint election with the IRS for the TRS Lessee to be treated as a TRS. A corporation of which a qualifying TRS owns, directly or indirectly, more than 35% of the voting power or value of the corporation’s stock will automatically be treated as a TRS. Overall, no more than 25% of the value of our assets may consist of securities of one or more TRS, and no more than 25% of the value of our assets may consist of the securities of TRSs and other assets that are not qualifying assets for purposes of the 75% asset test. The 75% asset test generally requires that at least 75% of the value of our total assets be represented by real estate assets, cash, or government securities.
The rent that we receive from a TRS qualifies as “rents from real property” as long as the property is operated on behalf of the TRS by a person who qualifies as an “independent contractor” and who is, or is related to a person who is, actively engaged in the trade or business of operating “qualified lodging facilities” for any person unrelated to us and the TRS (an “eligible independent contractor”). A “qualified lodging facility” is a hotel, motel or other establishment in which more than one-half of the dwelling units are used on a transient basis. A “qualified lodging facility” does not include any facility where wagering activities are conducted. A “qualified lodging facility” includes customary amenities and facilities operated as part of, or associated with, the lodging facility as long as such amenities and facilities are customary for other properties of a comparable size and class owned by other unrelated owners.
We have formed the TRS Lessee as a wholly owned TRS. We lease each of our hotels to the TRS Lessee or one of its subsidiaries. These leases provide for a base rent plus variable rent based on occupied rooms and departmental revenues. These leases must contain economic terms which are similar to a lease between unrelated parties. If they do not, the IRS could impose a 100% excise tax on certain transactions between our TRS and us or our tenants that are not conducted on an arm’s-length basis. We believe that all transactions between us and the TRS Lessee are conducted on an arm’s-length basis. Further, the TRS rules limit the deductibility of interest paid or accrued by a TRS to us to assure that the TRS is subject to an appropriate level of corporate taxation.
The TRS Lessee has engaged eligible independent contractors to manage the hotels it leases from Sunstone Hotel Partnership, LLC.
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Ground, Building and Air Lease Agreements
At December 31, 2014, nine of the 30 hotels are subject to ground, building and/or air leases with unaffiliated parties that cover either all or portions of their respective properties. As of December 31, 2014, the remaining terms of these ground, building and air leases (including renewal options) range from approximately 29 to 112 years. These leases generally require us to make rental payments and payments for all or portions of costs and expenses, including real and personal property taxes, insurance and utilities associated with the leased property.
Any proposed sale of a property that is subject to a ground, building or air lease or any proposed assignment of our leasehold interest as lessee under the ground, building or air lease may require the consent of the applicable lessor. As a result, we may not be able to sell, assign, transfer or convey our interest in any such property in the future absent the consent of the ground, building or air lessor, even if such transaction may be in the best interests of our stockholders. Three of the nine leases prohibit the sale or conveyance of the hotel and assignment of the lease by us to another party without first offering the lessor the opportunity to acquire our interest in the associated hotel and property upon the same terms and conditions as offered by us to the third party.
Three of the nine leases allow us the option to acquire the ground or building lessor’s interest in the ground or building lease subject to certain exercisability provisions. From time to time, we evaluate our options to purchase the ground lessors’ interests in the leases. As such, in June 2014, we purchased the land beneath the Fairmont Newport Beach for $11.0 million, reducing our ground lease expense by a total of $0.6 million for 2014.
Offices
We lease our headquarters located at 120 Vantis, Suite 350, Aliso Viejo, California 92656 from an unaffiliated third party. We occupy our headquarters under a lease that terminates on August 30, 2018.
Employees
At February 1, 2015, we had 79 employees, including 31 employees at BuyEfficient. We believe that our relations with our employees are positive. All persons employed in the day-to-day operations of the hotels are employees of the management companies engaged by the TRS Lessee or its subsidiaries to operate such hotels.
Environmental
Environmental reviews have been conducted on all of our hotels. Environmental consultants retained by our lenders have conducted Phase I environmental site assessments on many of our properties. In certain instances, these Phase I assessments relied on older environmental assessments prepared in connection with prior financings. Phase I assessments are designed to evaluate the potential for environmental contamination of properties based generally upon site inspections, facility personnel interviews, historical information and certain publicly available databases. Phase I assessments will not necessarily reveal the existence or extent of all environmental conditions, liabilities or compliance concerns at the properties. In addition, material environmental conditions, liabilities or compliance concerns may arise after the Phase I assessments are completed, or may arise in the future, and future laws, ordinances or regulations may impose material additional environmental liabilities.
Under various federal, state and local laws and regulations, an owner or operator of real estate may be liable for the costs of removal or remediation of certain hazardous or toxic substances on the property. These laws often impose such liability without regard to whether the owner knew of, or was responsible for, the presence of hazardous or toxic substances. Furthermore, a person that arranges for the disposal or transports for disposal or treatment of a hazardous substance at another property may be liable for the costs of removal or remediation of hazardous substances released into the environment at that property. The costs of remediation or removal of such substances may be substantial, and the presence of such substances, or the failure to promptly remediate such substances, may adversely affect the owner’s ability to sell such real estate or to borrow using such real estate as collateral. In connection with the ownership and operation of our properties, we or the TRS Lessee, as the case may be, may be potentially liable for such costs. Although we have tried to mitigate environmental risk through insurance, this insurance may not cover all or any of the environmental risks we encounter.
As an owner of real estate, we are not directly involved in the operation of our properties or other activities that produce meaningful levels of greenhouse gas emissions. As a result, we have not implemented a formal program to
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measure or manage emissions associated with our corporate office or hotels. Although we do not believe that climate change represents a direct material risk to our business, we could be indirectly affected by climate change and other environmental issues to the extent these issues negatively affect the broader economy, result in increased regulation or costs, or have a negative impact on travel.
We have provided unsecured environmental indemnities to certain lenders. We have performed due diligence on the potential environmental risks including obtaining an independent environmental review from outside environmental consultants. These indemnities obligate us to reimburse the guaranteed parties for damages related to environmental matters. There is generally no term or damage limitation on these indemnities; however, if an environmental matter arises, we could have recourse against other previous owners.
ADA Regulation
Our properties must comply with various laws and regulations, including Title III of the Americans with Disabilities Act (“ADA”) to the extent that such properties are “public accommodations” as defined by the ADA. The ADA may require removal of structural barriers to access by persons with disabilities in certain public areas of our properties where such removal is readily achievable. We believe that our properties are in substantial compliance with the ADA; however, noncompliance with the ADA could result in capital expenditures, the imposition of fines or an award of damages to private litigants. The obligation to make readily achievable accommodations is an ongoing one, and we will continue to assess our properties and to make alterations as appropriate in this respect.
Seasonality and Volatility
As is typical of the lodging industry, we experience some seasonality in our business. Revenue for certain of our hotels is generally affected by seasonal business patterns (e.g., the first quarter is strong in Orlando, the second quarter is strong for the Mid-Atlantic business hotels, and the fourth quarter is strong for New York City and Hawaii). Quarterly revenue also may be adversely affected by renovations and repositionings, our managers’ effectiveness in generating business and by events beyond our control, such as extreme weather conditions, terrorist attacks or alerts, public health concerns, airline strikes or reduced airline capacity, economic factors and other considerations affecting travel.
Inflation
Inflation may affect our expenses, including, without limitation, by increasing costs such as labor, food, taxes, property and casualty insurance and utilities.
Securities Exchange Act Reports
Our internet address is www.sunstonehotels.com. Periodic and current Securities and Exchange Commission (“SEC”) reports and amendments to those reports, such as our annual proxy statement, our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, are available, free of charge, through links displayed on our web site as soon as reasonably practicable after we file such material with, or furnish it to, the SEC. In addition, the SEC maintains a website that contains these reports at www.sec.gov. Our website and the SEC website and the information on our and the SEC’s website is not a part of this Annual Report on Form 10-K.
The statements in this section describe some of the significant risks to our business and should be considered carefully. In addition, these statements constitute our cautionary statements under the Private Securities Litigation Reform Act of 1995, as amended.
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Risks Related to Our Business
In the past, events beyond our control, including economic slowdowns and terrorism, harmed the operating performance of the hotel industry generally and the performance of our hotels, and if these or similar events occur again, our operating and financial results may be harmed by declines in average daily room rates and/or occupancy.
The performance of the lodging industry has traditionally been closely linked with the performance of the general economy. The majority of our hotels are classified as upper upscale hotels. In an economic downturn, this type of hotel may be more susceptible to a decrease in revenue, as compared to hotels in other categories that have lower room rates in part because upper upscale hotels generally target business and high-end leisure travelers. In periods of economic difficulties, business and leisure travelers may reduce travel costs by limiting travel or by using lower cost accommodations. In addition, operating results at our hotels in key gateway markets may be negatively affected by reduced demand from international travelers due to financial conditions in their home countries or a material strengthening of the U.S. dollar in relation to other currencies. Also, volatility in transportation fuel costs, increases in air and ground travel costs and decreases in airline capacity may reduce the demand for our hotel rooms. Accordingly, our financial results may be harmed if economic conditions worsen, or if travel-associated costs, such as transportation fuel costs, increase. In addition, the terrorist attacks of September 11, 2001 had a dramatic adverse effect on business and leisure travel, and on the occupancy and average daily rate, or ADR, of our hotels. Future terrorist activities could have a harmful effect on both the industry and us.
Volatility in the debt and equity markets may adversely affect our ability to acquire, renovate, refinance or sell hotel assets.
Volatility in the global financial markets may have a material adverse effect on our financial condition or results of operations. Among other things, over time, the capital markets have experienced periods of extreme price volatility, dislocations and liquidity disruptions, all of which have exerted downward pressure on stock prices, widened credit spreads on debt financing and led to declines in the market values of U.S. and foreign stock exchanges. Future dislocations in the debt markets may reduce the amount of capital that is available to finance real estate, which, in turn may limit our ability to finance the acquisition of hotels or the ability of purchasers to obtain financing for hotels that we wish to sell, either of which may have a material adverse impact on revenues, income and/or cash flow.
We have historically used capital obtained from debt and equity markets, including secured mortgage debt, to acquire, renovate and refinance hotel assets. If these markets become difficult to access as a result of low demand for debt or equity securities, higher capital costs and interest rates, a low value for capital securities (including our common or preferred stock), and more restrictive lending standards, our business could be adversely affected. Similar factors could also adversely affect the ability of others to obtain capital and therefore could make it more difficult for us to sell hotel assets.
Changes in the debt and equity markets may adversely affect the value of our hotels.
The value of hotel real estate has an inverse correlation to the capital costs of hotel investors. If capital costs increase, real estate values may decrease. Capital costs are generally a function of the perceived risks associated with our assets, interest rates on debt and return expectations of equity investors. Interest rates for hotel mortgages had increased by several percentage points from 2007 to 2009 before moderating in 2010 and then decreasing from 2011 to 2014. If capital costs increase from current levels, and if the income generated by our hotels does not increase by amounts sufficient to cover such higher capital costs, the market value of our hotel real estate may decline. In some cases, the value of our hotel real estate has previously declined, and may in the future decline, to levels below the principal amount of the debt securing such hotel real estate.
As of December 31, 2014, we had approximately $1.4 billion of consolidated outstanding debt, and carrying such debt may impair our financial flexibility or harm our business and financial results by imposing requirements on our business.
Of our total debt outstanding as of December 31, 2014, approximately $806.7 million matures over the next four years ($99.1 million in 2015, $188.2 million in 2016, $241.8 million in 2017 and $277.6 million in 2018). The $806.7 million does not include $22.3 million of scheduled loan amortization payments due in 2015, $17.6 million due in 2016,
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$15.6 million due in 2017, or $13.3 million due in 2018. Carrying our outstanding debt may adversely impact our business and financial results by:
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requiring us to use a substantial portion of our funds from operations to make required payments on principal and interest, which will reduce the amount of cash available to us for our operations and capital expenditures, future business opportunities and other purposes, including distributions to our stockholders; |
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making us more vulnerable to economic and industry downturns and reducing our flexibility in responding to changing business and economic conditions; |
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limiting our ability to undertake refinancings of debt or borrow more money for operations or capital expenditures or to finance acquisitions; and |
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compelling us to sell or deed back properties, possibly on disadvantageous terms, in order to make required payments of interest and principal. |
We also may incur additional debt in connection with future acquisitions of real estate, which may include loans secured by some or all of the hotels we acquire. In addition to our outstanding debt, at December 31, 2014, we had $0.7 million in outstanding letters of credit.
We anticipate that we will refinance our indebtedness from time to time to repay our debt, and our inability to refinance on favorable terms, or at all, could impact our operating results.
Because we anticipate that our internally generated cash will be adequate to repay only a portion of our indebtedness prior to maturity, we expect that we will be required to repay debt from time to time through refinancings of our indebtedness and/or offerings of equity or debt. The amount of our existing indebtedness may impede our ability to repay our debt through refinancings. If we are unable to refinance our indebtedness with property secured debt or corporate debt on acceptable terms, or at all, and are unable to negotiate an extension with the lender, we may be in default or forced to sell one or more of our properties on potentially disadvantageous terms, which might increase our borrowing costs, result in losses to us and reduce the amount of cash available to us for distributions to our stockholders. If prevailing interest rates or other factors at the time of any refinancing result in higher interest rates on new debt, our interest expense would increase, which would harm our operating results.
If we were to default on our secured debt in the future, the loss of our property securing the debt may negatively affect our ability to satisfy other obligations.
All of our debt, excluding letters of credit, at December 31, 2014 is secured by first deeds of trust on our properties. Using our properties as collateral increases our risk of property losses because defaults on indebtedness secured by properties may result in foreclosure actions initiated by lenders and ultimately our loss of the property that secures any loan under which we are in default. Additionally, defaulting on indebtedness may damage our reputation as a borrower, and may limit our ability to secure financing in the future. For tax purposes, a foreclosure on any of our properties would be treated as a sale of the property. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we would recognize taxable income on foreclosure but would not necessarily receive any cash proceeds. As a result, we may be required to identify and utilize other sources of cash or employ a partial cash and partial stock dividend to satisfy our taxable income distribution requirements.
Financial covenants in our debt instruments may restrict our operating or acquisition activities.
Our credit facility contains, and other potential financings that we may incur or assume in the future may contain, restrictions, requirements and other limitations on our ability to incur additional debt and make distributions to our stockholders, as well as financial covenants relating to the performance of our hotel properties. Our ability to borrow under these agreements is subject to compliance with these financial and other covenants. If we are unable to engage in activities that we believe would benefit our hotel properties or we are unable to incur debt to pursue those activities, our growth may be limited. Obtaining consents or waivers from compliance with these covenants may not be possible, or if possible, may cause us to incur additional costs.
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Many of our existing mortgage debt agreements contain “cash trap” provisions that could limit our ability to make distributions to our stockholders.
Certain of our loan agreements contain cash trap provisions that may be triggered if the performance of the hotels securing the loans decline. If these provisions are triggered, substantially all of the profit generated by the secured hotel would be deposited directly into lockbox accounts and then swept into cash management accounts for the benefit of the lender. As of December 31, 2014, no cash trap provisions were triggered at any of our hotels.
Cash generated by our hotels that secure our existing mortgage debt agreements is distributed to us only after the related debt service and certain impound amounts are paid, which could affect our liquidity and limit our ability to make distributions to our stockholders.
Cash generated by our hotels that secure our existing mortgage debt agreements is distributed to us only after certain items are paid, including deposits into leasing and maintenance reserves and the payment of debt service, insurance, taxes, operating expenses, and extraordinary capital expenditures and leasing expenses. This limit on distributions could affect our liquidity and our ability to make distributions to our stockholders.
Our organizational documents contain no limitations on the amount of debt we may incur, so we may become too highly leveraged.
Our organizational documents do not limit the amount of indebtedness that we may incur. If we were to increase the level of our borrowings, then the resulting increase in cash flow that must be used for debt service would reduce cash available for capital investments or external growth, and could harm our ability to make payments on our outstanding indebtedness and our financial condition.
One of our directors has direct and active economic interests in hotels, which may result in conflicts and competing demands on his time.
One of our directors, Lewis N. Wolff, is actively involved in the management of entities that invest in hotels. Accordingly, this director may have a conflict of interest in owning hotels that operate in similar markets or in evaluating hotel acquisition opportunities in which we and Mr. Wolff both have a potential interest. Our Code of Business Conduct and Ethics requires Mr. Wolff to obtain approval from our in-house counsel and/or the chair of our Nominating and Corporate Governance Committee prior to engaging in any transaction or relationship that could reasonably be expected to give rise to a potential conflict of interest. We cannot assure you that these procedures will prevent any conflicts or mitigate the impact of such conflicts if they arise.
We face competition for hotel acquisitions and dispositions, and we may not be successful in completing hotel acquisitions or dispositions that meet our criteria, which may impede our business strategy.
Our business strategy is predicated on a cycle-appropriate approach to hotel acquisitions and dispositions. We may not be successful in identifying or completing acquisitions or dispositions that are consistent with our strategy. We compete with institutional pension funds, private equity investors, international investors, other REITs, owner-operators of hotels, franchise-owned hotels and others who are engaged in the acquisition of hotels, and we rely on such entities as purchasers of hotels we seek to sell. These competitors may affect the supply/demand dynamics and, accordingly, increase the price we must pay for hotels or hotel companies we seek to acquire, and these competitors may succeed in acquiring those hotels or hotel companies themselves. Furthermore, our potential acquisition targets may find our competitors to be more attractive suitors because they may have greater financial resources, may be willing to pay more, or may have a more compatible operating philosophy. In addition, the number of entities competing for suitable hotels may increase in the future, which would increase demand for these hotels and the prices we must pay to acquire them, which, although beneficial to dispositions of hotels, may materially impact our ability to acquire new properties. We are also unable to predict certain market changes including changes in supply of, or demand for, similar real properties in a particular area. If we pay higher prices for hotels, our profitability may be reduced. Also, future acquisitions of hotels or hotel companies may not yield the returns we expect and, if financed using our equity, may result in stockholder dilution. In addition, our profitability may suffer because of acquisition-related costs or amortization costs for acquired intangible assets, and the integration of such acquisitions may cause disruptions to our business and may strain management resources.
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Delays in the acquisition and renovation or repositioning of hotel properties may have adverse effects on our results of operations and returns to our stockholders.
Delays we encounter in the selection, acquisition, renovation, repositioning and development of real properties could adversely affect investor returns. Our ability to commit to purchase specific assets will depend, in part, on the amount of our available cash at a given time. Renovation or repositioning programs may take longer and cost more than initially expected. Therefore, we may experience delays in receiving cash distributions from such hotels. If our projections are inaccurate, we may not achieve our anticipated returns.
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 estimated fair values. Should the allocation be incorrect, our assets and liabilities may be overstated or understated, which may also affect depreciation expense on our statement of operations.
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 and equipment, intangible assets and capital lease obligations that are assumed as part of the acquisition of a leasehold interest. During 2011, 2012, 2013 and 2014, we 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 liabilities assumed in our purchases of 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, the purchase of a 75.0% majority interest in the entity that owns the Hilton San Diego Bayfront, the Hyatt Chicago Magnificent Mile, the Hilton Garden Inn Chicago Downtown/Magnificent Mile, the Hilton New Orleans St. Charles, the Boston Park Plaza, the Hyatt Regency San Francisco and the Marriott Wailea hotels. Should any of these allocations be incorrect, our assets and liabilities may be overstated or understated, which may also affect depreciation expense on our statement of operations.
The acquisition of a portfolio of hotels or a company presents more risks to our business and financial results than the acquisition of a single hotel.
We have acquired in the past, and may acquire in the future, multiple hotels in single transactions to seek to reduce acquisition costs per hotel and enable us to expand our hotel portfolio more rapidly. We may also evaluate acquiring companies that own hotels. Multiple hotel and company acquisitions, however, are generally more complex than single hotel acquisitions and, as a result, the risk that they will not be completed is greater. These acquisitions may also result in our owning hotels in new markets, which places additional demands on our ability to actively asset manage the hotels. In addition, we may be required by a seller to purchase a group of hotels as a package, even though one or more of the hotels in the package do not meet our investment criteria. In those events, we expect to attempt to sell the hotels that do not meet our investment criteria, but may not be able to do so on acceptable terms or may have to pay a 100% “prohibited transactions” tax on any gain. These hotels may harm our operating results if they operate below our underwriting or if we sell them at a loss. Also, a portfolio of hotels may be more difficult to integrate with our existing hotels than a single hotel, may strain our management resources and may make it more difficult to find one or more management companies to operate the hotels. Any of these risks could harm our operating results.
Joint venture investments could be adversely affected by our lack of sole decision-making authority, our reliance on a co-venturer’s financial condition and disputes between us and our co-venturers.
We have co-invested, and may in the future co-invest, with third parties through partnerships, joint ventures or other entities, acquiring non-controlling interests in or sharing responsibility for managing the affairs of a property, partnership, joint venture or other entity. For example, on April 15, 2011, we acquired a 75.0% majority equity interest in One Park Boulevard, LLC, a Delaware limited liability company (“One Park”), the joint venture that holds title to the 1,190-room Hilton San Diego Bayfront hotel located in San Diego, California. Hilton Worldwide, Inc. is the 25.0% minority equity partner in One Park. Accordingly, we are not in a position, and may not be in a position in the future to exercise sole decision-making authority regarding a property, partnership, joint venture or other entity. Investments in partnerships, joint ventures or other entities may, under certain circumstances, involve risks not present were a third party not involved, including the possibility that partners or co-venturers might become bankrupt or fail to fund their share of required capital contributions. Partners or co-venturers may have economic or other business interests or goals which are inconsistent with
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our business interests or goals, and may be in a position to take actions contrary to our policies or objectives. Such investments may also have the potential risk of impasses on decisions, such as a sale, because neither we nor the partner or co-venturer would have full control over the partnership or joint venture. Disputes between us and partners or co-venturers may result in litigation or arbitration that would increase our expenses and prevent our officers and/or trustees from focusing their time and effort on our business. Consequently, actions by, or disputes with, partners or co-venturers might result in subjecting properties owned by the partnership or joint venture to additional risk. In addition, we may in certain circumstances be liable for the actions of our third party partners or co-venturers.
The mortgage loan and preferred equity investment we currently own, or mortgage loans or preferred equity investments we may invest in at a future date, may be affected by unfavorable real estate market or other conditions, events or occurrences, which could decrease the value of those loans and the return on our investment.
In 2010, we paid $0.5 million for a $5.0 million mortgage loan secured by the 101-room boutique hotel known as Twelve Atlantic Station in Atlanta, Georgia. As the expected cash flows from the loan have not been reasonably probable and estimable, we accounted for this loan using the cost-recovery method, which reduced the carrying value of this loan to $0.2 million as of December 31, 2012. The mortgage loan was in default at its maturity date in November 2012, causing us to reserve the $0.2 million balance on our balance sheet at December 31, 2012. In June 2014, the loan was restructured as a 7.0% $1.125 million mortgage loan, maturing the earlier of June 2015 or upon disposition of the hotel. Due to uncertainty about the timing and amount of cash flows expected to be collected, the restructured loan will not be accreted to its face value and has been placed on nonaccrual status. The carrying value of this restructured loan on our balance sheet is zero as of December 31, 2014.
In conjunction with our January 2013 sale of four hotels and a commercial laundry facility located in Rochester, Minnesota, we retained a $25.0 million preferred equity investment in the four hotels that yields an 11% dividend, resulting in a deferred gain on the sale of $25.0 million. The $25.0 million gain will be deferred until the preferred equity investment is redeemed. The preferred equity investment is recorded at face value on our consolidated balance sheet, net of the deferred gain, resulting in a net book value of zero on our consolidated balance sheet as of December 31, 2014.
We do not know whether the value of the security for the mortgage loan and preferred equity investment we currently own, or any mortgage loans or preferred equity investments we may acquire in the future, will remain at the levels existing on the dates of origination of those mortgage loans or preferred equity investments. If the values of the underlying properties were to drop, our risk would increase because of the lower value of the security associated with such loans or preferred equity investments.
The mortgage loan we currently own, or mortgage loans we may invest in at a future date, may be subject to interest rate fluctuations that could reduce our returns as compared to market interest rates and reduce the value of the mortgage loans in the event we sell them.
With respect to the mortgage loan we currently own, or mortgage loans we may invest in at a future date, we could yield a return that is lower than the current rate in existence when the loans were acquired. If interest rates decrease, we will be adversely affected to the extent that mortgage loans are prepaid because we may not be able to make new loans at the higher interest rate. If we invest in variable-rate loans and interest rates decrease, our revenues will also decrease. Finally, if we invest in variable-rate loans and interest rates increase, the value of the loans we own at such time would decrease, which would lower the proceeds we would receive in the event we sell such assets. For these reasons, our returns on those loans and the value of your investment will be subject to fluctuations in interest rates.
The loans in which we invest may involve greater risks of loss than senior loans secured by income-producing real properties.
We have invested in hotel loans, and may invest in additional loans in the future, including mezzanine loans that take the form of subordinated loans secured by second mortgages on the underlying real property or loans secured by a pledge of the ownership interests of the entity owning the real property, the entity that owns the interest in the entity owning the real property or other assets. These types of investments involve a higher degree of risk than direct hotel investments because the investment may become unsecured as a result of foreclosure by the senior lender. In the event of a bankruptcy of the entity providing the pledge of its ownership interests as security, we may not have full recourse to the assets of such entity, or the assets of the entity may not be sufficient to satisfy our mezzanine loan. If a borrower defaults on our mezzanine loan or debt senior to our loan, or in the event of a borrower bankruptcy, our mezzanine loan will be satisfied only after the senior debt. As a result, we may not recover some or all of our investment. In addition, mezzanine loans may have higher
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loan-to-value ratios than conventional mortgage loans, resulting in less equity in the real property and increasing the risk of loss of principal.
If we make or invest in mortgage loans with the intent of gaining ownership of the hotel secured by or pledged to the loan, our ability to perfect an ownership interest in the hotel is subject to the sponsor’s willingness to forfeit the property in lieu of the debt.
If we invest in a mortgage loan or note secured by the equity interest in a property with the intention of gaining ownership through the foreclosure process, the time it will take for us to perfect our interest in the property may depend on the sponsor’s willingness to cooperate during the foreclosure process. The sponsor may elect to file bankruptcy which could materially impact our ability to perfect our interest in the property and could result in a loss on our investment in the debt or note.
Certain of our long-lived assets and goodwill have in the past become impaired and may become impaired in the future.
We periodically review the fair value of each of our hotels, BuyEfficient and goodwill for possible impairment. We did not identify any properties or other assets with indicators of impairment during 2014, 2013 or 2012. In 2011, however, we recognized an impairment loss of $1.5 million to discontinued operations to reduce the carrying value of our commercial laundry facility in Salt Lake City, Utah to its fair value based on proceeds received on the sale of the commercial laundry facility in July 2011. In addition, we recognized an impairment loss of $10.9 million in 2011 to reduce the carrying value of a note receivable from the purchaser of the Royal Palm Miami Beach (the “Royal Palm note”) to its fair value based on proceeds received from the sale of the Royal Palm note in October 2011. Our other hotels, BuyEfficient and related goodwill may become impaired, or our hotels and related goodwill which have previously become impaired may become further impaired, in the future, which may adversely affect our financial condition and results of operations.
We own primarily upper upscale hotels, and the upper upscale segment of the lodging market is highly competitive and may be subject to greater volatility than other segments of the market, which could negatively affect our profitability.
The upper upscale segment of the hotel business is highly competitive. Our hotels compete on the basis of location, room rates and quality, service levels, reputation and reservations systems, among many other factors. There are many competitors in our hotel chain scale segments, and many of these competitors have substantially greater marketing and financial resources than we have. This competition could reduce occupancy levels and room revenue at our hotels, which would harm our operations. Over-building in the hotel industry may increase the number of rooms available and may decrease occupancy and room rates. We may also face competition from nationally recognized hotel brands with which we are not associated. In addition, in periods of weak demand, profitability is negatively affected by the relatively high fixed costs of operating upper upscale hotels when compared to other classes of hotels.
Rising operating expenses or low occupancy rates could reduce our cash flow and funds available for future distributions.
Our hotels, and any hotels we buy in the future, are and will be subject to operating risks common to the lodging industry in general. If any hotel is not occupied at a level sufficient to cover our operating expenses, then we could be required to spend additional funds for that hotel’s operating expenses. In the future, our hotels will be subject to increases in real estate and other tax rates, utility costs, operating expenses, insurance costs, repairs and maintenance and administrative expenses, which could reduce our cash flow and funds available for future distributions.
A significant portion of our hotels are geographically concentrated in California, New York, Illinois, Massachusetts and the greater Washington DC area and, accordingly, we could be disproportionately harmed by economic downturns or natural disasters in these areas of the country.
As of December 31, 2014, nine of the 30 hotels are located in California, which is the largest concentration of our hotels in any state, representing 31% of our rooms and 33% of the revenue generated by the 30 hotels during 2014. In addition, as of December 31, 2014, three of the 30 hotels are located in each of the States of New York, Illinois and Massachusetts, as well as in the greater Washington DC area. The three hotels located in New York represented 9% of our rooms and 13% of the revenue generated by the 30 hotels during 2014. The three hotels located in Illinois represented 8% of our rooms and 7% of the revenue generated by the 30 hotels during 2014. The three hotels located in Massachusetts
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represented 14% of our rooms and 14% of the revenue generated by the 30 hotels during 2014. The three hotels located in the greater Washington DC area represented 13% of our rooms and 12% of the revenue generated by the 30 hotels during 2014. The concentration of our hotels in California, New York, Illinois, Massachusetts and the greater Washington DC area exposes our business to economic conditions, competition and real and personal property tax rates unique to these locales. In addition, natural disasters in California, New York, Illinois, Massachusetts or the greater Washington DC area would disproportionately affect our hotel portfolio. The California, New York, Illinois, Massachusetts and the greater Washington DC area economies and tourism industries, in comparison to other parts of the country, are negatively affected to a greater extent by changes and downturns in certain industries, including the entertainment, high technology, financial and government industries. It is also possible that because of our California, New York, Illinois, Massachusetts and the greater Washington DC area concentrations, a change in laws applicable to such hotels and the lodging industry may have a greater impact on us than a change in comparable laws in another geographical area in which we have hotels. Adverse developments in California, New York, Illinois, Massachusetts and the greater Washington DC area could harm our revenue or increase our operating expenses.
The operating results of some of our individual hotels are significantly impacted by group contract business and room nights generated by large corporate transient customers, and the loss of such customers for any reason could harm our operating results.
Group contract business and room nights generated by other large corporate transient customers can significantly impact the results of operations of our hotels. These contracts and customers vary from hotel to hotel and change from time to time. Such group contracts are typically for a limited period of time after which they may be put up for competitive bidding. The impact and timing of large events are not always easy to predict. As a result, the operating results for our individual hotels can fluctuate as a result of these factors, possibly in adverse ways, and these fluctuations can affect our overall operating results.
Because all but one of our hotels are operated under franchise agreements or are brand managed, termination of these franchise, management or operating lease agreements or circumstances that negatively affect the franchisor or the hotel brand could cause us to lose business at our hotels or lead to a default or acceleration of our obligations under certain of our notes payable.
As of December 31, 2014, all of the 30 hotels except the Boston Park Plaza were operated under franchise, management or operating lease agreements with franchisors or hotel management companies, such as Marriott, Hilton, Hyatt, Fairmont and Sheraton. In general, under these arrangements, the franchisor or brand manager provides marketing services and room reservations and certain other operating assistance, but requires us to pay significant fees to it and to maintain the hotel in a required condition. If we fail to maintain these required standards, then the franchisor or hotel brand may terminate its agreement with us and obtain damages for any liability we may have caused. Moreover, from time to time, we may receive notices from franchisors or the hotel brands regarding our alleged non-compliance with the franchise agreements or brand standards, and we may disagree with these claims that we are not in compliance. Any disputes arising under these agreements could also lead to a termination of a franchise, management or operating lease agreement and a payment of liquidated damages. Such a termination may trigger a default or acceleration of our obligations under some of our notes payable. In addition, as our franchise, management or operating lease agreements expire, we may not be able to renew them on favorable terms or at all. If we were to lose a franchise or hotel brand for a particular hotel, it could harm the operation, financing, or value of that hotel due to the loss of the franchise or hotel brand name, marketing support and centralized reservation system. Moreover, negative publicity affecting a franchisor or hotel brand in general could reduce the revenue we receive from the hotels subject to that particular franchise or brand. Any loss of revenue at a hotel could harm the ability of the TRS Lessee, to whom we have leased our hotels as a result of certain federal income tax restrictions on lodging REITs, to pay rent to the Operating Partnership and could harm our ability to pay dividends on our common stock or preferred stock.
Our franchisors and brand managers may require us to make capital expenditures pursuant to property improvement plans, or PIPs, and the failure to make the expenditures required under the PIPs or to comply with brand standards could cause the franchisors or hotel brands to terminate the franchise, management or operating lease agreements.
Our franchisors and brand managers may require that we make renovations to certain of our hotels in connection with revisions to our franchise, management or operating lease agreements. In addition, upon regular inspection of our hotels, our franchisors and hotel brands may determine that additional renovations are required to bring the physical condition of
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our hotels into compliance with the specifications and standards each franchisor or hotel brand has developed. In connection with the acquisitions of hotels, franchisors and hotel brands may also require PIPs, which set forth their renovation requirements. If we do not satisfy the PIP renovation requirements, the franchisor or hotel brand may have the right to terminate the applicable agreement. In addition, in the event that we are in default under any franchise agreement as a result of our failure to comply with the PIP requirements, in general, we will be required to pay the franchisor liquidated damages, generally equal to a percentage of gross room revenue for the preceding two-, three- or five-year period for the hotel or a percentage of gross revenue for the preceding twelve-month period for all hotels operated under the franchised brand if the hotel has not been operating for at least two years.
Our franchisors and brand managers may change certain policies or cost allocations that could negatively impact our hotels.
Our franchisors and brand managers incur certain costs that are allocated to our hotels subject to our franchise, management or operating lease agreements. Those costs may increase over time or our franchisors and brand managers may elect to introduce new programs that could increase costs allocated to our hotels. In addition, certain policies may be altered resulting in reduced revenue or increased costs to our hotels. For example, a change in one of our third-party manager’s frequent traveler reward program during 2013 negatively impacted revenue at both our Doubletree Guest Suites Times Square and Hilton Times Square hotels. Future changes to our third-party manager’s frequent traveler program during 2015 could impact future revenues at our hotels.
Because we are a REIT, we depend on third parties to operate our hotels, which could harm our results of operations.
In order to qualify as a REIT, we cannot directly operate our hotels. Accordingly, we must enter into management or operating lease agreements (together, “management agreements”) with eligible independent contractors to manage our hotels. Thus, independent management companies control the daily operations of our hotels.
As of December 31, 2014, our 30 hotels were managed as follows: Marriott 11 hotels; IHR six hotels; Highgate four hotels; Davidson two hotels; Hilton two hotels; Hyatt two hotels; and Crestline, Dimension and Fairmont one hotel each. We depend on these independent management companies to operate our hotels as provided in the applicable management agreements. Thus, even if we believe a hotel is being operated inefficiently or in a manner that does not result in satisfactory ADR, occupancy rates or profitability, we may not necessarily have contractual rights to cause our independent management companies to change their method of operation at our hotels. We can only seek redress if a management company violates the terms of its applicable management agreement with us or fails to meet performance objectives set forth in the applicable management agreement, and then our remedies may be limited by the terms of the management agreement. Additionally, while our management agreements typically provide for limited contractual penalties in the event that we terminate the applicable management agreement upon an event of default, such terminations could result in significant disruptions at the affected hotels. If any of the foregoing occurs at franchised hotels, our relationships with the franchisors may be damaged, and we may be in breach of one or more of our franchise or management agreements.
Of these agreements, one was entered into during 2014, three were entered into during each of the years 2013 and 2012, and four of these agreements were entered into during 2011. If we were to terminate any of these agreements and enter into new agreements with different hotel operators, the day to day operations of our hotels may be disrupted. In addition, we cannot assure you that any new management agreement would contain terms that are favorable to us, or that a new management company would be successful in managing our hotels.
We also cannot assure you that our existing management companies will successfully manage our hotels. A failure by our management companies to successfully manage our hotels could lead to an increase in our operating expenses or a decrease in our revenue, or both, which would reduce the amount available for dividends on our common stock and our preferred stock. In addition, the management companies may operate other hotels that may compete with our hotels or divert attention away from the management of our hotels.
We are subject to risks associated with the employment of hotel personnel.
Our third-party managers are responsible for hiring and maintaining the labor force at each of our hotels. Although we do not directly employ or manage employees at our consolidated hotels, we are still subject to many of the costs and risks generally associated with the hotel labor force. From time to time, hotel operations may be disrupted as a result of
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strikes, lockouts, public demonstrations or other negative actions and publicity. We also may incur increased legal costs and indirect labor costs as a result of contract disputes involving our third-party managers and their labor force or other events. The resolution of labor disputes or re-negotiated labor contracts could lead to increased labor costs, a significant component of our costs, either by increases in wages or benefits or by changes in work rules that raise hotel operating costs. We generally do not have the ability to affect the outcome of these negotiations.
System security risks, data protection breaches, cyber-attacks and systems integration issues could disrupt our internal operations or services provided to guests at our hotels, and any such disruption could reduce our expected revenue, increase our expenses, damage our reputation and adversely affect our stock price.
Experienced computer programmers and hackers may be able to penetrate our network security or the network security of our third-party managers and franchisors, and misappropriate or compromise our confidential information or that of our hotel guests, create system disruptions or cause the shutdown of our hotels. Computer programmers and hackers also may be able to develop and deploy viruses, worms, and other malicious software programs that attack our computer systems or the computer systems operated by our third-party managers and franchisors, or otherwise exploit any security vulnerabilities of our respective networks. In addition, sophisticated hardware and operating system software and applications that we and our third-party managers or franchisors may procure from outside companies may contain defects in design or manufacture, including “bugs” and other problems that could unexpectedly interfere with our internal operations or the operations at our hotels. The costs to us to eliminate or alleviate cyber or other security problems, bugs, viruses, worms, malicious software programs and security vulnerabilities could be significant, and our efforts to address these problems may not be successful and could result in interruptions, delays, cessation of service and loss of existing or potential business at our hotels.
Portions of our information technology infrastructure or the information technology infrastructure of our third-party managers and franchisors also may experience interruptions, delays or cessations of service or produce errors in connection with systems integration or migration work that takes place from time to time. We or our third-party managers and franchisors may not be successful in implementing new systems and transitioning data, which could cause business disruptions and be more expensive, time consuming, disruptive and resource-intensive. Such disruptions could adversely impact the ability of our third-party managers and franchisors to fulfill reservations for guestrooms and other services offered at our hotels. Delayed sales or bookings, lower margins or lost guest reservations resulting from these disruptions could adversely affect our financial results, stock price and reputation.
Our hotels have an ongoing need for renovations and potentially significant capital expenditures in connection with acquisitions, repositionings and other capital improvements, some of which are mandated by applicable laws or regulations or agreements with third parties, and the costs of such renovations, repositionings or improvements may exceed our expectations or cause other problems.
In addition to capital expenditures required by our management, franchise and loan agreements, from time to time we will need to make capital expenditures to comply with applicable laws and regulations, to remain competitive with other hotels and to maintain the economic value of our hotels. We also may need to make significant capital improvements to hotels that we acquire. During 2014, we invested $126.0 million on capital improvements to our hotels, and we expect this amount to increase in 2015 driven by renovations and repositionings at recently acquired hotels as part of our acquisition strategy. Occupancy and ADR are often affected by the maintenance and capital improvements at a hotel, especially in the event that the maintenance or improvements are not completed on schedule or if the improvements require significant closures at the hotel. The costs of capital improvements we need or choose to make could harm our financial condition and reduce amounts available for distribution to our stockholders. These capital improvements may give rise to the following additional risks, among others:
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construction cost overruns and delays; |
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a possible shortage of available cash to fund capital improvements and the related possibility that financing for these capital improvements may not be available to us on affordable terms; |
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uncertainties as to market demand or a loss of market demand after capital improvements have begun; |
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disruption in service and room availability causing reduced demand, occupancy and rates; |
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possible environmental problems; and |
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disputes with managers or franchisors regarding our compliance with the requirements under the relevant management, operating lease or franchise agreement. |
Because we are a REIT, we depend on the TRS Lessee and its subsidiaries to make rent payments to us, and their inability to do so could harm our revenue and our ability to make distributions to our stockholders.
Due to certain federal income tax restrictions on hotel REITs, we cannot directly operate our hotel properties. Therefore, we lease our hotel properties to the TRS Lessee or one of its subsidiaries, which contracts with third-party hotel managers to manage our hotels. Our revenue and our ability to make distributions to our stockholders will depend solely upon the ability of the TRS Lessee and its subsidiaries to make rent payments under these leases. In general, under the leases with the TRS Lessee and its subsidiaries, we will receive from the TRS Lessee or its subsidiaries both fixed rent and variable rent based upon a percentage of gross revenues and the number of occupied rooms. As a result, we participate in the operations of our hotels only through our share of rent paid pursuant to the leases.
The ability of the TRS Lessee and its subsidiaries to pay rent is affected by factors beyond its control, such as changes in general economic conditions, the level of demand for hotels and the related services of our hotels, competition in the lodging and hospitality industry, the ability to maintain and increase gross revenue at our hotels and other factors relating to the operations of our hotels.
Although failure on the part of the TRS Lessee or its subsidiaries to materially comply with the terms of a lease (including failure to pay rent when due) would give us the right to terminate the lease, repossess the hotel and enforce the payment obligations under the lease, such steps may not provide us with any substantive relief since the TRS Lessee is our subsidiary. If we were to terminate a lease, we would then be required to find another lessee to lease the hotel or enter into a new lease with our TRS Lessee or its subsidiaries because we cannot operate hotel properties directly and remain qualified as a REIT. We cannot assure you that we would be able to find another lessee or that, if another lessee were found, we would be able to enter into a new lease on similar terms.
Because nine of the 30 hotels are subject to ground, building or air leases with unaffiliated parties, termination of these leases by the lessors could cause us to lose the ability to operate these hotels altogether and incur substantial costs in restoring the premises.
Our rights to use the underlying land, building and/or air space of nine of the 30 hotels are based upon our interest under long-term leases with unaffiliated parties. Pursuant to the terms of the applicable leases for these hotels, we are required to pay all rent due and comply with all other lessee obligations. As of December 31, 2014, the terms of these ground, building and air leases (including renewal options) range from approximately 29 to 112 years. Any pledge of our interest in a ground, building or air lease may also require the consent of the applicable lessor and its lenders. As a result, we may not be able to sell, assign, transfer or convey our lessee’s interest in any hotel subject to a ground, building or air lease in the future absent consent of such third parties even if such transactions may be in the best interest of our stockholders.
The lessors may require us, at the expiration or termination of the ground, building or air leases, to surrender or remove any improvements, alterations or additions to the land at our own expense. The leases also generally require us to restore the premises following a casualty and to apply in a specified manner any proceeds received in connection therewith. We may have to restore the premises if a material casualty, such as a fire or an act of nature, occurs and the cost thereof exceeds available insurance proceeds.
If we fail to maintain effective internal control over financial reporting and disclosure controls and procedures in the future, we may not be able to accurately report our financial results, which could have an adverse effect on our business.
If our internal control over financial reporting and disclosure controls and procedures are not effective, we may not be able to provide reliable financial information. If we discover deficiencies in our internal controls, we will make efforts to remediate these deficiencies; however, there is no assurance that we will be successful either in identifying deficiencies or
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in their remediation. Any failure to maintain effective controls in the future could adversely affect our business or cause us to fail to meet our reporting obligations. Such non-compliance could also result in an adverse reaction in the financial marketplace due to a loss of investor confidence in the reliability of our financial statements. In addition, perceptions of our business among customers, suppliers, rating agencies, lenders, investors, securities analysts and others could be adversely affected.
Risks Related to Our Organization and Structure
Provisions of Maryland law and our organizational documents may limit the ability of a third party to acquire control of our company and may serve to limit our stock price.
Provisions of Maryland law and our charter and bylaws could have the effect of discouraging, delaying or preventing transactions that involve an actual or threatened change in control of us, and may have the effect of entrenching our management and members of our board of directors, regardless of performance. These provisions include the following:
Aggregate Stock and Common Stock Ownership Limits. In order for us to qualify as a REIT, no more than 50% of the value of outstanding shares of our stock may be owned, actually or constructively, by five or fewer individuals at any time during the last half of each taxable year. To assure that we will not fail to qualify as a REIT under this test, subject to some exceptions, our charter prohibits any stockholder from owning beneficially or constructively more than 9.8% (in number or value, whichever is more restrictive) of the outstanding shares of our common stock or more than 9.8% of the value of the outstanding shares of our capital stock. Any attempt to own or transfer shares of our capital stock in excess of the ownership limit without the consent of our board of directors will be void and could result in the shares (and all dividends thereon) being automatically transferred to a charitable trust. The board of directors has granted waivers of the aggregate stock and common stock ownership limits to four “look through entities” such as mutual or investment funds. This ownership limitation may prevent a third party from acquiring control of us if our board of directors does not grant an exemption from the ownership limitation, even if our stockholders believe the change in control is in their best interests.
Authority to Issue Stock. Our charter authorizes our board of directors to cause us to issue up to 500,000,000 shares of common stock and up to 100,000,000 shares of preferred stock. Our charter authorizes our board of directors to amend our charter without stockholder approval to increase or decrease the aggregate number of shares of stock or the number of shares of any class or series of our stock that it has authority to issue, to classify or reclassify any unissued shares of our common stock or preferred stock and to set the preferences, rights and other terms of the classified or reclassified shares. Issuances of additional shares of stock may have the effect of delaying or preventing a change in control of our company, including change of control transactions offering a premium over the market price of shares of our common stock, even if our stockholders believe that a change of control is in their interest.
Number of Directors, Board Vacancies, Term of Office. Under our charter and bylaws, we have elected to be subject to certain provisions of Maryland law which vest in the board of directors the exclusive right to determine the number of directors and the exclusive right, by the affirmative vote of a majority of the remaining directors, to fill vacancies on the board even if the remaining directors do not constitute a quorum. Any director elected to fill a vacancy will hold office until the next annual meeting of stockholders, and until his or her successor is elected and qualifies. As a result, stockholder influence over these matters is limited.
Limitation on Stockholder Requested Special Meetings. Our bylaws provide that our stockholders have the right to call a special meeting only upon the written request of the stockholders entitled to cast not less than a majority of all the votes entitled to be cast by the stockholders at such meeting. This provision makes it more difficult for stockholders to call special meetings.
Advance Notice Provisions for Stockholder Nominations and Proposals. Our bylaws require advance written notice for stockholders to nominate persons for election as directors at, or to bring other business before, any meeting of our stockholders. This bylaw provision limits the ability of our stockholders to make nominations of persons for election as directors or to introduce other proposals unless we are notified and provided certain required information in a timely manner prior to the meeting.
Authority of our Board to Amend our Bylaws. Our bylaws provide that our board of directors has the exclusive power to adopt, alter or repeal any provision of the bylaws or to make new bylaws, except with respect to amendments to the
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provision of our bylaws regarding our opt out of the Maryland Business Combination and Control Share Acquisition Acts. Thus, our stockholders may not effect any changes to our bylaws other than as noted in the preceding sentence.
Duties of Directors. Maryland law requires that a director perform his or her duties (1) in good faith, (2) in a manner he or she reasonably believes to be in the best interests of the corporation and (3) with the care that an ordinary prudent person in a like position would use under similar circumstances. The duty of the directors of a Maryland corporation does not require them to (1) accept, recommend or respond on behalf of the corporation to any proposal by a person seeking to acquire control of the corporation, (2) authorize the corporation to redeem any rights under, or modify or render inapplicable, a stockholders’ rights plan, (3) elect on behalf of the corporation to be subject to or refrain from electing on behalf of the corporation to be subject to the unsolicited takeover provisions of Maryland law, (4) make a determination under the Maryland Business Combination Act or the Maryland Control Share Acquisition Act or (5) act or fail to act solely because of the effect the act or failure to act may have on an acquisition or potential acquisition of control of the corporation or the amount or type of consideration that may be offered or paid to the stockholders in an acquisition. Moreover, under Maryland law the act of the directors of a Maryland corporation relating to or affecting an acquisition or potential acquisition of control is not subject to any higher duty or greater scrutiny than is applied to any other act of a director. Maryland law also contains a statutory presumption that an act of a director of a Maryland corporation satisfies the applicable standards of conduct for directors under Maryland law. These provisions increase the ability of our directors to respond to a takeover and may make it more difficult for a third party to effect an unsolicited takeover.
Unsolicited Takeover Provisions. Provisions of Maryland law permit the board of a corporation with a class of equity securities registered under the Exchange Act and at least three independent directors, without stockholder approval, to implement possible takeover defenses, such as a classified board or a two-thirds vote requirement for removal of a director. These provisions, if implemented, may make it more difficult for a third party to effect a takeover. In April 2013, however, we amended our charter to prohibit us from dividing directors into classes unless such action is first approved by the affirmative vote of a majority of the votes cast on the matter by stockholders entitled to vote generally in the election of directors.
We rely on our senior management team, the loss of whom could cause us to incur costs and harm our business.
Our continued success will depend to a significant extent on the efforts and abilities of our senior management team. These individuals are important to our business and strategy and to the extent that any of them departs, we could incur severance or other costs. In January 2015, our former Chief Executive Officer, Kenneth E. Cruse, left the Company, and our current President, John V. Arabia, was promoted to the additional role of Chief Executive Officer.
Risks Related to the Lodging and Real Estate Industries
A number of factors, many of which are common to the lodging industry and beyond our control, could affect our business, including the following:
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general economic and business conditions, including a U.S. recession or global economic slowdown, which may diminish the desire for leisure travel or the need for business travel, as well as any type of flu or disease-related pandemic, affecting the lodging and travel industry, internationally, nationally and locally; |
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threat of terrorism, terrorist events, airline strikes or other factors that may affect travel patterns and reduce the number of business and commercial travelers and tourists; |
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volatility in the capital markets and the effect on the lodging demand or our ability to obtain capital on favorable terms or at all; |
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increased competition from other hotels in our markets; |
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new hotel supply in our markets, which could harm our occupancy levels and revenue at our hotels; |
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unexpected changes in business, commercial and leisure travel and tourism; |
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increases in operating costs due to inflation, labor costs, workers’ compensation and health-care related costs (including the impact of the Patient Protection and Affordable Care Act), utility costs, insurance and unanticipated costs such as acts of nature and their consequences and other factors that may not be offset by increased room rates; |
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changes in interest rates and in the availability, cost and terms of debt financing and other changes in our business that adversely affect our ability to comply with covenants in our debt financing; |
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changes in our relationships with, and the performance and reputation of, our management companies and franchisors; and |
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changes in governmental laws and regulations, fiscal policies and zoning ordinances and the related costs of compliance with laws and regulations, fiscal policies and ordinances. |
These factors could harm our financial condition, results of operations and ability to make distributions to our stockholders.
The hotel business is seasonal and seasonal variations in revenue at our hotels can be expected to cause quarterly fluctuations in our revenue.
Quarterly revenue may also be harmed by events beyond our control, such as extreme weather conditions, terrorist attacks or alerts, contagious diseases, airline strikes, economic factors, natural disasters and other considerations affecting travel. Seasonal fluctuations in revenue may affect our ability to make distributions to our stockholders or to fund our debt service.
The growth of alternative reservation channels could adversely affect our business and profitability.
A significant percentage of hotel rooms for individual guests is booked through internet travel intermediaries. Many of our managers and franchisors contract with such intermediaries and pay them various commissions and transaction fees for sales of our rooms through their systems. If such bookings increase, these intermediaries may be able to obtain higher commissions, reduced room rates or other significant concessions from us or our franchisees. Although our managers and franchisors may have established agreements with many of these intermediaries that limit transaction fees for hotels, there can be no assurance that our managers and franchisors will be able to renegotiate such agreements upon their expiration with terms as favorable as the provisions that exist today. Moreover, hospitality intermediaries generally employ aggressive marketing strategies, including expending significant resources for online and television advertising campaigns to drive consumers to their websites. As a result, consumers may develop brand loyalties to the intermediaries’ offered brands, websites and reservations systems rather than to brands of our managers and franchisors. If this happens, our business and profitability may be significantly negatively impacted.
In addition, in general, internet travel intermediaries have traditionally competed to attract individual consumers or “transient” business rather than group and convention business. However, hospitality intermediaries have recently grown their business to include marketing to large group and convention business. If that growth continues, it could both divert group and convention business away from our hotels, and it could also increase our cost of sales for group and convention business.
The illiquidity of real estate investments and the lack of alternative uses of hotel properties could significantly limit our ability to respond to adverse changes in the performance of our hotels and harm our financial condition.
Because commercial real estate investments are relatively illiquid, our ability to promptly sell one or more of our hotels in response to changing economic, financial and investment conditions is limited. The real estate market, including our hotels, is affected by many factors, such as general economic conditions, availability of financing, interest rates and other factors, including supply and demand, that are beyond our control. We may not be able to sell any of our hotels on favorable terms. It may take a long time to find a willing purchaser and to close the sale of a hotel if we want to sell. Should we decide to sell a hotel during the term of that particular hotel’s management agreement, we may have to pay termination fees, which could be substantial, to the applicable management company.
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In addition, hotels may not be readily converted to alternative uses if they were to become unprofitable due to competition, age of improvements, decreased demand or other factors. The conversion of a hotel to alternative uses would also generally require substantial capital expenditures and may give rise to substantial payments to our franchisors, management companies and lenders.
We may be required to expend funds to correct defects or to make improvements before a hotel can be sold. We may not have funds available to correct those defects or to make those improvements and, as a result, our ability to sell the hotel would be restricted. In acquiring a hotel, we may agree to lock-out provisions that materially restrict us from selling that hotel for a period of time or impose other restrictions on us, such as a limitation on the amount of debt that can be placed or repaid on that hotel to address specific concerns of sellers. These lock-out provisions would restrict our ability to sell a hotel. These factors and any others that would impede our ability to respond to adverse changes in the performance of our hotels could harm our financial condition and results of operations.
Claims by persons relating to our properties could affect the attractiveness of our hotels or cause us to incur additional expenses.
We could incur liabilities resulting from loss or injury to our hotels or to persons at our hotels. These losses could be attributable to us or result from actions taken by a hotel management company. Claims such as these, whether or not they have merit, could harm the reputation of a hotel or cause us to incur expenses to the extent of insurance deductibles or losses in excess of policy limitations, which could harm our results of operations.
We have in the past and could in the future incur liabilities resulting from claims by hotel employees. While these claims are, for the most part, covered by insurance, some claims (such as claims for unpaid overtime wages) generally are not insured or insurable. These claims, whether or not they have merit, could harm the reputation of a hotel or cause us to incur losses which could harm our results of operations.
Uninsured and underinsured losses could harm our financial condition, results of operations and ability to make distributions to our stockholders.
Various types of litigation losses and catastrophic losses, such as losses due to wars, terrorist acts, earthquakes, floods, hurricanes, pollution or environmental matters, generally are either uninsurable or not economically insurable, or may be subject to insurance coverage limitations, such as large deductibles or co-payments.
Of the 30 hotels, nine are located in California, which has been historically at greater risk to certain acts of nature (such as fires, earthquakes and mudslides) than other states. In the event of a catastrophic loss, our insurance coverage may not be sufficient to cover the full current market value or replacement cost of our lost investment. Should an uninsured loss or a loss in excess of insured limits occur, we could lose all or a portion of the capital we have invested in a hotel, as well as the anticipated future revenue from the hotel. In that event, we might nevertheless remain obligated for any notes payable or other financial obligations related to the property, in addition to obligations to our ground lessors, franchisors and managers. Inflation, changes in building codes and ordinances, environmental considerations and other factors might also keep us from using insurance proceeds to replace or renovate a hotel after it has been damaged or destroyed. Under those circumstances, the insurance proceeds we receive might be inadequate to restore our economic position on the damaged or destroyed hotel.
Since September 11, 2001, it has generally become more difficult and expensive to obtain property and casualty insurance, including coverage for terrorism. When our current insurance policies expire, we may encounter difficulty in obtaining or renewing property or casualty insurance on our hotels at the same levels of coverage and under similar terms. Such insurance may be more limited and for some catastrophic risks (e.g., earthquake, fire, flood and terrorism) may not be generally available at current levels. Even if we are able to renew our policies or to obtain new policies at levels and with limitations consistent with our current policies, we cannot be sure that we will be able to obtain such insurance at premium rates that are commercially reasonable. If we are unable to obtain adequate insurance on our hotels for certain risks, it could cause us to be in default under specific covenants on certain of our indebtedness or other contractual commitments we have to our ground lessors, franchisors and managers which require us to maintain adequate insurance on our properties to protect against the risk of loss. If this were to occur, or if we were unable to obtain adequate insurance and our properties experienced damages which would otherwise have been covered by insurance, it could harm our financial condition and results of operations.
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In addition, there are other risks, such as certain environmental hazards, that may be deemed to fall completely outside the general coverage limits of our policies or may be uninsurable or too expensive to justify coverage. We also may encounter challenges with an insurance provider regarding whether it will pay a particular claim that we believe to be covered under our policy. Should a loss in excess of insured limits or an uninsured loss occur, or should we be unsuccessful in obtaining coverage from an insurance carrier, we could lose all or a part of the capital we have invested in a property, as well as the anticipated future revenue from the hotel. In that event, we might nevertheless remain obligated for any mortgage debt or other financial obligations related to the property.
Terrorist attacks and military conflicts may adversely affect the hospitality industry.
The terrorist attacks on the World Trade Center and the Pentagon on September 11, 2001 underscore the possibility that large public facilities or economically important assets could become the target of terrorist attacks in the future. In particular, properties that are well-known or are located in concentrated business sectors in major cities may be subject to the risk of terrorist attacks. The occurrence or the possibility of terrorist attacks or military conflicts could:
· |
cause damage to one or more of our properties that may not be fully covered by insurance to the value of the damages; |
· |
cause all or portions of affected properties to be shut down for prolonged periods, resulting in a loss of income; |
· |
generally reduce travel to affected areas for tourism and business or adversely affect the willingness of customers to stay in or avail themselves of the services of the affected properties; |
· |
expose us to a risk of monetary claims arising out of death, injury or damage to property caused by any such attacks; and |
· |
result in higher costs for security and insurance premiums or diminish the availability of insurance coverage for losses related to terrorist attacks, particularly for properties in target areas, all of which could adversely affect our results. |
We may not be able to recover fully under our existing terrorism insurance for losses caused by some types of terrorist acts, and federal terrorism legislation does not ensure that we will be able to obtain terrorism insurance in adequate amounts or at acceptable premium levels in the future.
We obtain terrorism insurance as part of our all-risk property insurance program. However, our all-risk policies have limitations such as per occurrence limits and sublimits that might have to be shared proportionally across participating hotels under certain loss scenarios. Also, all-risk insurers only have to provide terrorism coverage to the extent mandated by the Terrorism Risk Insurance Act (the “TRIA”) for “certified” acts of terrorism — namely those which are committed on behalf of non-United States persons or interests. Furthermore, we may not have full replacement coverage for all of our properties for acts of terrorism committed on behalf of United States persons or interests (“noncertified” events), as well as for “certified” events, as our terrorism coverage for such incidents is subject to sublimits and/or annual aggregate limits. In addition, property damage related to war and to nuclear, biological and chemical incidents is excluded under our policies. To the extent we have property damage directly related to fire following a nuclear, biological or chemical incident, however, our coverage may extend to reimburse us for our losses. While the TRIA provides for the reimbursement of insurers for losses resulting from nuclear, biological and chemical perils, the TRIA does not require insurers to offer coverage for these perils and, to date, insurers are not willing to provide this coverage, even with government reinsurance. As a result of the above, there remains considerable uncertainty regarding the extent and adequacy of terrorism coverage that will be available to protect our interests in the event of future terrorist attacks that impact our properties.
27
Laws and governmental regulations may restrict the ways in which we use our hotel properties and increase the cost of compliance with such regulations. Noncompliance with such regulations could subject us to penalties, loss of value of our properties or civil damages.
Our hotel properties are subject to various federal, state and local laws relating to the environment, fire and safety and access and use by disabled persons. Under these laws, courts and government agencies have the authority to require us, if we are the owner of a contaminated property, to clean up the property, even if we did not know of or were not responsible for the contamination. These laws also apply to persons who owned a property at the time it became contaminated. In addition to the costs of cleanup, environmental contamination can affect the value of a property and, therefore, an owner’s ability to borrow funds using the property as collateral or to sell the property. Under such environmental laws, courts and government agencies also have the authority to require that a person who sent waste to a waste disposal facility, such as a landfill or an incinerator, pay for the clean-up of that facility if it becomes contaminated and threatens human health or the environment.
Furthermore, various court decisions have established that third parties may recover damages for injury caused by property contamination. For instance, a person exposed to asbestos while staying in or working at a hotel may seek to recover damages for injuries suffered. Additionally, some of these environmental laws restrict the use of a property or place conditions on various activities. For example, some laws require a business using chemicals (such as swimming pool chemicals at a hotel) to manage them carefully and to notify local officials that the chemicals are being used.
We could be responsible for the types of costs discussed above. The costs to clean up a contaminated property, to defend against a claim, or to comply with environmental laws could be material and could reduce the funds available for distribution to our stockholders. Future laws or regulations may impose material environmental liabilities on us, or the current environmental condition of our hotel properties may be affected by the condition of the properties in the vicinity of our hotels (such as the presence of leaking underground storage tanks) or by third parties unrelated to us.
Our hotel properties are also subject to the Americans with Disabilities Act of 1990, or the ADA. Under the ADA, all public accommodations must meet various Federal requirements related to access and use by disabled persons. Compliance with the ADA’s requirements could require removal of access barriers and non-compliance could result in the U.S. government imposing fines or in private litigants’ winning damages. If we are required to make substantial modifications to our hotels, whether to comply with the ADA or other changes in governmental rules and regulations, our financial condition, results of operations and the ability to make distributions to our stockholders could be harmed. In addition, we are required to operate our hotel properties in compliance with fire and safety regulations, building codes and other land use regulations, as they may be adopted by governmental agencies and become applicable to our properties.
Tax and Employee Benefit Plan Risks
If we fail to qualify as a REIT, our distributions will not be deductible by us and our income will be subject to federal and state taxation, reducing our cash available for distribution.
We are a REIT under the Code, which affords us significant tax advantages. The requirements for qualifying as a REIT, however, are complex. If we fail to meet these requirements, our distributions will not be deductible by us and we will have to pay a corporate federal and state level tax on our income. This would substantially reduce our cash available to pay distributions and your yield on your investment in our common stock. In addition, such a tax liability might cause us to borrow funds, liquidate some of our investments or take other steps which could negatively affect our results of operations. Moreover, if our REIT status is terminated because of our failure to meet a technical REIT requirement or if we voluntarily revoke our election, we would generally be disqualified from electing treatment as a REIT for the four taxable years following the year in which REIT status is lost.
Even as a REIT, we may become subject to federal, state or local taxes on our income or property, reducing our cash available for distribution.
Even as a REIT, we may become subject to federal income taxes and related state taxes. For example, if we have net income from a “prohibited transaction,” that income will be subject to a 100% tax. A “prohibited transaction” is, in general, the sale or other disposition of inventory or property, other than foreclosure property, held primarily for sale to customers in the ordinary course of business. We may not be able to make sufficient distributions to avoid excise taxes applicable to REITs. We may also decide to retain income we earn from the sale or other disposition of our property and pay federal
28
income tax directly on that income. In that event, our stockholders would be treated as if they earned that income and paid the tax on it directly. However, stockholders that are tax-exempt, such as charities or qualified pension plans, would have no benefit from their deemed payment of that tax liability.
We may also be subject to federal and/or state income taxes when using net operating loss carryforwards to offset current taxable income. During 2013 and 2012, our use of net operating loss carryforwards resulted in federal alternative minimum tax and state income tax expense (where our use of net operating loss carryforwards was either limited or unavailable) totaling $1.9 million and $1.1 million, respectively. We did not use any net operating loss carryforwards during 2014.
We may also be subject to state and local taxes on our income or property at the level of our operating partnership or at the level of the other companies through which we indirectly own our assets. In the normal course of business, entities through which we own or operate real estate either have undergone, or may undergo future tax audits. Should we receive a material tax deficiency notice in the future which requires us to incur additional expense, our earnings may be negatively impacted. There can be no assurance that future audits will not occur with increased frequency or that the ultimate result of such audits will not have a material adverse effect on our results of operations. We cannot assure you that we will be able to continue to satisfy the REIT requirements, or that it will be in our best interests to continue to do so.
If the leases of our hotels to our taxable REIT subsidiary are not respected as true leases for federal income tax purposes, we would fail to qualify as a REIT.
To qualify as a REIT, we must satisfy two gross income tests, under which specified percentages of our gross income must be passive income. Passive income includes rent paid pursuant to our operating leases between our TRS Lessee and its subsidiaries and our Operating Partnership. These rents constitute substantially all of our gross income. For the rent to qualify for purposes of the gross income tests, the leases must be respected as true leases for federal income tax purposes and not be treated as service contracts, joint ventures or some other type of arrangement. If the leases are not respected as true leases for federal income tax purposes, we would fail to qualify as a REIT.
We may be subject to taxes in the event our operating leases are held not to be on an arm’s-length basis.
In the event that leases between us and our taxable REIT subsidiaries are held not to have been made on an arm’s-length basis, we or our taxable REIT subsidiaries could be subject to income taxes. In 2011, the Internal Revenue Service, or the IRS, notified us of their intent to audit our taxable REIT subsidiary, Sunstone Hotel TRS Lessee, Inc., and its subsidiaries. During 2013, the IRS issued a notice of proposed adjustment to us, challenging certain aspects of our leases with our TRS Lessee and its subsidiaries. Though we believe our leases comply with all Code requirements, we determined that the costs associated with defending our position were greater than the benefits that might result therefrom. As such, we recognized income tax expense of $4.7 million related to the IRS’s audit of tax years 2008, 2009 and 2010, including $0.6 million in related interest expense. We recorded additional income tax expense of $1.5 million during 2013 based on the ongoing evaluations of our uncertain tax positions related to 2012, and as a result of our recent resolution of outstanding issues with the IRS.
Our taxable REIT subsidiary is subject to special rules that may result in increased taxes.
Several Code provisions ensure that a taxable REIT subsidiary is subject to an appropriate level of federal income taxation. For example, a taxable REIT subsidiary, such as the TRS Lessee, is limited in its ability to deduct interest payments made to an affiliated REIT. In addition, the REIT has to pay a 100% penalty tax on some payments that it receives if the economic arrangements between us and the taxable REIT subsidiary are not comparable to similar arrangements between unrelated parties. The IRS may successfully assert that the economic arrangements of any of our inter-company transactions, including the hotel leases, are not comparable to similar arrangements between unrelated parties.
We may be required to pay a penalty tax upon the sale of a hotel.
The federal income tax provisions applicable to REITs provide that any gain realized by a REIT on the sale of property held as inventory or other property held primarily for sale to customers in the ordinary course of business is treated as income from a “prohibited transaction” that is subject to a 100% penalty tax. Under current law, unless a sale of real property qualifies for a safe harbor, the question of whether the sale of a hotel (or other property) constitutes the sale of
29
property held primarily for sale to customers is generally a question of the facts and circumstances regarding a particular transaction. We may make sales that do not satisfy the requirements of the safe harbors or the IRS may successfully assert that one or more of our sales are prohibited transactions and, therefore we may be required to pay a penalty tax.
We also may be subject to corporate level income tax on certain built-in gains.
We hold certain properties acquired from C corporations (and may acquire additional such properties in the future), in which we must adopt the C corporation’s tax basis in that asset as our tax basis. If we sell any such property within 10 years of the date on which we acquire it, then we will have to pay tax on the gain at the highest regular corporate tax rate.
Risks Related to Our Common Stock
The market price of our equity securities may vary substantially.
The trading prices of equity securities issued by REITs may be affected by changes in market interest rates and other factors. During 2014, our closing daily stock price fluctuated from a low of $12.46 to a high of $17.17. One of the factors that may influence the price of our common stock or preferred stock in public trading markets is the annual yield from distributions on our common stock or preferred stock, if any, as compared to yields on other financial instruments. An increase in market interest rates, or a decrease in our distributions to stockholders, may lead prospective purchasers of our stock to demand a higher annual yield, which could reduce the market price of our equity securities.
In addition to the risk factors discussed, other factors that could affect the market price of our equity securities include the following:
· |
a U.S. recession impacting the market for common equity generally; |
· |
actual or anticipated variations in our quarterly or annual results of operations; |
· |
changes in market valuations or investment return requirements of companies in the hotel or real estate industries; |
· |
changes in expectations of our future financial performance, changes in our estimates by securities analysts or failures to achieve those expectations or estimates; |
· |
the trading volumes of our stock; |
· |
additional issuances of our common stock or other securities, including the issuance of our preferred stock; |
· |
the addition or departure of board members or senior management; |
· |
disputes with any of our lenders or managers or franchisors; and |
· |
announcements by us or our competitors of acquisitions, investments or strategic alliances. |
Our distributions to stockholders may vary.
We paid a quarterly cash dividend of $0.50 per share to the stockholders of our Series D cumulative redeemable preferred stock, or the Series D preferred stock, in each of January, April, July and October 2014. We also paid a cash dividend of $0.05 per share to the stockholders of our common stock in each of January, April, July and October 2014. In October 2014, our board of directors authorized the payment of a quarterly cash dividend of $0.50 per share to our Series D preferred stockholders, and a quarterly dividend of $0.36 per share to our common stockholders payable in cash or stock, at the stockholders’ election (subject to a limit on the total amount of cash that may be paid). We paid such dividends in January 2015. Future distributions will be authorized and determined by our board of directors in its sole discretion from time to time and will be dependent upon a number of factors, including long-term operating projections, expected capital requirements and risks affecting our business. Furthermore, our board of directors may elect to pay dividends on our
30
common stock by any means allowed under the Code, including a combination of cash and shares of our common stock. We cannot assure you as to the timing or amount of future dividends; however, we expect to continue to pay a regular dividend of $0.05 per share of common stock throughout 2015. To the extent that expected regular quarterly dividends for 2015 do not satisfy our annual distribution requirements, we expect to satisfy the annual distribution requirement by paying a “catch up” dividend in January 2016, which dividend may be paid in cash and/or shares of common stock. We believe that investors consider the relationship of dividend yield to market interest rates to be an important factor in deciding whether to buy or sell shares of a REIT. If market interest rates increase, prospective purchasers of REIT shares may expect a higher dividend rate. Thus, higher market interest rates could cause the market price of our shares to decrease.
Distributions on our common stock may be made in the form of cash, stock, or a combination of both.
As a REIT, we are required to distribute at least 90% of our taxable income to our stockholders. Typically, we generate cash for distributions through our operations, the disposition of assets, or the incurrence of additional debt. We have elected in the past, and may elect in the future, to pay dividends on our common stock in cash, shares of common stock or a combination of cash and shares of common stock. Changes in our dividend policy could adversely affect the price of our stock.
The IRS may disallow our use of stock dividends to satisfy our distribution requirements.
We may elect to satisfy our REIT distribution requirements in the form of shares of our common stock along with cash. We have previously received private letter rulings from the IRS, including for both tax years 2014 and 2015, regarding the treatment of these distributions for purposes of satisfying our REIT distribution requirements. In the future, however, we may make cash/common stock distributions prior to receiving a private letter ruling. Should the IRS disallow our future use of cash/common stock dividends, the distribution would not qualify for purposes of meeting our distribution requirements, and we would need to make additional all cash distributions to satisfy the distribution requirement through the use of the deficiency dividend procedures outlined in the Code.
Shares of our common stock that are or become available for sale could affect the share price.
Sales of a substantial number of shares of our common stock, or the perception that sales could occur, could adversely affect prevailing market prices for our common stock. On July 17, 2014 we filed a prospectus supplement relating to the possible resale by certain selling security holders of up to 4,034,970 shares of our common stock issued in connection with our acquisition of the Marriott Wailea. In addition, a substantial number of shares of our common stock have been and will be issued or reserved for issuance from time to time under our employee benefit plans or pursuant to securities we may issue that are convertible into shares of our common stock or securities that are exchangeable for shares of our common stock.
Our earnings and cash distributions will affect the market price of shares of our common stock.
We believe that the market value of a REIT’s equity securities is based primarily on the value of the REIT’s owned real estate, capital structure, debt levels and perception of the REIT’s growth potential and its current and potential future cash distributions, whether from operations, sales, acquisitions, development or refinancings. Because our market value is based on a combination of factors, shares of our common stock may trade at prices that are higher or lower than the net value per share of our underlying assets. To the extent we retain operating cash flow for investment purposes, working capital reserves or other purposes rather than distributing the cash flow to stockholders, these retained funds, while increasing the value of our underlying assets, may negatively impact the market price of our common stock. Our failure to meet our expectations or the market’s expectation with regard to future earnings and cash distributions would likely adversely affect the market price of our common stock.
Item 1B.Unresolved Staff Comments
None.
The following table sets forth additional summary information with respect to our 30 hotels as of December 31, 2014:
31
Hotel |
|
City |
|
State |
|
Chain Scale |
|
Service |
|
Rooms |
|
Manager |
Boston Park Plaza |
|
Boston |
|
Massachusetts |
|
Upper Upscale |
|
Full Service |
|
1,054 |
|
Highgate |
Courtyard by Marriott Los Angeles (2) |
|
Los Angeles |
|
California |
|
Upscale |
|
Select Service |
|
187 |
|
IHR |
Doubletree Guest Suites Times Square (2) |
|
New York City |
|
New York |
|
Upper Upscale |
|
Full Service |
|
468 |
|
Highgate |
Embassy Suites Chicago |
|
Chicago |
|
Illinois |
|
Upper Upscale |
|
Full Service |
|
368 |
|
Davidson |
Embassy Suites La Jolla |
|
San Diego |
|
California |
|
Upper Upscale |
|
Full Service |
|
340 |
|
Hilton |
Fairmont Newport Beach |
|
Newport Beach |
|
California |
|
Luxury |
|
Full Service |
|
444 |
|
Fairmont |
Hilton Garden Inn Chicago Downtown/Magnificent Mile |
|
Chicago |
|
Illinois |
|
Upper Upscale |
|
Full Service |
|
361 |
|
Crestline |
Hilton New Orleans St. Charles |
|
New Orleans |
|
Louisiana |
|
Upper Upscale |
|
Full Service |
|
250 |
|
Dimension |
Hilton North Houston |
|
Houston |
|
Texas |
|
Upper Upscale |
|
Full Service |
|
480 |
|
IHR |
Hilton San Diego Bayfront (2) (3) |
|
San Diego |
|
California |
|
Upper Upscale |
|
Full Service |
|
1,190 |
|
Hilton |
Hilton Times Square (2) |
|
New York City |
|
New York |
|
Upper Upscale |
|
Full Service |
|
460 |
|
Highgate |
Hyatt Chicago Magnificent Mile (2) |
|
Chicago |
|
Illinois |
|
Upper Upscale |
|
Full Service |
|
419 |
|
Davidson |
Hyatt Regency Newport Beach (2) |
|
Newport Beach |
|
California |
|
Upper Upscale |
|
Full Service |
|
407 |
|
Hyatt |
Hyatt Regency San Francisco |
|
San Francisco |
|
California |
|
Upper Upscale |
|
Full Service |
|
803 |
|
Hyatt |
JW Marriott New Orleans (2) |
|
New Orleans |
|
Louisiana |
|
Luxury |
|
Full Service |
|
496 |
|
Marriott |
Marriott Boston Long Wharf |
|
Boston |
|
Massachusetts |
|
Upper Upscale |
|
Full Service |
|
412 |
|
Marriott |
Marriott Houston |
|
Houston |
|
Texas |
|
Upper Upscale |
|
Full Service |
|
390 |
|
IHR |
Marriott Wailea |
|
Wailea |
|
Hawaii |
|
Upper Upscale |
|
Full Service |
|
541 |
|
Marriott |
Marriott Park City |
|
Park City |
|
Utah |
|
Upper Upscale |
|
Full Service |
|
199 |
|
IHR |
Marriott Philadelphia |
|
West Conshohocken |
|
Pennsylvania |
|
Upper Upscale |
|
Full Service |
|
289 |
|
Marriott |
Marriott Portland |
|
Portland |
|
Oregon |
|
Upper Upscale |
|
Full Service |
|
249 |
|
IHR |
Marriott Quincy |
|
Quincy |
|
Massachusetts |
|
Upper Upscale |
|
Full Service |
|
464 |
|
Marriott |
Marriott Tysons Corner |
|
Vienna |
|
Virginia |
|
Upper Upscale |
|
Full Service |
|
396 |
|
Marriott |
Renaissance Harborplace (2) |
|
Baltimore |
|
Maryland |
|
Upper Upscale |
|
Full Service |
|
622 |
|
Marriott |
Renaissance Los Angeles Airport |
|
Los Angeles |
|
California |
|
Upper Upscale |
|
Full Service |
|
501 |
|
Marriott |
Renaissance Long Beach |
|
Long Beach |
|
California |
|
Upper Upscale |
|
Full Service |
|
374 |
|
Marriott |
Renaissance Orlando at Sea World ® (4) |
|
Orlando |
|
Florida |
|
Upper Upscale |
|
Full Service |
|
781 |
|
Marriott |
Renaissance Washington DC |
|
Washington, DC |
|
District of Columbia |
|
Upper Upscale |
|
Full Service |
|
807 |
|
Marriott |
Renaissance Westchester |
|
White Plains |
|
New York |
|
Upper Upscale |
|
Full Service |
|
348 |
|
Highgate |
Sheraton Cerritos (2) |
|
Cerritos |
|
California |
|
Upper Upscale |
|
Full Service |
|
203 |
|
IHR |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total number of rooms |
|
|
|
|
|
|
|
|
|
14,303 |
|
|
(1) |
As defined by Smith Travel Research. |
(2) |
Subject to a ground, building or air lease with an unaffiliated third party. |
(3) |
75% ownership interest. |
(4) |
85% ownership interest. |
In addition to the hotel properties listed above, as of December 31, 2014, we also owned one undeveloped parcel of land in Craig, Colorado.
Geographic Diversity
We own a geographically diverse portfolio of hotels located in 13 states and in Washington, DC. The following tables summarize our 30 hotels by region as of December 31, 2014, and the operating statistics by region for 2014, 2013 and 2012, including prior ownership results for the 2014 acquisition (Marriott Wailea), the 2013 acquisitions (Hilton New Orleans St. Charles, Boston Park Plaza and Hyatt Regency San Francisco), and the 2012 acquisitions (Hyatt Chicago Magnificent Mile and Hilton Garden Inn Chicago Downtown/Magnificent Mile).
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of 2014 |
|
Region |
|
Number of Hotels |
|
Number of Rooms |
|
Revenues |
|
California (1) |
|
9 |
|
4,449 |
|
32.6 |
% |
Other West (2) |
|
5 |
|
1,859 |
|
11.1 |
% |
Midwest (3) |
|
3 |
|
1,148 |
|
6.9 |
% |
East (4) |
|
13 |
|
6,847 |
|
49.4 |
% |
|
|
|
|
|
|
|
|
Total |
|
30 |
|
14,303 |
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014 |
|
2013 |
|
Change |
|
||||||||||||||||
Region |
|
Occupancy |
|
ADR |
|
RevPAR |
|
Occupancy |
|
ADR |
|
RevPAR |
|
Occupancy |
|
ADR |
|
RevPAR |
|
||||
California (1) |
|
84.9 |
% |
$ |
186.99 |
|
$ |
158.75 |
|
83.4 |
% |
$ |
175.21 |
|
$ |
146.13 |
|
150 |
bps |
6.7 |
% |
8.6 |
% |
Other West (2) |
|
81.1 |
% |
$ |
171.77 |
|
$ |
139.31 |
|
79.9 |
% |
$ |
162.38 |
|
$ |
129.74 |
|
120 |
bps |
5.8 |
% |
7.4 |
% |
Midwest (3) |
|
80.5 |
% |
$ |
195.24 |
|
$ |
157.17 |
|
79.8 |
% |
$ |
179.57 |
|
$ |
143.30 |
|
70 |
bps |
8.7 |
% |
9.7 |
% |
East (4) |
|
81.5 |
% |
$ |
205.21 |
|
$ |
167.25 |
|
78.9 |
% |
$ |
201.18 |
|
$ |
158.73 |
|
260 |
bps |
2.0 |
% |
5.4 |
% |
Weighted average |
|
82.4 |
% |
$ |
194.31 |
|
$ |
160.11 |
|
80.5 |
% |
$ |
186.11 |
|
$ |
149.82 |
|
190 |
bps |
4.4 |
% |
6.9 |
% |
Weighted average adjusted for change in Marriott calendar (5) |
|
82.4 |
% |
|
194.31 |
|
|
160.11 |
|
80.5 |
% |
$ |
186.24 |
|
$ |
149.92 |
|
190 |
bps |
4.3 |
% |
6.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
2013 |
|
2012 |
|
Change |
|
|||||||||||||||||||||
Region |
|
Occupancy |
|
ADR |
|
RevPAR |
|
Occupancy |
|
ADR |
|
RevPAR |
|
Occupancy |
|
ADR |
|
RevPAR |
|
|||||||||
California (1) |
|
83.4 |
% |
$ |
175.21 |
|
$ |
146.13 |
|
81.2 |
% |
$ |
169.45 |
|
$ |
137.59 |
|
220 |
bps |
3.4 |
% |
6.2 |
% |
|||||
Other West (2) |
|
79.9 |
% |
$ |
162.38 |
|
$ |
129.74 |
|
81.3 |
% |
$ |
157.33 |
|
$ |
127.91 |
|
(140) |
bps |
3.2 |
% |
1.4 |
% |
|||||
Midwest (3) |
|
79.8 |
% |
$ |
179.57 |
|
$ |
143.30 |
|
81.7 |
% |
$ |
171.25 |
|
$ |
139.91 |
|
(190) |
bps |
4.9 |
% |
2.4 |
% |
|||||
East (4) |
|
78.9 |
% |
$ |
201.18 |
|
$ |
158.73 |
|
78.8 |
% |
$ |
197.64 |
|
$ |
155.74 |
|
10 |
bps |
1.8 |
% |
1.9 |
% |
|||||
Weighted average |
|
80.5 |
% |
$ |
186.11 |
|
$ |
149.82 |
|
80.1 |
% |
$ |
181.12 |
|
$ |
145.08 |
|
40 |
bps |
2.8 |
% |
3.3 |
% |
|||||
Weighted average adjusted for change in Marriott calendar (5) |
|
80.5 |
% |
$ |
186.24 |
|
$ |
149.92 |
|
80.1 |
% |
$ |
181.02 |
|
$ |
145.00 |
|
40 |
bps |
2.9 |
% |
3.4 |
% |
(1) |
All but one of these hotels are located in Southern California. |
(2) |
Includes Hawaii, Oregon, Texas and Utah. |
(3) |
Includes Illinois. |
(4) |
Includes Florida, Louisiana, Maryland, Massachusetts, New York, Pennsylvania, Virginia and Washington, DC. |
(5) |
Weighted average adjusted for change in Marriott calendar include the effects of removing three additional days (December 29, 2012 through December 31, 2012) from Marriott's fiscal 2013 calendar and adding two additional days (December 29, 2012 through December 31, 2012 less December 31, 2011) to Marriott's fiscal 2012 calendar for ten of the Company's Marriott-managed hotels. |
We are involved from time to time in various claims and legal actions in the ordinary course of our business. We do not believe that the resolution of any such pending legal matters will have a material adverse effect on our financial position or results of operations when resolved.
Item 4.Mine Safety Disclosures
Not applicable.
33
Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is traded on the NYSE under the symbol “SHO.” On February 12, 2015, the last reported price per share of common stock on the NYSE was $17.63. The table below sets forth the high and low closing price per share of our common stock as reported on the NYSE and the cash dividends per share of common stock we declared with respect to each period.
|
|
|
|
|
|
|
|
|
|
|
|
|
High |
|
Low |
|
Dividends Declared |
|
|||
2013: |
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
12.31 |
|
$ |
11.02 |
|
$ |
— |
|
Second Quarter |
|
$ |
13.09 |
|
$ |
11.14 |
|
$ |
— |
|
Third Quarter |
|
$ |
13.49 |
|
$ |
11.87 |
|
$ |
0.05 |
|
Fourth Quarter |
|
$ |
14.06 |
|
$ |
12.50 |
|
$ |
0.05 |
|
2014: |
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
14.00 |
|
$ |
12.46 |
|
$ |
0.05 |
|
Second Quarter |
|
$ |
15.25 |
|
$ |
13.22 |
|
$ |
0.05 |
|
Third Quarter |
|
$ |
15.17 |
|
$ |
13.71 |
|
$ |
0.05 |
|
Fourth Quarter |
|
$ |
17.17 |
|
$ |
13.42 |
|
$ |
0.36 |
(1) |
(1) |
Paid in a combination of cash and shares of our common stock, pursuant to elections by individual stockholders. |
Subject to certain limitations, we intend to make dividends on our stock in amounts equivalent to 100% of our annual taxable income. The level of any future dividends will be determined by our board of directors after considering long-term operating projections, expected capital requirements and risks affecting our business; however, we expect to continue to pay a regular dividend of $0.05 per share of common stock throughout 2015. To the extent that expected regular quarterly dividends for 2015 do not satisfy our annual distribution requirements, we expect to satisfy the annual distribution requirement by paying a “catch up” dividend in January 2016, which dividend may be paid in cash and/or shares of common stock. Any future common stock dividends may be comprised of cash only, or a combination of cash and stock, consistent with Internal Revenue Service guidelines.
As of February 9, 2015, we had approximately 23 holders of record of our common stock. However, because many of the shares of our common stock are held by brokers and other institutions on behalf of stockholders, we believe there are substantially more beneficial holders of our common stock than record holders. In order to comply with certain requirements related to our qualification as a REIT, our charter limits the number of common shares that may be owned by any single person or affiliated group to 9.8% of the outstanding common shares, subject to the ability of our board to waive this limitation under certain conditions.
Information relating to compensation plans under which our equity securities are authorized for issuance is set forth in Part III, Item 12 of this Annual Report on Form 10-K.
Fourth Quarter 2014 Purchases of Equity Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum Number (or |
|
|
|
|
|
|
|
|
|
Total Number of |
|
Appropriate Dollar |
|
|
|
|
|
|
|
|
|
Shares Purchased |
|
Value) of Shares that |
|
|
|
|
Total Number |
|
|
|
|
as Part of Publicly |
|
May Yet Be Purchased |
|
|
|
|
of Shares |
|
Average Price |
|
Announced Plans |
|
Under the Plans or |
|
||
Period |
|
Purchased |
|
Paid per Share |
|
or Programs |
|
Programs |
|
||
October 1, 2014 — October 31, 2014 |
|
— |
|
$ |
— |
|
— |
|
|
|
|
November 1, 2014 — November 30, 2014 |
|
— |
|
$ |
— |
|
— |
|
|
|
|
December 1, 2014 — December 31, 2014 |
|
— |
|
$ |
— |
|
— |
|
|
|
|
Total |
|
— |
|
|
|
|
|
|
$ |
100,000,000 |
(1) |
(1) |
On February 19, 2014, the Company’s board of directors authorized a share repurchase plan to acquire up to $100.0 million of the Company’s common and preferred stock. As of December 31, 2014, no shares of either the Company’s common or preferred stock have been repurchased. Future purchases will depend on various factors, including the Company’s capital needs, as well as the Company’s common and preferred stock price. |
34
Item 6.Selected Financial Data
The following table sets forth selected financial information for the Company that has been derived from the consolidated financial statements and notes. This information should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.
Year Ended |
Year Ended |
Year Ended |
Year Ended |
Year Ended |
||||||||||||
December 31, |
December 31, |
December 31, |
December 31, |
December 31, |
||||||||||||
2014 |
2013 |
2012 |
2011 |
2010 |
||||||||||||
Operating Data ($ in thousands): |
||||||||||||||||
REVENUES |
||||||||||||||||
Room |
$ |
811,709 |
$ |
653,955 |
$ |
576,146 |
$ |
501,183 |
$ |
351,039 | ||||||
Food and beverage |
259,358 | 213,346 | 200,810 | 175,103 | 138,188 | |||||||||||
Other operating |
70,931 | 56,523 | 52,128 | 45,508 | 26,373 | |||||||||||
Total revenues |
1,141,998 | 923,824 | 829,084 | 721,794 | 515,600 | |||||||||||
OPERATING EXPENSES |
||||||||||||||||
Room |
214,899 | 170,361 | 147,932 | 128,225 | 92,101 | |||||||||||
Food and beverage |
180,053 | 147,713 | 139,106 | 126,139 | 98,889 | |||||||||||
Other operating |
21,012 | 16,819 | 16,162 | 14,004 | 11,535 | |||||||||||
Advertising and promotion |
54,992 | 47,306 | 42,474 | 37,226 | 27,326 | |||||||||||
Repairs and maintenance |
45,901 | 35,884 | 32,042 | 29,067 | 22,608 | |||||||||||
Utilities |
34,141 | 27,006 | 25,596 | 25,537 | 19,117 | |||||||||||
Franchise costs |
38,271 | 32,932 | 30,067 | 25,595 | 18,032 | |||||||||||
Property tax, ground lease and insurance |
84,665 | 79,004 | 66,830 | 58,010 | 35,280 | |||||||||||
Property general and administrative |
126,737 | 103,454 | 94,642 | 85,293 | 61,753 | |||||||||||
Corporate overhead |
28,739 | 26,671 | 24,316 | 25,453 | 21,751 | |||||||||||
Depreciation and amortization |
155,845 | 137,476 | 130,907 | 113,708 | 79,633 | |||||||||||
Impairment loss |
— |
— |
— |
10,862 |
— |
|||||||||||
Total operating expenses |
985,255 | 824,626 | 750,074 | 679,119 | 488,025 | |||||||||||
Operating income |
156,743 | 99,198 | 79,010 | 42,675 | 27,575 | |||||||||||
Equity in net earnings of unconsolidated joint ventures |
— |
— |
— |
21 | 555 | |||||||||||
Interest and other income |
3,479 | 2,821 | 297 | 3,115 | 112 | |||||||||||
Interest expense |
(72,315) | (72,239) | (76,821) | (74,195) | (58,931) | |||||||||||
Loss on extinguishment of debt |
(4,638) | (44) | (191) |
— |
— |
|||||||||||
Gain on remeasurement of equity interests |
— |
— |
— |
69,230 |
— |
|||||||||||
Income (loss) before income taxes and discontinued operations |
83,269 | 29,736 | 2,295 | 40,846 | (30,689) | |||||||||||
Income tax provision |
(179) | (8,145) | (1,148) |
— |
— |
|||||||||||
Income (loss) from continuing operations |
83,090 | 21,591 | 1,147 | 40,846 | (30,689) | |||||||||||
Income from discontinued operations |
4,849 | 48,410 | 48,410 | 40,453 | 69,231 | |||||||||||
NET INCOME |
87,939 | 70,001 | 49,557 | 81,299 | 38,542 | |||||||||||
Income from consolidated joint venture attributable to non-controlling interest |
(6,676) | (4,013) | (1,761) | (312) |
— |
|||||||||||
Distributions to non-controlling interest |
(32) | (32) | (31) | (30) |
— |
|||||||||||
Preferred stock dividends, redemption charges and accretion |
(9,200) | (19,013) | (29,748) | (27,321) | (20,652) | |||||||||||
INCOME AVAILABLE TO COMMON STOCKHOLDERS |
$ |
72,031 |
$ |
46,943 |
$ |
18,017 |
$ |
53,636 |
$ |
17,890 | ||||||
Income (loss) from continuing operations available (attributable) to common stockholders per diluted common share |
$ |
0.34 |
$ |
(0.01) |
$ |
(0.24) |
$ |
0.11 |
$ |
(0.52) | ||||||
Dividends declared per common share |
$ |
0.51 |
$ |
0.10 |
$ |
— |
$ |
— |
$ |
— |
||||||
Balance Sheet Data ($ in thousands): |
||||||||||||||||
Investment in hotel properties, net (1) |
$ |
3,538,129 |
$ |
3,231,382 |
$ |
2,681,877 |
$ |
2,532,232 |
$ |
1,666,180 | ||||||
Total assets |
$ |
3,924,965 |
$ |
3,508,798 |
$ |
3,136,675 |
$ |
3,101,240 |
$ |
2,436,106 | ||||||
Total debt (1) |
$ |
1,429,292 |
$ |
1,404,075 |
$ |
1,363,389 |
$ |
1,416,890 |
$ |
973,810 | ||||||
Total liabilities |
$ |
1,656,131 |
$ |
1,556,399 |
$ |
1,517,362 |
$ |
1,675,946 |
$ |
1,236,807 | ||||||
Equity |
$ |
2,268,834 |
$ |
1,952,399 |
$ |
1,519,313 |
$ |
1,325,294 |
$ |
1,099,299 |
(1) |
Does not include hotels or debt which have been reclassified to discontinued operations, or which have been classified as held for sale. |
35
Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read together with the consolidated financial statements and related notes included elsewhere in this report.
Overview
Sunstone Hotel Investors, Inc. is a Maryland corporation. We operate as a self-managed and self-administered real estate investment trust, or REIT. A REIT is a legal entity that directly or indirectly owns real estate assets. REITs generally are not subject to federal income taxes at the corporate level as long as they pay stockholder dividends equivalent to 100% of their taxable income. REITs are required to distribute to stockholders at least 90% of their taxable income. We own, directly or indirectly, 100% of the interests of Sunstone Hotel Partnership, LLC (the “Operating Partnership”), which is the entity that directly or indirectly owns our hotel properties. We also own 100% of the interests of our taxable REIT subsidiary, Sunstone Hotel TRS Lessee, Inc., which leases all of our hotels from the Operating Partnership, and engages independent third-parties to manage our hotels. In addition, we own BuyEfficient, LLC (“BuyEfficient”), an electronic purchasing platform that allows members to procure food, operating supplies, furniture, fixtures and equipment.
We own primarily upper upscale hotels in the United States. As of December 31, 2014, we had interests in 30 hotels, which are currently held for investment (the “30 hotels”). Of the 30 hotels, we classify 27 as upper upscale, two as luxury and one as upscale as defined by Smith Travel Research, Inc. All but one (the Boston Park Plaza) of our 30 hotels are operated under nationally recognized brands such as Marriott, Hilton, Hyatt, Fairmont and Sheraton, which are among the most respected and widely recognized brands in the lodging industry. While independent hotels may do well in strong market locations, we believe the largest and most stable segment of travelers prefer the consistent service and quality associated with nationally recognized brands.
We seek to own hotels primarily in urban locations that benefit from significant barriers to entry by competitors and diverse economic drivers. As of December 31, 2014, all but one (the Marriott Wailea) of our 30 hotels are considered business, convention, or airport hotels, as opposed to resort or leisure hotels. The hotels comprising our 30 hotel portfolio average 477 rooms in size.
Since the end of 2009, demand for lodging in the U.S. has increased, which has resulted in improved hotel revenues and profits. In light of increasing demand for lodging and generally muted supply of new hotel development, we believe we are currently in the middle phase of a cyclical lodging recovery. Accordingly, during the past four years, we selectively acquired interests in nine hotels: the Doubletree Guest Suites Times Square in January 2011; the JW Marriott New Orleans in February 2011; the Hilton San Diego Bayfront in April 2011; the Hyatt Chicago Magnificent Mile in June 2012; the Hilton Garden Inn Chicago Downtown/Magnificent Mile in July 2012; the Hilton New Orleans St. Charles in May 2013; the Boston Park Plaza in July 2013; the Hyatt Regency San Francisco in December 2013; and the Marriott Wailea in July 2014. Based on our purchase prices, the combined asset value of these nine hotels totals $1.8 billion, or $329,000 per key. In addition, we purchased the outside 50.0% equity interest in our BuyEfficient joint venture in January 2011. Our acquisition program is aimed at generating attractive risk-adjusted returns on our investment dollars. We, therefore, may target lodging assets outside of the typical branded, urban, upper upscale profile represented by our existing portfolio in order to capitalize on opportunities which may arise. We intend to select the brands and operators for our hotels that we believe will lead to the highest returns.
We have from time to time divested of assets that no longer fit our target profile, will not offer long-term returns in excess of our cost of capital, or that have high risk relative to their anticipated return expectations. In connection with this strategy, during the past four years, we sold 10 hotels: the Royal Palm Miami Beach in April 2011; the Valley River Inn located in Eugene, Oregon in October 2011; the Marriott Del Mar in August 2012; the Doubletree Guest Suites Minneapolis, the Hilton Del Mar, and the Marriott Troy in September 2012; and the Kahler Grand, the Kahler Inn & Suites, the Marriott Rochester and the Residence Inn by Marriott Rochester (the “Rochester Hotels”) in January 2013. Based on our sales prices, the combined asset value of these 10 hotels totals $547.2 million, or $182,000 per key. In addition, during the past four years, we sold the following non-hotel assets: a commercial laundry facility located in Salt Lake City, Utah in July 2011; an office building adjacent to the Marriott Troy in September 2012; and a commercial laundry facility located in Rochester, Minnesota in January 2013 (together with the Rochester Hotels, the “Rochester Portfolio”).
36
2014 Highlights
In February 2014, we entered into separate Equity Distribution Agreements with Wells Fargo Securities LLC and Merrill Lynch, Pierce Fenner & Smith Incorporated (the “Managers”). Under the terms of the agreements, we may issue and sell from time to time through or to the Managers, as sales agents and/or principals, shares of our common stock having an aggregate offering amount of up to $150.0 million. During 2014, we received $21.0 million in net proceeds from the issuance of 1,352,703 shares of our common stock pursuant to the agreements.
In June 2014, we acquired approximately seven acres of land underlying the Fairmont Newport Beach for $11.0 million. Prior to our acquisition, the land was leased to us by a third party.
Also in June 2014, we issued 18,000,000 shares of our common stock in an underwritten public offering for net proceeds of approximately $262.5 million, which were used to acquire the Marriott Wailea in July 2014.
In July 2014, we purchased the 544-room Marriott Wailea for a net purchase price of $325.6 million, which was comprised of $265.6 million in cash, including $4.4 million of proration credits and unrestricted and restricted cash received from the seller, and $60.0 million of our common stock issued directly to the seller. The acquisition was funded with proceeds received from our June 2014 common stock offering, and 4,034,970 shares of our common stock valued at $60.0 million ($14.87 per share). Subsequent to our acquisition, three rooms were temporarily taken out of service, leaving 541 rooms available to sell.
In August 2014, we amended the non-recourse mortgage secured by the Hilton San Diego Bayfront. The loan amendment extends the maturity date from April 2016 to August 2019, and reduces the interest rate from three-month LIBOR plus 325 basis points to one-month LIBOR plus 225 basis points. The loan originally included a syndication of four lenders. One of the four lenders elected not to proceed with the amended loan, causing us to expense $0.5 million of the unamortized balance of the applicable deferred financing fees to loss on extinguishment of debt. In conjunction with the amendment, we paid additional deferred financing fees of $1.3 million to the three remaining lenders, which we are amortizing over the term of the refinanced debt. We also paid $0.1 million in loan fees to third parties, which we recorded as a component of interest expense.
In December 2014, we repaid the $38.9 million mortgage secured by the JW Marriott New Orleans, using proceeds received from a new $90.0 million mortgage secured by the JW Marriott New Orleans. The new loan extends the maturity date from September 2015 to December 2024. The new loan is subject to a 30-year amortization schedule, and reduces the interest rate from 5.45% under a related interest rate swap agreement to a fixed rate of 4.15%. In conjunction with our repayment of the original mortgage, we wrote off $39,000 of unamortized deferred financing fees, which are included in loss on extinguishment of debt in our consolidated statements of operations, and we paid $0.6 million to terminate the related interest rate swap agreement. In addition, we paid deferred financing fees of $0.6 million related to the new loan, which we are amortizing over the term of the new loan.
Also in December 2014, we extinguished the $67.1 million mortgage secured by the Embassy Suites La Jolla for a total cost of $71.1 million, and recorded a loss on extinguishment of debt of $4.0 million. The extinguishment was funded using proceeds received from a new $65.0 million mortgage secured by the Embassy Suites La Jolla, along with cash on hand. The new loan is subject to a 30-year amortization schedule, reduces the interest rate from a fixed rate of 6.6% to a fixed rate of 4.12%, and extends the maturity date from June 2019 to January 2025. In conjunction with our repayment of the original mortgage, we wrote off $43,000 of unamortized deferred financing fees, which are included in loss on extinguishment of debt in our consolidated statements of operations. In addition, we paid deferred financing fees of $0.4 million related to the new loan, which we are amortizing over the term of the new loan.
As of December 31, 2014, the weighted average term to maturity of our debt is approximately four years, and 71.6% of our debt is fixed rate with a weighted average interest rate of 5.2%. The weighted average interest rate on all of our debt, which includes our variable-rate debt obligations based on variable rates at December 31, 2014, is 4.5%.
37
Operating Activities
Operating Performance Indicators. The following performance indicators are commonly used in the hotel industry:
· |
Occupancy, which is the quotient of total rooms sold divided by total rooms available; |
· |
Average daily room rate, or ADR, which is the quotient of room revenue divided by total rooms sold; |
· |
Revenue per available room, or RevPAR, which is the product of occupancy and ADR, and does not include food and beverage revenue, or other operating revenue; |
· |
Comparable RevPAR, which we define as the RevPAR generated by hotels we owned as of the end of the reporting period, but excluding those hotels that we classified as held for sale, those hotels that are undergoing a material repositioning and those hotels whose room counts have materially changed during either the current or prior year. For hotels that were not owned for the entirety of the comparison periods, comparable RevPAR is calculated using RevPAR generated during periods of prior ownership. We refer to this subset of our hotels used to calculate comparable RevPAR as our “Comparable Portfolio.” Currently our Comparable Portfolio includes all 30 hotels in which we have interests as of December 31, 2014. In addition, our Comparable Portfolio includes prior ownership results for the Hyatt Chicago Magnificent Mile, the Hilton Garden Inn Chicago Downtown/Magnificent Mile, the Hilton New Orleans St. Charles, the Boston Park Plaza, the Hyatt Regency San Francisco and the Marriott Wailea; |
· |
RevPAR index, which is the quotient of a hotel’s RevPAR divided by the average RevPAR of its competitors, multiplied by 100. A RevPAR index in excess of 100 indicates a hotel is achieving higher RevPAR than the average of its competitors. In addition to absolute RevPAR index, we monitor changes in RevPAR index; |
· |
EBITDA, which is net income (loss) excluding: non-controlling interests; interest expense; provision for income taxes, including income taxes applicable to sale of assets; and depreciation and amortization; |
· |
Adjusted EBITDA, which includes EBITDA but excludes: amortization of deferred stock compensation; the impact of any gain or loss from asset sales; impairment charges; prior year property tax assessments or credits; and any other identified adjustments; |
· |
Funds from operations, or FFO, which includes net income (loss), excluding non-controlling interests, gains and losses from sales of property, plus real estate-related depreciation and amortization (excluding amortization of deferred financing costs) and real estate-related impairment losses, and after adjustment for unconsolidated partnerships and joint ventures; and |
· |
Adjusted FFO available to common stockholders, which includes FFO but excludes preferred stock dividends and redemption charges, penalties, written-off deferred financing costs, non-real estate-related impairment losses, income tax benefits or (provisions) associated with the application of net operating loss carryforwards, and any other identified adjustments. |
Revenues. Substantially all of our revenues are derived from the operation of our hotels. Specifically, our revenues consist of the following:
· |
Room revenue, which is the product of the number of rooms sold and the ADR; |
· |
Food and beverage revenue, which is comprised of revenue realized in the hotel food and beverage outlets as well as banquet and catering events; and |
· |
Other operating revenue, which includes ancillary hotel revenue and other items primarily driven by occupancy such as telephone/internet, parking, spa, resort and other facility fees, entertainment and other guest services. Additionally, this category includes, among other things, operating revenue from BuyEfficient, and hotel space leased by third parties. |
38
Expenses. Our expenses consist of the following:
· |
Room expense, which is primarily driven by occupancy and, therefore, has a significant correlation with room revenue; |
· |
Food and beverage expense, which is primarily driven by food and beverage sales and banquet and catering bookings and, therefore, has a significant correlation with food and beverage revenue; |
· |
Other operating expense, which includes the corresponding expense of other operating revenue, advertising and promotion, repairs and maintenance, utilities, and franchise costs; |
· |
Property tax, ground lease and insurance expense, which includes the expenses associated with property tax, ground lease and insurance payments, each of which is primarily a fixed expense, however property tax is subject to regular revaluations based on the specific tax regulations and practices of each municipality; |
· |
Property general and administrative expense, which includes our property-level general and administrative expenses, such as payroll and related costs, contract and professional fees, credit and collection expenses, employee recruitment, relocation and training expenses, travel expenses, management fees and other costs. Additionally, this category includes general and administrative expenses from BuyEfficient; |
· |
Corporate overhead expense, which includes our corporate-level expenses, such as payroll and related costs, amortization of deferred stock compensation, acquisition and due diligence costs, legal expenses, contract and professional fees, relocation, entity-level state franchise and minimum taxes, travel expenses, office rent and other costs; and |
· |
Depreciation and amortization expense, which includes depreciation on our hotel buildings, improvements, furniture, fixtures and equipment, along with amortization on our franchise fees and certain intangibles. Additionally, this category includes depreciation and amortization related to both our corporate office and BuyEfficient’s furniture, fixtures, equipment and intangibles. |
Other Revenue and Expense. Other revenue and expense consists of the following:
· |
Interest and other income, which includes interest we have earned on our restricted and unrestricted cash accounts and the Preferred Equity Investment, as well as any energy rebates we have received or any gains or losses we have recognized on sales of assets other than real estate investments; |
· |
Interest expense, which includes interest expense incurred on our outstanding fixed and variable-rate debt and capital lease obligation, accretion of our Operating Partnership’s 4.6% exchangeable senior notes (the “Senior Notes”) that were repurchased in 2013, amortization of deferred financing fees, gains or losses on derivatives and any loan penalties and fees incurred on our debt; |
· |
Loss on extinguishment of debt, which includes losses we recognized on amendments or early repayments of mortgages or other debt obligations; |
· |
Income tax provision, which includes federal and state income taxes charged to the Company net of any refunds received, and any adjustments to unrecognized tax positions, along with any related interest and penalties incurred; |
· |
Income from discontinued operations, which includes the results of operations for any hotels or other real estate investments sold during the reporting period, along with the gain or loss realized on the sale of these assets and any extinguishments of related debt; |
· |
Income from consolidated joint venture attributable to non-controlling interest, which includes net income attributable to the outside 25.0% interest in the joint venture that owns the Hilton San Diego Bayfront; |
39
· |
Distributions to non-controlling interest, which includes preferred dividends earned by investors from an entity that owns the Doubletree Guest Suites Times Square, including related administrative fees; and |
· |
Preferred stock dividends and redemption charges, which includes dividends earned on our 8.0% Series A Cumulative Redeemable Preferred Stock (“Series A preferred stock”) until their redemption in March 2013, Series C Cumulative Convertible Redeemable Preferred Stock (“Series C preferred stock”) until their redemption in May 2013, and 8.0% Series D Cumulative Redeemable Preferred Stock (“Series D preferred stock”), as well as redemption charges for preferred stock redemptions made in excess of net carrying values. |
Factors Affecting Our Operating Results. The primary factors affecting our operating results include overall demand for hotel rooms, the pace of new hotel development, or supply, and the relative performance of our operators in increasing revenue and controlling hotel operating expenses.
· |
Demand. The demand for lodging generally fluctuates with the overall economy. In aggregate, demand for our hotels has improved each year since 2010. In 2012, our Comparable Portfolio RevPAR increased 6.2% as compared to 2011, with a 260 basis point increase in portfolio occupancy. These improving demand trends continued in 2013 and 2014. As a result, our Comparable Portfolio RevPAR increased 3.3% in 2013 as compared to 2012, and 6.9% in 2014 as compared to 2013. Comparable Portfolio occupancy increased 40 basis points in 2013 as compared to 2012, and increased an additional 190 basis points in 2014 as compared to 2013. Our operating statistics improved in 2013 as compared to 2012, even as four of our hotels were under major renovations during the first half of 2013, causing limited occupancy. These major renovations were substantially completed during the third quarter of 2013. While a portion of the improvement in our operating statistics in 2014 as compared to 2013 was due to occupancy improvements at the four hotels under renovation during 2013, this improvement was muted by the negative impact of renovations at four of our hotels during 2014. Consistent with prior trends, we anticipate that lodging demand will continue to improve as the U.S. economy continues to strengthen. Historically, cyclical troughs are followed by extended periods of relatively strong demand, resulting in a cyclical lodging growth phase. While growth is not expected to be uniform, we expect hotel demand to remain strong over the next several years if the U.S. economy continues to grow and employment levels continue to improve. |
· |
Supply. The addition of new competitive hotels affects the ability of existing hotels to absorb demand for lodging and therefore drive RevPAR and profits. The development of new hotels is largely driven by construction costs and expected performance of existing hotels. The recession and financial crisis which occurred in 2008 and 2009, served to restrict credit and tighten lending standards, which resulted in a curtailment of funding for new hotel construction projects. In aggregate, we expect the U.S. hotel supply will remain slightly below historic levels over the next few years. On a market-by-market basis, some markets may experience new hotel room openings at or greater than historic levels, including in New York City, Washington DC and Chicago where there are currently higher-than-average supplies of new hotel room openings. In addition, lenders are seeking higher yielding instruments, which may lead to riskier lending practices, including lending on new hotel construction. |
· |
Revenues and expenses. We believe that marginal improvements in RevPAR index, even in the face of declining revenues, are a good indicator of the relative quality and appeal of our hotels, and our operators’ effectiveness in maximizing revenues. Similarly, we also evaluate our operators’ effectiveness in minimizing incremental operating expenses in the context of increasing revenues or, conversely, in reducing operating expenses in the context of declining revenues. |
With respect to improving RevPAR index, we continue to work with our hotel operators to optimize revenue management initiatives while taking into consideration market demand trends and the pricing strategies of competitor hotels in our markets. We also develop capital investment programs designed to ensure each of our hotels is well renovated and positioned to appeal to groups and individual travelers fitting target guest profiles. Increased capital investment in our properties may lead to short-term revenue disruption and negatively impact RevPAR index. Our revenue management initiatives are generally oriented towards maximizing ADR even if the result may be lower occupancy than may be achieved through lower ADR. Increases in RevPAR attributable to increases in ADR may be accompanied by minimal additional expenses, while increases in RevPAR attributable to higher occupancy may result in higher variable expenses
40
such as housekeeping, labor and utilities expense. In 2013, our Comparable Portfolio RevPAR index decreased 60 basis points as compared to the same period in 2012 due to several capital investment programs at our hotels. In 2014, our Comparable Portfolio RevPAR index increased by 120 basis points as compared to the same period in 2013 due in part to a reduction in renovation displacement and the effect of newly-implemented resort fees in 2014.
We continue to work with our operators to identify operational efficiencies designed to reduce expenses while maintaining guest experience and hotel employee satisfaction. Key asset management initiatives include optimizing hotel staffing levels, increasing the efficiency of the hotels, such as installing energy efficient management and inventory control systems, and selectively combining food and beverage outlets. Our operational efficiency initiatives may be difficult to implement, as most categories of variable operating expenses, such as utilities and housekeeping labor costs, fluctuate with changes in occupancy. Furthermore, our hotels operate with significant fixed costs, such as general and administrative expense, insurance, property taxes, and other expenses associated with owning hotels, over which our operators have little control. We have experienced either currently or in the past, increases in hourly wages, employee benefits (especially health insurance), utility costs and property insurance, which have negatively affected our operating margins. Moreover, there are limits to how far our operators can reduce expenses without affecting brand standards or the competitiveness of our hotels.
Operating Results. The following table presents our operating results for our total portfolio for the years ended December 31, 2014 and 2013, including the amount and percentage change in the results between the two periods. The table presents the results of operations included in the consolidated statements of operations, and includes the 30 hotels (14,303 rooms) as of December 31, 2014 and 29 hotels (13,744 rooms) as of December 31, 2013. No hotels were classified as discontinued operations during 2014, however, adjustments were recognized during 2014 related to hotels sold during 2004 through 2013. Discontinued Operations for 2013 includes the Rochester Portfolio (1,222 rooms).
2014 |
2013 |
Change $ |
Change % |
||||||||||||||||||
(dollars in thousands, except statistical data) |
|||||||||||||||||||||
REVENUES |
|||||||||||||||||||||
Room |
$ |
811,709 |
$ |
653,955 |
$ |
157,754 | 24.1 |
% |
|||||||||||||
Food and beverage |
259,358 | 213,346 | 46,012 | 21.6 |
% |
||||||||||||||||
Other operating |
70,931 | 56,523 | 14,408 | 25.5 |
% |
||||||||||||||||
Total revenues |
1,141,998 | 923,824 | 218,174 | 23.6 |
% |
||||||||||||||||
OPERATING EXPENSES |
|||||||||||||||||||||
Hotel operating |
673,934 | 557,025 | 116,909 | 21.0 |
% |
||||||||||||||||
Property general and administrative |
126,737 | 103,454 | 23,283 | 22.5 |
% |
||||||||||||||||
Corporate overhead |
28,739 | 26,671 | 2,068 | 7.8 |
% |
||||||||||||||||
Depreciation and amortization |
155,845 | 137,476 | 18,369 | 13.4 |
% |
||||||||||||||||
Total operating expenses |
985,255 | 824,626 | 160,629 | 19.5 |
% |
||||||||||||||||
Operating income |
156,743 | 99,198 | 57,545 | 58.0 |
% |
||||||||||||||||
Interest and other income |
3,479 | 2,821 | 658 | 23.3 |
% |
||||||||||||||||
Interest expense |
(72,315) | (72,239) | (76) | (0.1) |
% |
||||||||||||||||
Loss on extinguishment of debt |
(4,638) | (44) | (4,594) | (10,440.9) |
% |
||||||||||||||||
Income before income taxes and discontinued operations |
83,269 | 29,736 | 53,533 | 180.0 |
% |
||||||||||||||||
Income tax provision |
(179) | (8,145) | 7,966 | 97.8 |
% |
||||||||||||||||
Income from continuing operations |
83,090 | 21,591 | 61,499 | 284.8 |
% |
||||||||||||||||
Income from discontinued operations |
4,849 | 48,410 | (43,561) | (90.0) |
% |
||||||||||||||||
NET INCOME |
87,939 | 70,001 | 17,938 | 25.6 |
% |
||||||||||||||||
Income from consolidated joint venture attributable to non-controlling interest |
(6,676) | (4,013) | (2,663) | (66.4) |
% |
||||||||||||||||
Distributions to non-controlling interest |
(32) | (32) |
— |
— |
% |
||||||||||||||||
Preferred stock dividends and redemption charges |
(9,200) | (19,013) | 9,813 | 51.6 |
% |
||||||||||||||||
INCOME AVAILABLE TO COMMON STOCKHOLDERS |
$ |
72,031 |
$ |
46,943 |
$ |
25,088 | 53.4 |
% |
The following table presents our operating results for our total portfolio for the years ended December 31, 2013 and 2012, including the amount and percentage change in the results between the two periods. The table presents the results of operations included in the consolidated statements of operations, and includes continuing operations for 29 hotels (13,744 rooms) as of December 31, 2013 and 26 hotels (11,632 rooms) as of December 31, 2012, as well as discontinued operations for the Rochester portfolio (1,222 rooms) as of December 31, 2013 and 8 hotels (2,342 rooms) as of December 31, 2012.
41
2013 |
2012 |
Change $ |
Change % |
|||||||||||||||
(dollars in thousands, except statistical data) |
||||||||||||||||||
REVENUES |
||||||||||||||||||
Room |
$ |
653,955 |
$ |
576,146 |
$ |
77,809 | 13.5 |
% |
||||||||||
Food and beverage |
213,346 | 200,810 | 12,536 | 6.2 |
% |
|||||||||||||
Other operating |
56,523 | 52,128 | 4,395 | 8.4 |
% |
|||||||||||||
Total revenues |
923,824 | 829,084 | 94,740 | 11.4 |
% |
|||||||||||||
OPERATING EXPENSES |
||||||||||||||||||
Hotel operating |
557,025 | 500,209 | 56,816 | 11.4 |
% |
|||||||||||||
Property general and administrative |
103,454 | 94,642 | 8,812 | 9.3 |
% |
|||||||||||||
Corporate overhead |
26,671 | 24,316 | 2,355 | 9.7 |
% |
|||||||||||||
Depreciation and amortization |
137,476 | 130,907 | 6,569 | 5.0 |
% |
|||||||||||||
Total operating expenses |
824,626 | 750,074 | 74,552 | 9.9 |
% |
|||||||||||||
Operating income |
99,198 | 79,010 | 20,188 | 25.6 |
% |
|||||||||||||
Interest and other income |
2,821 | 297 | 2,524 | 849.8 |
% |
|||||||||||||
Interest expense |
(72,239) | (76,821) | 4,582 | 6.0 |
% |
|||||||||||||
Loss on extinguishment of debt |
(44) | (191) | 147 | 77.0 |
% |
|||||||||||||
Income before income taxes and discontinued operations |
29,736 | 2,295 | 27,441 | 1,195.7 |
% |
|||||||||||||
Income tax provision |
(8,145) | (1,148) | (6,997) | (609.5) |
% |
|||||||||||||
Income from continuing operations |
21,591 | 1,147 | 20,444 | 1,782.4 |
% |
|||||||||||||
Income from discontinued operations |
48,410 | 48,410 |
— |
— |
% |
|||||||||||||
NET INCOME |
70,001 | 49,557 | 20,444 | 41.3 |
% |
|||||||||||||
Income from consolidated joint venture attributable to non-controlling interest |
(4,013) | (1,761) | (2,252) | (127.9) |
% |
|||||||||||||
Distributions to non-controlling interest |
(32) | (31) | (1) | (3.2) |
% |
|||||||||||||
Preferred stock dividends and redemption charges |
(19,013) | (29,748) | 10,735 | 36.1 |
% |
|||||||||||||
INCOME AVAILABLE TO COMMON STOCKHOLDERS |
$ |
46,943 |
$ |
18,017 |
$ |
28,926 | 160.5 |
% |
Operating Statistics. The following tables include comparisons of the key operating metrics for our Comparable Portfolio, including prior ownership results as applicable for the Hyatt Chicago Magnificent Mile, the Hilton Garden Inn Chicago Downtown/Magnificent Mile, the Hilton New Orleans St. Charles, the Boston Park Plaza, the Hyatt Regency San Francisco and the Marriott Wailea.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014 |
|
2013 |
|
Change |
|
||||||||||||||||
|
|
Occ% |
|
ADR |
|
RevPAR |
|
Occ% |
|
ADR |
|
RevPAR |
|
Occ% |
|
ADR |
|
RevPAR |
|
||||
Comparable Portfolio |
|
82.4 |
% |
$ |
194.31 |
|
$ |
160.11 |
|
80.5 |
% |
$ |
186.11 |
|
$ |
149.82 |
|
190 |
bps |
4.4 |
% |
6.9 |
% |
Marriott Adjusted Comparable Portfolio (1) |
|
82.4 |
% |
$ |
194.31 |
|
$ |
160.11 |
|
80.5 |
% |
$ |
186.24 |
|
$ |
149.92 |
|
190 |
bps |
4.3 |
% |
6.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013 |
|
2012 |
|
Change |
|
||||||||||||||||
|
|
Occ% |
|
ADR |
|
RevPAR |
|
Occ% |
|
ADR |
|
RevPAR |
|
Occ% |
|
ADR |
|
RevPAR |
|
||||
Comparable Portfolio |
|
80.5 |
% |
$ |
186.11 |
|
$ |
149.82 |
|
80.1 |
% |
$ |
181.12 |
|
$ |
145.08 |
|
40 |
bps |
2.8 |
% |
3.3 |
% |
Marriott Adjusted Comparable Portfolio (1) |
|
80.5 |
% |
$ |
186.24 |
|
$ |
149.92 |
|
80.1 |
% |
$ |
181.02 |
|
$ |
145.00 |
|
40 |
bps |
2.9 |
% |
3.4 |
% |
Marriott Adjusted Comparable Portfolio excluding Boston Park Plaza (2) |
|
80.2 |
% |
$ |
188.03 |
|
$ |
150.80 |
|
79.8 |
% |
$ |
181.93 |
|
$ |
145.18 |
|
40 |
bps |
3.4 |
% |
3.9 |
% |
(1) |
Includes the Comparable Portfolio adjusted for the effects of converting the operating statistics for ten of our Marriott-managed hotels from a 13-period basis as reported in 2012 to a standard 12-month calendar basis. |
(2) |
Includes the Comparable Portfolio adjusted for the change in Marriott’s calendar as noted in the above footnote, and adjusted to exclude the Boston Park Plaza due to the hotel adding 12 rooms in September 2012, and an additional 100 rooms in January 2013. |
42
Non-GAAP Financial Measures. We use the following “non-GAAP financial measures” that we believe are useful to investors as key supplemental measures of our operating performance: EBITDA, Adjusted EBITDA, FFO and Adjusted FFO available to common stockholders. These measures should not be considered in isolation or as a substitute for measures of performance in accordance with GAAP. EBITDA, Adjusted EBITDA, FFO and Adjusted FFO available to common stockholders, as calculated by us, may not be comparable to other companies that do not define such terms exactly as the Company. These non-GAAP measures are used in addition to and in conjunction with results presented in accordance with GAAP. They should not be considered as alternatives to operating profit, cash flow from operations, or any other operating performance measure prescribed by GAAP. These non-GAAP financial measures reflect additional ways of viewing our operations that we believe, when viewed with our GAAP results and the reconciliations to the corresponding GAAP financial measures, provide a more complete understanding of factors and trends affecting our business than could be obtained absent this disclosure. We strongly encourage investors to review our financial information in its entirety and not to rely on a single financial measure.
EBITDA is a commonly used measure of performance in many industries. We believe EBITDA is useful to investors in evaluating our operating performance because this measure helps investors evaluate and compare the results of our operations from period to period by removing the impact of our capital structure (primarily interest expense) and our asset base (primarily depreciation and amortization) from our operating results. We also believe the use of EBITDA facilitates comparisons between us and other lodging REITs, hotel owners who are not REITs and other capital-intensive companies. In addition, certain covenants included in our indebtedness use EBITDA as a measure of financial compliance. We also use EBITDA as a measure in determining the value of hotel acquisitions and dispositions.
Historically, we have adjusted EBITDA when evaluating our performance because we believe that the exclusion of certain additional items described below provides useful information to investors regarding our operating performance and that the presentation of Adjusted EBITDA, when combined with the primary GAAP presentation of net income, is beneficial to an investor’s complete understanding of our operating performance. We adjust EBITDA for the following items, which may occur in any period, and refer to this measure as Adjusted EBITDA:
· |
Amortization of deferred stock compensation: we exclude the non-cash expense incurred with the amortization of deferred stock compensation as this expense does not reflect the underlying performance of our hotels. |
· |
Amortization of favorable and unfavorable contracts: we exclude the non-cash amortization of the favorable management contract asset recorded in conjunction with our acquisition of the Hilton Garden Inn Chicago Downtown/Magnificent Mile, along with the favorable and unfavorable tenant lease contracts, as applicable, recorded in conjunction with our acquisitions of the Boston Park Plaza, the Hilton Garden Inn Chicago Downtown/Magnificent Mile, the Hilton New Orleans St. Charles, the Hyatt Regency San Francisco and the Marriott Wailea. The amortization of favorable and unfavorable contracts does not reflect the underlying performance of our hotels. |
· |
Ground rent adjustments: we exclude the non-cash expense incurred from straightlining our ground lease obligations as this expense does not reflect the underlying performance of our hotels. We do however, include an adjustment for the cash ground lease expense recorded on the Hyatt Chicago Magnificent Mile’s building lease. Upon acquisition of this hotel, we determined that the building lease was a capital lease, and, therefore, we include a portion of the capital lease payment each month in interest expense. We include an adjustment for ground lease expense on capital leases in order to more accurately reflect the operating performance of the Hyatt Chicago Magnificent Mile. |
· |
Real estate transactions: we exclude the effect of gains and losses on the disposition of depreciable assets because we believe that including them in Adjusted EBITDA is not consistent with reflecting the ongoing performance of our assets. In addition, material gains or losses from the depreciated value of the disposed assets could be less important to investors given that the depreciated asset value often does not reflect its market value. |
· |
Gains or losses from debt transactions: we exclude the effect of finance charges and premiums associated with the extinguishment of debt, including the acceleration of deferred financing costs from the original issuance of the debt being redeemed or retired because, like interest expense, their removal helps investors
43 |
evaluate and compare the results of our operations from period to period by removing the impact of our capital structure. |
· |
Acquisition costs: under GAAP, costs associated with completed acquisitions are expensed in the year incurred. We exclude the effect of these costs because we believe they are not reflective of the ongoing performance of the Company. |
· |
Consolidated partnership adjustments: we deduct the non-controlling partner’s pro rata share of any EBITDA adjustments related to our consolidated Hilton San Diego Bayfront partnership. |
· |
Cumulative effect of a change in accounting principle: from time to time, the FASB promulgates new accounting standards that require the consolidated statement of operations to reflect the cumulative effect of a change in accounting principle. We exclude these one-time adjustments because they do not reflect our actual performance for that period. |
· |
Impairment losses: we exclude the effect of impairment losses because we believe that including them in Adjusted EBITDA is not consistent with reflecting the ongoing performance of our remaining assets. In addition, we believe that impairment charges, which are based off of historical cost account values, are similar to gains (losses) on dispositions and depreciation expense, both of which are also excluded from Adjusted EBITDA. |
· |
Other adjustments: we exclude other adjustments such as lawsuit settlement costs, prior year property tax assessments and/or credits, management company transition costs, and departmental closing costs, including severance, because we do not believe these costs reflect our actual performance for that period and/or the ongoing operations of our hotels. |
44
The following table reconciles our net income to EBITDA and Adjusted EBITDA for our hotel portfolio for the years ended December 31, 2014, 2013 and 2012 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014 |
|
2013 |
|
2012 |
|
||||
Net income |
|
$ |
87,939 |
|
$ |
70,001 |
|
$ |
49,557 |
|
|
Operations held for investment: |
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
155,845 |
|
|
137,476 |
|
|
130,907 |
|
|
Amortization of lease intangibles |
|
|
4,113 |
|
|
4,112 |
|
|
4,113 |
|
|
Interest expense |
|
|
72,315 |
|
|
72,239 |
|
|
76,821 |
|
|
Income tax provision |
|
|
179 |
|
|
8,145 |
|
|
1,148 |
|
|
Non-controlling interests: |
|
|
|
|
|
|
|
|
|
|
|
Income from consolidated joint venture attributable to non-controlling interest |
|
|
(6,676) |
|
|
(4,013) |
|
|
(1,761) |
|
|
Depreciation and amortization |
|
|
(3,335) |
|
|
(3,956) |
|
|
(5,685) |
|
|
Interest expense |
|
|
(2,020) |
|
|
(2,341) |
|
|
(2,477) |
|
|
Discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
— |
|
|
— |
|
|
13,164 |
|
|
Amortization of lease intangibles |
|
|
— |
|
|
— |
|
|
14 |
|
|
Interest expense |
|
|
— |
|
|
99 |
|
|
6,490 |
|
|
EBITDA |
|
|
308,360 |
|
|
281,762 |
|
|
272,291 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations held for investment: |
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred stock compensation |
|
|
6,221 |
|
|
4,858 |
|
|
3,466 |
|
|
Amortization of favorable and unfavorable contracts, net |
|
|
166 |
|
|
320 |
|
|
206 |
|
|
Non-cash straightline lease expense |
|
|
2,021 |
|
|
2,055 |
|
|
2,777 |
|
|
Capital lease obligation interest — cash ground rent |
|
|
(1,404) |
|
|
(1,404) |
|
|
(819) |
|
|
(Gain) loss on sale of assets, net |
|
|
(93) |
|
|
(12) |
|
|
18 |
|
|
Loss on extinguishment of debt |
|
|
4,638 |
|
|
44 |
|
|
191 |
|
|
Closing costs — completed acquisitions |
|
|
541 |
|
|
1,678 |
|
|
1,965 |
|
|
Lawsuit settlement costs, net |
|
|
— |
|
|
358 |
|
|
158 |
|
|
Prior year property tax and CAM adjustments, net |
|
|
(3,305) |
|
|
106 |
|
|
621 |
|
|
Property-level restructuring costs |
|
|
675 |
|
|
— |
|
|
623 |
|
|
Non-controlling interests: |
|
|
|
|
|
|
|
|
|
|
|
Non-cash straightline lease expense |
|
|
(450) |
|
|
(450) |
|
|
(450) |
|
|
Prior year property tax adjustments, net |
|
|
696 |
|
|
— |
|
|
(202) |
|
|
Loss on extinguishment of debt |
|
|
(133) |
|
|
— |
|
|
— |
|
|
Discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of assets, net |
|
|
(5,199) |
|
|
(51,620) |
|
|
(38,292) |
|
|
Loss on extinguishment of debt |
|
|
— |
|
|
3,115 |
|
|
— |
|
|
Lawsuit reversal costs |
|
|
— |
|
|
— |
|
|
(48) |
|
|
|
|
|
4,374 |
|
|
(40,952) |
|
|
(29,786) |
|
|
Adjusted EBITDA |
|
$ |
312,734 |
|
$ |
240,810 |
|
$ |
242,505 |
|
Adjusted EBITDA was $312.7 million in 2014 as compared to $240.8 million in 2013 and $242.5 million in 2012. Adjusted EBITDA increased $71.9 million in 2014 as compared to 2013 in part due to additional earnings generated by the three hotels we acquired in 2013 and the one hotel we acquired in 2014 (the Hilton New Orleans St. Charles in May 2013, the Boston Park Plaza in July 2013, the Hyatt Regency San Francisco in December 2013 and the Marriott Wailea in July 2014, together the “four 2013-2014 acquired hotels”), combined with an increase in earnings at four of our hotels which were undergoing major renovations during the first half of 2013 (the Hilton Times Square, the Hyatt Chicago Magnificent Mile, the Hyatt Regency Newport Beach and the Renaissance Westchester, together the “four 2013 renovation hotels”). These increases were partially offset by a decrease in earnings at two of our hotels which were undergoing major renovations during the first quarter of 2014 (the Hilton Garden Inn Chicago Downtown/Magnificent Mile and the Renaissance Long Beach, together the “two 2014 renovation hotels”), combined with decreases in earnings at the Hyatt Regency San Francisco and the Boston Park Plaza, which were undergoing major renovations during the first half and fourth quarter of 2014, respectively.
45
Adjusted EBITDA decreased $1.7 million in 2013 as compared to 2012 as additional earnings generated by the two hotels we acquired in 2012 and the three hotels we acquired in 2013 (the Hyatt Chicago Magnificent Mile in June 2012, the Hilton Garden Inn Chicago Downtown/Magnificent Mile in July 2012, the Hilton New Orleans St. Charles in May 2013, the Boston Park Plaza in July 2013 and the Hyatt Regency San Francisco in December 2013, together the “five 2012-2013 acquired hotels”) were mostly offset by a decrease in earnings caused by major renovations at the four 2013 renovation hotels. These renovations were substantially completed by June 30, 2013.
We believe that the presentation of FFO provides useful information to investors regarding our operating performance because it is a measure of our operations without regard to specified non-cash items such as real estate depreciation and amortization, amortization of lease intangibles, any real estate impairment loss and any gain or loss on sale of real estate assets, all of which are based on historical cost accounting and may be of lesser significance in evaluating our current performance. Our presentation of FFO conforms to the National Association of Real Estate Investment Trusts’ (“NAREIT”) definition of FFO. This may not be comparable to FFO reported by other REITs that do not define the terms in accordance with the current NAREIT definition, or that interpret the current NAREIT definition differently than we do.
We also present Adjusted FFO available to common stockholders when evaluating our operating performance because we believe that the exclusion of certain additional items described below provides useful supplemental information to investors regarding our ongoing operating performance, and may facilitate comparisons of operating performance between periods and our peer companies. We adjust FFO for the following items, which may occur in any period, and refer to this measure as Adjusted FFO available to common stockholders:
· |
Preferred stock dividends and redemption charges: we deduct preferred stock dividends and exclude redemption charges in order to facilitate comparisons between us and the majority of other lodging REITs who either have no preferred stock dividends or who also present Adjusted FFO available to common stockholders. |
· |
Amortization of favorable and unfavorable contracts: we exclude the non-cash amortization of the favorable management contract asset recorded in conjunction with our acquisition of the Hilton Garden Inn Chicago Downtown/Magnificent Mile, along with the favorable and unfavorable tenant lease contracts, as applicable, recorded in conjunction with our acquisitions of the Boston Park Plaza, the Hilton Garden Inn Chicago Downtown/Magnificent Mile, the Hilton New Orleans St. Charles, the Hyatt Regency San Francisco and the Marriott Wailea. The amortization of favorable and unfavorable contracts does not reflect the underlying performance of our hotels. |
· |
Non-cash ground rent adjustments: we exclude the non-cash expense incurred from straightlining our ground lease obligations as this expense does not reflect the underlying performance of our hotels. |
· |
Gains or losses from debt transactions: we exclude the effect of finance charges and premiums associated with the extinguishment of debt, including the acceleration of deferred financing costs from the original issuance of the debt being redeemed or retired, as well as the non-cash gains or losses on our derivatives. We believe that these items are not reflective of our ongoing finance costs. |
· |
Acquisition costs: under GAAP, costs associated with completed acquisitions are expensed in the year incurred. We exclude the effect of these costs because we believe they are not reflective of the ongoing performance of the Company. |
· |
Impairment losses: we exclude the effect of non-real estate impairment losses because we believe that including them in Adjusted FFO available to common stockholders is not consistent with reflecting the ongoing performance of our remaining assets. |
· |
Consolidated partnership adjustments: we deduct the non-controlling partner’s pro rata share of any FFO adjustments related to our consolidated Hilton San Diego Bayfront partnership. |
· |
Other adjustments: we exclude other adjustments such as lawsuit settlement costs, prior year property tax assessments and/or credits, management company transition costs, departmental closing costs, including
46 |
severance, and income tax benefits or provisions associated with the application of net operating loss carryforwards because we do not believe these costs reflect our actual performance for that period and/or the ongoing operations of our hotels. |
The following table reconciles our net income to FFO and Adjusted FFO available to common stockholders for our hotel portfolio for the years ended December 31, 2014, 2013 and 2012 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014 |
|
2013 |
|
2012 |
|
||||
Net income |
|
$ |
87,939 |
|
$ |
70,001 |
|
$ |
49,557 |
|
|
Operations held for investment: |
|
|
|
|
|
|
|
|
|
|
|
Real estate depreciation and amortization |
|
|
154,253 |
|
|
136,047 |
|
|
129,668 |
|
|
Amortization of lease intangibles |
|
|
4,113 |
|
|
4,112 |
|
|
4,113 |
|
|
(Gain) loss on sale of assets, net |
|
|
(93) |
|
|
(12) |
|
|
18 |
|
|
Non-controlling interests: |
|
|
|
|
|
|
|
|
|
|
|
Income from consolidated joint venture attributable to non-controlling interest |
|
|
(6,676) |
|
|
(4,013) |
|
|
(1,761) |
|
|
Real estate depreciation and amortization |
|
|
(3,335) |
|
|
(3,956) |
|
|
(5,685) |
|
|
Discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
Real estate depreciation and amortization |
|
|
— |
|
|
— |
|
|
13,164 |
|
|
Amortization of lease intangibles |
|
|
— |
|
|
— |
|
|
14 |
|
|
Gain on sale of assets, net |
|
|
(5,199) |
|
|
(51,620) |
|
|
(38,292) |
|
|
FFO |
|
|
231,002 |
|
|
150,559 |
|
|
150,796 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations held for investment: |
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends and redemption charges |
|
|
(9,200) |
|
|
(19,013) |
|
|
(29,748) |
|
|
Amortization of favorable and unfavorable contracts, net |
|
|
166 |
|
|
320 |
|
|
206 |
|
|
Non-cash straightline lease expense |
|
|
2,021 |
|
|
2,055 |
|
|
2,777 |
|
|
Write-off of deferred financing fees |
|
|
— |
|
|
— |
|
|
3 |
|
|
Non-cash interest related to (gain) loss on derivatives, net |
|
|
(529) |
|
|
(525) |
|
|
406 |
|
|
Loss on extinguishment of debt |
|
|
4,638 |
|
|
44 |
|
|
191 |
|
|
Closing costs — completed acquisitions |
|
|
541 |
|
|
1,678 |
|
|
1,965 |
|
|
Lawsuit settlement costs, net |
|
|
— |
|
|
358 |
|
|
158 |
|
|
Prior year property tax and CAM adjustments, net |
|
|
(3,305) |
|
|
106 |
|
|
621 |
|
|
Property-level restructuring costs |
|
|
675 |
|
|
— |
|
|
623 |
|
|
Income tax (benefit) provision related to prior years |
|
|
(762) |
|
|
8,145 |
|
|
1,148 |
|
|
Preferred stock redemption charges |
|
|
— |
|
|
4,770 |
|
|
— |
|
|
Non-controlling interests: |
|
|
|
|
|
|
|
|
|
|
|
Non-cash straightline lease expense |
|
|
(450) |
|
|
(450) |
|
|
(450) |
|
|
Non-cash interest related to loss on derivative |
|
|
— |
|
|
(3) |
|
|
(1) |
|
|
Prior year property tax adjustments, net |
|
|
696 |
|
|
— |
|
|
(202) |
|
|
Loss on extinguishment of debt |
|
|
(133) |
|
|
— |
|
|
— |
|
|
Discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
Loss on extinguishment of debt |
|
|
— |
|
|
3,115 |
|
|
— |
|
|
Write-off of deferred financing fees |
|
|
— |
|
|
— |
|
|
185 |
|
|
Lawsuit reversal costs |
|
|
— |
|
|
— |
|
|
(48) |
|
|
|
|
|
(5,642) |
|
|
600 |
|
|
(22,166) |
|
|
Adjusted FFO available to common stockholders |
|
$ |
225,360 |
|
$ |
151,159 |
|
$ |
128,630 |
|
Adjusted FFO available to common stockholders was $225.4 million in 2014 as compared to $151.2 million in 2013 and $128.6 million in 2012. Adjusted FFO available to common stockholders increased $74.2 million in 2014 as compared to 2013 in part due to additional earnings generated by the four 2013-2014 acquired hotels, combined with an increase in earnings at the four 2013 renovation hotels. In addition, Adjusted FFO available to common stockholders increased during 2014 as compared to 2013 due to a decrease in preferred stock dividends and redemption charges. These increases were partially offset by a decrease in earnings at the two 2014 renovation hotels, combined with decreases in earnings at the Hyatt Regency San Francisco and the Boston Park Plaza, which were undergoing major renovations during the first half and fourth quarter of 2014, respectively.
47
Adjusted FFO available to common stockholders increased $22.5 million in 2013 as compared to 2012 due to additional earnings generated by the five 2012-2013 acquired hotels, combined with a decrease in preferred stock dividends and interest expense. These increases to Adjusted FFO available to common stockholders were partially offset by a decrease in earnings caused by major renovations at the four 2013 renovation hotels. These renovations were substantially completed by June 30, 2013.
Room revenue. Room revenue increased $157.8 million, or 24.1%, in 2014 as compared to 2013. The four 2013-2014 acquired hotels contributed additional room revenue of $113.8 million during 2014. Room revenues at both the Boston Park Plaza and the Hyatt Regency San Francisco were negatively impacted during 2014 by major renovations, which caused 9,080 room nights to be out of service, displacing approximately $2.6 million in room revenue based on the hotels achieving a combined potential 80.8% occupancy rate and RevPAR of $187.97 without the renovations. Room revenue generated by the 26 hotels we owned prior to January 1, 2013 (our “existing portfolio”) increased $45.5 million during 2014 as compared to 2013 due to increases in both occupancy ($19.2 million) and ADR ($26.3 million). The increases in occupancy and ADR were driven by an additional 68,236 group room nights, combined with an additional 39,230 transient room nights. Room revenue in our existing portfolio was negatively impacted during 2014 by major renovations at the two 2014 renovation hotels. These major renovations caused a total of 5,141 room nights to be out of service during the first quarter of 2014, displacing approximately $0.5 million in room revenue based on the hotels achieving a combined potential 69.5% occupancy rate and RevPAR of $90.00 without the renovations. In comparison, the 2013 displacement experienced by the four 2013 renovation hotels caused a total of 40,287 room nights to be out of service during 2013, displacing approximately $7.7 million in room revenue based on the hotels achieving a combined potential 79.9% occupancy rate and RevPAR of $159.02 without the renovations.
Partially offsetting the increase in our existing portfolio’s room revenue during 2014 as compared to 2013, room revenue decreased as a result of a change in the financial reporting calendar used by Marriott, one of our third-party managers. Beginning in 2013, Marriott switched from using a 13-fiscal period accounting calendar to a standard 12-month calendar. However, due to the timing of Marriott’s fiscal 2012 year-end of December 28, 2012, Marriott’s fiscal 2013 includes three additional days, December 29, 2012 through December 31, 2012. These three additional days in fiscal 2013 generated approximately $1.6 million more in room revenue for ten of our Marriott-managed hotels during 2013 as compared to 2014.
Room revenue increased $77.8 million, or 13.5%, in 2013 as compared to 2012. The five 2012-2013 acquired hotels contributed additional room revenue of $54.3 million during 2013. Room revenue at the Hyatt Chicago Magnificent Mile was negatively impacted during 2013 by a major renovation, which caused 13,601 room nights to be out of service, displacing approximately $2.4 million in room revenue based on the hotel achieving a potential 74.9% occupancy rate and RevPAR of $127.70 without the renovation. In addition, room revenue increased during 2013 as compared to the same period in 2012 due to a change in the financial reporting calendar used by Marriott. Beginning in 2013, Marriott switched from using a 13-fiscal period accounting calendar to a standard 12-month calendar, which caused there to be an additional three days and approximately $1.6 million more in room revenue for ten of our Marriott-managed hotels during 2013 as compared to 2012. Room revenue generated by the 24 hotels we owned prior to January 1, 2012 (our “prior year existing portfolio”) increased $21.9 million during 2013 as compared to 2012 due to increases in both occupancy ($7.7 million) and ADR ($14.2 million). The increases in occupancy and ADR were driven by an additional 58,248 transient room nights, partially offset by 14,435 fewer group room nights. Room revenue in our prior year existing portfolio was negatively impacted during 2013 by major renovations at three hotels in our prior year existing portfolio: the Hilton Times Square; the Hyatt Regency Newport Beach; and the Renaissance Westchester. These major renovations caused a total of 26,686 room nights to be out of service during 2013, displacing approximately $5.2 million in room revenue based on these three hotels achieving a combined potential 81.6% occupancy rate and RevPAR of $169.76 without the renovations. This 2013 displacement compares to our 2012 displacement caused by major renovations at the Renaissance Washington DC and the Hyatt Regency Newport Beach. The major renovation at the Renaissance Washington DC caused 13,656 room nights to be out of service during the last six months of 2012, displacing approximately $2.9 million in room revenue based on the hotel achieving a potential 72.7% occupancy rate and RevPAR of $148.24 without the renovation. The major renovation at the Hyatt Regency Newport Beach caused 4,333 room nights to be out of service during the last two months of 2012, displacing approximately $0.5 million in room revenue based on the hotel achieving a potential 85.0% occupancy rate and RevPAR of $110.96 without the renovation.
48
Food and beverage revenue. Food and beverage revenue increased $46.0 million, or 21.6%, in 2014 as compared to 2013. Our four 2013-2014 acquired hotels contributed an additional $29.0 million to food and beverage revenue during 2014. Food and beverage revenue in our existing portfolio increased $17.6 million in 2014 as compared to 2013, primarily due to increased banquet and outlet revenue at the majority of our hotels due to the increases in occupancy and group room nights. In addition, food and beverage revenue increased in our existing portfolio during 2014 as the negative impact from the two 2014 renovation hotels during 2014 was much less than the negative impact from the four 2013 renovation hotels during 2013. These increases in food and beverage revenue during 2014 as compared to 2013 were partially offset by Marriott’s additional three days in the first quarter 2013, which generated approximately $0.6 million in food and beverage revenue for ten of our Marriott-managed hotels during 2013 as compared to 2014.
Food and beverage revenue increased $12.5 million, or 6.2%, in 2013 as compared to 2012. The five 2012-2013 acquired hotels contributed an additional $11.3 million to food and beverage revenue during 2013, though food and beverage revenue generated by the Hyatt Chicago Magnificent Mile was negatively affected by the hotel’s major renovation. Marriott’s additional three days in 2013 generated approximately $0.6 million in food and beverage revenue for ten of our Marriott-managed hotels during 2013 as compared to 2012. Food and beverage revenue in our prior year existing portfolio increased $0.6 million during 2013 as compared to 2012, due to increased outlet and room service revenue caused by the increase in occupancy, partially offset by decreased banquet revenue at several of our hotels caused by 14,435 fewer group room nights, as well as the negative impact of the renovations at the Hilton Times Square, the Hyatt Regency Newport Beach and the Renaissance Westchester. The decrease in group room nights during 2013 as compared to 2012 was further exaggerated by the fact that the type of group shifted from corporate and citywide business with a higher number of banquet functions during the first few months of 2012 to associations with fewer banquet functions during the first few months of 2013. The decrease in food and beverage revenue in our existing portfolio was partially offset by increased revenue generated during 2013 by the Renaissance Washington DC, which was under a major renovation during 2012, causing revenue to decrease in outlets, banquets and room service during 2012.
Other operating revenue. Other operating revenue increased $14.4 million, or 25.5%, in 2014 as compared to 2013. Our four 2013-2014 acquired hotels contributed an additional $9.3 million to other operating revenue during 2014. In addition, BuyEfficient’s revenue increased $0.4 million during 2014 as compared to 2013 due to increased transaction fees. Other operating revenue in our existing portfolio increased $4.7 million in 2014 as compared to 2013, primarily due to our resort fee charges beginning in 2014 at two of our existing hotels, which generated $2.5 million during 2014. In addition, other operating revenue grew in our existing portfolio as increased parking, spa and third-party lease revenue was only partially offset by decreased telephone/internet revenue, cancellation and attrition revenue.
Other operating revenue increased $4.4 million, or 8.4%, in 2013 as compared to 2012. Our five 2012-2013 acquired hotels contributed an additional $3.5 million to other operating revenue during 2013. In addition, BuyEfficient’s revenue increased $0.5 million during 2013 as compared to 2012 due to increased transaction and development fees. Other operating revenue in our prior year existing portfolio increased $0.4 million during 2013 as compared to 2012, due to Marriott’s three additional days during 2013, combined with increased parking and spa revenue. These increases were partially offset by decreased telephone/internet revenue, cancellation, attrition, and third-party lease revenue.
Hotel operating expenses. Hotel operating expenses increased $116.9 million, or 21.0%, in 2014 as compared to 2013. The four 2013-2014 acquired hotels contributed an additional $96.7 million to hotel operating expenses during 2014. Hotel operating expenses in our existing portfolio increased $20.2 million during 2014 as compared to 2013, primarily due to the corresponding increases in room, food and beverage and parking revenue. In addition, hotel operating expenses in our existing portfolio increased in 2014 as compared to 2013 due to the following increased expenses: franchise costs due to the increase in revenues; advertising and promotion and repairs and maintenance due to increased payroll and related expenses; utility expense due to increased rates at several of our hotels, combined with increased usage due to the extremely cold winter in the Midwest and East; and ground lease expense due to higher percentage rent at several of our hotels caused by the increase in revenue. The increases in our existing portfolio’s hotel operating expenses during 2014 as compared to 2013 were slightly offset by lower property taxes, which decreased due to appeal refunds received at several of our hotels, as well as by the inclusion of three additional days of expense for ten of the Marriott-managed hotels during 2013 as compared to 2014.
Hotel operating expenses increased $56.8 million, or 11.4%, in 2013 as compared to 2012. The five 2012-2013 acquired hotels contributed $46.3 million to hotel operating expenses during 2013. Hotel operating expenses in our prior year existing portfolio increased $10.5 million during 2013 as compared to 2012, primarily related to the corresponding
49
increase in room revenue, combined with the Marriott-managed hotels’ three additional days in 2013 as compared to 2012. In addition, hotel operating expenses in our prior year existing portfolio increased during 2013 as compared to 2012 due to increases in property taxes, property and liability insurance premiums and ground lease expense.
Property general and administrative expense. Property general and administrative expense increased $23.3 million, or 22.5% in 2014 as compared to 2013. The four 2013-2014 acquired hotels contributed an additional $16.2 million to property general and administrative expense during 2014. Property general and administrative expense in our existing portfolio increased $7.1 million during 2014 as compared to 2013, primarily due to increased management fees, credit and collection expenses, payroll and related expenses, contract and professional fees, and licenses and permits expenses due to the increase in revenue, partially offset by decreased security and sales tax audit expenses. In addition, property general and administrative expenses in our existing portfolio decreased during 2014 as compared to 2013 due to the Marriott-managed hotels’ three additional days in 2013 as compared to 2014.
Property general and administrative expense increased $8.8 million, or 9.3%, in 2013 as compared to 2012. The five 2012-2013 acquired hotels contributed $7.6 million to property general and administrative expense during 2013. In addition, BuyEfficient contributed an additional $0.2 million in property general and administrative expense during 2013 as compared to 2012 due to increases in payroll and related expenses, including deferred stock compensation expense. Property general and administrative expense in our prior year existing portfolio increased $1.0 million during 2013 as compared to 2012, primarily due to the Marriott-managed hotels’ three additional days in 2013 as compared to 2012, combined with increased management fees, and credit and collection expenses due to the increase in revenue. Property general and administrative expenses also increased due to higher costs related to licenses and permits, and security expenses, partially offset by decreased payroll and related costs, contract and professional fees, employee relations, recruitment, training, sales tax audit fees, operating supplies and travel.
Corporate overhead expense. Corporate overhead expense increased $2.1 million, or 7.8%, in 2014 as compared to 2013, primarily due to increased payroll and related expenses ($1.8 million), deferred stock compensation expense ($1.5 million), and legal, employee relations and donations expenses ($0.4 million), partially offset by decreased due diligence expense ($1.1 million), entity-level state franchise and minimum taxes ($0.3 million) and contract and professional fees ($0.2 million). Due diligence expense decreased during 2014 versus 2013 as we recognized $0.6 million of due diligence costs related to our completed acquisitions and an additional $0.1 million related to in-process or abandoned projects during 2014, whereas during 2013 we recognized $1.7 million of due diligence costs related to our completed acquisitions, and an additional $0.1 million related to in-process or abandoned projects.
Corporate overhead expense increased $2.4 million, or 9.7%, in 2013 as compared to 2012, primarily due to the following increases: payroll and related expenses ($1.0 million); deferred stock compensation ($1.3 million); contract and professional fees ($0.6 million); and legal, conferences, travel and entity-level state franchise and minimum taxes ($0.7 million). These increases were partially offset by a $1.1 million decrease in acquisition and due diligence costs and a $0.1 million decrease in donations. During 2013, we incurred acquisition and due diligence costs of $1.7 million related to our completed acquisitions, and an additional $0.1 million related to in-process or abandoned projects. During 2012, we incurred acquisition and due diligence costs of $2.0 million related to our completed acquisitions, and an additional $0.9 million related to in-process or abandoned projects.
Depreciation and amortization expense. Depreciation and amortization increased $18.4 million, or 13.4%, in 2014 as compared to 2013. The four 2013-2014 acquired hotels contributed an additional $21.7 million to depreciation and amortization during 2014. Depreciation and amortization expense in our existing portfolio decreased $3.3 million during 2014 as compared to 2013 primarily due to advanced bookings recorded in conjunction with our purchases of the JW Marriott New Orleans, the Hilton San Diego Bayfront and the Hilton Garden Inn Chicago Downtown/Magnificent Mile that were fully amortized as of February 2013, April 2013 and December 2013, respectively. In addition the furniture, fixtures and equipment (“FF&E”) at some of our hotels was fully depreciated as of the end of 2013. These decreases in expense were partially offset by additional depreciation recognized on hotel renovations and purchases of FF&E for our existing portfolio.
Depreciation and amortization increased $6.6 million, or 5.0%, in 2013 as compared to 2012. The five 2012-2013 acquired hotels contributed $11.3 million to depreciation and amortization during 2013. Depreciation and amortization expense in our prior year existing portfolio decreased $4.7 million during 2013 as compared to 2012 primarily due to advanced bookings recorded in conjunction with our purchases of the JW Marriott New Orleans and the Hilton San Diego
50
Bayfront that were fully amortized as of February 2013 and April 2013, respectively. This decrease in amortization was partially offset by additional depreciation recognized on hotel renovations and purchases of FF&E for our prior year existing portfolio.
Interest and other income. Interest and other income totaled $3.5 million in 2014, $2.8 million in 2013, and $0.3 million in 2012. In 2014, we recognized $2.8 million in interest income on the Preferred Equity Investment, $0.4 million in energy rebates due to energy efficient renovations at our hotels, and $0.3 million in other interest and miscellaneous income. In 2013, we recognized $2.8 million in interest income, including $2.6 million on the Preferred Equity Investment. In 2012, we recognized $0.2 million in interest income, and $0.1 million in other miscellaneous income.
Interest expense. Interest expense is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
Year Ended |
|
Year Ended |
|
|||
|
|
December 31, |
|
December 31, |
|
December 31, |
|
|||
|
|
2014 |
|
2013 |
|
2012 |
|
|||
Interest expense on debt and capital lease obligations |
|
$ |
70,067 |
|
$ |
69,806 |
|
$ |
71,664 |
|
(Gain) loss on derivatives, net |
|
|
(529) |
|
|
(525) |
|
|
406 |
|
Accretion of Senior Notes |
|
|
— |
|
|
3 |
|
|
1,058 |
|
Amortization of deferred financing fees |
|
|
2,777 |
|
|
2,955 |
|
|
3,690 |
|
Write-off of deferred financing fees |
|
|
— |
|
|
— |
|
|
3 |
|
|
|
$ |
72,315 |
|
$ |
72,239 |
|
$ |
76,821 |
|
Interest expense increased $0.1 million, or 0.1%, in 2014 as compared to 2013. The increase in interest expense in 2014 as compared to 2013 is due to an increase in expense on our debt and capital lease obligations ($0.3 million) primarily offset by a decrease in amortization of deferred financing fees ($0.2 million). Interest expense on our debt and capital lease obligations increased as a result of our assumption of a $119.2 million loan in conjunction with our purchase of the Boston Park Plaza in July 2013. The increase in interest expense on our debt and capital lease obligations during 2014 as compared to 2013 due to the Boston Park Plaza loan was partially offset by decreased interest on our other debt obligations due to lower balances as a result of scheduled amortization, as well as to decreased variable interest rates on our non-recourse loans secured by the Doubletree Guest Suites Times Square and the Hilton San Diego Bayfront. The variable interest rate on our Hilton San Diego Bayfront mortgage was impacted during 2014 by our completion of an amendment to such mortgage in August 2014, which reduced the loan’s interest rate from three-month LIBOR plus 325 basis points to one-month LIBOR plus 225 basis points. In addition, our amortization of deferred financing fees decreased during 2014 as compared to 2013 due to our amendment of the Hilton San Diego Bayfront loan.
Interest expense decreased $4.6 million, or 6.0%, in 2013 as compared to 2012. The decrease in interest expense in 2013 as compared to 2012 is comprised of the following: a decrease in expense on our debt and capital lease obligations ($1.9 million); a decrease in expense related to our derivatives ($0.9 million); a decrease in accretion of Senior Notes ($1.1 million); and a decrease in amortization of deferred financing fees ($0.7 million). Interest expense on our debt and capital lease obligations decreased $1.9 million during 2013 as compared to 2012 due to reduced loan balances related to scheduled amortization, a repayment of debt in April 2012 and a repurchase of debt in January 2013. In April 2012, we repaid a $32.2 million loan secured by the Renaissance Long Beach, and in January 2013, we repurchased $58.0 million of our Senior Notes. These decreases in our debt obligations and related decreases in interest expense were partially offset by an increase in capital lease obligations and related interest expense due to our acquisition of the Hyatt Chicago Magnificent Mile in June 2012, which included the assumption of a building lease that we determined should be accounted for as a capital lease. Interest expense on our debt and capital lease obligations also increased during 2013 as compared to 2012 due to our assumption of a $119.2 million loan in conjunction with our purchase of the Boston Park Plaza in July 2013. Interest expense related to our derivatives decreased $0.9 million during 2013 as compared to 2012 due to our recording a net gain on our interest rate cap and swap agreements in 2013 as compared to a loss during 2012. Interest expense related to the accretion of our Senior Notes decreased $1.1 million during 2013 as compared to 2012 due to the fact that the Senior Notes were fully accreted to their face value as of the first put date in January 2013. Interest expense related to amortization of deferred financing fees decreased $0.7 million during 2013 as compared to 2012 due to the repayment of the loan secured by the Renaissance Long Beach in April 2012, combined with the fact that the deferred financing fees related to the Senior Notes were fully amortized as of the first put date in January 2013, partially offset by an increase in deferred financing fees incurred to amend our line of credit in September 2012 and to assume the Boston Park Plaza debt.
51
Our weighted average interest rate per annum on debt included in our continuing operations, including our variable-rate debt obligations, was approximately 4.5% at December 31, 2014, and 4.9% at both December 31, 2013 and 2012. At December 31, 2014, 2013 and 2012, approximately 71.6%, 70.7% and 69.6%, respectively, of the outstanding notes payable included in our continuing operations had fixed interest rates.
Loss on extinguishment of debt. Loss on extinguishment of debt totaled $4.6 million in 2014, $44,000 in 2013 and $0.2 million in 2012. In conjunction with our financing transactions regarding the debt secured by the Hilton San Diego Bayfront, the JW Marriott New Orleans and the Embassy Suites La Jolla during 2014, we expensed the unamortized balances of the lenders’ deferred financing fees in accordance with the Debt Topic of the FASB ASC, resulting in losses on the extinguishment of these debts totaling $0.6 million. In addition, we paid a premium of $4.0 million to extinguish the debt secured by the Embassy Suites La Jolla, which is also included in loss on extinguishment of debt.
During 2013, we recognized a loss of $44,000 due to the repurchase and redemption of the remaining $58.0 million aggregate principal amount of the Senior Notes.
During 2012, we recognized a loss of $0.2 million due to the repurchase and cancellation of $4.5 million in aggregate principal amount of the Senior Notes.
Income tax provision. Income tax provision totaled $0.2 million in 2014, $8.1 million in 2013 and $1.1 million in 2012. We lease our hotels to the TRS Lessee and its subsidiaries, which are subject to federal and state income taxes. In addition, the REIT and Operating Partnership may also be subject to various state and local income taxes. During 2014, we recognized a combined federal and state income tax provision of $0.2 million based on a 2013 actual tax benefit ($0.6 million), partially offset by a 2014 projected tax provision net of operating loss carryforwards ($0.8 million) for our taxable entities.
During 2013, we recognized income tax expense of $4.7 million as a result of Internal Revenue Service (“IRS”) audits of tax years 2008, 2009 and 2010, including $0.6 million in accrued interest. We recorded additional income tax expense of $1.5 million during 2013 based on the ongoing evaluations of our uncertain tax positions related to the year ended December 31, 2012, and as a result of our recent resolution of outstanding issues with the IRS. During 2013, we recorded additional tax expense of $1.9 million related to estimated 2013 federal alternative minimum tax resulting from our use of net operating loss carryforwards, as well as state income tax where our use of net operating loss carryforwards was either limited or unavailable.
During 2012, our federal alternative minimum tax resulting from our use of net operating loss carryforwards combined with our state income tax expense where the use of net operating loss carryforwards was either limited or unavailable to total $1.1 million of income tax expense.
52
Income from discontinued operations. As described under “—Investing Activities—Dispositions” and in accordance with the Property, Plant and Equipment Topic of the FASB ASC, income from discontinued operations included the results of operations, along with any gains on extinguishment of debt, gains or losses on sales and impairments recognized for the following properties:
|
|
|
|
|
|
Hotels and Other Assets |
|
Rooms |
|
Disposition Date |
|
2014 |
|
|
|
|
|
None |
|
|
|
|
|
2013 |
|
|
|
|
|
Kahler Grand, Minnesota (1) |
|
660 |
|
January 25, 2013 |
|
Kahler Inn & Suites, Minnesota |
|
271 |
|
January 25, 2013 |
|
Marriott Rochester, Minnesota (1) |
|
202 |
|
January 25, 2013 |
|
Residence Inn by Marriott Rochester, Minnesota |
|
89 |
|
January 25, 2013 |
|
Textile Care Services Rochester, Minnesota |
|
— |
|
January 25, 2013 |
|
2012 |
|
|
|
|
|
Marriott Del Mar, California |
|
284 |
|
August 23, 2012 |
|
Doubletree Guest Suites Minneapolis, Minnesota |
|
229 |
|
September 14, 2012 |
|
Hilton Del Mar, California |
|
257 |
|
September 14, 2012 |
|
Marriott Troy, Michigan |
|
350 |
|
September 14, 2012 |
|
Office building adjacent to the Marriott Troy, Michigan |
|
— |
|
September 14, 2012 |
|
Total rooms |
|
2,342 |
|
|
|
(1) |
During 2012, the Company subtracted eight rooms from the Kahler Grand and one room from the Marriott Rochester, bringing the hotel room counts to 660 and 202, respectively. |
Income from discontinued operations for the years ended December 31, 2014, 2013 and 2012 is as follows (in thousands):
Year Ended |
Year Ended |
Year Ended |
|||||||||||
December 31, |
December 31, |
December 31, |
|||||||||||
2014 |
2013 |
2012 |
|||||||||||
Operating revenues |
$ |
— |
$ |
3,690 |
$ |
100,861 | |||||||
Operating expenses |
(350) | (3,686) | (71,089) | ||||||||||
Interest expense |
— |
(99) | (6,490) | ||||||||||
Depreciation and amortization expense |
— |
— |
(13,164) | ||||||||||
Loss on extinguishment of debt |
— |
(3,115) |
— |
||||||||||
Gain on sale of hotels and other assets, net |
5,199 | 51,620 | 38,292 | ||||||||||
Income from discontinued operations |
$ |
4,849 |
$ |
48,410 |
$ |
48,410 |
Income from discontinued operations for the year ended December 31, 2014 includes two adjustments related to our 2013 sale of the Rochester Portfolio, as well as an adjustment related to six hotels sold during 2004 through 2013. The first Rochester Portfolio adjustment relates to our retention of a liability not to exceed $14.0 million related to the Rochester Portfolio’s pension plan, which could be triggered in certain circumstances, including termination of the pension plan. The recognition of the $14.0 million pension plan liability reduced the gain we recognized in 2013 on the sale of the Rochester Portfolio. In May 2014, we were released from $7.0 million of our pension plan liability, causing us to recognize additional gain on the sale of the Rochester Portfolio of $7.0 million, which is included in discontinued operations for the year ended December 31, 2014. The remaining $7.0 million gain will be recognized, if at all, when and to the extent we are released from any potential liability related to the Rochester Portfolio’s pension plan.
The second Rochester Portfolio adjustment relates to potential future costs for certain capital expenditures at one of the hotels in the Rochester Portfolio. In accordance with the Contingencies Topic of the FASB ASC, which requires a liability be recorded based on our estimate of the probable cost of the resolution of a contingency, we accrued $0.3 million in 2013 when we sold the Rochester Portfolio related to these potential future costs. During 2014, we determined that our total costs for these capital expenditures may range from $2.0 million to $3.0 million. As such, we accrued an additional $1.8 million during 2014 in accordance with the Contingencies Topic of the FASB ASC, which is included in discontinued
53
operations for the year ended December 31, 2014. During 2014, we paid $1.3 million of the liability, bringing the accrued balance for this contingency to $0.8 million as of December 31, 2014.
Income from discontinued operations for the year ended December 31, 2014 also includes additional expense of $0.4 million related to workers’ compensation claims which originated during our periods of ownership at six hotels. We sold these hotels during 2004, 2005, 2010 and 2013.
Income from discontinued operations for the year ended December 31, 2013 includes activity for the Rochester Portfolio sold in 2013.
Income from discontinued operations for the year ended December 31, 2012 includes activity for the Rochester Portfolio sold in 2013, and the four hotels and one office building sold in 2012. Income from discontinued operations for 2012 also includes property tax refunds and reimbursements for certain transaction related invoices for the Royal Palm Miami Beach, which we sold in April 2011.
Income from consolidated joint venture attributable to non-controlling interest. Income from consolidated joint venture attributable to non-controlling interest totaled $6.7 million in 2014, $4.0 million in 2013 and $1.8 million in 2012. Consistent with the Presentation Topic of the FASB ASC, our net income for the years ended December 31, 2014, 2013 and 2012 includes 100% of the net income generated during our ownership period by the entity that owns the Hilton San Diego Bayfront. The outside 25.0% interest in the entity that owns the Hilton San Diego Bayfront earned net income of $6.7 million, $4.0 million and $1.8 million for the years ended December 31, 2014, 2013 and 2012, respectively.
Distributions to non-controlling interest. Distributions to non-controlling interest totaled $32,000 in both 2014 and 2013, and $31,000 in 2012. We are the sole common stockholder of the captive REIT that owns the Doubletree Guest Suites Times Square. Preferred dividends earned by investors from the entity that owns the Doubletree Guest Suites Times Square, net of related administrative fees, totaled $32,000 for both 2014 and 2013, and $31,000 for 2012.
Preferred stock dividends and redemption charges. Preferred stock dividends decreased $9.8 million, or 51.6%, during the year ended December 31, 2014 as compared to the year ended December 31, 2013. Pursuant to our strategy of gradually reducing our leverage, during 2013 we redeemed all 7,050,000 shares of our Series A preferred stock and all 4,102,564 shares of our Series C preferred stock in March and May, respectively. As such, our total Series A and Series C preferred stock dividends decreased to zero in 2014 as compared to $5.1 million in 2013. In addition, preferred stock dividends and redemption charges decreased during 2014 as compared to 2013 due to our recognition of redemption charges in 2013 totaling $4.6 million and $0.1 million in conjunction with the redemptions of our Series A preferred stock and Series C preferred stock, respectively. These redemption charges related to the original issuance costs of these shares, which were previously included in additional paid in capital.
Preferred stock dividends decreased $10.7 million, or 36.1%, during the year ended December 31, 2013 as compared to the year ended December 31, 2012. Due to the redemptions of all of our Series A preferred stock in March 2013, and all of our Series C preferred stock in May 2013, our total Series A and Series C preferred dividends decreased $15.5 million in 2013 as compared to 2012. This decrease in our Series A and Series C preferred stock dividends was partially offset by a $4.6 million redemption charge recognized on our Series A preferred stock and a $0.1 million redemption charge recognized on our Series C preferred stock related to the original issuance costs of these shares, which were previously included in additional paid in capital.
54
Investing Activities
Acquisitions. We believe we are in the middle phase of a potentially prolonged cyclical lodging industry recovery. Accordingly, we further believe that hotels acquired over the next several quarters are likely to benefit from a multi-year recovery in hotel profitability, and may create long-term value in excess of our investment hurdles. During 2012, 2013 and 2014, we made several hotel acquisitions as detailed below:
|
|
|
|
|
|
|
Hotels |
|
Rooms |
|
Acquisition Date |
|
|
2014: |
|
|
|
|
|
|
Marriott Wailea, Hawaii (1) |
|
544 |
|
|
July 17, 2014 |
|
2013: |
|
|
|
|
|
|
Hilton New Orleans St. Charles, Louisiana |
|
250 |
|
|
May 1, 2013 |
|
Boston Park Plaza, Massachusetts (1) |
|
1,053 |
|
|
July 2, 2013 |
|
Hyatt Regency San Francisco, California (1) |
|
802 |
|
|
December 2, 2013 |
|
2012: |
|
|
|
|
|
|
Hyatt Chicago Magnificent Mile, Illinois (1) |
|
417 |
|
|
June 4, 2012 |
|
Hilton Garden Inn Chicago Downtown/Magnificent Mile, Illinois |
|
357 |
|
|
July 19, 2012 |
|
Total rooms |
|
3,423 |
|
|
|
|
(1) |
Subsequent to these acquisitions, we temporarily removed three rooms from the Marriott Wailea, leaving 541 rooms available to sell. In addition, we added rooms as follows: one at the Boston Park Plaza, increasing the room count to 1,054; one at the Hyatt Regency San Francisco, increasing the room count to 803; and two at the Hyatt Chicago Magnificent Mile, increasing the room count to 419. |
The total cost for these six hotel acquisitions was approximately $1.1 billion, including shares of our common stock valued at $111.2 million for accounting purposes, or $314,000 per room. Each of these acquisitions is discussed below.
In July 2014, we purchased the 544-room Marriott Wailea for a net purchase price of $325.6 million, which was comprised of $265.6 million in cash, including $4.4 million of proration credits and unrestricted and restricted cash received from the seller, and $60.0 million of our common stock issued directly to the seller. The acquisition was funded with proceeds received from our June 2014 common stock offering, and 4,034,970 shares of our common stock valued at $60.0 million ($14.87 per share). Subsequent to our acquisition, three rooms were temporarily taken out of service, leaving 541 rooms available to sell.
In May 2013, we purchased the 250-room Hilton New Orleans St. Charles for a net purchase price of $59.1 million, including $0.2 million of proration credits and unrestricted cash received from the seller. The acquisition was funded with $53.2 million of proceeds generated by our January 2013 sale of the Rochester Portfolio, as well as with proceeds received from our February 2013 issuance of common stock.
In July 2013, we purchased the 1,053-room Boston Park Plaza for a net purchase price of $248.0 million, including $2.0 million of proration credits, unrestricted and restricted cash and other adjustments received from the seller. The acquisition was funded with $92.3 million of proceeds generated by our January 2013 sale of the Rochester Portfolio, the assumption of a $119.2 million non-recourse loan secured by the hotel, as well as with proceeds received from the Company’s February 2013 issuance of common stock and with cash on hand. The mortgage we assumed in conjunction with our purchase of the Boston Park Plaza bears interest at a fixed rate of 4.4%, and matures in February 2018.
In December 2013, we purchased the 802-room Hyatt Regency San Francisco for a net purchase price of $262.5 million, including $5.5 million of purchase price adjustments comprised of restricted cash and other adjustments received from the seller. The acquisition was funded with proceeds generated by our November 2013 issuance of common stock.
In June 2012, we purchased the leasehold interest in the 417-room Wyndham Chicago located in Chicago, Illinois for a contractual purchase price of $88.425 million. The acquisition was funded with $29.7 million of cash on hand (including $0.3 million of proration credits) and the issuance of 5,454,164 shares of our 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 $10.40 on the NYSE of our common stock on May 2, 2012 and (2) 1.03. In connection with this acquisition, we entered into a registration rights agreement requiring us to register the Wyndham stock consideration. We
55
prepared the registration statement on Form S-3, which we 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 date the acquisition closed, the total purchase price of the Wyndham Chicago hotel for accounting purposes was $81.16 million, excluding proration adjustments and closing costs. Upon closing, we terminated the existing management agreement and entered into a new management agreement with Davidson Hotels & Resorts. We rebranded the hotel the Hyatt Chicago Magnificent Mile and immediately commenced planning for a $25.0 million renovation program, which was completed in the second quarter 2013.
In July 2012, we purchased the 357-room Hilton Garden Inn Chicago Downtown/Magnificent Mile located in Chicago, Illinois for a net purchase price of $90.3 million. The acquisition was funded with a portion of the $126.2 million net proceeds we received from the issuance of 12,143,273 shares of our common stock in June 2012.
In addition to the above noted hotels, in June 2014 we acquired approximately seven acres of land underlying the Fairmont Newport Beach for $11.0 million, using net proceeds from the March 2014 issuance of our common stock in connection with the Equity Distribution Agreements entered into in February 2014, combined with cash on hand. Prior to our acquisition, the land was leased to us by a third party. Our acquisition of the land reduced our property tax, ground lease and insurance expense by $0.6 million for the year ended December 31, 2014.
While our primary focus is on acquiring branded, urban, upper upscale hotels, our acquisition program is aimed at generating attractive risk-adjusted returns on our investment dollars, and therefore we may target lodging assets outside of the typical branded, urban, upper upscale profile represented by our existing portfolio in order to capitalize on opportunities which may arise. We intend to select the brands and operators for our hotels that we believe will lead to the highest returns. Additionally, the scope of our acquisitions program may include large hotel portfolios or hotel loans. Future acquisitions may be funded by our issuance of additional debt or equity securities, including our common and preferred OP units, or by draws on our $150.0 million senior corporate credit facility. However, in light of our current financial objectives, we expect to fund any near term acquisitions with a greater proportion of equity capital than debt capital.
Dispositions. We have from time to time divested of assets that no longer fit our target profile, will not offer long-term returns in excess of our cost of capital, or that have high risk relative to their anticipated returns. The following table sets forth the hotels we have sold since January 1, 2012:
|
|
|
|
|
|
Hotels |
|
Rooms |
|
Disposition Date |
|
2014: |
|
|
|
|
|
None |
|
|
|
|
|
2013: |
|
|
|
|
|
Kahler Grand, Minnesota (1) (2) |
|
660 |
|
January 25, 2013 |
|
Kahler Inn & Suites, Minnesota (1) |
|
271 |
|
January 25, 2013 |
|
Marriott Rochester, Minnesota (1) (2) |
|
202 |
|
January 25, 2013 |
|
Residence Inn by Marriott Rochester, Minnesota (1) |
|
89 |
|
January 25, 2013 |
|
2012: |
|
|
|
|
|
Marriott Del Mar, California |
|
284 |
|
August 23, 2012 |
|
Doubletree Guest Suites Minneapolis, Minnesota (3) |
|
229 |
|
September 14, 2012 |
|
Hilton Del Mar, California (3) |
|
257 |
|
September 14, 2012 |
|
Marriott Troy, Michigan (3) |
|
350 |
|
September 14, 2012 |
|
Total rooms |
|
2,342 |
|
|
|
(1) |
The 2013 portfolio sale of the Rochester Hotels also included a commercial laundry facility in Rochester, Minnesota. |
(2) |
During 2012, the Company subtracted eight rooms from the Kahler Grand and one room from the Marriott Rochester, bringing the hotel room counts to 660 and 202, respectively. |
(3) |
The 2012 portfolio sale of the Doubletree Guest Suites Minneapolis, the Hilton Del Mar, and the Marriott Troy also included an office building adjacent to the Marriott Troy. |
The aggregate net sale proceeds for these eight hotels was $401.0 million, or $171,000 per room. The results of operations of all of the properties identified above and the gains or losses on dispositions and extinguishments of debt are included in discontinued operations for all periods presented through the time of sale. The cash proceeds from the sales are
56
included in our cash flows from investing activities for the respective periods. Each of these dispositions is discussed below.
In January 2013, we sold the Rochester Portfolio to an unaffiliated third party, for net proceeds of $195.6 million, of which $145.7 million was deposited with an accommodator in order to facilitate our tax-deferred exchanges for the Hilton New Orleans St. Charles and the Boston Park Plaza. We recognized a net gain on the sale of $51.6 million. We retained a $25.0 million Preferred Equity Investment in the Rochester Hotels that yields an 11% dividend, resulting in a deferred gain on the sale of $25.0 million. The $25.0 million gain will be deferred until the Preferred Equity Investment is redeemed. We also provided a $3.7 million working cash advance to the buyer, resulting in a deferred gain on the sale of $3.7 million. The $3.7 million gain will be deferred until we are repaid from the Rochester Portfolio’s available cash flow.
Concurrent with the Rochester Portfolio sale, we extinguished the outstanding $26.7 million mortgage secured by the Kahler Grand for a total cost of $29.8 million, prepaid the $0.4 million loan secured by the commercial laundry facility, and recorded a loss on extinguishment of debt of $3.1 million, which is included in discontinued operations.
In addition, at the time we sold the Rochester Portfolio, we retained a liability not to exceed $14.0 million related to the Rochester Portfolio’s pension plan, which could be triggered in certain circumstances, including termination of the pension plan. The recognition of the $14.0 million pension plan liability reduced our gain on the sale of the Rochester Portfolio. In May 2014, we were released from $7.0 million of the pension plan liability, causing us to recognize additional gain on the sale of the Rochester Portfolio of $7.0 million, which is included in discontinued operations. The remaining $7.0 million gain will be recognized, if at all, when and to the extent we are released from any potential liability related to the Rochester Portfolio’s pension plan.
We sold four hotels and an office building adjacent to one of the hotels in 2012. In August 2012, we sold the Marriott Del Mar located in San Diego, California for net proceeds of $17.7 million, including the assumption of the existing mortgage secured by the hotel which totaled $47.1 million on the date of sale, and recognized a gain on the sale of $25.5 million. In addition, we wrote off $48,000 in deferred financing fees in conjunction with the buyer’s assumption of the debt secured by the hotel. In September 2012, we sold a portfolio of assets that included the Doubletree Guest Suites Minneapolis, the Hilton Del Mar, the Marriott Troy (located in Minneapolis, Minnesota, San Diego, California, and Troy, Michigan, respectively) and an office building adjacent to the Marriott Troy for net proceeds of $28.6 million, including the assumptions of three separate mortgages secured by the hotels totaling $75.6 million, as well as a $2.2 million liability for deferred management fees payable to the Marriott Troy’s third-party manager. We recognized a net gain on the sale of $12.7 million. In addition, we wrote off $0.1 million in deferred financing fees in conjunction with the buyer’s assumption of the debt secured by the three hotels.
The following table summarizes our portfolio and room data from January 1, 2012 through December 31, 2014, adjusted for the hotels acquired and sold during the respective periods.
|
|
|
|
|
|
|
|
|
|
2014 |
|
2013 |
|
2012 |
|
Portfolio Data—Hotels |
|
|
|
|
|
|
|
Number of hotels—beginning of period |
|
29 |
|
30 |
|
32 |
|
Add: Acquisitions |
|
1 |
|
3 |
|
2 |
|
Less: Dispositions |
|
— |
|
(4) |
|
(4) |
|
Number of hotels—end of period |
|
30 |
|
29 |
|
30 |
|
|
|
|
|
|
|
|
|
|
|
2014 |
|
2013 |
|
2012 |
|
Portfolio Data—Rooms |
|
|
|
|
|
|
|
Number of rooms—beginning of period |
|
13,744 |
|
12,854 |
|
13,208 |
|
Add: Acquisitions |
|
544 |
|
2,105 |
|
774 |
|
Add: Room (conversions) expansions |
|
15 |
|
7 |
|
(8) |
|
Less: Dispositions |
|
— |
|
(1,222) |
|
(1,120) |
|
Number of rooms—end of period |
|
14,303 |
|
13,744 |
|
12,854 |
|
Average rooms per hotel—end of period |
|
477 |
|
474 |
|
428 |
|
57
Renovations. We invested $126.0 million, $117.7 million and $109.3 million in capital improvements to our hotel portfolio during the years ended December 31, 2014, 2013 and 2012, respectively. During 2014, we continued to undertake major renovations, repositionings and ordinary course rooms and public space renovations, most significantly at the Boston Park Plaza and the Hyatt Regency San Francisco, and to a lesser degree at the Hilton Garden Inn Chicago Downtown/Magnificent Mile and the Renaissance Long Beach. During 2013, four of our hotels were undergoing major renovations or repositionings: the Hilton Times Square; the Hyatt Chicago Magnificent Mile; the Hyatt Regency Newport Beach; and the Renaissance Westchester. During 2012, two of our hotels were undergoing major renovations: the Renaissance Washington DC; and the Hyatt Regency Newport Beach. As a result of our major renovations and repositionings, we incurred revenue disruption of approximately $3.1 million in 2014, $7.7 million in 2013 and $3.4 million in 2012, all of which was in line with our expectations.
Liquidity and Capital Resources
Historical. During the periods presented, our sources of cash included our operating activities, working capital, sales of hotel properties and other assets, proceeds from our credit facility, and proceeds from our common stock offerings. Our primary uses of cash were for acquisitions of hotel properties and other assets, capital expenditures for hotels, operating expenses, repayment of notes payable (including repurchases of Senior Notes) and our credit facility, repurchases of our preferred stock, dividends on our preferred and common stock and distributions to our joint venture partners. We cannot be certain that traditional sources of funds will be available in the future.
Operating activities. Our net cash provided by or used in operating activities fluctuates primarily as a result of changes in RevPAR and the operating cash flow of our hotels. Our net cash provided by or used in operating activities may also be affected by changes in our portfolio resulting from hotel acquisitions, dispositions or renovations. Net cash provided by operating activities was $278.6 million for 2014 compared to $171.1 million for 2013, and $171.5 million for 2012. This increase was primarily due to additional cash generated by the four 2013-2014 acquired hotels, combined by an increase in cash generated by the four 2013 renovation hotels. This increase in cash provided by operating activities was partially offset by decreased cash generated by four of our hotels which were undergoing major renovations during 2014: the Boston Park Plaza; the Hilton Garden Inn Chicago Downtown/Magnificent Mile; the Hyatt Regency San Francisco; and the Renaissance Long Beach.
Operating cash decreased slightly in 2013 as compared to 2012 due to decreased cash generated by the four 2013 renovation hotels as well as increased restricted cash, mostly offset by operating cash generated by the five 2012-2013 acquired hotels.
Investing activities. Our net cash provided by or used in investing activities fluctuates primarily as a result of acquisitions, dispositions and renovations of hotels. Net cash used in investing activities in 2014, 2013 and 2012 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
||
|
|
Year Ended |
|
Year Ended |
|
Year Ended |
|
|||||
|
|
December 31, |
|
December 31, |
|
December 31, |
|
|||||
|
|
2014 |
|
2013 |
|
2012 |
|
|||||
Proceeds from sales of hotel properties and other assets |
|
$ |
110 |
|
$ |
195,628 |
|
$ |
46,367 |
|
||
Restricted cash — replacement reserve |
|
|
(4,311) |
|
|
1,272 |
|
|
(10,743) |
|
||
Acquisitions of hotel properties and other assets |
|
|
(276,558) |
|
|
(450,544) |
|
|
(120,003) |
|
||
Renovations and additions to hotel properties and other assets |
|
|
(125,975) |
|
|
(117,694) |
|
|
(109,321) |
|
||
Payment for interest rate derivative |
|
|
— |
|
|
(12) |
|
|
— |
|
||
Net cash used in investing activities |
|
$ |
(406,734) |
|
$ |
(371,350) |
|
$ |
(193,700) |
|
Net cash used in investing activities was $406.7 million in 2014, $371.4 million in 2013 and $193.7 million in 2012. During 2014, we paid cash of $265.6 million to acquire the Marriott Wailea, and cash of $11.0 million to acquire the land underlying the Fairmont Newport Beach for a total of $276.6 million. We also paid $126.0 million for renovations and additions to our portfolio, and increased the balance in our restricted cash replacement reserve accounts by $4.3 million. These cash outflows were slightly offset by $0.1 million received from the sale of surplus FF&E.
58
During 2013, we received proceeds of $195.6 million from the sale of the Rochester Portfolio. In addition, we purchased three hotels during 2013 for a total of $450.5 million, including the Hilton New Orleans St. Charles in May 2013 ($59.1 million), the Boston Park Plaza in July 2013 ($128.9 million), and the Hyatt Regency San Francisco in December 2013 ($262.5 million). During 2013, we also decreased the balance in our restricted cash replacement reserve accounts by $1.3 million, paid $117.7 million for renovations and additions to our portfolio and paid $12,000 for an interest rate cap agreement on our variable-rate mortgage secured by the Hilton San Diego Bayfront.
During 2012, we received total proceeds of $46.4 million from the sales of four hotels and an office building adjacent to one of the sold hotels, including $17.7 million for the Marriott Del Mar, $28.6 million from the portfolio sale of the Doubletree Guest Suites Minneapolis, the Hilton Del Mar, the Marriott Troy, and an office building adjacent to the Marriott Troy, and an additional $37,000 from the sale of surplus FF&E. These cash inflows were offset by the following cash outflows: $10.7 million as we increased the balance in our restricted cash replacement reserve accounts; $120.0 million to acquire two hotels, including $29.7 million paid to acquire the Hyatt Chicago Magnificent Mile and $90.3 million paid to acquire the Hilton Garden Inn Chicago Downtown/Magnificent Mile; and $109.3 million for renovations and additions to our portfolio.
Financing activities. Our net cash provided by or used in financing activities fluctuates primarily as a result of our issuance of common stock, our issuance and repayment of notes payable (including the repurchase of Senior Notes) and our credit facility, and our issuance and repurchase of other forms of capital, including preferred equity. Net cash provided by financing activities was $245.9 million in 2014, $147.4 million in 2013, and $30.2 million in 2012. Net cash provided by financing activities during 2014 consisted of $283.4 million in net proceeds received from our issuance of common stock, and $178.3 million in proceeds received from notes payable and our credit facility, including $90.0 million from a new loan secured by the JW Marriott New Orleans, $65.0 million from a new loan secured by the Embassy Suites La Jolla and $23.3 million from short-term borrowings on our credit facility. These cash inflows were partially offset by $153.0 million in principal payments on our notes payable and credit facility, including $38.9 million to repay the old loan secured by the JW Marriott New Orleans, $67.1 million to extinguish the old loan secured by the Embassy Suites La Jolla, $23.3 million to repay draws on our credit facility and $23.7 million of principal payments on our notes payable. In addition, we paid a total of $4.1 million in fees to extinguish the old Embassy Suites La Jolla debt as well as debt related to one of the lenders who chose not to participate in the amended mortgage secured by the Hilton San Diego Bayfront. We also paid $2.3 million in deferred financing costs related to the new loans secured by the JW Marriott New Orleans and the Embassy Suites La Jolla, along with the three lenders who are participating in the amended mortgage secured by the Hilton San Diego Bayfront. Finally, we paid $47.9 million in dividends to our preferred and common stockholders, and $8.5 million in distributions to the non-controlling interests in our hotels.
Net cash provided by financing activities during 2013 consisted of $565.8 million in net proceeds received from our issuance of common stock and $35.8 million in proceeds received from our credit facility, partially offset by the following cash outflows: a total of $276.3 million paid to redeem all of our Series A and Series C preferred stock; $141.5 million in principal payments on our notes payable and credit facility, including $58.0 million to repurchase our Senior Notes, $26.7 million to extinguish the existing mortgage on the Kahler Grand, $0.4 million to prepay the existing mortgage on the commercial laundry facility included in the Rochester Portfolio, $35.8 million to repay draws on our credit facility and $20.6 million of principal payments on our notes payable; $3.1 million in costs incurred on our repurchase of the Senior Notes, our extinguishment of the Kahler Grand mortgage and our repayment of the commercial laundry mortgage; $27.5 million in common and preferred dividends to our stockholders; $5.5 million in distributions to the non-controlling interests in our hotels; and $0.2 million in deferred financing costs paid in connection with our purchase of the interest rate cap agreement on our variable-rate mortgage secured by the Hilton San Diego Bayfront and on our assumption of the Boston Park Plaza loan.
Net cash provided by financing activities during 2012 consisted of $126.1 million in net proceeds received from the issuance of common stock, including $126.2 million in net proceeds received from our common stock offering offset by $0.1 million in fees related to shares issued to the seller of the Hyatt Chicago Magnificent Mile, and $15.0 million in proceeds received from a draw on our credit facility. These cash inflows were partially offset by $68.8 million in principal payments on our notes payable and credit facility, including $32.2 million to repay the existing mortgage secured by the Renaissance Long Beach, $15.0 million to repay a draw on our credit facility and $21.6 million of principal payments on our notes payable. In addition, we paid $4.6 million to repurchase a portion of our Senior Notes, $1.3 million in deferred financing costs to amend our credit facility, $29.7 million in preferred dividends to our stockholders, and $6.4 million in distributions to the non-controlling interests in our hotels.
59
Future. We expect our primary uses of cash to be for capital investments in our hotels, operating expenses, repayment of principal on our notes payable and credit facility, interest expense, dividends on our common and preferred stock and acquisitions of hotels, including possibly hotel portfolios. We expect our primary sources of cash will continue to be our operating activities, working capital, notes payable and our credit facility, dispositions of hotel properties, and proceeds from public and private offerings of debt securities and common and preferred stock. Our financial objectives include the maintenance of our credit ratios, appropriate levels of liquidity, and continued balance sheet strength. Consistent with maintaining our low leverage and balance sheet strength, in the near-term, we expect to fund acquisitions largely through the issuance of equity in order to selectively grow the quality and scale of our portfolio. To that end, we issued common stock in June 2012 to fund our acquisitions of both the Hyatt Chicago Magnificent Mile in June 2012 and the Hilton Garden Inn Chicago Downtown/Magnificent Mile in July 2012. In addition, we used a portion of the proceeds we received from our February 2013 common stock offering to fund our acquisitions of both the Hilton New Orleans St. Charles in May 2013 and the Boston Park Plaza in July 2013, and we used a portion of the proceeds we received from our November 2013 common stock offering to fund our acquisition of the Hyatt Regency San Francisco in December 2013. In 2014, we used a portion of the proceeds we received from our June 2014 common stock offering, along with common stock issued directly to the seller, to fund our July 2014 acquisition of the Marriott Wailea. Our ability to raise funds through the issuance of equity securities depends on, among other things, general market conditions for hotel companies and REITs and market perceptions about us. We will continue to analyze alternate sources of capital in an effort to minimize our capital costs and maximize our financial flexibility, including pursuant to the Equity Distribution Agreements we entered into in February 2014 with the Managers. Under the terms of the agreements, we may issue and sell from time to time through or to the Managers, as sales agents and/or principals, shares of our common stock having an aggregate offering amount of up to $150.0 million. During 2014, we received $21.0 million in net proceeds from the issuance of 1,352,703 shares of our common stock in connection with the agreements, which we used to partially fund the acquisition of the land underlying the Fairmont Newport Beach in June 2014. However, when needed, the capital markets may not be available to us on favorable terms or at all.
We believe that our current cash balance, our cash flow from operations, our access to capital markets and our unencumbered properties will provide us with sufficient liquidity to meet our current operating expenses and other expenses directly associated with our business (including payment of cash dividends on our capital stock, if declared) for the foreseeable future, and in any event for at least the next 12 months.
Debt. As of December 31, 2014, we had $1.4 billion of consolidated debt, $304.2 million of cash and cash equivalents, including restricted cash, and total assets of $3.9 billion. We believe that by controlling debt levels, staggering maturity dates and maintaining a highly flexible capital structure, we can maintain lower capital costs than more highly leveraged companies, or companies with limited flexibility due to restrictive corporate-level financial covenants.
The weighted average term to maturity of our debt as of December 31, 2014, is approximately 4 years, and 71.6% of our debt is fixed rate with a weighted average interest rate of 5.2%. Including our variable-rate debt obligations based on the variable rates at December 31, 2014, the weighted average interest rate on this debt is 4.5%.
As of December 31, 2014, all of our outstanding debt had fixed interest rates, except our two variable-rate obligations, which include the $228.3 million non-recourse mortgage on the Hilton San Diego Bayfront and the $177.2 million non-recourse mortgage on the Doubletree Guest Suites Times Square, both of which are subject to interest rate cap agreements. The interest rate cap agreement on the Hilton San Diego Bayfront mortgage matures in April 2015, and caps the 3-month LIBOR rate at 3.75%. The interest rate cap agreement on the Doubletree Guest Suites Times Square mortgage matures in October 2015, and caps the LIBOR rate at 4.0%. All of our mortgage debt is in the form of single asset non-recourse loans rather than cross-collateralized multi-property pools. We currently believe this structure is appropriate for the operating characteristics of our business as it isolates risk and provides flexibility for various portfolio management initiatives, including the sale of individual hotels subject to existing debt.
Each of our debt transactions for the years ended December 31, 2014, 2013 and 2012 are discussed below.
In August 2014, we amended the mortgage on the Hilton San Diego Bayfront, which mortgage originally included the syndication of four lenders. One of these lenders chose not to participate in the refinancing, and, in accordance with the Debt Topic of the FASB ASC, we expensed the unamortized balance of the lender’s deferred financing fees, resulting in a $0.5 million loss on the extinguishment of this lender’s debt. In addition, we paid $1.3 million in deferred finance fees to
60
the three lenders who are participating in the amended mortgage, which we are amortizing over the term of the refinanced debt. As a result of this amendment, the interest rate decreased to a blended rate of one-month LIBOR plus 225 basis points from the blended rate of three-month LIBOR plus 325 basis points. In addition, the original maturity date of April 2016 was extended to August 2019.
In December 2014, we repaid the $38.9 million mortgage secured by the JW Marriott New Orleans, using proceeds received from a new $90.0 million mortgage secured by the JW Marriott New Orleans. The new loan extends the maturity date from September 2015 to December 2024. The new loan is subject to a 30-year amortization schedule, and reduces the interest rate from 5.45% under a related interest rate swap agreement to a fixed rate of 4.15%. In conjunction with our repayment of the original mortgage, we wrote off $39,000 of unamortized deferred financing fees, which are included in loss on extinguishment of debt in our consolidated statements of operations, and we paid $0.6 million to terminate the related interest rate swap agreement. In addition, we paid deferred financing fees of $0.6 million related to the new loan, which we are amortizing over the term of the new loan.
Also in December 2014, we extinguished the $67.1 million mortgage secured by the Embassy Suites La Jolla for a total cost of $71.1 million, and recorded a loss on extinguishment of debt of $4.0 million. The extinguishment was funded using proceeds received from a new $65.0 million mortgage secured by the Embassy Suites La Jolla, along with cash on hand. The new loan is subject to a 30-year amortization schedule, reduces the interest rate from a fixed rate of 6.6% to a fixed rate of 4.12%, and extends the maturity date from June 2019 to January 2025. In conjunction with our repayment of the original mortgage, we wrote off $43,000 of unamortized deferred financing fees, which are included in loss on extinguishment of debt in our consolidated statements of operations. In addition, we paid deferred financing fees of $0.4 million related to the new loan, which we are amortizing over the term of the new loan.
Concurrent with the Rochester Portfolio sale in January 2013, we extinguished the outstanding $26.7 million mortgage secured by the Kahler Grand for a total cost of $29.8 million, prepaid the $0.4 million loan secured by the commercial laundry facility, and recorded a loss on extinguishment of debt of $3.1 million which is included in discontinued operations.
In January 2013, we repurchased $42.0 million of Senior Notes pursuant to a tender offer, and we redeemed the remaining $16.0 million of the Senior Notes. We funded the total $58.0 million in Senior Note redemptions with available cash, leaving no future amounts outstanding related to the Senior Notes. We recognized a loss of $44,000 on this extinguishment of debt.
In conjunction with our acquisition of the Boston Park Plaza in July 2013, we assumed a $119.2 million non-recourse mortgage secured by the hotel. The mortgage bears interest at a fixed rate of 4.4%, and matures in February 2018.
Regarding our 2012 debt activities, in February 2012, we repurchased $4.5 million in aggregate principal amount of our Senior Notes for $4.57 million. After the repurchase, such Senior Notes were cancelled. We 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.
In April 2012, we used existing cash to repay the remaining $32.2 million balance of the non-recourse mortgage secured by the Renaissance Long Beach. In connection with this repayment, we wrote off $3,000 in deferred financing fees.
In August 2012, we completed the sale of the Marriott Del Mar for a gross sales price of $66.0 million, including the buyer’s assumption of the $47.1 million mortgage secured by the hotel, and wrote off $48,000 in related deferred financing fees.
In September 2012, we completed the portfolio sale of the Doubletree Guest Suites Minneapolis, the Hilton Del Mar, the Marriott Troy and an office building adjacent to the Marriott Troy for a gross sales price of $105.0 million, including the buyer’s assumption of the three mortgages secured by the hotels totaling $75.6 million, and wrote off $0.1 million in related deferred financing fees.
In September 2012, we amended and restated our $150.0 million senior unsecured revolving credit facility, which was scheduled to mature in November 2013. The pricing on the amended revolving credit facility was reduced and the 1% LIBOR floor was eliminated. The maturity of the credit facility was extended to November 2015 with an option to extend
61
to November 2016. The amended credit facility’s interest rate is based on a pricing grid with a range of 175 to 350 basis points, which represents a reduction from the previous grid that ranged from 325 to 425 basis points over LIBOR depending on our leverage ratio. The credit facility also includes an accordion option that allows us to request additional lender commitments up to a total of $350.0 million. We paid $1.3 million in deferred financing fees in conjunction with this amendment, which we are amortizing over the term of the amended credit facility. The credit facility currently has no outstanding borrowings; however, as of December 31, 2014, we had $0.7 million in outstanding irrevocable letters of credit backed by the credit facility.
We may in the future seek to obtain mortgages on one or all of our 14 unencumbered hotels, all but five of which are currently held by subsidiaries whose interests are pledged to our credit facility at December 31, 2014: Courtyard by Marriott Los Angeles, Fairmont Newport Beach, Hilton Garden Inn Chicago Downtown/Magnificent Mile (not pledged to our credit facility), Hilton New Orleans St. Charles (not pledged to our credit facility), Hyatt Chicago Magnificent Mile (not pledged to our credit facility), Hyatt Regency Newport Beach, Hyatt Regency San Francisco (not pledged to our credit facility), Marriott Quincy, Marriott Portland, Marriott Wailea (not pledged to our credit facility), Renaissance Long Beach, Renaissance Los Angeles Airport, Renaissance Westchester and Sheraton Cerritos. These 14 hotels had an aggregate of 5,551 rooms as of December 31, 2014, and generated $424.1 million in revenue during 2014, including revenue generated by the Marriott Wailea prior to our ownership. Should we obtain secured financing on any or all of our 14 unencumbered hotels, the amount of capital available through our credit facility may be reduced.
Cash Balance. As of December 31, 2014, our unrestricted cash balance was $222.1 million. By minimizing our need to access external capital by maintaining higher than typical cash balances, our financial security and flexibility are meaningfully enhanced because we are able to fund our business needs and debt maturities, specifically our 2015 remaining debt maturities, partially with our cash. As we believe the lodging cycle is in the middle phase of a potentially prolonged cyclical recovery, we deployed a portion of our excess cash balance in 2014 towards debt refinancing activities (including refinancing the mortgages secured by the Hilton San Diego Bayfront, the JW Marriott New Orleans and the Embassy Suites La Jolla), selective acquisitions and capital investments in our portfolio. In addition, as we have made progress on our core objective to improve the quality and scale of our portfolio while gradually deleveraging our balance sheet, we continued payment of a quarterly cash dividend on our common shares, which we reinstituted during 2013. While our primary focus is on acquiring branded, urban, upper upscale hotels, our acquisition program is aimed at generating attractive risk-adjusted returns on our investment dollars. We, therefore, may target lodging assets outside of the typical branded, urban, upper upscale profile represented by our existing portfolio in order to capitalize on opportunities which may arise. Additionally, the scope of our acquisitions program may include large hotel portfolios or hotel loans.
Contractual Obligations
The following table summarizes our payment obligations and commitments as of December 31, 2014 (in thousands):
Payment due by period |
|||||||||||||||||||||||||||||||
Less Than |
1 to 3 |
3 to 5 |
More than |
||||||||||||||||||||||||||||
Total |
1 year |
years |
years |
5 years |
|||||||||||||||||||||||||||
Notes payable |
$ |
1,429,292 |
$ |
121,328 |
$ |
463,207 |
$ |
514,732 |
$ |
330,025 | |||||||||||||||||||||
Interest obligations on notes payable (1) |
238,172 | 59,690 | 89,307 | 48,321 | 40,854 | ||||||||||||||||||||||||||
Capital lease obligations |
15,583 | 7 | 2 | 2 | 15,572 | ||||||||||||||||||||||||||
Interest obligations on capital leases |
100,852 | 1,402 | 2,804 | 2,804 | 93,842 | ||||||||||||||||||||||||||
Operating lease obligations |
386,155 | 8,438 | 20,022 | 22,686 | 335,009 | ||||||||||||||||||||||||||
Construction commitments |
56,472 | 56,472 |
— |
— |
— |
||||||||||||||||||||||||||
Employment obligations |
7,025 | 6,319 | 706 |
— |
— |
||||||||||||||||||||||||||
Total |
$ |
2,233,551 |
$ |
253,656 |
$ |
576,048 |
$ |
588,545 |
$ |
815,302 |
(1) |
Interest on variable-rate debt obligations is calculated based on the variable rates at December 31, 2014. |
Capital Expenditures and Reserve Funds
We believe we maintain each of our hotels in good repair and condition and in general conformity with applicable franchise and management agreements, ground, building and air leases, laws and regulations. Our capital expenditures
62
primarily relate to the ongoing maintenance of our hotels and are budgeted in the reserve accounts described in the following paragraph. We also incur capital expenditures for renovation and development. We invested $126.0 million in our portfolio during 2014. As of December 31, 2014, we have contractual construction commitments totaling $56.5 million. If we renovate or develop additional hotels in the future, our capital expenditures will likely increase.
With respect to our hotels that are operated under management or franchise agreements with major national hotel brands and for all of our hotels subject to first mortgage liens, we are obligated to maintain an FF&E reserve account for future planned and emergency-related capital expenditures at these hotels. The amount funded into each of these reserve accounts is determined pursuant to the management, franchise and loan agreements for each of the respective hotels, ranging between zero and 5.0% of the respective hotel’s total annual revenue. As of December 31, 2014, $50.3 million was held in FF&E reserve accounts for future capital expenditures at the 30 hotels. According to certain loan agreements, reserve funds are to be held by the lenders or managers in restricted cash accounts, and we are not required to spend the entire amount in such reserve accounts each year.
Off-Balance Sheet Arrangements
Our off-balance sheet arrangement consists of our ownership interest in the Preferred Equity Investment. For further discussion of the Preferred Equity Investment and its effect on our financial condition, results of operations and cash flows, see Note 4 to the consolidated financial statements.
Seasonality and Volatility
As is typical of the lodging industry, we experience some seasonality in our business as indicated in the table below. Revenue for certain of our hotels is generally affected by seasonal business patterns (e.g., the first quarter is strong in Orlando, the second quarter is strong for the Mid-Atlantic business hotels, and the fourth quarter is strong for New York City and Hawaii). Quarterly revenue also may be adversely affected by renovations and repositionings, our managers’ effectiveness in generating business and by events beyond our control, such as extreme weather conditions, terrorist attacks or alerts, public health concerns, airline strikes or reduced airline capacity, economic factors and other considerations affecting travel. The Comparable Portfolio’s quarterly and full year 2012, first quarter 2013 and full year 2013 revenues were also impacted by the 13-fiscal period accounting calendar used by Marriott. In 2013, Marriott converted its reporting calendar from a 13-period basis to a standard 12-month basis, the effect of which was to shift the operating results for 20 calendar days from the fourth quarter 2012 to the first three quarters of 2012. In addition, since Marriott’s 2012 fiscal year ended on December 28, 2012, Marriott’s 2013 first quarter and calendar year contain an additional three days, December 29, 2012 through December 31, 2012. Revenues for our 30 hotel Comparable Portfolio by quarter for 2012, 2013 and 2014 were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First |
|
Second |
|
Third |
|
Fourth |
|
|
|
|
||||
Revenues |
|
Quarter |
|
Quarter |
|
Quarter |
|
Quarter |
|
Total |
|
|||||
2012 Comparable Portfolio (1) |
|
$ |
232,728 |
|
$ |
279,099 |
|
$ |
258,442 |
|
$ |
286,838 |
|
$ |
1,057,107 |
|
Revenues as a percentage of total |
|
|
22.0 |
% |
|
26.4 |
% |
|
24.5 |
% |
|
27.1 |
% |
|
100.0 |
% |
2012 Comparable Portfolio excluding Boston Park Plaza (2) |
|
$ |
221,518 |
|
$ |
257,976 |
|
$ |
240,714 |
|
$ |
270,765 |
|
$ |
990,973 |
|
Revenues as a percentage of total |
|
|
22.4 |
% |
|
26.0 |
% |
|
24.3 |
% |
|
27.3 |
% |
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013 Comparable Portfolio (1) |
|
$ |
243,333 |
|
$ |
292,603 |
|
$ |
284,858 |
|
$ |
272,940 |
|
$ |
1,093,734 |
|
Revenues as a percentage of total |
|
|
22.2 |
% |
|
26.8 |
% |
|
26.0 |
% |
|
25.0 |
% |
|
100.0 |
% |
2013 Comparable Portfolio excluding Boston Park Plaza (2) |
|
$ |
232,555 |
|
$ |
270,404 |
|
$ |
264,920 |
|
$ |
255,358 |
|
$ |
1,023,237 |
|
Revenues as a percentage of total |
|
|
22.7 |
% |
|
26.4 |
% |
|
25.9 |
% |
|
25.0 |
% |
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014 Comparable Portfolio (1) |
|
$ |
259,277 |
|
$ |
312,469 |
|
$ |
308,364 |
|
$ |
288,083 |
|
$ |
1,168,193 |
|
Revenues as a percentage of total |
|
|
22.2 |
% |
|
26.7 |
% |
|
26.4 |
% |
|
24.7 |
% |
|
100.0 |
% |
(1) |
Includes all 30 hotel properties in which we have interests as of December 31, 2014. Also includes prior ownership results as applicable for the Hyatt Chicago Magnificent Mile, the Hilton Garden Inn Chicago Downtown/Magnificent Mile, the Hilton New Orleans St. Charles, the Boston Park Plaza, the Hyatt Regency San Francisco and the Marriott Wailea before our acquisitions of the hotels. |
63
(2) |
Includes the Comparable Portfolio adjusted to exclude the Boston Park Plaza due to the hotel adding 12 rooms in September 2012, and an additional 100 rooms in January 2013. |
Inflation
Inflation may affect our expenses, including, without limitation, by increasing such costs as labor, food, taxes, property and casualty insurance and utilities.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosure of contingent assets and liabilities.
We evaluate our estimates on an ongoing basis. We base our estimates on historical experience, information that is currently available to us and on various other assumptions that we believe are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect the most significant judgments and estimates used in the preparation of our consolidated financial statements.
· |
Impairment of long-lived assets and goodwill. We periodically review each property and any related goodwill for possible impairment. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment recognized is measured by the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets. We perform a Level 3 analysis of fair value, using a discounted cash flow analysis to estimate the fair value of our properties taking into account each property’s expected cash flow from operations, holding period and proceeds from the disposition of the property. The factors addressed in determining estimated proceeds from disposition include anticipated operating cash flow in the year of disposition and terminal capitalization rate. Our judgment is required in determining the discount rate applied to estimated cash flows, growth rate of the properties, operating income of the properties, the need for capital expenditures, as well as specific market and economic conditions. |
We account for goodwill in accordance with the Intangibles — Goodwill and Other Topic of the FASB ASC, which states that goodwill has an indefinite useful life that should not be amortized but should be reviewed annually for impairment, or more frequently if events or changes in circumstances indicate that goodwill might be impaired, as well as the Fair Value Measurements and Disclosures Topic of the FASB ASC for financial and nonfinancial assets and liabilities, which establishes a framework for measuring fair value and expands disclosures about fair value measurements by establishing a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The review of any potential goodwill impairment requires estimates of fair value for our properties that have goodwill arising from unallocated acquisition costs. These estimates of fair value are prepared using Level 3 measurements.
· |
Acquisition related assets and liabilities. Accounting for the acquisition of a hotel property or other entity as a purchase transaction requires an allocation of the purchase price to the assets acquired and the liabilities assumed in the transaction at their respective estimated fair values. The most difficult estimations of individual fair values are those involving long-lived assets, such as property, equipment, intangible assets and capital lease obligations that are assumed as part of the acquisition of a leasehold interest. During 2012, 2013 and 2014, we 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 in our purchases of the Hyatt Chicago Magnificent Mile, the Hilton Garden Inn Chicago Downtown/ Magnificent Mile, the Hilton New Orleans St. Charles, the Boston Park Plaza, the Hyatt Regency San Francisco and the Marriott Wailea. Due to the inherent subjectivity in determining the estimated fair value of long-lived assets, we believe that the recording of acquired assets and liabilities is a critical accounting policy. |
64
· |
Depreciation and amortization expense. Depreciation expense is based on the estimated useful life of our assets. The life of the assets is based on a number of assumptions, including the cost and timing of capital expenditures to maintain and refurbish our hotels, as well as specific market and economic conditions. Hotel properties and other investments are depreciated using the straight-line method over estimated useful lives primarily ranging from five to 35 years for buildings and improvements and three to 12 years for furniture, fixtures and equipment. While we believe our estimates are reasonable, a change in the estimated lives could affect depreciation expense and net income or the gain or loss on the sale of any of our hotels. We have not changed the estimated useful lives of any of our assets during the periods discussed. |
New Accounting Standards and Accounting Changes
In April 2014, the FASB issued Accounting Standards Update No. 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity” (“ASU No. 2014-08”). ASU No. 2014-08 raises the threshold for a disposal to qualify as a discontinued operation and requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. Under ASU No. 2014-08, a discontinued operation is (1) a component of an entity or group of components that has been disposed of by sale, disposed of other than by sale or is classified as held for sale that represents a strategic shift that has or will have a major effect on an entity’s operations and financial results, or (2) an acquired business or nonprofit activity that is classified as held for sale on the date of the acquisition. A strategic shift that has or will have a major effect on an entity’s operations and financial results could include the disposal of (1) a major line of business, (2) a major geographical area (3) a major equity method investment, or (4) other major parts of an entity. ASU No. 2014-08 expands the disclosures for discontinued operations and requires new disclosures related to individually material disposals that do not meet the definition of a discontinued operation, an entity’s continuing involvement with a discontinued operation following the disposal date and retained equity method investments in a discontinued operation. ASU No. 2014-08 is effective prospectively for all disposals (or classifications as held for sale) of components of an entity that occur within annual periods beginning on or after December 15, 2014, and interim periods within that year. Early adoption is permitted, but only for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued or available for issuance. Our early adoption of ASU No. 2014-08 in the first quarter of 2014 did not have any effect on our financial statements as we had no disposals (or classifications as held for sale) during the year ended December 31, 2014. In the future, when we have disposals (or classifications as held for sale), we will be required to determine whether such disposal meets the discontinued operations requirements under ASU No. 2014-08. Additional disclosures may be required.
In May 2014, the FASB issued Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU No. 2014-09”). The core principal of ASU No. 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principal, an entity will need to apply a five-step model: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. ASU No. 2014-09 will become effective during the first quarter of 2017, and will require either a full retrospective approach or a modified retrospective approach, with early adoption prohibited. We are currently evaluating the impact that ASU No. 2014-09 will have on our financial statements.
In June 2014, the FASB issued Accounting Standards Update No. 2014-12, “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period” (“ASU No. 2014-12”), which requires a reporting entity to treat a performance target that affects vesting and that could be achieved after the requisite service period as a performance condition. ASU 2014-12 will become effective during the first quarter of 2016. Early adoption is permitted. ASU 2014-12 may be adopted either prospectively for share-based payment awards granted or modified on or after the effective date, or retrospectively, using a modified retrospective approach. The modified retrospective approach would apply to share-based payment awards outstanding as of the beginning of the earliest annual period presented in the financial statements on adoption, and to all new or modified awards thereafter. ASU No. 2014-12 will not have an effect on our financial statements unless we issue grants in the future that fall within its scope.
65
Item 7A.Quantitative and Qualitative Disclosures About Market Risk
To the extent that we incur debt with variable interest rates, our future income, cash flows and fair values relevant to financial instruments are dependent upon prevailing market interest rates. Market risk refers to the risk of loss from adverse changes in market prices and interest rates. We have no derivative financial instruments held for trading purposes. We use derivative financial instruments to manage, or hedge, interest rate risks.
As of December 31, 2014, 71.6% of our debt obligations are fixed in nature, which largely mitigates the effect of changes in interest rates on our cash interest payments. If market rates of interest on our variable rate debt increase or decrease by 100 basis points, interest expense would increase or decrease, respectively, our future earnings and cash flows by approximately $3.7 million based on the variable rates at December 31, 2014. After adjusting for the non-controlling interest in the Hilton San Diego Bayfront, this increase or decrease in interest expense would increase or decrease, respectively, our future earnings by $3.2 million based on the variable rates at December 31, 2014. However, increases and decreases in LIBOR rates are sometimes correlated with increases and decreases in lodging operations, which may mean that any increases in our interest expense due to higher variable rates may coincide with increases in our revenue due to higher lodging demand.
Item 8.Financial Statements and Supplementary Data
See index to financial statements included in this report.
Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
Based upon an evaluation of the effectiveness of disclosure controls and procedures, our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) have concluded that as of the end of the period covered by this Annual Report on Form 10-K our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act) were effective to provide reasonable assurance that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified by the rules and forms of the SEC and is accumulated and communicated to management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
(b) Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate due to changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our management, including our CEO and CFO, we conducted an evaluation of the effectiveness of our internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control—Integrated Framework (2013 Framework). Based on its evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2014.
Ernst & Young LLP, an independent registered public accounting firm, has audited the Consolidated Financial Statements included in this Annual Report on Form 10-K and, as part of its audit, has issued its report, included herein at page 68, on the effectiveness of our internal control over financial reporting.
66
(c) Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting that occurred during the most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
67
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Sunstone Hotel Investors, Inc.
We have audited Sunstone Hotel Investors, Inc.’s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) (the COSO criteria). Sunstone Hotel Investors, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Sunstone Hotel Investors, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Sunstone Hotel Investors, Inc. as of December 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 2014 of Sunstone Hotel Investors, Inc. and our report dated February 19, 2015 expressed an unqualified opinion thereon.
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/s/ Ernst & Young LLP |
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Irvine, California |
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February 19, 2015 |
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68
None.
Item 10.Directors, Executive Officers and Corporate Governance
The information required by this Item is set forth under the caption “Election of Directors” in our definitive Proxy Statement, which will be filed with the SEC pursuant to Regulation 14A under the Exchange Act and is incorporated herein by reference.
Item 11.Executive Compensation
The information required by this Item is set forth under the caption “Executive Officer Compensation” in our definitive Proxy Statement, which will be filed with the SEC pursuant to Regulation 14A under the Exchange Act and is incorporated herein by reference.
Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Except as set forth below, the information required by this Item is set forth under the caption “Security Ownership by Directors, Executive Officers and Five Percent Stockholders” in our definitive Proxy Statement, which will be filed with the SEC pursuant to Regulation 14A under the Exchange Act and is incorporated herein by reference. The following table sets forth certain information with respect to securities authorized for issuance under the equity compensation plan as of December 31, 2014:
Equity Compensation Plan Information
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Number of securities |
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remaining available |
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for future issuance |
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under the Long-term |
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Number of securities to |
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Weighted-average |
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Incentive Plan |
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be issued upon exercise |
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exercise price of |
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(excluding securities |
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of outstanding awards |
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outstanding awards |
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reflected in column a) |
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(a) |
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(b) |
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(c) |
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Equity compensation plans approved by the Company’s stockholders: |
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- 2004 Long-Term Incentive Plan |
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200,000 |
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$ |
17.71 |
(1) |
6,537,837 |
(1) |
The weighted-average exercise price is for the 200,000 options outstanding as of December 31, 2014. |
Item 13.Certain Relationships and Related Transactions, and Director Independence
The information required by this Item is set forth under the caption “Certain Relationships and Related Transactions” and “Corporate Governance” in our definitive Proxy Statement, which will be filed with the SEC pursuant to Regulation 14A under the Exchange Act and is incorporated herein by reference.
Item 14.Principal Accounting Fees and Services
The information required by this Item is set forth under the caption “Ratification of the Audit Committee’s Appointment of Independent Registered Public Accounting Firm” in our definitive Proxy Statement, which will be filed with the SEC pursuant to Regulation 14A under the Exchange Act and is incorporated herein by reference.
69
Item 15.Exhibits and Financial Statement Schedules
(a)(1) |
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Financial Statements. See Index to Financial Statements and Schedules on page F-1. |
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(a)(2) |
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Financial Statement Schedules. See Index to Financial Statements and Schedules on page F-1. |
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(a)(3) |
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Exhibits. The following exhibits are filed (or incorporated by reference herein) as a part of this Annual Report on Form 10-K: |
Exhibit |
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Number |
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Description |
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3.1 |
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Articles of Amendment and Restatement of Sunstone Hotel Investors, Inc. (incorporated by reference to Exhibit 3.1 to the registration statement on Form S-11 (File No. 333-117141) filed by the Company). |
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3.2 |
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Amended and Restated Bylaws of Sunstone Hotel Investors, Inc. (incorporated by reference to Exhibit 3.1 to Form 10-Q filed by the Company on August 5, 2008). |
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3.3 |
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First Amendment to the Amended and Restated Bylaws of Sunstone Hotel Investors, Inc., effective as of March 19, 2012 (incorporated by reference to Exhibit 3.1 to Form 8-K, filed by the Company on March 22, 2012). |
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3.4 |
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Second Amendment to the Amended and Restated Bylaws of Sunstone Hotel Investors, Inc., effective as of February 13, 2015. |
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3.5 |
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Form of Articles Supplementary for Series D preferred stock (incorporated by reference to Exhibit 3.3 to the registration statement on Form 8-A filed by the Company on April 6, 2011). |
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3.6 |
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Articles Supplementary Prohibiting the Company From Electing to be Subject to Section 3-803 of the Maryland General Corporation Law Absent Shareholder Approval (incorporated by reference to Exhibit 3.1 to Form 8-K, filed by the Company on April 29, 2013). |
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4.1 |
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Specimen Certificate of Common Stock of Sunstone Hotel Investors, Inc. (incorporated by reference to Exhibit 4.1 to the registration statement on Form S-11 (File No. 333-117141) filed by the Company). |
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4.2 |
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Letter furnished to Securities and Exchange Commission agreeing to furnish certain debt instruments (incorporated by reference to Exhibit 4.2 to the registration statement on Form S-11 (File No. 333-117141) filed by the Company). |
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10.1 |
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Form of Master Agreement with Management Company (incorporated by reference to Exhibit 10.2 to the registration statement on Form S-11 (File No. 333-117141) filed by the Company). |
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10.2 |
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Form of Hotel Management Agreement (incorporated by reference to Exhibit 10.3 to the registration statement on Form S-11 (File No. 333-117141) filed by the Company). |
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10.3 |
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Management Agreement Amendment dated as of July 1, 2005 (incorporated by reference to Exhibit 10.10.1 to Form 10-K filed by the Company on February 15, 2006). |
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10.3.1 |
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Management Agreement Amendment dated as of January 1, 2006 (incorporated by reference to Exhibit 10.3.2 to Form 10-K filed by the Company on February 12, 2009). |
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10.3.2 |
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Management Agreement Letter Amendment dated as of June 1, 2006 (incorporated by reference to Exhibit 10.3.3 to Form 10-K filed by the Company on February 23, 2010). |
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70
10.4 |
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Loan Agreement, dated January 22, 2013, as amended and assumed, between Boston 1927 Owner, LLC and U.S. Bank National Association, as Trustee for Morgan Stanley Bank of America Merrill Lynch Trust 2013-C8, Commercial Mortgage Pass-Through Certificates, Series 2013-C8 (incorporated by reference to Exhibit 10.1 to Form 10-Q, filed by the Company on August 7, 2013). |
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10.4.1 |
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Assumption Agreement, dated July 2, 2013, between Boston 1927 Owner, LLC and U.S. Bank National Association, as Trustee for Morgan Stanley Bank of America Merrill Lynch Trust 2013-C8, Commercial Mortgage Pass-Through Certificates, Series 2013-C8 (incorporated by reference to Exhibit 10.2 to Form 10-Q, filed by the Company on August 7, 2013). |
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10.5 |
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2004 Long-Term Incentive Plan of Sunstone Hotel Investors, Inc., as amended and restated effective May 1, 2014 (incorporated by reference to Exhibit 10.1 to Form 8-K filed by the Company on May 5, 2014). |
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10.6 |
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Sunstone Hotel Investors, Inc. Executive Incentive Plan (incorporated by reference to Exhibit 10.3 to Form 10-Q filed by the Company on August 5, 2008). |
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10.7 |
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Form of Restricted Stock Award Agreement. |
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10.8 |
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Form of Restricted Stock Award Certificate. |
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10.9 |
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Form of TRS Lease. |
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10.10 |
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Credit Agreement, dated November 1, 2010, among Sunstone Hotel Partnership, LLC, Sunstone Hotel Investors, Inc., each lender from time to time party thereto and Bank of America, N.A., as administrative agent and L/C issuer (incorporated by reference to Exhibit 10.1 to Form 8-K filed by the Company on November 5, 2010). |
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10.10.1 |
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Second Amendment to Credit Agreement and Second Amendment to Pledge Agreement, dated September 5, 2012, among Sunstone Hotel Partnership, LLC, Sunstone Hotel Investors, Inc., certain subsidiaries of Sunstone Hotel Investors, Inc., each lender party thereto and Bank of America, N.A., as administrative agent (incorporated by reference to Exhibit 10.1 to Form 8-K, filed by the Company on September 10, 2012). |
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10.11 |
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Form of Senior Management Incentive Plan of Sunstone Hotel Investors, Inc. (incorporated by reference to Exhibit 10.14 to the registration statement on Form S-11 (File No. 333-117141) filed by the Company). |
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10.12 |
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Second Amended and Restated Limited Liability Company Agreement of Sunstone Hotel Partnership, LLC (incorporated by reference to Exhibit 10 to Form 8-K filed by the Company on July 17, 2005). |
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10.12.1 |
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Third Amended and Restated Limited Liability Company Agreement of Sunstone Hotel Partnership, LLC (incorporated by reference to Exhibit 3.2 to Form 8-K filed by the Company on April 6, 2011). |
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10.13 |
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Employment Agreement (including the Indemnification Agreement), dated as of August 4, 2010, by and between Sunstone Hotel Investors, Inc., Sunstone Hotel Partnership, LLC and Kenneth E. Cruse (incorporated by reference to Exhibit 10.2 to Form 10-Q filed by the Company on August 6, 2010). |
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10.13.1 |
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Amendment No. 1 to Employment Agreement, dated March 22, 2011, between Sunstone Hotel Investors, Inc., Sunstone Hotel Partnership, LLC and Kenneth E. Cruse (incorporated by reference to Exhibit 10.2 to Form 8-K filed by the Company on March 25, 2011). |
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10.13.2 |
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Amendment No. 2 to Employment Agreement, dated November 7, 2011, between Sunstone Hotel Investors, Inc., Sunstone Hotel Partnership, LLC and Kenneth E. Cruse (incorporated by reference to Exhibit 10.2 to Form 8-K filed by the Company on November 7, 2011). |
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10.14 |
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Form of Indemnification Agreement for Directors and Officers (incorporated by reference to Exhibit 10.1 to Form 10-Q filed by the Company on August 7, 2012). |
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71
10.15 |
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Employment Agreement (including the Indemnification Agreement), dated as of August 4, 2010, by and between Sunstone Hotel Investors, Inc., Sunstone Hotel Partnership, LLC and Marc A. Hoffman (incorporated by reference to Exhibit 10.3 to Form 10-Q filed by the Company on August 6, 2010). |
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10.16 |
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Employment Agreement (including the Indemnification Agreement), dated as of February 14, 2011, by and between Sunstone Hotel Investors, Inc., Sunstone Hotel Partnership, LLC and John Arabia (incorporated by reference to Exhibit 10.18 to Form 10-K filed by the Company on February 17, 2011). |
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10.16.1 |
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Amendment No. 1 to Employment Agreement, dated November 8, 2013, between Sunstone Hotel Investors, Inc., Sunstone Hotel Partnership, LLC, and John V. Arabia (incorporated by reference to Exhibit 10.3 to Form 10-Q filed by the Company on November 12, 2013). |
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10.17 |
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Employment Offer Letter to Robert Springer, dated as of April 14, 2011 (incorporated by reference to Exhibit 10.1 to Form 10-Q filed by the Company on May 6, 2011). |
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10.17.1 |
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Termination and Change in Control Agreement, dated as of April 14, 2011, between Sunstone Hotel Investors, Inc. and Robert Springer (incorporated by reference to Exhibit 10.2 to Form 10-Q filed by the Company on May 6, 2011). |
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10.18 |
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Loan Agreement, dated as of April 15, 2011, among One Park Boulevard, LLC as Borrower, Sunstone Park Lessee, LLC as Operating Lessee, Aareal Capital Corporation as Agent for the Lenders, and Aareal Capital Corporation as Lender (incorporated by reference to Exhibit 10.3 to Form 10-Q filed by the Company on May 6, 2011). |
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10.18.1 |
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Second Amendment to Loan Agreement, dated as of August 8, 2014, among One Park Boulevard, LLC as Borrower, Sunstone Park Lessee, LLC as Operating Lessee, MUFG Union Bank, N.A. as Agent for the Lenders, and MUFG Union Bank, N.A., Compass Bank and CIBC Inc. as Lenders (incorporated by reference to Exhibit 10.1 to Form 10-Q filed by the Company on November 4, 2014). |
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10.19 |
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Loan Agreement, dated as of October 7, 2011, among Times Square Hotel Owner, LLC (as Borrower), Times Square Hotel Operating Lessee, LLC (as Operating Lessee), Eurohypo AG, New York Branch (as Agent for the Lenders), and Eurohypo AG, New York Branch and Aareal Capital Corporation (as Lenders) (incorporated by reference to Exhibit 10.1 to Form 10-Q filed by the Company on November 9, 2011). |
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12 |
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Computation of Ratios of Earnings to Fixed Charges and Preferred Stock Dividends. |
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14.1 |
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Sunstone Hotel Investors, Inc. Code of Business Conduct and Ethics. |
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21.1 |
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List of subsidiaries. |
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23.1 |
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Consent of Ernst & Young LLP. |
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31.1 |
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Certification of Principal Executive Officer (Section 302 Certification). |
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31.2 |
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Certification of Principal Financial Officer (Section 302 Certification). |
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32.1 |
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Certification of Principal Executive Officer and Principal Financial Officer (Section 906 Certification). |
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101.INS |
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XBRL Instance Document * |
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101.SCH |
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XBRL Taxonomy Extension Schema Document * |
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101.CAL |
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XBRL Taxonomy Extension Calculation Linkbase Document * |
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101.LAB |
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XBRL Taxonomy Extension Label Linkbase Document * |
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72
101.PRE |
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XBRL Taxonomy Extension Presentation Linkbase Document * |
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101.DEF |
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XBRL Taxonomy Extension Definition Linkbase Document * |
*Attached as Exhibit 101 to this Annual Report on Form 10-K are the following materials, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets at December 31, 2014 and December 31, 2013; (ii) the Consolidated Statements of Operations for the years ended December 31, 2014, 2013 and 2012; (iii) the Consolidated Statements of Comprehensive Income for the years ended December 31, 2014, 2013 and 2012; (iv) the Consolidated Statements of Equity for the years ended December 31, 2014, 2013 and 2012 (v) the Consolidated Statements of Cash Flows for the years ended December 31, 2014, 2013 and 2012; and (vi) Notes to Consolidated Financial Statements that have been detail tagged.
73
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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Sunstone Hotel Investors, Inc. |
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Date: February 19, 2015 |
/S/ Bryan A. Giglia |
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Bryan A. Giglia |
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Chief Financial Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
Signature |
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Title |
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Date |
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/S/ KEITH M. LOCKER |
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Non-Executive Chairman |
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February 19, 2015 |
Keith M. Locker |
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/S/ JOHN V. ARABIA |
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Director, President and Chief Executive Officer |
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February 19, 2015 |
John V. Arabia |
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(Principal Executive Officer) |
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/S/ ANDREW BATINOVICH |
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Director |
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February 19, 2015 |
Andrew Batinovich |
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/S/ Z. JAMIE BEHAR |
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Director |
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February 19, 2015 |
Z. Jamie Behar |
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/S/ THOMAS A. LEWIS, JR. |
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Director |
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February 19, 2015 |
Thomas A. Lewis, Jr. |
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/S/ DOUGLAS M. PASQUALE |
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Director |
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February 19, 2015 |
Douglas M. Pasquale |
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/S/ KEITH P. RUSSELL |
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Director |
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February 19, 2015 |
Keith P. Russell |
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/S/ LEWIS N. WOLFF |
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Director |
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February 19, 2015 |
Lewis N. Wolff |
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74
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Sunstone Hotel Investors, Inc.
We have audited the accompanying consolidated balance sheets of Sunstone Hotel Investors, Inc. as of December 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 2014. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Sunstone Hotel Investors, Inc. at December 31, 2014 and 2013, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
As discussed in Note 2 to the consolidated financial statements, the Company changed its reporting of discontinued operations as a result of the adoption of the amendments to the FASB Accounting Standards Codification resulting from Accounting Standards Update No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360), “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.”
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Sunstone Hotel Investors, Inc.’s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) and our report dated February 19, 2015 expressed an unqualified opinion thereon.
|
/s/ Ernst & Young LLP |
|
|
Irvine, California |
|
February 19, 2015 |
|
F-2
SUNSTONE HOTEL INVESTORS, INC.
(In thousands, except share data)
December 31, 2014 |
December 31, 2013 |
||||||
ASSETS |
|||||||
Current assets: |
|||||||
Cash and cash equivalents |
$ |
222,096 |
$ |
104,363 | |||
Restricted cash |
82,074 | 89,306 | |||||
Accounts receivable, net |
34,227 | 29,941 | |||||
Inventories |
1,439 | 1,464 | |||||
Prepaid expenses |
14,909 | 12,612 | |||||
Total current assets |
354,745 | 237,686 | |||||
Investment in hotel properties, net |
3,538,129 | 3,231,382 | |||||
Deferred financing fees, net |
8,201 | 9,219 | |||||
Goodwill |
9,405 | 9,405 | |||||
Other assets, net |
14,485 | 21,106 | |||||
Total assets |
$ |
3,924,965 |
$ |
3,508,798 | |||
LIABILITIES AND EQUITY |
|||||||
Current liabilities: |
|||||||
Accounts payable and accrued expenses |
$ |
32,577 |
$ |
25,116 | |||
Accrued payroll and employee benefits |
31,919 | 29,933 | |||||
Dividends payable |
76,694 | 11,443 | |||||
Other current liabilities |
36,466 | 30,288 | |||||
Current portion of notes payable |
121,328 | 23,289 | |||||
Total current liabilities |
298,984 | 120,069 | |||||
Notes payable, less current portion |
1,307,964 | 1,380,786 | |||||
Capital lease obligations, less current portion |
15,576 | 15,586 | |||||
Other liabilities |
33,607 | 39,958 | |||||
Total liabilities |
1,656,131 | 1,556,399 | |||||
Commitments and contingencies (Note 13) |
|||||||
Equity: |
|||||||
Stockholders’ equity: |
|||||||
Preferred stock, $0.01 par value, 100,000,000 shares authorized. |
|||||||
8.0% Series D Cumulative Redeemable Preferred Stock, 4,600,000 shares issued and outstanding at December 31, 2014 and 2013, stated at liquidation preference of $25.00 per share |
115,000 | 115,000 | |||||
Common stock, $0.01 par value, 500,000,000 shares authorized, 204,766,718 shares issued and outstanding at December 31, 2014 and 180,858,699 shares issued and outstanding at December 31, 2013 |
2,048 | 1,809 | |||||
Additional paid in capital |
2,418,567 | 2,068,721 | |||||
Retained earnings |
305,627 | 224,364 | |||||
Cumulative dividends |
(624,545) | (511,444) | |||||
Total stockholders’ equity |
2,216,697 | 1,898,450 | |||||
Non-controlling interest in consolidated joint ventures |
52,137 | 53,949 | |||||
Total equity |
2,268,834 | 1,952,399 | |||||
Total liabilities and equity |
$ |
3,924,965 |
$ |
3,508,798 |
See accompanying notes to consolidated financial statements.
F-3
SUNSTONE HOTEL INVESTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Year Ended |
Year Ended |
Year Ended |
|||||||||
December 31, 2014 |
December 31, 2013 |
December 31, 2012 |
|||||||||
REVENUES |
|||||||||||
Room |
$ |
811,709 |
$ |
653,955 |
$ |
576,146 | |||||
Food and beverage |
259,358 | 213,346 | 200,810 | ||||||||
Other operating |
70,931 | 56,523 | 52,128 | ||||||||
Total revenues |
1,141,998 | 923,824 | 829,084 | ||||||||
OPERATING EXPENSES |
|||||||||||
Room |
214,899 | 170,361 | 147,932 | ||||||||
Food and beverage |
180,053 | 147,713 | 139,106 | ||||||||
Other operating |
21,012 | 16,819 | 16,162 | ||||||||
Advertising and promotion |
54,992 | 47,306 | 42,474 | ||||||||
Repairs and maintenance |
45,901 | 35,884 | 32,042 | ||||||||
Utilities |
34,141 | 27,006 | 25,596 | ||||||||
Franchise costs |
38,271 | 32,932 | 30,067 | ||||||||
Property tax, ground lease and insurance |
84,665 | 79,004 | 66,830 | ||||||||
Property general and administrative |
126,737 | 103,454 | 94,642 | ||||||||
Corporate overhead |
28,739 | 26,671 | 24,316 | ||||||||
Depreciation and amortization |
155,845 | 137,476 | 130,907 | ||||||||
Total operating expenses |
985,255 | 824,626 | 750,074 | ||||||||
Operating income |
156,743 | 99,198 | 79,010 | ||||||||
Interest and other income |
3,479 | 2,821 | 297 | ||||||||
Interest expense |
(72,315) | (72,239) | (76,821) | ||||||||
Loss on extinguishment of debt |
(4,638) | (44) | (191) | ||||||||
Income before income taxes and discontinued operations |
83,269 | 29,736 | 2,295 | ||||||||
Income tax provision |
(179) | (8,145) | (1,148) | ||||||||
Income from continuing operations |
83,090 | 21,591 | 1,147 | ||||||||
Income from discontinued operations |
4,849 | 48,410 | 48,410 | ||||||||
NET INCOME |
87,939 | 70,001 | 49,557 | ||||||||
Income from consolidated joint venture attributable to non-controlling interest |
(6,676) | (4,013) | (1,761) | ||||||||
Distributions to non-controlling interest |
(32) | (32) | (31) | ||||||||
Preferred stock dividends and redemption charges |
(9,200) | (19,013) | (29,748) | ||||||||
INCOME AVAILABLE TO COMMON STOCKHOLDERS |
$ |
72,031 |
$ |
46,943 |
$ |
18,017 | |||||
Basic and diluted per share amounts: |
|||||||||||
Income (loss) from continuing operations available (attributable) to common stockholders |
$ |
0.34 |
$ |
(0.01) |
$ |
(0.24) | |||||
Income from discontinued operations |
0.03 | 0.30 | 0.38 | ||||||||
Basic and diluted income available to common stockholders per common share |
$ |
0.37 |
$ |
0.29 |
$ |
0.14 | |||||
Basic and diluted weighted average common shares outstanding |
192,674 | 161,784 | 127,027 |
See accompanying notes to consolidated financial statements.
F-4
SUNSTONE HOTEL INVESTORS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Year Ended |
Year Ended |
Year Ended |
||||||||
December 31, 2014 |
December 31, 2013 |
December 31, 2012 |
||||||||
Net income |
$ |
87,939 |
$ |
70,001 |
$ |
49,557 | ||||
Pension liability adjustment |
— |
— |
(419) | |||||||
Reclassification to income from discontinued operations |
— |
5,335 |
— |
|||||||
Comprehensive income |
87,939 | 75,336 | 49,138 | |||||||
Income from consolidated joint venture attributable to non-controlling interest |
(6,676) | (4,013) | (1,761) | |||||||
Distributions to non-controlling interest |
(32) | (32) | (31) | |||||||
Preferred stock dividends and redemption charges |
(9,200) | (19,013) | (29,748) | |||||||
Comprehensive income available to common stockholders |
$ |
72,031 |
$ |
52,278 |
$ |
17,598 |
See accompanying notes to consolidated financial statements.
F-5
SUNSTONE HOTEL INVESTORS, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(In thousands, except per share data)
|
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Non- |
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Controlling |
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Preferred Stock |
|
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Accumulated |
|
Interest in |
|
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||||||||||
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|
Series A |
|
Series D |
|
Common Stock |
|
Additional |
|
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Other |
|
Consolidated |
|
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||||||||||||
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Number of |
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Number of |
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Number of |
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Paid in |
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Retained |
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Cumulative |
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Comprehensive |
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Joint |
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|||||
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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 |
|
Net proceeds from sale of common stock |
|
— |
|
|
— |
|
— |
|
|
— |
|
12,143,273 |
|
|
121 |
|
|
126,058 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
126,179 |
|
Issuance of common stock in connection with hotel acquisition, net |
|
— |
|
|
— |
|
— |
|
|
— |
|
5,454,164 |
|
|
55 |
|
|
51,008 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
51,063 |
|
Vesting of restricted common stock |
|
— |
|
|
— |
|
— |
|
|
— |
|
374,911 |
|
|
3 |
|
|
3,765 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
3,768 |
|
Distributions to non-controlling interests |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(6,381) |
|
|
(6,381) |
|
Series A preferred dividends and dividends payable at $2.00 per share |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(14,100) |
|
|
— |
|
|
— |
|
|
(14,100) |
|
Series C preferred dividends and dividends payable at $1.572 per share |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(6,448) |
|
|
— |
|
|
— |
|
|
(6,448) |
|
Series D preferred dividends and dividends payable at $2.00 per share |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(9,200) |
|
|
— |
|
|
— |
|
|
(9,200) |
|
Net income |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
— |
|
|
47,796 |
|
|
— |
|
|
— |
|
|
1,761 |
|
|
49,557 |
|
Pension liability adjustment |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
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— |
|
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(419) |
|
|
— |
|
|
(419) |
|
F-6
Non- |
||||||||||||||||||||||||||||||||||
Controlling |
||||||||||||||||||||||||||||||||||
Preferred Stock |
Accumulated |
Interest in |
||||||||||||||||||||||||||||||||
Series A |
Series D |
Common Stock |
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, 2012 |
7,050,000 |
$ |
176,250 | 4,600,000 |
$ |
115,000 | 135,237,438 |
$ |
1,352 |
$ |
1,493,397 |
$ |
158,376 |
$ |
(475,144) |
$ |
(5,335) |
$ |
55,417 |
$ |
1,519,313 | |||||||||||||
Net proceeds from sale of common stock |
— |
— |
— |
— |
45,300,000 | 453 | 565,307 |
— |
— |
— |
— |
565,760 | ||||||||||||||||||||||
Vesting of restricted common stock |
— |
— |
— |
— |
321,261 | 4 | 5,247 |
— |
— |
— |
— |
5,251 | ||||||||||||||||||||||
Redemptions of Series A and Series C preferred stock |
(7,050,000) | (176,250) |
— |
— |
— |
— |
4,770 |
— |
(4,770) |
— |
— |
(176,250) | ||||||||||||||||||||||
Distributions to non-controlling interests |
— |
— |
— |
— |
— |
— |
— |
— |
— |
— |
(5,481) | (5,481) | ||||||||||||||||||||||
Common stock dividends and dividends payable at $0.10 per share |
— |
— |
— |
— |
— |
— |
— |
— |
(17,287) |
— |
— |
(17,287) | ||||||||||||||||||||||
Series A preferred dividends at $0.50 per share through redemption date |
— |
— |
— |
— |
— |
— |
— |
— |
(2,350) |
— |
— |
(2,350) | ||||||||||||||||||||||
Series C preferred dividends at $0.786 per share through redemption date |
— |
— |
— |
— |
— |
— |
— |
— |
(2,693) |
— |
— |
(2,693) | ||||||||||||||||||||||
Series D preferred dividends and dividends payable at $2.00 per share |
— |
— |
— |
— |
— |
— |
— |
— |
(9,200) |
— |
— |
(9,200) | ||||||||||||||||||||||
Net income |
— |
— |
— |
— |
— |
— |
— |
65,988 |
— |
— |
4,013 | 70,001 | ||||||||||||||||||||||
Pension liability reclassification |
— |
— |
— |
— |
— |
— |
— |
— |
— |
5,335 |
— |
5,335 | ||||||||||||||||||||||
Balance at December 31, 2013 |
— |
— |
4,600,000 | 115,000 | 180,858,699 | 1,809 | 2,068,721 | 224,364 | (511,444) |
— |
53,949 | 1,952,399 | ||||||||||||||||||||||
Net proceeds from sale of common stock |
— |
— |
— |
— |
19,352,703 | 194 | 283,262 |
— |
— |
— |
— |
283,456 | ||||||||||||||||||||||
Issuance of common stock in connection with hotel acquisition, net |
— |
— |
— |
— |
4,034,970 | 40 | 59,894 |
— |
— |
— |
— |
59,934 | ||||||||||||||||||||||
Vesting of restricted common stock |
— |
— |
— |
— |
520,346 | 5 | 6,690 |
— |
— |
— |
— |
6,695 | ||||||||||||||||||||||
Distributions to non-controlling interests |
— |
— |
— |
— |
— |
— |
— |
— |
— |
— |
(8,488) | (8,488) | ||||||||||||||||||||||
Common stock dividends and dividends payable at $0.51 per share |
— |
— |
— |
— |
— |
— |
— |
— |
(103,901) |
— |
— |
(103,901) | ||||||||||||||||||||||
Series D preferred dividends and dividends payable at $2.00 per share |
— |
— |
— |
— |
— |
— |
— |
— |
(9,200) |
— |
— |
(9,200) | ||||||||||||||||||||||
Net income |
— |
— |
— |
— |
— |
— |
— |
81,263 |
— |
— |
6,676 | 87,939 | ||||||||||||||||||||||
Balance at December 31, 2014 |
— |
$ |
— |
4,600,000 |
$ |
115,000 | 204,766,718 |
$ |
2,048 |
$ |
2,418,567 |
$ |
305,627 |
$ |
(624,545) |
$ |
— |
$ |
52,137 |
$ |
2,268,834 |
See accompanying notes to consolidated financial statements
F-7
SUNSTONE HOTEL INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended |
Year Ended |
Year Ended |
||||||||
December 31, 2014 |
December 31, 2013 |
December 31, 2012 |
||||||||
CASH FLOWS FROM OPERATING ACTIVITIES |
||||||||||
Net income |
$ |
87,939 |
$ |
70,001 |
$ |
49,557 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||||
Bad debt expense |
368 | 294 | 410 | |||||||
Gain on sale of assets, net |
(5,292) | (51,632) | (38,274) | |||||||
Loss on extinguishment of debt |
4,638 | 3,159 | 191 | |||||||
(Gain) loss on derivatives, net |
(529) | (525) | 406 | |||||||
Depreciation |
152,581 | 131,793 | 128,206 | |||||||
Amortization of franchise fees and other intangibles |
7,543 | 10,115 | 20,198 | |||||||
Amortization and write-off of deferred financing fees |
2,777 | 2,957 | 3,952 | |||||||
Amortization of loan discounts |
— |
3 | 1,058 | |||||||
Amortization of deferred stock compensation |
6,221 | 4,858 | 3,466 | |||||||
Changes in operating assets and liabilities: |
||||||||||
Restricted cash |
11,543 | (11,688) | (249) | |||||||
Accounts receivable |
(1,532) | 1,740 | 4,587 | |||||||
Inventories |
100 | 1,524 | (271) | |||||||
Prepaid expenses and other assets |
3,121 | 2,724 | (7,906) | |||||||
Accounts payable and other liabilities |
7,273 | 7,001 | 2,279 | |||||||
Accrued payroll and employee benefits |
1,844 | (1,637) | 2,983 | |||||||
Discontinued operations |
— |
432 | 903 | |||||||
Net cash provided by operating activities |
278,595 | 171,119 | 171,496 | |||||||
CASH FLOWS FROM INVESTING ACTIVITIES |
||||||||||
Proceeds from sales of hotel properties and other assets |
110 | 195,628 | 46,367 | |||||||
Restricted cash — replacement reserve |
(4,311) | 1,272 | (10,743) | |||||||
Acquisitions of hotel properties and other assets |
(276,558) | (450,544) | (120,003) | |||||||
Renovations and additions to hotel properties and other assets |
(125,975) | (117,694) | (109,321) | |||||||
Payment for interest rate derivative |
— |
(12) |
— |
|||||||
Net cash used in investing activities |
(406,734) | (371,350) | (193,700) | |||||||
CASH FLOWS FROM FINANCING ACTIVITIES |
||||||||||
Redemptions of preferred stock |
— |
(276,250) |
— |
|||||||
Proceeds from common stock offerings |
284,390 | 566,451 | 126,533 | |||||||
Payment of common stock offering costs |
(1,000) | (691) | (451) | |||||||
Proceeds from notes payable and credit facility |
178,250 | 35,750 | 15,000 | |||||||
Payments on notes payable and credit facility |
(153,033) | (141,527) | (73,328) | |||||||
Payments for costs related to extinguishment of notes payable |
(4,051) | (3,108) | (70) | |||||||
Payments of deferred financing costs |
(2,346) | (243) | (1,332) | |||||||
Dividends paid |
(47,850) | (27,524) | (29,748) | |||||||
Distributions to non-controlling interests |
(8,488) | (5,481) | (6,381) | |||||||
Net cash provided by financing activities |
245,872 | 147,377 | 30,223 | |||||||
Net increase (decrease) in cash and cash equivalents |
117,733 | (52,854) | 8,019 | |||||||
Cash and cash equivalents, beginning of year |
104,363 | 157,217 | 149,198 | |||||||
Cash and cash equivalents, end of year |
$ |
222,096 |
$ |
104,363 |
$ |
157,217 | ||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION |
||||||||||
Cash paid for interest |
$ |
69,511 |
$ |
71,563 |
$ |
78,234 | ||||
Cash paid for income taxes, net of refunds received |
$ |
273 |
$ |
7,143 |
$ |
1,023 | ||||
NONCASH INVESTING ACTIVITY |
||||||||||
Accounts payable related to renovations and additions to hotel properties and other real estate |
$ |
8,670 |
$ |
7,842 |
$ |
5,897 | ||||
Amortization of deferred stock compensation — construction activities |
$ |
474 |
$ |
393 |
$ |
302 | ||||
NONCASH FINANCING ACTIVITY |
||||||||||
Issuance of common stock in connection with acquisitions of hotel properties |
$ |
60,000 |
$ |
— |
$ |
51,160 | ||||
Assignment of debt in connection with dispositions of hotel properties |
$ |
— |
$ |
— |
$ |
(122,622) | ||||
Assumption of debt in connection with acquisition of hotel property |
$ |
— |
$ |
119,190 |
$ |
— |
||||
Dividends payable |
$ |
76,694 |
$ |
11,443 |
$ |
7,437 |
See accompanying notes to consolidated financial statements.
F-8
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 December 31, 2014, the Company had interests in 30 hotels (the “30 hotels”) held for investment, and the Company’s third-party managers included the following:
|
|
|
|
|
|
Number of Hotels |
|
Subsidiaries of Marriott International, Inc. or Marriott Hotel Services, Inc. (collectively, “Marriott”) |
|
11 |
|
Interstate Hotels & Resorts, Inc. |
|
6 |
|
Highgate Hotels L.P. and an affiliate |
|
4 |
|
Davidson Hotels & Resorts |
|
2 |
|
Hilton Worldwide |
|
2 |
|
Hyatt Corporation |
|
2 |
|
Crestline Hotels & Resorts |
|
1 |
|
Dimension Development Company |
|
1 |
|
Fairmont Hotels & Resorts (U.S.) |
|
1 |
|
|
|
|
|
Total hotels held for investment |
|
30 |
|
In addition, the Company owns 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 December 31, 2014 and 2013, and for the years ended December 31, 2014, 2013 and 2012, 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. Based on its review, the Company determined that all of its subsidiaries were properly consolidated as of December 31, 2014 and 2013, and for the years ended December 31, 2014, 2013 and 2012.
Non-controlling interests at both December 31, 2014 and 2013 represent the outside equity interests in various consolidated affiliates of the Company.
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.
F-9
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States (“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 are based on results reported to the Company by its hotel managers. Prior to 2013, Marriott used a fiscal year ending on the Friday closest to December 31 and reported 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. Beginning in 2013, Marriott switched its reporting to a standard monthly calendar; however, Marriott’s 2013 calendar contains an additional three days, December 29, 2012 through December 31, 2012. The Company and its other hotel managers use a standard monthly calendar to report their financial information. 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 2013 and 2012 results of operations for 10 of the Company’s Marriott-managed hotels are reported using the following reporting periods:
Number of |
||||||||
days in 2013 |
||||||||
2013 |
2012 |
versus 2012 (1) |
||||||
First quarter |
December 29 — March 31 |
December 31 — March 23 |
8 days |
|||||
Second quarter |
April 1 — June 30 |
March 24 — June 15 |
7 days |
|||||
Third quarter |
July 1 — September 30 |
June 16 — September 7 |
8 days |
|||||
Fourth quarter |
October 1 — December 31 |
September 8 — December 28 |
(20 days) |
|||||
Full year |
December 29, 2012 — December 31, 2013 |
December 31, 2011 — December 28, 2012 |
3 days |
(1) |
Number of days in 2013 versus 2012 does not include the leap day, February 29, 2012, as this extra day was not caused by the Marriott calendar conversion. |
The Company estimates that Marriott’s fiscal calendar had the following effects on the Company’s total revenue and net income based on the average daily revenues and income generated by its Marriott hotels during the years ended December 31, 2014, 2013 and 2012 as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014 |
|
2013 (1) |
|
2012 (1) |
|
||||
Total revenue |
|
$ |
— |
|
$ |
2,300 |
|
$ |
(1,251) |
|
|
Net income |
|
$ |
— |
|
$ |
672 |
|
$ |
(328) |
|
(1) |
Increases (decreases) to total revenue and net income based on the Marriott fiscal calendars for 2013 (368 days) and 2012 (364 days) versus a standard 365 day year. |
Cash and Cash Equivalents
Cash and cash equivalents are defined as cash on hand and in various bank accounts plus all short-term investments with an original maturity of three months or less.
The Company maintains cash and cash equivalents and certain other financial instruments with various financial institutions. These financial institutions are located throughout the country and the Company’s policy is designed to limit exposure to any one institution. The Company performs periodic evaluations of the relative credit standing of those financial institutions that are considered in the Company’s investment strategy. At December 31, 2014 and 2013, the Company had amounts in banks that were in excess of federally insured amounts.
F-10
Restricted Cash
Restricted cash is comprised of reserve accounts for debt service, interest reserves, capital replacements, ground leases, and property taxes. These restricted funds are subject to supervision and disbursement approval by certain of the Company’s lenders and/or hotel managers.
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 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 includes an allowance for doubtful accounts of $0.2 million at both December 31, 2014 and 2013.
Inventories
Inventories, consisting primarily of food and beverages at the hotels, are stated at the lower of cost or market, with cost determined on a method that approximates first-in, first-out basis.
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 any capital lease obligations that are assumed as part of the acquisition of a leasehold interest. During 2014, 2013 and 2012, the Company used all available information to make these fair value determinations, and engaged independent valuation specialists to assist in the fair value determination of the long-lived assets acquired and the liabilities assumed in the Company’s purchases of the Marriott Wailea, the Hilton New Orleans St. Charles, the Boston Park Plaza, the Hyatt Regency San Francisco, the Hyatt Chicago Magnificent Mile and the Hilton Garden Inn Chicago Downtown/Magnificent Mile. 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.
Investments In Hotel Properties and Other Assets
Hotel properties and other investments are depreciated using the straight-line method over estimated useful lives primarily ranging from five to 35 years for buildings and improvements and three to 12 years for furniture, fixtures and equipment. Intangible assets are amortized using the straight-line method over their estimated useful life or over the length of the related agreement, whichever is shorter.
The Company’s investment in hotel properties, net also includes initial franchise fees which are recorded at cost and amortized using the straight-line method over the lives of the franchise agreements ranging from 14 to 27 years. All other franchise fees that are based on the Company’s results of operations are expensed as incurred.
The Company follows the requirements of the Property, Plant and Equipment Topic of the FASB ASC, which requires impairment losses to be recorded on long-lived assets to be held and used by the Company when indicators of impairment are present and the future undiscounted net cash flows expected to be generated by those assets are less than the assets’ carrying amount. If such assets are considered to be impaired, the related assets are adjusted to their estimated fair value and an impairment is recognized. The impairment recognized is measured by the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets. In computing fair value, the Company uses 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 include anticipated operating cash flow in the year of disposition and terminal capitalization rate. In 2014, 2013 and 2012, the Company did not identify any properties or other assets with indicators of impairment. Based on the Company’s review, management believes that there were no other impairments on its long-lived assets, and that the carrying values of its hotel properties and other assets are recoverable at December 31, 2014.
Fair value represents the amount at which an asset could be bought or sold in a current transaction between willing parties, that is, other than a forced or liquidation sale. The estimation process involved in determining if assets have been impaired and in the determination of fair value is inherently uncertain because it requires estimates of current market yields as well as future events and conditions. Such future events and conditions include economic and market conditions, as well as the availability of suitable financing. The realization of the Company’s investment in hotel properties and other assets is dependent upon future uncertain events
F-11
and conditions and, accordingly, the actual timing and amounts realized by the Company may be materially different from their estimated fair values.
Assets Held for Sale
The Company considers a hotel or other asset held for sale if it is probable that the sale will be completed within twelve months, among other requirements. A sale is determined to be probable once the buyer completes its due diligence of the asset, there is an executed purchase and sale agreement between the Company and the buyer, and the Company has received a substantial non-refundable deposit. Depreciation ceases when a property is held for sale. Should an impairment loss be required for assets held for sale, the related assets are adjusted to their estimated fair values, less costs to sell. If the sale of the hotel or other asset represents a strategic shift that will have a major effect on the Company’s operations and financial results, the hotel or other asset is included in discontinued operations, and operating results are removed from income from continuing operations and reported as discontinued operations. The operating results for any such assets for any prior periods presented must also be reclassified as discontinued operations. As of both December 31, 2014 and 2013, the Company had no hotels or other assets held for sale. As of December 31, 2012, the Company classified four hotels and a commercial laundry facility as held for sale due to their sale in January 2013.
Deferred Financing Fees
Deferred financing fees consist of loan fees and other financing costs related to the Company’s outstanding indebtedness and credit facility commitments, and are amortized to interest expense over the terms of the related debt or commitment. If a loan is refinanced or paid before its maturity, any related unamortized deferred financing costs will generally be expensed unless specific rules are met that would allow for the carryover of such costs to the refinanced debt.
During 2014, the Company amended the mortgage secured by the Hilton San Diego Bayfront, and refinanced the mortgages secured by the JW Marriott New Orleans and the Embassy Suites La Jolla (see Note 7). In conjunction with these financing transactions, the Company paid additional deferred financing fees of $2.3 million, which are amortized over the terms of the modified and new loans. In addition, a total of $0.6 million of deferred financing fees were written off, which are included in the Company’s results of operations as loss on extinguishment of debt.
During 2013, the Company paid deferred financing fees of $0.2 million related to the assumption of a mortgage in connection with the acquisition of the Boston Park Plaza and the purchase of an interest rate cap derivative agreement on the Hilton San Diego Bayfront mortgage.
During 2012, the Company incurred and paid deferred financing fees of $1.3 million related to an amendment of its credit facility. In addition, the Company wrote-off $0.2 million in deferred financing fees, which is included in the Company’s results of operations as loss on extinguishment of debt, related to its sales of the Marriott Del Mar, the Doubletree Guest Suites Minneapolis, the Hilton Del Mar and the Marriott Troy, along with a nominal amount written off 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 2014, 2013 and 2012 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
2014 |
|
2013 |
|
2012 |
|
|||
Continuing operations: |
|
|
|
|
|
|
|
|
|
|
Amortization of deferred financing fees |
|
$ |
2,777 |
|
$ |
2,955 |
|
$ |
3,690 |
|
Write-off of deferred financing fees |
|
|
— |
|
|
— |
|
|
3 |
|
Total deferred financing fees — continuing operations |
|
|
2,777 |
|
|
2,955 |
|
|
3,693 |
|
Discontinued operations: |
|
|
|
|
|
|
|
|
|
|
Amortization of deferred financing fees |
|
|
— |
|
|
2 |
|
|
74 |
|
Write-off of deferred financing fees |
|
|
— |
|
|
— |
|
|
185 |
|
Total deferred financing fees — discontinued operations |
|
|
— |
|
|
2 |
|
|
259 |
|
Total amortization and write-off of deferred financing fees |
|
$ |
2,777 |
|
$ |
2,957 |
|
$ |
3,952 |
|
Goodwill and BuyEfficient Intangibles
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 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
F-12
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.
Based on its annual impairment evaluations for 2014, 2013 and 2012, the Company determined that no adjustments to its goodwill were required.
The Company’s other assets, net includes BuyEfficient’s intangibles 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 their useful lives ranging between seven to 20 years.
Property and Equipment
Property and equipment is stated on the cost basis and includes computer equipment and other corporate office equipment and furniture. Property and equipment is depreciated on a straight-line basis over the estimated useful lives ranging from three to 12 years. The Company includes property and equipment, net of related accumulated depreciation, in its other assets, net on the accompanying consolidated balance sheets.
Fair Value of Financial Instruments
As of December 31, 2014 and 2013, 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 Disclosures 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 5, the Company held two interest rate cap agreements at December 31, 2014 and 2013. At December 31, 2013, the Company also held one interest rate swap agreement. The Company holds its interest rate protection agreements to manage, or hedge, interest rate risks related to its floating rate debt. 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 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. Using Level 2 measurements, the Company determined that the total value of the interest rate cap agreements at December 31, 2014 was de minimis. At December 31, 2013, the Company has valued the derivative interest rate cap agreements as an asset of $16,000. The interest rate cap agreements are included in other assets, net, in the accompanying consolidated balance sheets. At December 31, 2013, the Company has valued the derivative interest rate swap agreement using Level 2 measurements as a liability of $1.1 million. The interest rate swap agreement is included in other liabilities in the accompanying consolidated balance sheets.
On an annual basis and periodically when indicators of impairment exist, the Company analyzes 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 include 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 2014, 2013 or 2012.
F-13
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. The Company did not identify any properties with indicators of goodwill impairment in 2014, 2013 or 2012.
As of December 31, 2014 and 2013, 71.6% and 70.7% (including the effect of an interest rate swap agreement), respectively, of the Company’s outstanding debt had fixed interest rates. The Company’s carrying value of its debt totaled $1.4 billion as of both December 31, 2014 and 2013. Using Level 3 measurements, including the Company’s weighted average cost of debt ranging from 4.5% to 5.0%, the Company estimates that the fair market value of its debt totaled $1.4 billion as of both December 31, 2014 and 2013.
The following table presents the Company’s assets measured at fair value on a recurring and non-recurring basis at December 31, 2014 and 2013 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date |
|
|||||||||||
|
|
Total |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
|||||
December 31, 2014: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate cap derivative agreements |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
|
Life insurance policy (1) |
|
|
1,198 |
|
|
— |
|
|
1,198 |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at December 31, 2014 |
|
$ |
1,198 |
|
$ |
— |
|
$ |
1,198 |
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate cap derivative agreements |
|
$ |
16 |
|
$ |
— |
|
$ |
16 |
|
$ |
— |
|
|
Life insurance policy (1) |
|
|
1,385 |
|
|
— |
|
|
1,385 |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at December 31, 2013 |
|
$ |
1,401 |
|
$ |
— |
|
$ |
1,401 |
|
$ |
— |
|
(1) |
Includes the split life insurance policy for one of the Company’s former associates, which the Company values using Level 2 measurements. These amounts are included in other assets, net on the accompanying consolidated balance sheets, and will be used to reimburse the Company for payments made to the former associate from the related retirement benefit agreement, which is included in accrued payroll and employee benefits on the accompanying consolidated balance sheets. |
The following table presents the Company’s liabilities measured at fair value on a recurring and non-recurring basis at December 31, 2014 and 2013 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date |
|
|||||||||||
|
|
Total |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
|||||
December 31, 2014: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap derivative agreement |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
|
Retirement benefit agreement (1) |
|
|
1,198 |
|
|
— |
|
|
1,198 |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities at December 31, 2014 |
|
$ |
1,198 |
|
$ |
— |
|
$ |
1,198 |
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap derivative agreement |
|
$ |
1,066 |
|
$ |
— |
|
$ |
1,066 |
|
$ |
— |
|
|
Retirement benefit agreement (1) |
|
|
1,385 |
|
|
— |
|
|
1,385 |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities at December 31, 2013 |
|
$ |
2,451 |
|
$ |
— |
|
$ |
2,451 |
|
$ |
— |
|
(1) |
Includes the retirement benefit agreement for one of the Company’s former associates, which the Company values using Level 2 measurements. The agreement calls for the balance of the retirement benefit agreement to be paid out to the former associate in 10 annual installments, beginning in 2011. As such, the Company has paid the former associate a total of $0.8 million through December 31, 2014, which was reimbursed to the Company using funds from the related split life insurance policy noted above. These amounts are included in accrued payroll and employee benefits in the accompanying consolidated balance sheets. |
Revenue Recognition
Room revenue and food and beverage revenue are recognized as earned, which is generally defined as the date upon which a guest occupies a room and/or utilizes the hotel’s services. Additionally, some of the Company’s hotel rooms are booked through
F-14
independent internet travel intermediaries. Revenue for these rooms is booked at the price the Company sold the room to the independent internet travel intermediary less any discount or commission paid.
Other operating revenue consists of revenue derived from incidental hotel services such as telephone/internet, transportation, parking, spa, entertainment and other guest services, along with tenant lease revenues relating to hotel space leased by third parties. Other operating revenue also includes revenue generated by BuyEfficient. Revenues from incidental hotel services and BuyEfficient are recognized in the period the related services are provided or the revenue is earned.
Advertising and Promotion Costs
Advertising and promotion costs are expensed when incurred. Advertising and promotion costs represent the expense for advertising and reservation systems under the terms of the hotel franchise and brand management agreements and general and administrative expenses that are directly attributable to advertising and promotions.
Stock Based Compensation
Compensation expense related to awards of restricted shares and performance shares are measured at fair value on the date of grant and amortized over the relevant requisite service period or derived service period.
Income Taxes
The Company has elected to be treated as a REIT pursuant to the Internal Revenue Code, as amended (the “Code”). Management believes that the Company has qualified and intends to continue to qualify as a REIT. Therefore, the Company is permitted to deduct distributions paid to its stockholders, eliminating the federal taxation of income represented by such distributions at the company level. REITs are subject to a number of organizational and operational requirements. If the Company fails to qualify as a REIT in any taxable year, the Company will be subject to federal income tax (including any applicable alternative minimum tax) on taxable income at regular corporate tax rates.
With respect to taxable subsidiaries, the Company accounts for income taxes in accordance with the Income Taxes Topic of the FASB ASC. Accordingly, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse.
The Income Taxes Topic of the FASB ASC addresses how uncertain tax positions should be recognized, measured, presented, and disclosed in the financial statements. The guidance requires the accounting and disclosure of tax positions taken or expected to be taken in the course of preparing the Company’s tax returns to determine whether the tax positions are “more-likely-than-not” to be sustained by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold would be recorded as a tax benefit or expense in the current year. The Company’s management is required to analyze all open tax years, as defined by the statute of limitations, for all major jurisdictions, which includes federal and certain states.
Non-Controlling Interests
The Company’s financial statements include entities in which the Company has a controlling financial interest. Non-controlling interest is the portion of equity (net assets) in a subsidiary not attributable, directly or indirectly, to a parent. Such non-controlling interests are reported on the consolidated balance sheets within equity, separately from the Company’s equity. On the consolidated statements of operations, 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 non-controlling interests. Income or loss is allocated to non-controlling interests based on their weighted average ownership percentage for the applicable period. The consolidated statements of equity include beginning balances, activity for the period and ending balances for each component of stockholders’ equity, non-controlling interests and total equity.
At December 31, 2014, 2013 and 2012, the non-controlling interest reported in the Company’s financial statements includes Hilton Worldwide’s 25.0% ownership in the Hilton San Diego Bayfront. In addition, the Company is the sole common stockholder of the captive REIT that owns the Doubletree Guest Suites Times Square; however, there are also preferred investors in the captive REIT whose preferred dividends less administrative fees during 2014, 2013 and 2012 are represented as distributions to non-controlling interests on the Company’s statements of operations.
Dividends
In August 2013, the Company’s board of directors reinstated a quarterly dividend payable to the Company’s common stockholders. In addition, the Company currently pays quarterly dividends to the preferred stockholders of its 8.0% Series D
F-15
Cumulative Redeemable Preferred Stock (“Series D preferred stock”) as declared by the Company’s board of directors. Prior to their redemption dates in March 2013 and May 2013, respectively, the Company also paid quarterly dividends to the preferred stockholders of its 8.0% Series A Cumulative Redeemable Preferred Stock (“Series A preferred stock”) and its Series C Cumulative Convertible Redeemable Preferred Stock (“Series C preferred stock”) as declared by the board of directors. The Company’s ability to pay dividends is dependent on the receipt of distributions from the Operating Partnership.
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 all 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. During 2014 and 2013, distributed earnings representing nonforfeitable dividends of $1.0 million and $0.2 million, respectively, were allocated to the participating securities. There were no distributed earnings representing nonforfeitable dividends allocated to the participating securities during 2012. Undistributed earnings representing nonforfeitable dividends of $0.2 million were allocated to the participating securities during both 2013 and 2012. There were no undistributed earnings representing nonforfeitable dividends allocated to the participating securities during 2014.
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 and the incremental common shares issuable upon the exercise of stock options, using the more dilutive of either the two-class method or the treasury stock method.
The following table sets forth the computation of basic and diluted earnings per common share (in thousands, except per share data):
Year Ended |
Year Ended |
Year Ended |
||||||||
December 31, 2014 |
December 31, 2013 |
December 31, 2012 |
||||||||
Numerator: |
||||||||||
Net income |
$ |
87,939 |
$ |
70,001 |
$ |
49,557 | ||||
Income from consolidated joint venture attributable to non-controlling interest |
(6,676) | (4,013) | (1,761) | |||||||
Distributions to non-controlling interest |
(32) | (32) | (31) | |||||||
Preferred stock dividends and redemption charges |
(9,200) | (19,013) | (29,748) | |||||||
Dividends paid on unvested restricted stock compensation |
(969) | (201) |
— |
|||||||
Undistributed income allocated to unvested restricted stock compensation |
— |
(235) | (203) | |||||||
Numerator for basic and diluted earnings available to common stockholders |
$ |
71,062 |
$ |
46,507 |
$ |
17,814 | ||||
Denominator: |
||||||||||
Weighted average basic and diluted common shares outstanding |
192,674 | 161,784 | 127,027 | |||||||
Basic and diluted earnings available to common stockholders per common share |
$ |
0.37 |
$ |
0.29 |
$ |
0.14 |
The Company’s 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 per share for the years ended December 31, 2014, 2013 and 2012, as their inclusion would have been anti-dilutive. Prior to their redemption in May 2013, the shares of the Company’s Series C preferred stock issuable upon conversion were excluded from the above calculation of earnings per share for the year ended December 31, 2012, as their inclusion would have been anti-dilutive.
F-16
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.
Recent Accounting Pronouncements
In April 2014, the FASB issued Accounting Standards Update No. 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity” (“ASU No. 2014-08”). ASU No. 2014-08 raises the threshold for a disposal to qualify as a discontinued operation and requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. Under ASU No. 2014-08, a discontinued operation is (1) a component of an entity or group of components that has been disposed of by sale, disposed of other than by sale or is classified as held for sale that represents a strategic shift that has or will have a major effect on an entity’s operations and financial results, or (2) an acquired business or nonprofit activity that is classified as held for sale on the date of the acquisition. A strategic shift that has or will have a major effect on an entity’s operations and financial results could include the disposal of (1) a major line of business, (2) a major geographical area (3) a major equity method investment, or (4) other major parts of an entity. ASU No. 2014-08 expands the disclosures for discontinued operations and requires new disclosures related to individually material disposals that do not meet the definition of a discontinued operation, an entity’s continuing involvement with a discontinued operation following the disposal date and retained equity method investments in a discontinued operation. ASU No. 2014-08 is effective prospectively for all disposals (or classifications as held for sale) of components of an entity that occur within annual periods beginning on or after December 15, 2014, and interim periods within that year. Early adoption is permitted, but only for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued or available for issuance. The Company’s early adoption of ASU No. 2014-08 in the first quarter of 2014 did not have any effect on its financial statements as the Company had no disposals (or classifications as held for sale) during the year ended December 31, 2014. In the future, when the Company has disposals (or classifications as held for sale), it will be required to determine whether such disposal meets the discontinued operations requirements under ASU No. 2014-08. Additional disclosures may be required.
In May 2014, the FASB issued Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU No. 2014-09”). The core principal of ASU No. 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principal, an entity will need to apply a five-step model: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. ASU No. 2014-09 will become effective during the first quarter of 2017, and will require either a full retrospective approach or a modified retrospective approach, with early adoption prohibited. The Company is currently evaluating the impact that ASU No. 2014-09 will have on its financial statements.
In June 2014, the FASB issued Accounting Standards Update No. 2014-12, “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period” (“ASU No. 2014-12”), which requires a reporting entity to treat a performance target that affects vesting and that could be achieved after the requisite service period as a performance condition. ASU 2014-12 will become effective during the first quarter of 2016. Early adoption is permitted. ASU 2014-12 may be adopted either prospectively for share-based payment awards granted or modified on or after the effective date, or retrospectively, using a modified retrospective approach. The modified retrospective approach would apply to share-based payment awards outstanding as of the beginning of the earliest annual period presented in the financial statements on adoption, and to all new or modified awards thereafter. ASU No. 2014-12 will not have an effect on the Company’s financial statements unless the Company issues grants in the future that fall within its scope.
F-17
3. Investment in Hotel Properties
Investment in hotel properties, net consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31, |
|
||||
|
|
2014 |
|
2013 |
|
||
Land |
|
$ |
570,011 |
|
$ |
439,304 |
|
Buildings and improvements |
|
|
3,237,596 |
|
|
2,977,458 |
|
Furniture, fixtures and equipment |
|
|
450,057 |
|
|
414,192 |
|
Intangibles |
|
|
147,947 |
|
|
171,889 |
|
Franchise fees |
|
|
1,167 |
|
|
1,346 |
|
Construction in process |
|
|
68,275 |
|
|
34,643 |
|
|
|
|
4,475,053 |
|
|
4,038,832 |
|
Accumulated depreciation and amortization |
|
|
(936,924) |
|
|
(807,450) |
|
|
|
$ |
3,538,129 |
|
$ |
3,231,382 |
|
Acquisitions - 2014
In June 2014, the Company acquired approximately seven acres of land underlying the Fairmont Newport Beach for $11.0 million, using net proceeds from the March 2014 issuance of its common stock in connection with its Equity Distribution Agreements, combined with cash on hand. Prior to the Company’s acquisition, the land was leased to the Company by a third party.
In July 2014, the Company purchased the 544-room Marriott Wailea for a net purchase price of $325.6 million, which was comprised of $265.6 million in cash, including $4.4 million of proration credits and unrestricted and restricted cash received from the seller, and $60.0 million of the Company’s common stock issued directly to the seller (the “Wailea stock consideration”). The acquisition was funded with proceeds received from the Company’s June 2014 common stock offering, as well as with the Wailea stock consideration, consisting of 4,034,970 shares of the Company’s common stock valued at $60.0 million. The Wailea stock consideration was determined by dividing $60.0 million by $14.87, which was the NYSE closing price of the Company’s common stock on June 19, 2014, the date the Marriott Wailea purchase and sale agreement was executed. In connection with this acquisition, the Company entered into a registration rights agreement requiring the Company to register the Wailea stock consideration. On July 17, 2014, the Company filed a prospectus supplement with the SEC, which registered the shares comprising the Wailea stock consideration for resale in accordance with the registration rights agreement. Based on the $14.87 closing price of the Company’s common stock on the NYSE on July 17, 2014, the date the acquisition closed, the total purchase price of the Marriott Wailea for accounting purposes was also $325.6 million. The Company recorded the acquisition at fair value using an independent third-party analysis, with the purchase price allocated to investment in hotel properties and hotel working capital assets and liabilities. The Company recognized acquisition related costs of $0.5 million during 2014, which are included in corporate overhead on the Company’s consolidated statements of operations. The results of operations for the Marriott Wailea have been included in the Company’s statements of operations from the acquisition date of July 17, 2014 through the year ended December 31, 2014. Subsequent to the Company’s acquisition of the hotel, three rooms were temporarily taken out of service, leaving 541 rooms available to sell.
The fair values of the assets acquired and liabilities assumed at the Marriott Wailea’s acquisition date were allocated based on an independent third-party analysis. The following table summarizes the fair values of assets acquired, liabilities assumed and equity issued in this acquisition (in thousands):
F-18
|
|
|
|
Assets: |
|
|
|
Investment in hotel properties |
|
$ |
327,035 |
Accounts receivable |
|
|
3,122 |
Inventory |
|
|
75 |
Prepaid expenses |
|
|
238 |
Other assets |
|
|
150 |
Total assets acquired |
|
|
330,620 |
|
|
|
|
Liabilities: |
|
|
|
Accounts payable |
|
|
3,534 |
Accrued payroll and employee benefits |
|
|
142 |
Other current liabilities |
|
|
1,371 |
Other liabilities |
|
|
15 |
Total liabilities assumed |
|
|
5,062 |
|
|
|
|
Total equity issued directly to seller |
|
|
60,000 |
|
|
|
|
Total cash paid for acquisition |
|
$ |
265,558 |
Investment in hotel properties was allocated to land ($119.7 million), buildings and improvements ($194.2 million), furniture, fixtures and equipment ($8.2 million), and intangibles ($4.9 million) related to advanced bookings, above/(below) market lease agreements, and in-place lease agreements. Details of the intangibles acquired are as follows (in thousands):
Value at |
Weighted Average |
|||||
Acquisition |
Expected Life |
|||||
Advanced bookings |
$ |
4,207 |
41 months |
|||
Above/(Below) market lease agreements, net |
15 |
1 month |
||||
In-place lease agreements |
686 |
3 to 14 months |
||||
Total intangibles related to the 2014 acquisition |
4,908 |
44 to 55 months |
||||
Accumulated amortization |
(533) | |||||
Net book value of intangibles related to 2014 acquisition |
$ |
4,375 |
During the year ended December 31, 2014, the Company recorded amortization expense related to its Marriott Wailea intangibles as follows (in thousands):
2014 |
||||
Advanced bookings |
$ |
481 | ||
Above/(Below) market lease agreements, net |
(21) | |||
In-place lease agreements |
73 | |||
Total amortization expense on intangibles related to the 2014 acquisition |
$ |
533 |
Acquisitions - 2013
In May 2013, the Company purchased the 250-room Hilton New Orleans St. Charles for a net purchase price of $59.1 million, including $0.2 million of proration credits and unrestricted cash received from the seller. The acquisition was funded with $53.2 million of proceeds generated by the Company’s January 2013 sale of four hotels and a commercial laundry facility located in Rochester, Minnesota (see Note 4), as well as with proceeds received from the Company’s February 2013 issuance of common stock. The Company recorded the acquisition at fair value using an independent third-party analysis, with the purchase price allocated to investment in hotel properties and hotel working capital assets and liabilities. The Company incurred acquisition-related costs of $0.4 million during 2013, which are included in corporate overhead on the Company’s consolidated statements of operations. The results of operations for the Hilton New Orleans St. Charles have been included in the Company’s consolidated statements of operations from the acquisition date of May 1, 2013 through the year ended December 31, 2014.
In July 2013, the Company purchased the 1,053-room Boston Park Plaza for a net purchase price of $248.0 million, including $2.0 million of proration credits, unrestricted and restricted cash and other adjustments received from the seller. The acquisition was funded with $92.3 million of proceeds generated by the Company’s January 2013 sale of four hotels and a commercial laundry facility
F-19
located in Rochester, Minnesota (see Note 4), the assumption of a $119.2 million non-recourse loan secured by the hotel, as well as with proceeds received from the Company’s February 2013 issuance of common stock and with cash on hand. 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, notes payable and hotel working capital liabilities. The Company incurred acquisition-related costs of $0.9 million during 2013, which are included in corporate overhead on the Company’s consolidated statements of operations. The results of operations for the Boston Park Plaza have been included in the Company’s consolidated statements of operations from the acquisition date of July 2, 2013 through the year ended December 31, 2014.
In December 2013, the Company purchased the 802-room Hyatt Regency San Francisco for a net purchase price of $262.5 million, including $5.5 million of purchase price adjustments comprised of restricted cash and other adjustments received from the seller. The acquisition was funded with proceeds generated by the Company’s November 2013 issuance of common stock. The Company recorded the acquisition at fair value using an independent third-party analysis, with the purchase price and other adjustments allocated to investment in hotel properties, prepaid expenses and other current liabilities. The Company incurred acquisition-related costs of $0.5 million during 2013, which are included in corporate overhead on the Company’s consolidated statements of operations. The results of operations for the Hyatt Regency San Francisco have been included in the Company’s consolidated statements of operations from the acquisition date of December 2, 2013 through the year ended December 31, 2014.
Acquisitions - 2012
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 $10.40 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 date the acquisition closed, the total purchase price of the Wyndham Chicago hotel for accounting purposes was $81.16 million, excluding proration adjustments 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. During 2012, the Company incurred acquisition-related costs of $1.3 million, which are included in corporate overhead on the Company’s consolidated statements of operations. The results of operations for the Hyatt Chicago Magnificent Mile have been included in the Company’s consolidated statements of operations from the acquisition date of June 4, 2012 through the year ended December 31, 2014.
In July 2012, the Company purchased the 357-room Hilton Garden Inn Chicago Downtown/Magnificent Mile for a net purchase price of $90.3 million, including $1.45 million of proration credits. The Company recorded the acquisition at fair value using an independent third-party analysis, with the purchase price allocated to investment in hotel properties and hotel working capital assets and liabilities. The Company incurred acquisition-related costs of $0.7 million and $0.2 million during 2012 and 2011, respectively, which are included in corporate overhead on the Company’s consolidated statements of operations. The results of operations for the Hilton Garden Inn Chicago Downtown/Magnificent Mile have been included in the Company’s consolidated statements of operations from the acquisition date of July 19, 2012 through the year ended December 31, 2014.
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 Marriott Wailea in July 2014, the Hilton New Orleans St. Charles in May 2013, the Boston Park Plaza in July 2013, the Hyatt Regency San Francisco in December 2013, the Hyatt Chicago Magnificent Mile in June 2012 and the Hilton Garden Inn Chicago Downtown/Magnificent Mile in July 2012 had occurred on January 1, 2012. 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
2014 |
|
2013 |
|
2012 |
|
|||
Revenues |
|
$ |
1,175,367 |
|
$ |
1,100,354 |
|
$ |
1,063,094 |
|
|
|
|
|
|
|
|
|
|
|
|
Income available (loss attributable) to common stockholders from continuing operations |
|
$ |
74,811 |
|
$ |
19,931 |
|
$ |
(9,742) |
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per diluted share available (attributable) to common stockholders from continuing operations |
|
$ |
0.39 |
|
$ |
0.12 |
|
$ |
(0.08) |
|
F-20
For the year ended December 31, 2014, the Company included $27.0 million of revenues, and net income of $3.5 million in its consolidated statements of operations related to the Company’s 2014 acquisitions. For the year ended December 31, 2013, the Company included $51.0 million of revenues, and net income of $2.8 million in its consolidated statements of operations related to the Company’s 2013 acquisitions. For the year ended December 31, 2012, the Company included $27.7 million of revenues, and a net loss of $1.1 million in its consolidated statements of operations related to the Company’s 2012 acquisitions.
Intangible Assets
As of December 31, 2014 and 2013, intangible assets included in the Company’s investment in hotel properties, net consisted of the following (in thousands):
2014 |
2013 |
||||||
Advanced bookings (1) |
$ |
10,621 |
$ |
35,154 | |||
Easement agreement (2) |
9,727 | 9,727 | |||||
Ground/air lease agreements (3) |
121,850 | 121,850 | |||||
In-place lease agreements (4) |
6,795 | 6,223 | |||||
Above/(below) market lease agreements, net (5) |
(3,896) | (3,915) | |||||
Below market management agreement (6) |
2,850 | 2,850 | |||||
147,947 | 171,889 | ||||||
Accumulated amortization |
(22,453) | (44,426) | |||||
$ |
125,494 |
$ |
127,463 |
Amortization expense on these intangible assets for the years ended December 31, 2014, 2013 and 2012 consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
2014 |
|
2013 |
|
2012 |
|
|||
Advanced bookings (1) |
|
$ |
1,769 |
|
$ |
4,560 |
|
$ |
14,824 |
|
Ground/air lease agreements (3) |
|
|
4,113 |
|
|
4,113 |
|
|
4,113 |
|
In-place lease agreements (4) |
|
|
830 |
|
|
454 |
|
|
348 |
|
Above/(below) market lease agreements, net (5) |
|
|
(304) |
|
|
(148) |
|
|
(6) |
|
Below market management agreement (6) |
|
|
469 |
|
|
469 |
|
|
212 |
|
|
|
$ |
6,877 |
|
$ |
9,448 |
|
$ |
19,491 |
|
(1) |
Advanced bookings consist of advance deposits related to the purchases of the Boston Park Plaza, the Hyatt Regency San Francisco, and the Marriott Wailea. The contractual advanced hotel bookings were recorded at a discounted present value based on estimated collectability, and are amortized using the straight-line method based over the periods the amounts are expected to be collected. The amortization expense for contractual advanced hotel bookings is included in depreciation and amortization expense in the Company’s consolidated statements of operations. The amounts will be fully amortized for the Boston Park Plaza, the Hyatt Regency San Francisco and the Marriott Wailea by June 2018, December 2017 and July 2018, respectively. |
(2) |
The Easement agreement at the Hilton Times Square was valued at fair value at the date of acquisition. The Hilton Times Square easement agreement has an indefinite useful life, and, therefore, is not amortized. This non-amortizable intangible asset is reviewed annually for impairment and more frequently if events or circumstances indicate that the asset may be impaired. If a non-amortizable intangible asset is subsequently determined to have a finite useful life, the intangible asset will be written down to the lower of its fair value or carrying amount and then amortized prospectively, based on the remaining useful life of the intangible asset. |
(3) |
Ground/air lease agreements at the Doubletree Guest Suites Times Square, the Hilton Times Square and the JW Marriott New Orleans were valued at fair value at the dates of acquisition. The agreements are amortized using the straight-line method over the remaining non-cancelable terms of the related agreements, which range from between approximately 22 and 76 years as of December 31, 2014. The amortization expense for the agreements is included in property tax, ground lease and insurance expense in the Company’s consolidated statements of operations. |
(4) |
In-place lease agreements at the Boston Park Plaza, the Doubletree Guest Suites Times Square, the Hilton New Orleans St. Charles, the Hilton San Diego Bayfront, the Hyatt Regency San Francisco and the Marriott Wailea, were valued at fair value at the dates of acquisition. The agreements are amortized using the straight-line method over the remaining non-cancelable terms of the related agreements, which range from between approximately two months and 13 years as of December 31, 2014. The amortization expense for the agreements is included in depreciation and amortization expense in the Company’s consolidated statements of operations. |
F-21
(5) |
The above/(below) market lease agreements, net consist of unfavorable tenant lease liabilities at the Boston Park Plaza, the Hilton Garden Inn Chicago Downtown/Magnificent Mile, the Hyatt Regency San Francisco and the Marriott Wailea, and favorable tenant lease assets at the Hilton New Orleans St. Charles, the Hyatt Regency San Francisco and the Marriott Wailea. These agreements were valued at fair value at the dates of acquisition, and are amortized using the straight-line method over the remaining non-cancelable terms of the related agreements, which range from between approximately two months and 17 years as of December 31, 2014. The amortization expense for the agreements is included in other operating revenue in the Company’s consolidated statements of operations. |
(6) |
The below market management agreement at the Hilton Garden Inn Chicago Downtown/Magnificent Mile was valued at fair value at the acquisition date. The agreement is comprised of two components, one for the management of the Hilton Garden Inn Chicago Downtown/Magnificent Mile, and the other for the potential management of a future hotel. The agreement is amortized using the straight-line method over the remaining non-cancelable terms of the two components, approximately 3 and 8 years each as of December 31, 2014. The amortization expense for the agreement is included in property general and administrative expense in the Company’s consolidated statements of operations. |
For the next five years, amortization expense for the intangible assets noted above is expected to be as follows (in thousands):
|
|
|
|
|
2015 |
|
$ |
7,334 |
|
2016 |
|
$ |
7,239 |
|
2017 |
|
$ |
7,206 |
|
2018 |
|
$ |
5,673 |
|
2019 |
|
$ |
4,341 |
|
4. Discontinued Operations
In December 2014, the Company recorded additional expense of $0.4 million related to workers’ compensation claims which originated during the Company’s periods of ownership at several hotels. The Company sold these hotels during 2004, 2005, 2010 and 2013.
In January 2013, the Company sold a four-hotel, 1,222-room portfolio (the “Rochester Hotels”) and a commercial laundry facility (together with the Rochester Hotels, the “Rochester Portfolio”) in Rochester, Minnesota, to an unaffiliated third party, for net proceeds of $195.6 million, of which $145.7 million was deposited with an accommodator in order to facilitate tax-deferred exchanges. The Rochester Hotels include the 660-room Kahler Grand, the 271-room Kahler Inn & Suites, the 202-room Marriott Rochester and the 89-room Residence Inn by Marriott Rochester. The Company recognized a net gain on the sale of $51.6 million. The Company retained a $25.0 million preferred equity investment (the “Preferred Equity Investment”) in the Rochester Hotels that yields an 11% dividend, resulting in a deferred gain on the sale of $25.0 million. The $25.0 million gain will be deferred until the Preferred Equity Investment is redeemed. The Preferred Equity Investment is recorded at face value on the Company’s consolidated balance sheets net of the deferred gain, resulting in a net book value of zero on the Company’s consolidated balance sheets as of both December 31, 2014 and 2013. During the years ended December 31, 2014 and 2013, the Company recognized $2.8 million and $2.6 million in dividends on the Preferred Equity Investment, respectively. All of the dividends earned on the Preferred Equity Investment are included in interest and other income on the Company’s consolidated statements of operations. The Company also provided a $3.7 million working cash advance to the buyer, resulting in a deferred gain on the sale of $3.7 million. The $3.7 million gain will be deferred until the Company is repaid from the Rochester Portfolio’s available cash flow. The working cash advance is recorded at face value on the Company’s consolidated balance sheets net of the deferred gain, resulting in a net book value of zero on the Company’s consolidated balance sheets as of both December 31, 2014 and 2013.
Concurrent with the Rochester Portfolio sale, the Company extinguished the outstanding $26.7 million mortgage secured by the Kahler Grand for a total cost of $29.8 million, prepaid the $0.4 million loan secured by the commercial laundry facility, and recorded a loss on extinguishment of debt of $3.1 million which is included in discontinued operations on the Company’s consolidated statements of operations. The Company reclassified the Rochester Portfolio’s results of operations for January 2013 and the year ended December 31, 2012 to discontinued operations on its consolidated statements of operations.
In addition, at the time the Company sold the Rochester Portfolio, the Company retained a liability not to exceed $14.0 million related to the Rochester Portfolio’s pension plan, which could be triggered in certain circumstances, including termination of the pension plan. The recognition of the $14.0 million pension plan liability reduced the Company’s gain on the sale of the Rochester Portfolio. In May 2014, the Company was released from $7.0 million of its pension plan liability, causing the Company to recognize additional gain on the sale of the Rochester Portfolio of $7.0 million, which is included in discontinued operations for the year ended December 31, 2014. The pension plan liability, totaling $7.0 million and $14.0 million as of December 31, 2014 and 2013, respectively, is included in other liabilities on the Company’s consolidated balance sheets. The remaining $7.0 million gain will be
F-22
recognized, if at all, when and to the extent the Company is released from any potential liability related to the Rochester Portfolio’s pension plan.
In accordance with the Contingencies Topic of the FASB ASC, which requires a liability be recorded based on the Company’s estimate of the probable cost of the resolution of a contingency, the Company accrued $0.3 million when it sold the Rochester Portfolio related to potential future costs for certain capital expenditures at one of the hotels in the Rochester Portfolio. During the second quarter of 2014, the Company determined that its total costs for these capital expenditures may range from $2.0 million to $3.0 million. As such, the Company accrued an additional $1.8 million during the second quarter of 2014 in accordance with the Contingencies Topic of the FASB ASC, which is included in discontinued operations for the year ended December 31, 2014, bringing the total amount accrued for this contingency to $2.1 million. During 2014, the Company paid $1.3 million of the liability, reducing the accrued balance for this contingency to $0.8 million as of December 31, 2014. The Company expects to resolve this contingency in early 2015.
Prior to the sale of the Rochester Portfolio, pension liability adjustments related to the Rochester Portfolio’s defined benefit retirement plan were recorded as other comprehensive loss. The following table details the activity in accumulated other comprehensive loss in January 2013 due to the sale of the Rochester Portfolio (in thousands):
|
|
|
|
|
|
|
|
|
One Month Ended |
|
Affected Line in the Company’s Statements of |
|
|
|
|
January 31, 2013 |
|
Operations and Comprehensive Income |
|
|
Beginning balance of accumulated other comprehensive loss |
|
$ |
(5,335) |
|
|
|
Sale of Rochester Portfolio — pension liability adjustment |
|
|
5,335 |
|
Income from discontinued operations |
|
Ending balance of accumulated other comprehensive loss |
|
$ |
— |
|
|
|
During 2012, the Company sold four hotels and an office building adjacent to one of the sold hotels. In August 2012, the Company sold the Marriott Del Mar located in San Diego, California for net proceeds of $17.7 million, including the assumption of the existing mortgage secured by the hotel which totaled $47.1 million on the date of sale, and recognized a gain on the sale of $25.5 million. In addition, the Company wrote off $48,000 in deferred financing fees in conjunction with the buyer’s assumption of the debt secured by the hotel. The Company reclassified the hotel’s results of operations for the first eight months of 2012 to discontinued operations on its consolidated statements of operations.
In September 2012, the Company sold a portfolio of assets that included the Doubletree Guest Suites Minneapolis, the Hilton Del Mar, the Marriott Troy (located in Minneapolis, Minnesota, San Diego, California, and Troy, Michigan, respectively) and an office building adjacent to the Marriott Troy for net proceeds of $28.6 million, including the assumptions of three separate mortgages secured by the hotels totaling $75.6 million, as well as a $2.2 million liability for deferred management fees payable to the Marriott Troy’s third-party manager. The Company recognized a net gain on the sale of $12.7 million. In addition, the Company wrote off $0.1 million in deferred financing fees in conjunction with the buyer’s assumption of the debt secured by the three hotels. The Company reclassified the results of operations for the Doubletree Guest Suites Minneapolis, the Hilton Del Mar, the Marriott Troy and the office building to discontinued operations for the first nine months of 2012 on its consolidated statements of operations.
The following table sets forth the discontinued operations for the years ended December 31, 2014, 2013 and 2012 for the four hotels and the commercial laundry facility sold in 2013, and the four hotels and the office building sold in 2012 (in thousands):
2014 |
2013 |
2012 |
||||||||
Operating revenues |
$ |
— |
$ |
3,690 |
$ |
100,861 | ||||
Operating expenses |
(350) | (3,686) | (71,089) | |||||||
Interest expense |
— |
(99) | (6,490) | |||||||
Depreciation and amortization expense |
— |
— |
(13,164) | |||||||
Loss on extinguishment of debt |
— |
(3,115) |
— |
|||||||
Gain on sale of hotels and other assets, net |
5,199 | 51,620 | 38,292 | |||||||
Income from discontinued operations |
$ |
4,849 |
$ |
48,410 |
$ |
48,410 |
5. Interest Rate Derivative Agreements
At December 31, 2014 and 2013, the Company held two interest rate cap agreements. At December 31, 2013, the Company also held one interest rate swap agreement. The Company holds its interest rate derivative agreements in order to manage its exposure to the interest rate risks related to its floating rate debt. The first interest rate cap agreement is on the Hilton San Diego Bayfront mortgage, which mortgage currently bears an interest rate of one-month LIBOR plus 225 basis points. The initial interest rate cap agreement, whose strike rate was 3.75%, matured in April 2013. In April 2013, the Company purchased a new interest rate cap agreement on the Hilton San Diego Bayfront mortgage for a cost of $12,000, which extended the maturity date from April 2013 to April 2015. The new interest rate cap agreement on the Hilton San Diego Bayfront continues to cap the LIBOR rate at 3.75%. The
F-23
notional amount of the related debt capped totaled $117.0 million at both December 31, 2014 and 2013. The second interest rate cap agreement is on the Doubletree Guest Suites Times Square mortgage, which mortgage currently bears an interest rate of one-month LIBOR plus 325 basis points. The Doubletree Guest Suites Times Square cap agreement caps the LIBOR rate at 4.0% until October 2015. The notional amount of the related debt capped totaled $177.4 million and $179.6 million at December 31, 2014 and 2013, respectively.
At December 31, 2013, the Company held an interest rate swap agreement on the JW Marriott New Orleans mortgage. The interest rate swap agreement capped the LIBOR interest rate on the underlying debt at a total interest rate of 5.45%, and the maturity date was in September 2015. The notional amount of the related debt totaled $39.8 million as of December 31, 2013. In conjunction with the Company’s refinancing of the mortgage secured by the JW Marriott New Orleans in December 2014 (see Note 7), the Company paid a fee of $0.6 million to terminate the interest rate swap agreement.
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 gain of $0.5 million for both the years ended December 31, 2014 and 2013, and a net loss of $0.4 million for the year ended December 31, 2012, which have been reflected as decreases in interest expense for 2014 and 2013, and as an increase in interest expense for 2012. As of December 31, 2014, the fair values of the interest rate cap agreements were de minimus. As of December 31, 2013, the fair values of the interest rate cap agreements totaled an asset of $16,000. 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 zero and $1.1 million as of December 31, 2014 and 2013, respectively, and is included in other liabilities on the Company’s consolidated balance sheet as of December 31, 2013.
6. Other Assets
Other assets, net consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31, |
|
||||
|
|
2014 |
|
2013 |
|
||
Property and equipment, net |
|
$ |
2,127 |
|
$ |
2,478 |
|
Land held for development |
|
|
188 |
|
|
188 |
|
Intangibles, net |
|
|
6,677 |
|
|
7,277 |
|
Interest rate cap derivative agreements |
|
|
— |
|
|
16 |
|
Cash trap receivables |
|
|
— |
|
|
4,443 |
|
Other receivables |
|
|
2,094 |
|
|
3,942 |
|
Other |
|
|
3,399 |
|
|
2,762 |
|
|
|
$ |
14,485 |
|
$ |
21,106 |
|
As of December 31, 2014 and 2013, property and equipment, net consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
2014 |
|
2013 |
|
||
Cost basis |
|
$ |
11,573 |
|
$ |
10,933 |
|
Accumulated depreciation |
|
|
(9,446) |
|
|
(8,455) |
|
Property and equipment, net |
|
$ |
2,127 |
|
$ |
2,478 |
|
The Company’s other assets, net as of December 31, 2014 and 2013, include BuyEfficient’s intangible assets totaling $6.7 million and $7.3 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 their useful lives ranging between seven and 20 years. Accumulated amortization totaled $2.4 million and $1.8 million at December 31, 2014 and 2013, respectively. Amortization expense totaled $0.6 million for the years ended December 31, 2014, 2013 and 2012. For the next five years, amortization expense for the BuyEfficient intangible assets is expected to be as follows (in thousands):
|
|
|
|
|
2015 |
|
$ |
600 |
|
2016 |
|
$ |
600 |
|
2017 |
|
$ |
600 |
|
2018 |
|
$ |
351 |
|
2019 |
|
$ |
337 |
|
As of December 31, 2013, $4.4 million of the Company’s cash remained trapped by the lender associated with the mortgage secured by the Hilton Del Mar, which the Company sold in 2012, and whose mortgage was assumed by the buyer. In February 2014, the lender released the cash, and the entire $4.4 million was returned to the Company.
F-24
7. Notes Payable
Notes payable consisted of the following at December 31 (in thousands):
2014 |
2013 |
||||||
Notes payable requiring payments of interest and principal, with fixed rates ranging from 4.12% and 5.95% at December 31, 2014, and 4.4% and 6.6% at December 31, 2013; maturing at dates ranging from May 2015 through January 2025. The notes are collateralized by first deeds of trust on 14 hotel properties at both December 31, 2014 and 2013. |
$ |
1,023,780 |
$ |
993,164 | |||
Note payable requiring payments of interest and principal, bearing a blended rate of one-month LIBOR plus 225 basis points at December 31, 2014, and three-month LIBOR plus 325 basis points at December 31, 2013; maturing in August 2019. The note is collateralized by a first deed of trust on one hotel property. |
228,296 | 231,451 | |||||
Note payable requiring payments of interest only through October 2013, and interest and principal thereafter, with a blended interest rate of one-month LIBOR plus 325 basis points; maturing in October 2018. The note is collateralized by a first deed of trust on one hotel property. |
177,216 | 179,460 | |||||
Total notes payable |
1,429,292 | 1,404,075 | |||||
Less: current portion |
(121,328) | (23,289) | |||||
Notes payable, less current portion |
$ |
1,307,964 |
$ |
1,380,786 |
Notes Payable Transactions – 2014
In August 2014, the Company amended the mortgage secured by the Hilton San Diego Bayfront, which mortgage originally included the syndication of four lenders. In conjunction with the amendment and in accordance with the Debt Topic of the FASB ASC, the Company analyzed each of the four lenders to determine if their participation in the refinancing should be accounted for as a modification or as an extinguishment of their portion of the original loan. As a result of the Company’s assessments, three of the lenders’ participations were deemed to be modifications of the original loan, and the applicable amounts of unamortized deferred financing fees continue to be capitalized and amortized over the term of the refinanced debt. In conjunction with the amendment, the Company paid additional deferred financing fees of $1.3 million to these three lenders, which are also amortized over the term of the refinanced debt. During 2014, the Company paid $0.1 million in loan fees to third parties related to the modifications, which were recorded in the Company’s results of operations as a component of interest expense. The portion of the loan related to the lender who chose not to participate in the refinancing was determined to be an extinguishment of the original loan, and as a result, $0.5 million of the unamortized balance of the applicable deferred financing fees were expensed during 2014, and recorded in the Company’s results of operations as loss on extinguishment of debt. In addition, the Company paid the lender $25,000 in costs associated with the extinguishment of debt, which is also included in the Company’s results of operations as loss on extinguishment of debt. The amended loan extends the loan’s maturity from April 2016 to August 2019, and reduces the loan’s interest rate from three-month LIBOR plus 325 basis points to one-month LIBOR plus 225 basis points.
In December 2014, the Company repaid the $38.9 million mortgage secured by the JW Marriott New Orleans, using proceeds received from a new $90.0 million mortgage secured by the JW Marriott New Orleans. The new loan extends the maturity date from September 2015 to December 2024. The new loan is subject to a 30-year amortization schedule, and reduces the interest rate from 5.45% under a related interest rate swap agreement to a fixed rate of 4.15%. In conjunction with its repayment of the original mortgage, the Company wrote off $39,000 of unamortized deferred financing fees, which are included in loss on extinguishment of debt in the Company’s consolidated statements of operations, and paid a fee of $0.6 million to terminate the related interest rate swap agreement. In addition, the Company paid deferred financing fees of $0.6 million related to the new loan, which are amortized over the term of the new loan.
Also in December 2014, the Company extinguished the $67.1 million mortgage secured by the Embassy Suites La Jolla for a total cost of $71.1 million, and recorded a loss on extinguishment of debt of $4.0 million. The extinguishment was funded using proceeds received from a new $65.0 million mortgage secured by the Embassy Suites La Jolla, along with cash on hand. The new loan is subject to a 30-year amortization schedule, reduces the interest rate from a fixed rate of 6.6% to a fixed rate of 4.12%, and extends the maturity date from June 2019 to January 2025. In conjunction with its repayment of the original mortgage, the Company wrote off $43,000 of unamortized deferred financing fees, which are included in loss on extinguishment of debt in the Company’s consolidated statements of operations. In addition, the Company paid deferred financing fees of $0.4 million related to the new loan, which are amortized over the term of the new loan.
As of December 31, 2014, the Company has $150.0 million available for use under its senior unsecured revolving credit facility. An accordion option under the credit facility allows the Company to request additional lender commitments of up to $350.0 million.
F-25
The credit facility’s interest rate is based on a pricing grid with a range of 175 to 350 basis points, depending on the Company’s leverage ratio, and it matures in November 2015 with an option to extend to November 2016.
Notes Payable Transactions – 2013
In January 2013, the Company repurchased $42.0 million of the Senior Notes, and redeemed the remaining $16.0 million of the Senior Notes. The Company funded the total $58.0 million in Senior Note repurchases and redemptions with available cash, leaving no future amounts outstanding related to the Senior Notes.
Concurrent with the Rochester Portfolio sale in January 2013, the Company extinguished the outstanding $26.7 million mortgage secured by the Kahler Grand for a total cost of $29.8 million, prepaid the $0.4 million loan secured by the commercial laundry facility, and recorded a loss on extinguishment of debt of $3.1 million which is included in discontinued operations.
In conjunction with the Company’s acquisition of the Boston Park Plaza in July 2013, the Company assumed a $119.2 million non-recourse mortgage secured by the hotel. The mortgage bears interest at a fixed rate of 4.4%, and matures in February 2018.
Total interest incurred and expensed on the notes payable is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
2014 |
|
2013 |
|
2012 |
|
|||
Interest expense on debt and capital lease obligations |
|
$ |
70,067 |
|
$ |
69,806 |
|
$ |
71,664 |
|
(Gain) loss on derivatives, net |
|
|
(529) |
|
|
(525) |
|
|
406 |
|
Accretion of Senior Notes |
|
|
— |
|
|
3 |
|
|
1,058 |
|
Amortization of deferred financing fees |
|
|
2,777 |
|
|
2,955 |
|
|
3,690 |
|
Write-off of deferred financing fees |
|
|
— |
|
|
— |
|
|
3 |
|
|
|
$ |
72,315 |
|
$ |
72,239 |
|
$ |
76,821 |
|
Aggregate future principal maturities and amortization of notes payable at December 31, 2014, are as follows (in thousands):
|
|
|
|
|
2015 |
|
$ |
121,328 |
|
2016 |
|
|
205,802 |
|
2017 |
|
|
257,405 |
|
2018 |
|
|
290,852 |
|
2019 |
|
|
223,880 |
|
Thereafter |
|
|
330,025 |
|
Total |
|
$ |
1,429,292 |
|
8. Other Current Liabilities and Other Liabilities
Other Current Liabilities
Other current liabilities consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31, |
|
||||
|
|
2014 |
|
2013 |
|
||
Property, sales and use taxes payable |
|
$ |
14,490 |
|
$ |
14,482 |
|
Income tax payable |
|
|
295 |
|
|
— |
|
Accrued interest |
|
|
3,289 |
|
|
3,078 |
|
Advance deposits |
|
|
10,742 |
|
|
8,259 |
|
Management fees payable |
|
|
3,467 |
|
|
1,077 |
|
Other |
|
|
4,183 |
|
|
3,392 |
|
|
|
$ |
36,466 |
|
$ |
30,288 |
|
F-26
Other Liabilities
Other liabilities consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31, |
|
||||
|
|
2014 |
|
2013 |
|
||
Deferred gain on sale of asset |
|
$ |
7,000 |
|
$ |
14,000 |
|
Interest rate swap derivative agreement |
|
|
— |
|
|
1,066 |
|
Accrued income tax |
|
|
1,541 |
|
|
1,491 |
|
Deferred revenue |
|
|
6,790 |
|
|
6,918 |
|
Deferred rent |
|
|
15,075 |
|
|
12,270 |
|
Deferred incentive management fees |
|
|
534 |
|
|
1,714 |
|
Other |
|
|
2,667 |
|
|
2,499 |
|
|
|
$ |
33,607 |
|
$ |
39,958 |
|
In conjunction with the Rochester Portfolio sale, the Company retained a $14.0 million liability related to the Rochester Portfolio’s pension plan, which could be triggered in certain circumstances, including termination of the pension plan. Accordingly, the Company deferred $14.0 million of gain on the sale of the Rochester Portfolio. In May 2014, the Company was released from $7.0 million of its pension plan liability, causing the Company to recognize $7.0 million of the deferred gain on sale of the Rochester Portfolio, which is included in discontinued operations for the year ended December 31, 2014. The remaining $7.0 million deferred gain will be recognized, if at all, when and to the extent the Company is released from any potential liability related to the Rochester Portfolio’s pension plan.
9. Income Taxes
The Company has elected to be taxed as a REIT under the Code. As a REIT, the Company generally will not be subject to corporate level federal income taxes on net income it distributes to its stockholders. The Company may be subject to certain state and local taxes on its income and property and to federal income and excise taxes on its undistributed taxable income. The Company may also be subject to federal and/or state income taxes when using net operating loss carryforwards to offset current taxable income.
The Company leases its hotels to the TRS Lessee and its subsidiaries, which are subject to federal and state income taxes. The Company accounts for income taxes in accordance with the provisions of the Income Taxes Topic of the FASB ASC, which requires the Company to account for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between GAAP carrying amounts and their respective tax bases.
During 2014, the Company recognized a combined federal and state income tax provision of $0.2 million based on a 2013 actual tax benefit of $0.6 million, partially offset by a 2014 projected tax provision net of operating loss carryforwards of $0.8 million for its taxable entities.
During 2013, the Company recognized income tax expense of $4.7 million as a result of Internal Revenue Service (“IRS”) audits of tax years 2008, 2009 and 2010, including $0.6 million in accrued interest. The Company recorded additional income tax expense of $1.5 million during 2013 based on the ongoing evaluations of its uncertain tax positions related to the year ended December 31, 2012, and as a result of its recent resolution of outstanding issues with the IRS. During 2013, the Company recorded additional tax expense of $1.9 million related to estimated 2013 federal alternative minimum tax resulting from its use of net operating loss carryforwards, as well as state income tax where the Company’s use of net operating loss carryforwards was either limited or unavailable.
During 2012, the Company’s federal alternative minimum tax resulting from its use of net operating loss carryforwards combined with the Company’s state income tax expense where the use of net operating loss carryforwards was either limited or unavailable to total $1.1 million of income tax expense.
The Company recognizes penalties and interest related to unrecognized tax benefits in income tax expense. During 2014 and 2013, the Company recognized $50,000 and $0.6 million in interest expense related to its tax provisions, respectively. The Company recognized no penalties or interest related to its tax provisions for 2012.
F-27
The income tax provision for the Company is included in the consolidated financial statements as follows (in thousands):
Year Ended |
Year Ended |
Year Ended |
||||||||
December 31, |
December 31, |
December 31, |
||||||||
2014 |
2013 |
2012 |
||||||||
Current: |
||||||||||
Federal |
$ |
255 |
$ |
6,371 |
$ |
850 | ||||
State |
(76) | 1,774 | 298 | |||||||
Total current income tax provision |
$ |
179 |
$ |
8,145 |
$ |
1,148 | ||||
Deferred: |
||||||||||
Federal |
$ |
(2,341) |
$ |
(9,488) |
$ |
1,031 | ||||
State |
(598) | (2,426) | 278 | |||||||
Change in valuation allowance |
2,939 | 11,914 | (1,309) | |||||||
Total deferred income tax provision |
$ |
— |
$ |
— |
$ |
— |
The tax effects of temporary differences giving rise to the deferred tax assets (liabilities) are as follows (in thousands):
December 31, |
|||||||
2014 |
2013 |
||||||
NOL carryover |
$ |
28,420 |
$ |
31,258 | |||
Other reserves |
2,784 | 3,270 | |||||
State taxes and other |
(4,766) | (4,909) | |||||
Depreciation |
375 | 133 | |||||
Deferred tax asset before valuation allowance |
26,813 | 29,752 | |||||
Valuation allowance |
(26,813) | (29,752) | |||||
$ |
— |
$ |
— |
The Company has provided a valuation allowance against its net deferred tax asset at December 31, 2014 and 2013. The valuation allowance is due to the uncertainty of realizing the Company’s historical operating losses. Accordingly, no provision or benefit for deferred income taxes related to the Company is reflected in the accompanying consolidated statements of operations.
At December 31, 2014 and 2013, the net operating loss carryforwards for federal income tax purposes totaled approximately $72.3 million and $80.3 million, respectively. These losses, which begin to expire in 2024, are available to offset future income through 2032.
F-28
Characterization of Distributions
For income tax purposes, distributions paid consist of ordinary income, capital gains, return of capital or a combination thereof. For the years ended December 31, 2014, 2013 and 2012, distributions paid per share were characterized as follows (unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014 |
|
2013 |
|
2012 |
|
|||||||||
|
|
Amount |
|
% |
|
Amount |
|
% |
|
Amount |
|
% |
|
|||
Common Stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary income |
|
$ |
0.510 |
|
100 |
% |
$ |
0.100 |
|
100 |
% |
$ |
— |
|
— |
% |
Capital gain |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
Return of capital |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
Total |
|
$ |
0.510 |
|
100 |
% |
$ |
0.100 |
|
100 |
% |
$ |
— |
|
— |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock — Series A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary income |
|
$ |
— |
|
— |
% |
$ |
0.330 |
|
100 |
% |
$ |
2.000 |
|
100 |
% |
Capital gain |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
Return of capital |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
Total |
|
$ |
— |
|
— |
% |
$ |
0.330 |
|
100 |
% |
$ |
2.000 |
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock — Series C |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary income |
|
$ |
— |
|
— |
% |
$ |
0.656 |
|
100 |
% |
$ |
1.572 |
|
100 |
% |
Capital gain |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
Return of capital |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
Total |
|
$ |
— |
|
— |
% |
$ |
0.656 |
|
100 |
% |
$ |
1.572 |
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock — Series D |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary income |
|
$ |
2.000 |
|
100 |
% |
$ |
2.000 |
|
100 |
% |
$ |
2.000 |
|
100 |
% |
Capital gain |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
Return of capital |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
Total |
|
$ |
2.000 |
|
100 |
% |
$ |
2.000 |
|
100 |
% |
$ |
2.000 |
|
100 |
% |
10. Series C Cumulative Convertible Redeemable Preferred Stock
In May 2013, the Company redeemed all 4,102,564 shares of its Series C preferred stock for an aggregate redemption price of $101.1 million, including $1.1 million in accrued dividends. In accordance with the FASB’s Emerging Issues Task Force Topic D-42, an additional redemption charge of $0.1 million was recognized related to the original issuance costs of the Series C preferred stock, which were previously included in additional paid in capital. The Company redeemed the Series C preferred shares using cash received from its February 2013 common stock offering. After the redemption date, the Company has no outstanding shares of Series C preferred stock, and all rights of the holders of such shares were terminated.
11. Stockholders’ Equity
Series A Cumulative Redeemable Preferred Stock
In March 2013, the Company redeemed all 7,050,000 shares of its Series A preferred stock for an aggregate redemption price of $178.6 million, including $2.3 million in accrued dividends. In accordance with the FASB’s Emerging Issues Task Force Topic D-42, an additional redemption charge of $4.6 million was recognized related to the original issuance costs of the Series A preferred stock, which were previously included in additional paid in capital. The Company redeemed the Series A preferred shares using cash received from its February 2013 common stock offering. After the redemption date, the Company has no outstanding shares of Series A preferred stock, and all rights of the holders of such shares were terminated. Because the redemption of the Series A preferred stock is a redemption in full, trading of the Series A preferred stock on the New York Stock Exchange ceased after the redemption date.
Series D Cumulative Redeemable Preferred Stock
The Company’s 4,600,000 shares of its Series D preferred stock have a liquidation preference of $25.00 per share. On or after April 6, 2016, the Series D preferred stock will be redeemable at the Company’s option, in whole or in part, at any time or from time to time, for cash at a redemption price of $25.00 per share, plus accrued and unpaid dividends up to, but not including, the redemption date.
F-29
Common Stock
In February 2014, the Company entered into separate Equity Distribution Agreements (the “Agreements”) with Wells Fargo Securities, LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated (the “Managers”). Under the terms of the Agreements, the Company may issue and sell from time to time through or to the Managers, as sales agents and/or principals, shares of the Company’s common stock having an aggregate offering amount of up to $150.0 million. During 2014, the Company received $21.0 million in net proceeds from the issuance of 1,352,703 shares of its common stock in connection with the Agreements.
In June 2014, the Company issued 18,000,000 shares of its common stock in an underwritten public offering for net proceeds of approximately $262.5 million, which were used to acquire the Marriott Wailea in July 2014.
In July 2014, the Company issued 4,034,970 shares of its common stock valued at $60.0 million directly to the seller of the Marriott Wailea in connection with the Company’s acquisition of the hotel (see Note 3). The Company incurred offering costs of $0.1 million related to this transaction.
In February 2013, the Company issued 25,300,000 shares of its common stock, including the underwriters’ over-allotment of 3,300,000 shares, for net proceeds of approximately $294.9 million. The Company used $279.7 million of these proceeds to redeem all of its Series A preferred stock in March 2013, and its Series C preferred stock in May 2013, including accrued dividends, and used portions of the remaining proceeds towards the acquisitions of the Hilton New Orleans St. Charles in May 2013, and the Boston Park Plaza in July 2013.
In November 2013, the Company issued 20,000,000 shares of its common stock in an underwritten public offering for net proceeds of $270.9 million. The Company used the net proceeds from this offering to purchase the Hyatt Regency San Francisco, and used the remaining proceeds for capital investment in the Company’s portfolio and other general corporate purposes, including working capital.
In June 2012, the Company issued 5,454,164 shares of its common stock to the seller of the Wyndham Chicago (which the Company rebranded the Hyatt Chicago Magnificent Mile) in connection with the Company’s acquisition of the hotel (see Note 3). The Company incurred offering costs of $0.1 million related to this transaction.
Also in June 2012, the Company issued 12,143,273 shares of its common stock in an underwritten public offering for net proceeds of approximately $126.2 million. The Company used a portion of these proceeds to fund the purchase of the Hilton Garden Inn Chicago Downtown/Magnificent Mile in July 2012, and used the remaining proceeds for capital investment in the Company’s portfolio, including the renovation of the Hyatt Chicago Magnificent Mile, and other general corporate purposes, including working capital.
Dividends
The Company declared dividends per share on its Series A preferred stock, Series D preferred stock and common stock during 2014, 2013 and 2012 as follows:
2014 |
2013 |
2012 |
||||||||
Series A preferred stock |
$ |
— |
$ |
0.50 |
$ |
2.00 | ||||
Series D preferred stock |
2.00 | 2.00 | 2.00 | |||||||
Common stock (1) |
0.51 | 0.10 |
— |
|||||||
$ |
2.51 |
$ |
2.60 |
$ |
4.00 |
(1) |
Includes a $0.36 dividend declared during the fourth quarter of 2014, which will be paid in January 2015 in a combination of cash and shares of the Company’s common stock, pursuant to elections by individual stockholders. |
12. Long-Term Incentive Plan
Stock Grants
The Company’s Long-Term Incentive Plan (“LTIP”) provides for the granting to directors, officers and eligible employees incentive or nonqualified share options, restricted shares, deferred shares, share purchase rights and share appreciation rights in tandem with options, or any combination thereof. The Company has reserved 12,050,000 common shares for issuance under the LTIP, and 6,537,837 shares remain available for future issuance as of December 31, 2014.
F-30
Restricted shares granted pursuant to the Company’s LTIP generally vest over periods from three to five years from the date of grant.
Compensation expense related to awards of restricted shares and performance shares are measured at fair value on the date of grant and amortized over the relevant requisite service period or derived service period.
The Company’s compensation expense and forfeitures related to restricted shares and performance awards for the years ended December 31, 2014, 2013 and 2012 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
||
|
|
2014 |
|
2013 |
|
2012 |
|
|||||
Compensation expense, including forfeitures |
|
$ |
9,063 |
|
$ |
7,189 |
|
$ |
5,139 |
|
The Company’s total compensation expense differs from the vesting of restricted common stock amount presented in the Company’s consolidated statements of equity due to the Company withholding and using a portion of its restricted shares granted pursuant to its LTIP for purposes of remitting statutory minimum withholding and payroll taxes in connection with the release of restricted common shares to plan participants (“net-settle”). In addition, the Company capitalizes all restricted shares granted to certain of those employees who work on the design and construction of its hotels. The Company’s total compensation expense in relation to its vesting of restricted common stock presented in the Company’s consolidated statements of equity for the years ended December 31, 2014, 2013 and 2012 is as follows (in thousands):
2014 |
2013 |
2012 |
||||||||
Total compensation expense, including forfeitures |
$ |
9,063 |
$ |
7,189 |
$ |
5,139 | ||||
Net-settle adjustment |
(2,842) | (2,331) | (1,673) | |||||||
Amortization related to shares issued to design and construction employees |
474 | 393 | 302 | |||||||
Vesting of restricted stock presented on statement of equity |
$ |
6,695 |
$ |
5,251 |
$ |
3,768 |
The following is a summary of non-vested stock grant activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014 |
|
2013 |
|
2012 |
|
|||||||||
|
|
|
|
Weighted |
|
|
|
Weighted |
|
|
|
Weighted |
|
|||
|
|
|
|
Average |
|
|
|
Average |
|
|
|
Average |
|
|||
|
|
Shares |
|
Price |
|
Shares |
|
Price |
|
Shares |
|
Price |
|
|||
Outstanding at beginning of year |
|
2,009,412 |
|
$ |
10.23 |
|
1,539,992 |
|
$ |
9.11 |
|
1,407,152 |
|
$ |
8.55 |
|
Granted |
|
691,182 |
|
$ |
13.48 |
|
975,711 |
|
$ |
11.82 |
|
647,171 |
|
$ |
9.51 |
|
Vested |
|
(799,845) |
|
$ |
10.61 |
|
(497,199) |
|
$ |
9.89 |
|
(513,095) |
|
$ |
8.08 |
|
Forfeited |
|
(17,453) |
|
$ |
11.90 |
|
(9,092) |
|
$ |
10.89 |
|
(1,236) |
|
$ |
9.38 |
|
Outstanding at end of year |
|
1,883,296 |
|
$ |
11.24 |
|
2,009,412 |
|
$ |
10.23 |
|
1,539,992 |
|
$ |
9.11 |
|
At December 31, 2014, there were no deferred shares, share purchase rights, or share appreciation rights issued or outstanding under the LTIP.
Stock Options
In April 2008, the Compensation Committee of the Company’s board of directors approved a grant of 200,000 non-qualified stock options (the “Options”) to one of the Company’s former associates. The Options fully vested in April 2009, and will expire in April 2018. The exercise price of the Options is $17.71 per share.
13. Commitments and Contingencies
Management Agreements
Management agreements with the Company’s third-party hotel managers require the Company to pay between 2% and 3.5% of total revenue of the managed hotels to the third-party managers each month as a basic management fee. Total basic management fees
F-31
incurred by the Company during the years ended December 31, 2014, 2013 and 2012 were included in the Company’s consolidated statements of operations as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014 |
|
2013 |
|
2012 |
|
||||
Continuing operations — property general and administrative expense, and corporate overhead expense |
|
$ |
31,485 |
|
$ |
25,218 |
|
$ |
22,807 |
|
|
Discontinued operations |
|
|
— |
|
|
65 |
|
|
2,061 |
|
|
|
|
$ |
31,485 |
|
$ |
25,283 |
|
$ |
24,868 |
|
In addition to basic management fees, provided that certain operating thresholds are met, the Company may also be required to pay incentive management fees to certain of its third-party managers. Total incentive management fees incurred by the Company during the years ended December 31, 2014, 2013 and 2012 were included in the Company’s consolidated statements of operations as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014 |
|
2013 |
|
2012 |
|
||||
Continuing operations — property general and administrative expense |
|
$ |
4,034 |
|
$ |
3,025 |
|
$ |
2,738 |
|
|
Discontinued operations |
|
|
— |
|
|
— |
|
|
587 |
|
|
|
|
$ |
4,034 |
|
$ |
3,025 |
|
$ |
3,325 |
|
License and Franchise Agreements
The Company has entered into license and franchise agreements related to certain of its hotel properties. The license and franchise agreements require the Company to, among other things, pay monthly fees that are calculated based on specified percentages of certain revenues. The license and franchise agreements generally contain specific standards for, and restrictions and limitations on, the operation and maintenance of the hotels which are established by the franchisors to maintain uniformity in the system created by each such franchisor. Such standards generally regulate the appearance of the hotel, quality and type of goods and services offered, signage and protection of trademarks. Compliance with such standards may from time to time require the Company to make significant expenditures for capital improvements.
Total license and franchise fees incurred by the Company during the years ended December 31, 2014, 2013 and 2012 were included in the Company’s consolidated statements of operations as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
2014 |
|
2013 |
|
2012 |
|
|||
Continuing operations — franchise costs |
|
$ |
38,271 |
|
$ |
32,932 |
|
$ |
30,067 |
|
Discontinued operations |
|
|
— |
|
|
73 |
|
|
2,996 |
|
|
|
$ |
38,271 |
|
$ |
33,005 |
|
$ |
33,063 |
|
Total license and franchise costs included royalties of $11.6 million, $10.8 million and $10.6 million incurred by the Company during the years ended December 31, 2014, 2013 and 2012, respectively. The remaining costs included advertising, reservation and priority club assessments.
Renovation and Construction Commitments
At December 31, 2014, the Company had various contracts outstanding with third parties in connection with the renovation of certain of its hotel properties aimed at maintaining the appearance and quality of its hotels. The remaining commitments under these contracts at December 31, 2014 totaled $56.5 million.
Capital Leases
The Hyatt Chicago Magnificent Mile is subject to a building lease which expires in December 2097. Upon acquisition of the hotel in June 2012, 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.
The Company leases certain printers and copiers which leases have been determined to be capital leases pursuant to the Leases Topic of the FASB ASC. All of the leases expired in December 2014.
F-32
Assets under capital lease were included in investment in hotel properties, net on the Company’s consolidated balance sheets as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31, |
|
||||
|
|
2014 |
|
2013 |
|
||
Buildings and improvements |
|
$ |
58,799 |
|
$ |
58,799 |
|
Furniture, fixtures and equipment |
|
|
104 |
|
|
104 |
|
|
|
|
58,903 |
|
|
58,903 |
|
Accumulated depreciation |
|
|
(3,841) |
|
|
(2,356) |
|
|
|
$ |
55,062 |
|
$ |
56,547 |
|
Future minimum lease payments under capital leases together with the present value of the net minimum lease payments as of December 31, 2014 are as follows (in thousands):
|
|
|
|
|
2015 |
|
$ |
1,409 |
|
2016 |
|
|
1,403 |
|
2017 |
|
|
1,403 |
|
2018 |
|
|
1,403 |
|
2019 |
|
|
1,403 |
|
Thereafter |
|
|
109,414 |
|
Total minimum lease payments (1) |
|
|
116,435 |
|
Less: Amount representing interest (2) |
|
|
(100,852) |
|
Present value of net minimum lease payments (3) |
|
$ |
15,583 |
|
(1) |
Minimum lease payments do not include percentage rent which may be paid under the Hyatt Chicago Magnificent Mile building lease on the basis of 4.0% of the hotel’s gross room revenues over a certain threshold. The Company recorded zero in percentage rent during both 2014 and 2013, and $3,000 in percentage rent during 2012. |
(2) |
Interest includes the amount necessary to reduce net minimum lease payments to present value calculated at the Company’s incremental borrowing rate at lease inception. |
(3) |
The present value of net minimum lease payments are reflected in the Company’s consolidated balance sheet as of December 31, 2014 as a current obligation of $7,000, which is included in accounts payable and accrued expenses, and as a long-term obligation of $15.6 million, which is included in capital lease obligations, less current portion. |
Ground, Building and Air Leases
During 2014, 2013 and 2012, certain of the Company’s 30 hotels were obligated to unaffiliated third parties under the terms of ground, building and air leases as follows:
|
|
|
|
|
|
|
|
|
|
2014 |
|
2013 |
|
2012 |
|
Number of hotels with ground, building and/or air leases |
|
9 |
|
10 |
|
10 |
|
|
|
|
|
|
|
|
|
Number of ground leases |
|
8 |
|
9 |
|
9 |
|
Number of building leases (1) |
|
1 |
|
1 |
|
1 |
|
Number of air leases |
|
3 |
|
3 |
|
3 |
|
Total number of ground, building and air leases |
|
12 |
|
13 |
|
13 |
|
(1) |
The building lease is considered by the Company to be a capital lease, as noted above. |
F-33
At December 31, 2014, the ground, building and air leases mature in dates ranging from 2037 through 2097, excluding renewal options. One of the air leases requires a payment of $1.00 annually, which the Company has paid in full for the life of the lease. Total rent expense incurred pursuant to ground, building and air lease agreements for the years ended December 31, 2014, 2013 and 2012 was included in property tax, ground lease and insurance in the Company’s consolidated statements of operations as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
2014 |
|
2013 |
|
2012 |
|
|||
Minimum rent, including straightline adjustments |
|
$ |
14,999 |
|
$ |
15,228 |
|
$ |
14,950 |
|
Percentage rent (1) |
|
|
2,718 |
|
|
2,131 |
|
|
2,000 |
|
|
|
$ |
17,717 |
|
$ |
17,359 |
|
$ |
16,950 |
|
(1) |
Several of the Company’s hotels pay percentage rent, which is calculated on operating revenues above certain thresholds. |
Prior to the Company’s June 2014 acquisition of the land underlying the Fairmont Newport Beach, the land was leased to the Company by a third party. The Company’s acquisition of the land reduced its ground lease expense by $0.6 million during 2014.
At December 31, 2014, the Company was obligated to an unaffiliated party under the terms of a sublease on the corporate facility, which matures in 2018. Rent expense incurred pursuant to leases on the corporate facility totaled $0.4 million for each of the years ended December 31, 2014, 2013 and 2012, and was included in corporate overhead expense.
Future minimum payments under the terms of the ground and air leases, as well as the sublease on the corporate facility, in effect at December 31, 2014 are as follows (in thousands):
|
|
|
|
|
2015 |
|
$ |
8,438 |
|
2016 |
|
|
8,499 |
|
2017 |
|
|
11,523 |
|
2018 |
|
|
11,450 |
|
2019 |
|
|
11,236 |
|
Thereafter |
|
|
335,009 |
|
Total |
|
$ |
386,155 |
|
Employment Agreements
As of December 31, 2014, the Company has employment agreements with certain executive employees, which expire in August 2016. The terms of the agreements stipulate payments of base salaries and bonuses.
Approximate minimum future obligations under employment agreements are as follows as of December 31, 2014 (in thousands):
|
|
|
|
|
2015 |
|
$ |
6,319 |
|
2016 |
|
|
706 |
|
|
|
$ |
7,025 |
|
Collective Bargaining Agreements
The Company is subject to exposure to collective bargaining agreements at certain hotels operated by its management companies. At December 31, 2014, approximately 29.2% of workers employed by the Company’s third-party managers were covered by such collective bargaining agreements.
401(k) Savings and Retirement Plan
The Company’s employees may participate, subject to eligibility, in the Company’s 401(k) Savings and Retirement Plan (the “401(k) Plan”). Employees are eligible to participate in the 401(k) Plan after attaining 21 years of age and after the first of the month following the performance of six months of service. Three percent of eligible employee annual base earnings are contributed by the Company as a Safe Harbor elective contribution. Safe Harbor contributions made by the Company totaled $0.3 million for the year ended December 31, 2014, and $0.2 million for both of the years ended December 31, 2013 and 2012, and were included in corporate overhead expense.
F-34
The Company is also responsible for funding various retirement plans at certain hotels operated by its management companies. Property general and administrative expense on the Company’s consolidated statements of operations includes matching contributions into these various retirement plans of $1.5 million, $1.1 million and $0.9 million for the years ended December 31, 2014, 2013 and 2012, respectively. Discontinued operations on the Company’s consolidated statements of operations includes matching contributions into these retirement plans of zero for the year ended December 31, 2014, $3,000 for the year ended December 31, 2013, and $0.1 million for the year ended December 31, 2012.
Concentration of Risk
The concentration of the Company’s hotels in California, New York, Illinois, Massachusetts and the greater Washington DC area exposes the Company’s business to economic conditions, competition and real and personal property tax rates unique to these locales. As of December 31, 2014, the Company’s 30 hotels were concentrated in California, New York, Illinois, Massachusetts and the greater Washington DC area as follows:
Greater |
|||||||||||
Washington DC |
|||||||||||
California |
New York |
Illinois |
Massachusetts |
Area |
|||||||
Number of hotels |
9 | 3 | 3 | 3 | 3 | ||||||
Percentage of total rooms |
31 |
% |
9 |
% |
8 |
% |
14 |
% |
13 |
% |
|
Percentage of total revenue for the year ended December 31, 2014 |
33 |
% |
13 |
% |
7 |
% |
14 |
% |
12 |
% |
Other
The Company has provided customary unsecured environmental indemnities to certain lenders. The Company has performed due diligence on the potential environmental risks, including obtaining an independent environmental review from outside environmental consultants. These indemnities obligate the Company to reimburse the indemnified parties for damages related to certain environmental matters. There is no term or damage limitation on these indemnities; however, if an environmental matter arises, the Company could have recourse against other previous owners or a claim against its environmental insurance policies.
At December 31, 2014, the Company had $0.7 million of outstanding irrevocable letters of credit to guaranty the Company’s financial obligations related to workers’ compensation insurance programs from prior policy years. The beneficiaries of these letters of credit may draw upon these letters of credit in the event of a contractual default by the Company relating to each respective obligation. No draws have been made through December 31, 2014.
14. Quarterly Operating Results (Unaudited)
The consolidated quarterly results for the years ended December 31, 2014 and 2013, of the Company are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First |
|
Second |
|
Third |
|
Fourth |
|
||||
|
|
Quarter |
|
Quarter |
|
Quarter |
|
Quarter |
|
||||
Revenues — Continuing Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
2014 |
|
$ |
243,483 |
|
$ |
300,852 |
|
$ |
307,783 |
|
$ |
289,880 |
|
2013 |
|
$ |
194,921 |
|
$ |
234,638 |
|
$ |
250,370 |
|
$ |
243,895 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income — Continuing Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
2014 |
|
$ |
14,295 |
|
$ |
55,886 |
|
$ |
50,832 |
|
$ |
35,730 |
|
2013 |
|
$ |
3,568 |
|
$ |
36,622 |
|
$ |
34,368 |
|
$ |
24,640 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
2014 |
|
$ |
(3,496) |
|
$ |
43,535 |
|
$ |
33,643 |
|
$ |
14,257 |
|
2013 |
|
$ |
28,926 |
|
$ |
20,009 |
|
$ |
15,817 |
|
$ |
5,249 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available (loss attributable) to common stockholders per share — basic and diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
2014 |
|
$ |
(0.04) |
|
$ |
0.22 |
|
$ |
0.14 |
|
$ |
0.05 |
|
2013 |
|
$ |
0.12 |
|
$ |
0.09 |
|
$ |
0.07 |
|
$ |
0.01 |
|
F-35
Income available (loss attributable) to common stockholders per share is computed independently for each of the quarters presented and therefore may not sum to the annual amount for the year.
15. Subsequent Events
On February 13, 2015, the Company’s board of directors approved a “Second Amendment” to Article XIV of the Amended and Restated Bylaws of the Company (the “Bylaws”). Prior to the adoption of the Second Amendment, the Bylaws could only be amended, altered, repealed or rescinded by the board of directors. Pursuant to the Second Amendment, the Bylaws may be amended, altered, repealed or rescinded by the board of directors or by the stockholders upon an affirmative vote of a majority of all the votes entitled to be cast generally in the election of directors.
The Second Amendment to the Bylaws is attached hereto as Exhibit 3.4 and is incorporated by reference herein. The description of the foregoing amendment to the Company’s Bylaws is qualified in its entirety by reference to the full text of the attached Second Amendment. The effective date of the Second Amendment was February 13, 2015.
F-36
SUNSTONE HOTEL INVESTORS, INC.
SCHEDULE III—REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2014
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost Capitalized |
|
Gross Amount at |
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
|
|
|
|
Initial costs |
|
Subsequent to Acquisition |
|
December 31, 2014 (1) |
|
|
|
|
|
|
|
|
|
|
|
||||||||||||
|
|
|
|
|
|
|
|
Bldg. and |
|
|
|
|
Bldg. and |
|
|
|
|
Bldg. and |
|
|
|
|
Accum. |
|
Date |
|
Depr. |
|
||||
|
|
Encmbr |
|
Land |
|
Impr |
|
Land |
|
Impr. |
|
Land |
|
Impr. |
|
Totals |
|
Depr. |
|
Acq./Constr. |
|
Life |
|
|||||||||
Boston Park Plaza |
|
$ |
116,281 |
|
$ |
58,527 |
|
$ |
170,589 |
|
$ |
— |
|
$ |
13,105 |
|
$ |
58,527 |
|
$ |
183,694 |
|
$ |
242,221 |
|
$ |
10,042 |
|
2013 |
|
5-35 |
|
Courtyard by Marriott Los Angeles |
|
|
|
(2) |
|
— |
|
|
8,446 |
|
|
— |
|
|
12,870 |
|
|
— |
|
|
21,316 |
|
|
21,316 |
|
|
9,248 |
|
1999 |
|
5-35 |
|
Doubletree Guest Suites Times Square |
|
|
177,216 |
|
|
27,351 |
|
|
201,660 |
|
|
— |
|
|
11,718 |
|
|
27,351 |
|
|
213,378 |
|
|
240,729 |
|
|
19,788 |
|
2011 |
|
5-35 |
|
Embassy Suites Chicago |
|
|
69,370 |
|
|
79 |
|
|
46,886 |
|
|
6,348 |
|
|
20,703 |
|
|
6,427 |
|
|
67,589 |
|
|
74,016 |
|
|
24,078 |
|
2002 |
|
5-35 |
|
Embassy Suites La Jolla |
|
|
65,000 |
|
|
27,900 |
|
|
70,450 |
|
|
— |
|
|
8,959 |
|
|
27,900 |
|
|
79,409 |
|
|
107,309 |
|
|
23,182 |
|
2006 |
|
5-35 |
|
Fairmont Newport Beach |
|
|
|
(2) |
|
— |
|
|
65,769 |
|
|
11,000 |
|
|
33,848 |
|
|
11,000 |
|
|
99,617 |
|
|
110,617 |
|
|
30,703 |
|
2005 |
|
5-35 |
|
Hilton New Orleans St. Charles |
|
|
— |
|
|
3,698 |
|
|
53,578 |
|
|
— |
|
|
1,124 |
|
|
3,698 |
|
|
54,702 |
|
|
58,400 |
|
|
1,946 |
|
2013 |
|
5-35 |
|
Hilton North Houston |
|
|
31,253 |
|
|
6,184 |
|
|
35,628 |
|
|
— |
|
|
23,512 |
|
|
6,184 |
|
|
59,140 |
|
|
65,324 |
|
|
20,125 |
|
2002 |
|
5-35 |
|
Hilton San Diego Bayfront |
|
|
228,296 |
|
|
— |
|
|
424,992 |
|
|
— |
|
|
8,912 |
|
|
— |
|
|
433,904 |
|
|
433,904 |
|
|
29,463 |
|
2011 |
|
5-57 |
|
Hilton Times Square |
|
|
86,606 |
|
|
— |
|
|
221,488 |
|
|
— |
|
|
24,768 |
|
|
— |
|
|
246,256 |
|
|
246,256 |
|
|
72,049 |
|
2006 |
|
5-35 |
|
Hilton Garden Inn Chicago Downtown/Magnificent Mile |
|
|
— |
|
|
14,040 |
|
|
66,350 |
|
|
— |
|
|
7,086 |
|
|
14,040 |
|
|
73,436 |
|
|
87,476 |
|
|
3,609 |
|
2012 |
|
5-50 |
|
Hyatt Chicago Magnificent Mile |
|
|
— |
|
|
— |
|
|
91,964 |
|
|
— |
|
|
16,512 |
|
|
— |
|
|
108,476 |
|
|
108,476 |
|
|
9,436 |
|
2012 |
|
5-40 |
|
Hyatt Regency Newport Beach |
|
|
|
(2) |
|
— |
|
|
30,549 |
|
|
— |
|
|
25,801 |
|
|
— |
|
|
56,350 |
|
|
56,350 |
|
|
17,690 |
|
2002 |
|
5-35 |
|
Hyatt Regency San Francisco |
|
|
— |
|
|
116,140 |
|
|
131,430 |
|
|
— |
|
|
8,027 |
|
|
116,140 |
|
|
139,457 |
|
|
255,597 |
|
|
7,387 |
|
2013 |
|
5-35 |
|
JW Marriott New Orleans |
|
|
90,000 |
|
|
— |
|
|
73,420 |
|
|
— |
|
|
4,324 |
|
|
— |
|
|
77,744 |
|
|
77,744 |
|
|
8,643 |
|
2011 |
|
5-35 |
|
Marriott Boston Long Wharf |
|
|
176,000 |
|
|
51,598 |
|
|
170,238 |
|
|
— |
|
|
37,002 |
|
|
51,598 |
|
|
207,240 |
|
|
258,838 |
|
|
53,672 |
|
2007 |
|
5-35 |
|
Marriott Houston |
|
|
20,943 |
|
|
4,167 |
|
|
19,155 |
|
|
— |
|
|
13,921 |
|
|
4,167 |
|
|
33,076 |
|
|
37,243 |
|
|
11,141 |
|
2002 |
|
5-35 |
|
Marriott Park City |
|
|
13,652 |
|
|
2,260 |
|
|
17,778 |
|
|
— |
|
|
12,749 |
|
|
2,260 |
|
|
30,527 |
|
|
32,787 |
|
|
12,116 |
|
1999 |
|
5-35 |
|
Marriott Philadelphia |
|
|
24,737 |
|
|
3,297 |
|
|
29,710 |
|
|
— |
|
|
9,629 |
|
|
3,297 |
|
|
39,339 |
|
|
42,636 |
|
|
14,597 |
|
2002 |
|
5-35 |
|
Marriott Portland |
|
|
|
(2) |
|
5,341 |
|
|
20,705 |
|
|
— |
|
|
6,863 |
|
|
5,341 |
|
|
27,568 |
|
|
32,909 |
|
|
11,598 |
|
2000 |
|
5-35 |
|
Marriott Quincy |
|
|
|
(2) |
|
14,375 |
|
|
97,875 |
|
|
— |
|
|
4,651 |
|
|
14,375 |
|
|
102,526 |
|
|
116,901 |
|
|
27,284 |
|
2007 |
|
5-35 |
|
Marriott Tysons Corner |
|
|
40,866 |
|
|
3,897 |
|
|
43,528 |
|
|
(250) |
|
|
16,191 |
|
|
3,647 |
|
|
59,719 |
|
|
63,366 |
|
|
22,222 |
|
2002 |
|
5-35 |
|
Marriott Wailea |
|
|
— |
|
|
119,707 |
|
|
194,137 |
|
|
— |
|
|
— |
|
|
119,707 |
|
|
194,137 |
|
|
313,844 |
|
|
2,782 |
|
2014 |
|
5-40 |
|
Renaissance Harborplace |
|
|
88,901 |
|
|
25,085 |
|
|
102,707 |
|
|
— |
|
|
21,889 |
|
|
25,085 |
|
|
124,596 |
|
|
149,681 |
|
|
38,504 |
|
2005 |
|
5-35 |
|
Renaissance Los Angeles Airport |
|
|
|
(2) |
|
7,800 |
|
|
52,506 |
|
|
— |
|
|
4,435 |
|
|
7,800 |
|
|
56,941 |
|
|
64,741 |
|
|
15,595 |
|
2007 |
|
5-35 |
|
Renaissance Long Beach |
|
|
|
(2) |
|
10,437 |
|
|
37,300 |
|
|
— |
|
|
18,526 |
|
|
10,437 |
|
|
55,826 |
|
|
66,263 |
|
|
15,758 |
|
2005 |
|
5-35 |
|
Renaissance Orlando at Sea World ® |
|
|
75,923 |
|
|
— |
|
|
119,733 |
|
|
30,716 |
|
|
34,704 |
|
|
30,716 |
|
|
154,437 |
|
|
185,153 |
|
|
46,812 |
|
2005 |
|
5-35 |
|
Renaissance Washington DC |
|
|
124,248 |
|
|
14,563 |
|
|
132,800 |
|
|
— |
|
|
37,178 |
|
|
14,563 |
|
|
169,978 |
|
|
184,541 |
|
|
50,797 |
|
2005 |
|
5-35 |
|
Renaissance Westchester (3) |
|
|
|
(2) |
|
5,751 |
|
|
17,069 |
|
|
— |
|
|
17,811 |
|
|
5,751 |
|
|
34,880 |
|
|
40,631 |
|
|
5,045 |
|
2010 |
|
5-35 |
|
Sheraton Cerritos |
|
|
|
(2) |
|
— |
|
|
24,737 |
|
|
— |
|
|
7,601 |
|
|
— |
|
|
32,338 |
|
|
32,338 |
|
|
9,708 |
|
2005 |
|
5-35 |
|
|
|
$ |
1,429,292 |
|
$ |
522,197 |
|
$ |
2,773,177 |
|
$ |
47,814 |
|
$ |
464,419 |
|
$ |
570,011 |
|
$ |
3,237,596 |
|
$ |
3,807,607 |
|
$ |
625,020 |
|
|
|
|
|
F-37
SUNSTONE HOTEL INVESTORS, INC.
SCHEDULE III—REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2014
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost Capitalized |
|
Gross Amount at |
|
|
|
|
|
|
|
|
|
|
|
|||||||||
|
|
|
|
|
Initial costs |
|
Subsequent to Acquisition |
|
December 31, 2014 (1) |
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
|
|
|
|
|
|
|
Bldg. and |
|
|
|
|
Bldg. and |
|
|
|
|
Bldg. and |
|
|
|
|
Accum. |
|
Date |
|
Depr. |
|
|||||
|
|
Encmbr. |
|
Land |
|
Impr. |
|
Land |
|
Impr |
|
Land |
|
Impr. |
|
Totals |
|
Depr. |
|
Acq./Constr. |
|
Life |
|
||||||||||
Investments in Other Real Estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land held for future development or sale |
|
$ |
— |
|
$ |
4,500 |
|
$ |
— |
|
$ |
(4,312) |
|
$ |
— |
|
$ |
188 |
|
$ |
— |
|
$ |
188 |
|
$ |
— |
|
1999 |
|
NA |
|
|
|
|
$ |
— |
|
$ |
4,500 |
|
$ |
— |
|
$ |
(4,312) |
|
$ |
— |
|
$ |
188 |
|
$ |
— |
|
$ |
188 |
|
$ |
— |
|
|
|
|
|
(1) |
The aggregate cost of properties for federal income tax purposes is approximately $3.7 billion (unaudited) at December 31, 2014. |
(2) |
Hotel is pledged as collateral by the credit facility entered into in November 2010. As of December 31, 2014, the Company has no outstanding indebtedness under its credit facility. |
(3) |
Hotel originally acquired in 2005. Possession and control of the hotel transferred to a receiver in December 2009, and the Company reacquired the hotel in June 2010. |
F-38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hotel Properties |
|
Other Real Estate Investments |
|
||||||||||||||
|
|
2014 |
|
2013 |
|
2012 |
|
2014 |
|
2013 |
|
2012 |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Reconciliation of land and buildings and improvements: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the beginning of the year |
|
$ |
3,416,762 |
|
$ |
2,801,963 |
|
$ |
2,904,975 |
|
$ |
188 |
|
$ |
188 |
|
$ |
12,437 |
|
Additions during year: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions |
|
|
324,844 |
|
|
533,962 |
|
|
172,354 |
|
|
— |
|
|
— |
|
|
— |
|
Improvements |
|
|
66,001 |
|
|
80,923 |
|
|
46,831 |
|
|
— |
|
|
— |
|
|
50 |
|
Changes in reporting presentation (a) |
|
|
— |
|
|
— |
|
|
(163,455) |
|
|
— |
|
|
— |
|
|
(9,793) |
|
Disposals during the year (a) |
|
|
— |
|
|
(86) |
|
|
(158,742) |
|
|
— |
|
|
— |
|
|
(2,506) |
|
Balance at the end of the year |
|
$ |
3,807,607 |
|
$ |
3,416,762 |
|
$ |
2,801,963 |
|
$ |
188 |
|
$ |
188 |
|
$ |
188 |
|
(2) Reconciliation of accumulated depreciation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the beginning of the year |
|
$ |
524,014 |
|
$ |
439,446 |
|
$ |
457,431 |
|
$ |
— |
|
$ |
— |
|
$ |
2,865 |
|
Depreciation for the year |
|
|
101,006 |
|
|
84,568 |
|
|
82,871 |
|
|
— |
|
|
— |
|
|
301 |
|
Changes in reporting presentation |
|
|
— |
|
|
— |
|
|
(58,364) |
|
|
— |
|
|
— |
|
|
(2,740) |
|
Retirement |
|
|
— |
|
|
— |
|
|
(42,492) |
|
|
— |
|
|
— |
|
|
(426) |
|
Balance at the end of the year |
|
$ |
625,020 |
|
$ |
524,014 |
|
$ |
439,446 |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
(a) |
2012 changes in reporting presentation and 2013 disposals during the year represent the Rochester Portfolio classified as held for sale as of December 31, 2012 due to its sale in January 2013. |
F-39
EXHIBIT 3.4
SUNSTONE HOTEL INVESTORS, INC.
SECOND AMENDMENT TO THE AMENDED AND RESTATED BYLAWS
THIS SECOND AMENDMENT, to the Amended and Restated Bylaws (the “Bylaws”) of Sunstone Hotel Investors, Inc., a Maryland corporation (the “Corporation”), was adopted and approved by the Board of Directors of the Corporation on February 13, 2015. In accordance with Article XIV of the Bylaws, this Second Amendment is effective as of February 13, 2015.
Article XIV of the Bylaws is hereby deleted in its entirety and the following is hereby substituted therefor:
“Except as otherwise provided in Sections 2.14 and 2.15 hereof, these Bylaws may be amended, altered, repealed or rescinded (a) by the Board of Directors or (b) by the stockholders, by the affirmative vote of a majority of all the votes entitled to be cast generally in the election of directors.”
Exhibit 10.7
Sunstone Hotel Investors, Inc.
2004 Long-Term INCENTIVE PLAN
RESTRICTED STOCK AWARD AGREEMENT
This Restricted Stock Award Agreement (the “Agreement”) is made and entered into as of the Grant Date indicated in the Award Certificate by and between you (the “Grantee”) and Sunstone Hotel Investors, Inc., a Maryland corporation (the “Company”), pursuant to the Company’s 2004 Long-Term Incentive Plan (as amended and restated effective May 1, 2014, the “Plan”). Capitalized terms not defined in this Agreement have the meanings ascribed to them in the Plan. The “Award Certificate” means the award certificate delivered separately to you which sets forth certain terms of this Agreement and which is incorporated by reference as part of this Agreement.
Grant of Restricted Stock. The Company hereby awards to the Grantee pursuant to the Plan the number shares of the Company’s Common Stock (the “Shares”) set forth in the Award Certificate, subject to the terms and conditions of the Plan, this Agreement and the Award Certificate. If an executed copy of the Award Certificate is not returned to the Company by the date indicated in the Award Certificate, the grant of Shares hereunder shall be null and void, unless the Company determines, in its sole discretion, that any delay was for good cause.
Consideration. The Shares are awarded without the payment of any consideration by Grantee.
Vesting. Except as otherwise provided herein, the Shares shall vest in accordance with the vesting schedule in the Award Certificate, provided that the Grantee has not incurred a Termination of Employment prior to such relevant vesting date.
Forfeiture. Unless the Committee determines otherwise, upon Grantee’s Termination of Employment for any reason, all of Grantee’s unvested Shares shall immediately be cancelled by the Company and Grantee (or Grantee’s legal representative or authorized assignee) shall forfeit any rights or interests in such unvested Shares.
Escrow. To insure the availability for delivery of Grantee’s unvested Shares upon cancellation and forfeiture pursuant to Section 4, Grantee hereby irrevocably appoints the Secretary of the Company or any other person designated by the Company (the “Escrow Agent”), as escrow agent and as its attorney‑in‑fact to deliver unto the Company such unvested Shares, if any, forfeited to the Company and shall, upon execution of this Agreement, deliver and deposit with the Escrow Agent, the share certificates representing the unvested Shares. The unvested Shares shall be held by the Escrow Agent in escrow until such unvested Shares become vested, or until such time as this Agreement is no longer in effect. Upon vesting of the Shares, the Escrow Agent shall promptly deliver to Grantee the certificate or certificates representing such vested Shares in the Escrow Agent’s possession belonging to Grantee, and the Escrow Agent
shall be discharged of all further obligations hereunder; provided, however, that the Escrow Agent shall nevertheless retain such certificate or certificates as escrow agent if so required pursuant to other restrictions imposed pursuant to this Agreement. Grantee hereby irrevocably authorizes and directs the Escrow Agent to transfer the unvested Shares which have been cancelled and forfeited to the Company. The Escrow Agent shall not be liable for any act it may do or omit to do with respect to holding the Shares in escrow and while acting in good faith and in the exercise of its judgment.
Transferability. Unvested Shares may not be transferred in any manner. Transfer or sale of vested Shares is subject to restrictions on transfer imposed by the Plan and this Agreement, and any applicable state and federal securities laws. Any transferee shall hold such Shares subject to all the provisions of the Plan and of this Agreement.
Change in Control. Upon a Change in Control, Shares will be treated in accordance with Section 3.7 of the Plan.
Ownership, Voting Rights, Duties. This Agreement shall not affect in any way the ownership, voting rights or other rights or duties of Grantee as a stockholder of the Company, except as specifically provided herein.
Tax Representations and Tax Withholding. Grantee has reviewed with his own tax advisors the federal, state, local and foreign tax consequences of this investment and the transactions contemplated by this Agreement. Grantee is relying solely on such advisors and not on any statements or representations of the Company or any of its agents. Grantee understands that he (and not the Company) shall be responsible for his own tax liability that may arise as a result of this investment or the transactions contemplated by this Agreement. The Company may require the Grantee to pay to the Company, or make arrangements satisfactory to the Company regarding payment of any taxes of any kind required by law to be withheld with respect to the Shares. In order to satisfy any such withholding obligation, the Company may withhold Shares having a Fair Market Value equal to the amount of the tax to be withheld.
Right of Offset. The Company shall have the right to offset against the obligation to deliver Share certificates to Grantee, any outstanding amounts then owed by Grantee to the Company.
Entire Agreement. The Plan is incorporated herein by reference. This Agreement, the Plan and such other documents as may be executed in connection with the Shares constitute the entire agreement and understanding of the parties hereto with respect to the subject matter hereof and supersede all prior understandings and agreements with respect to such subject matter. Any action taken or decision made by the Committee arising out of or in connection with the construction, administration, interpretation or effect of this Agreement shall lie within its sole and absolute discretion, as the case may be, and shall be final, conclusive and binding on the Grantee and all persons claiming under or through the Grantee.
Amendment. The Committee may amend the Plan and this Agreement in any respect whatsoever, provided that any such amendment that materially impairs any rights or materially increases any obligations of the Grantee under this Agreement shall be made only with the consent of the Grantee.
No Obligation to Employ. Nothing in the Plan or this Agreement shall confer on the Grantee any right to continue in the employ of, or other relationship with, the Company or any Related Entity, or limit in any way the right of the Company or any Related Entity to terminate the Grantee’s employment or other relationship at any time, with or without cause.
Notices. Any notice required to be given or delivered to the Company under the terms of this Agreement shall be in writing and addressed to the Corporate Secretary of the Company at its principal corporate offices. Any notice required to be given or delivered to the Grantee shall be in writing and addressed to the Grantee at the address indicated in the Company’s employment records or to such other address as such party may designate in writing from time to time to the Company. All notices shall be deemed to have been given or delivered upon: personal delivery; three (3) days after deposit in the United States mail by certified or registered mail (return receipt requested); one (1) business day after deposit with any return receipt express courier (prepaid); or one (1) business day after transmission by facsimile.
Successors and Assigns. The Company may assign any of its rights under this Agreement. This Agreement shall be binding upon and inure to the benefit of the successors and assigns of the Company. Subject to the restrictions on transfer set forth herein, this Agreement shall be binding upon the Grantee and the Grantee’s heirs, executors, administrators, legal representatives, successors and assigns.
Choice of Forum. THE COMPANY AND THE GRANTEE HEREBY IRREVOCABLY SUBMIT TO THE EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED IN THE CITY OF LOS ANGELES OVER ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO OR CONCERNING THE PLAN OR THIS AGREEMENT THAT IS NOT OTHERWISE RESOLVED ACCORDING TO THIS AGREEMENT.
GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF CALIFORNIA WITHOUT REGARD TO THAT BODY OF LAW PERTAINING TO CHOICE OF LAW OR CONFLICT OF LAW.
Headings. The headings in this Agreement are for the purpose of convenience only and are not intended to define or limit the construction of the provisions hereof.
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed and delivered as of the Grant Date.
Sunstone Hotel Investors, Inc.
By:
Name:
Title:
Exhibit 10.8
Sunstone Hotel Investors, Inc.
Restricted Stock Award Certificate
[NAME]
Name of Grantee
Grant Series |
February [___] |
Total Number of Shares of Restricted Stock Granted |
[___] |
Grant Date |
[___] |
|
|
This Certificate and the attached Restricted Stock Award Agreement confirm the grant under the Sunstone Hotel Investors, Inc. 2004 Long-Term Incentive Plan to the above-named Grantee of the amount of Restricted Stock set forth above. This Certificate merely evidences such grant and does not constitute property of any nature or type or confer any additional rights. This grant is subject in all respects to the applicable terms of the Plan and the Restricted Stock Award Agreement attached hereto, which are incorporated by reference in this Certificate. A copy of the Plan may be obtained at no cost by contacting the Corporate Secretary.
This Restricted Stock award will vest in accordance with the Schedule below. Shares of Restricted Stock that are included in this award may not be transferred by the Grantee prior to vesting and shall be forfeited by the Grantee upon the Grantee’s Termination of Employment, as defined in the Plan, prior to vesting for any reason. Notwithstanding the foregoing or anything to the contrary contained herein or in the Plan, if and to the extent that any dividends or other distributions become payable with respect to any shares subject to this grant, as determined by the Committee in its sole discretion, the cash and/or property paid to Grantee in respect of such dividend or other distribution shall be fully vested and nonforfeitable upon payment, whether or not the shares underlying such dividend or other distribution have vested. In addition, the Committee shall determine in its sole discretion the medium in which any such dividend or distribution (if any) shall be paid.
Vesting Date |
Percentage (%) of Restricted Stock With Respect to Which Grantee Is Vested |
First Vesting Date – [___] |
___% |
Second Vesting Date – [___] |
___% |
Third Vesting Date – [___] |
___% |
Additional Provisions:
Any tax withholding obligations relating to this Restricted Stock award shall be satisfied by the Company’s withholding shares of Restricted Stock, having a Fair Market Value, as defined in the Plan, equal to the amount of the tax to be withheld.
If an executed copy of this Award Certificate is not returned to the Company by [___], the grant of shares of Restricted Stock hereunder shall be null and void, unless the Company determines, in its sole discretion, that any delay was for good cause.
By:
Name: [NAME]
LEASE AGREEMENT
THIS LEASE AGREEMENT (this "Lease"), dated as of _______ XX, 20XX entered into by and between ___________________, a ___________________ ("Operating Lessor") and _________________, a _______________ ("Operating Lessee"), provides as follows.
R E C I T A L S:
A. Operating Lessor has acquired that certain improved real property constituting the hotel property more specifically described on Exhibit "A" attached hereto and incorporated herein by reference (collectively, the "Leased Property"). |
B. Operating Lessee has applied for and been granted various licenses to operate each of the Facilities on the Leased Property (as defined in Section 1.1 below). |
C. Operating Lessor desires to lease the Leased Property to Operating Lessee and Operating Lessee has agreed to lease the Leased Property from Operating Lessor in accordance with the terms of this Lease. |
D. In furtherance of the consummation of such series of transactions, Operating Lessor and Operating Lessee wish to enter into this Lease. |
A G R E E M E N T:
NOW, THEREFORE, Operating Lessor, in consideration of the payment of rent by Operating Lessee to Operating Lessor, the covenants and agreements to be performed by Operating Lessee, and upon the terms and conditions hereinafter stated, does hereby rent and lease unto Operating Lessee, and Operating Lessee does hereby rent and lease from Operating Lessor, the Leased Property.
ARTICLE 1
LEASED PROPERTY; TERM
1.1 Leased Property. The leased property (the "Leased Property") is comprised of Operating Lessor's interest in the following:
(a) the land described in Exhibit "A" attached hereto and by reference incorporated herein (the Land"); |
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(b) all buildings, structures and other improvements of every kind including, but not limited to, each Facility, alleyways and connecting tunnels, sidewalks, utility pipes, conduits and lines (on-site and off-site), as applicable any parking garage constructed on a portion of the Land (collectively referred to herein as the "Parking Facilities"), and such roadways appurtenant to the Parking Facilities and such buildings and structures presently situated upon the Land (collectively, the "Leased Improvements"); |
(c) all easements, rights and appurtenances relating to the Land or the Leased Improvements; |
(d) all fixtures and equipment, machinery, and all other items of property, including all components thereof, now and hereafter permanently affixed to or incorporated into the Leased Improvements, including, without limitation, all furnaces, boilers, heaters, electrical equipment, heating, plumbing, lighting, ventilating, refrigerating, incineration, air and water pollution control, waste disposal, air-cooling and air-conditioning systems and apparatus, sprinkler systems and fire and theft protection equipment, all of which to the greatest extent permitted by law are hereby deemed by the parties hereto to constitute real estate, together with all replacements, modifications, alterations and additions thereto (but only to the extent such items constitute "real property" as such term is used in Section 512(b)(3)(A)(i) of the Code) (collectively, the "Fixtures"); |
(e) all furniture, furnishings, wall coverings, fixtures and hotel equipment and systems located at, or used in connection with, any Facility, together with all replacements therefor and additions thereto, including, without limitation, (i) all equipment and systems required for the operation of kitchens, bars, if any, and laundry and dry cleaning facilities, (ii) dining room wagons, materials handling equipment, cleaning and engineering equipment, all items of bedding (iii) telephone and computerized accounting systems, and (iv) vehicles (collectively, "Furniture and Equipment") but specifically excluding any Excess FF&E not owned by Operating Lessor and Operating Lessee's Personal Property; provided, however, that to the extent any item of property that could reasonably be deemed to constitute both a Fixture and Furniture and Equipment, such item of property shall be deemed to be included in the definition of Fixture and not in this definition of Furniture and Equipment; and |
(f) all existing leases and/or licenses of space within the Leased Property (including any security deposits or collateral held by Operating Lessor pursuant thereto). |
THE LEASED PROPERTY IS DEMISED IN ITS PRESENT, "AS-IS" CONDITION, WITHOUT REPRESENTATION OR WARRANTY (EXPRESSED OR IMPLIED) BY LESSOR AS MORE SPECIFICALLY SET FORTH IN SECTION 5.1 HEREOF AND SUBJECT TO THE EXISTING STATE OF TITLE INCLUDING ALL COVENANTS, CONDITIONS, RESTRICTIONS, EASEMENTS AND OTHER MATTERS OF RECORD INCLUDING ALL APPLICABLE LEGAL REQUIREMENTS, THE LIEN OF FINANCING INSTRUMENTS, MORTGAGES, DEEDS OF TRUST AND SECURITY DEEDS, AND INCLUDING OTHER MATTERS WHICH WOULD BE DISCLOSED BY AN INSPECTION OF THE LEASED PROPERTY OR BY AN ACCURATE SURVEY THEREOF.
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1.2 Term. The term of this Lease (the "Term") shall commence on the date hereof (the "Commencement Date") and shall end on _______ XX, 20XX unless sooner terminated in accordance with the provisions hereof. Notwithstanding the foregoing to the contrary, provided that the Operating Lessee is not in default under this Lease beyond any applicable notice and cure period, the Term shall automatically be extended for up to ___ (X) additional ____ (X) year periods; provided, however, during any period either Operating Lessor or Operating Lessee may terminate this Lease upon the then scheduled expiration dated of the Term (and without any obligation to pay any termination fee as provided in Article 39 below) by delivering written termination notice to the other at least ninety (90) days prior to the then scheduled expiration date of the Term.
1.3 Assignment and Assumption of Contracts; Initial Transaction.
(a) Effective upon the Commencement Date, Operating Lessor hereby transfers and assigns to Operating Lessee and Operating Lessee assumes and covenants to perform all of Operating Lessor's obligations under the following agreements and contracts to which the Leased Property remains subject on the Commencement Date, to the maximum extent assignable pursuant to applicable law (the "Assigned Agreements"): |
(i) All contracts for the use or occupancy of guest rooms and/or the meeting, dining, banquet, and spa and health facilities of the Facility; |
(ii) All service and maintenance contracts, equipment leases, purchase orders and other contracts pertaining to the ownership, maintenance, operation, provisioning or equipping of the Facility, including warranties and guaranties relating thereto; |
(iii) All Licenses and permits used in or relating to the ownership, occupancy or operation of any part of the Facility; |
(iv) Any developer's, declarant's, or owner's interests under any operating agreements or reciprocal easement agreements or other similar agreements affecting and/or benefiting the Facility; and |
(v) All leases of space (including any security deposits held by Operating Lessor pursuant thereto, which will be paid over to Operating Lessee by check on the Commencement Date, or credited to Operating Lessee against the cost of the Working Capital sold to Operating Lessee pursuant to Section 5.3) in the Facility to tenants thereof. |
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2.1 Definitions. For all purposes of this Lease, except as otherwise expressly provided or unless the context otherwise requires, (a) the terms defined in this Article 2 have the meanings assigned to them in this Article and include the plural as well as the singular, (b) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with generally accepted accounting principles as are at the time applicable, (c) all references in this Lease to designated "Articles," "Sections" and other subdivisions are to the designated Articles, Sections and other subdivisions of this Lease, and (d) the words "herein," "hereof" and "hereunder" and other words of similar import refer to this Lease as a whole and not to any particular Article, Section or other subdivision:
Accrued Rent: Any amount of Rent that is not paid by Operating Lessee as and when the same becomes due and payable under the terms of this Lease, which Accrued Rent shall bear interest at the Base Rate until paid or otherwise discharged in accordance with this Lease.
Additional Charges: As defined in Section 3.1.5.
Affiliate: Any (a) Person that, directly or indirectly, controls or is controlled by or is under common control with such Person, (b) other Person that owns, beneficially, directly or indirectly, fifty (50%) percent or more of the outstanding capital stock, shares or equity interests of such Person, or (c) officer, director, employee, partner or trustee of such Person or any Person controlling, controlled by or under common control with such Person (excluding trustees and persons serving in similar capacities who are not otherwise an Affiliate of such Person). For the purposes of this definition, "control" (including the correlative meanings of the terms "controlled by" and "under common control with", as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, through the ownership of voting securities, partnership interests or other equity interests.
Alterations: As defined in Section 8.1.
Annual Budget: The operating and capital budget prepared by Operating Lessee and delivered to Operating Lessor in accordance with Section 22.3
Assigned Agreements: Shall have the meaning given such term in Section 1.3(a).
Award: As defined in Section 13.1(c).
Base Rate: The rate of interest announced publicly by JPMorgan Chase Bank, New York, New York from time to time, as such bank's base rate. If no such rate is announced or becomes discontinued, then such other rate as Operating Lessor may reasonably designate.
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Business Day: Each Monday, Tuesday, Wednesday, Thursday and Friday that is not a day on which national banks in the City of New York, New York, or in the municipality wherein the Leased Property is located, are closed.
Cash Management Agreement: Any Cash Management Agreement by and among Operating Lessor, Operating Lessee, and Lender.
Cash Management System: The cash management system established pursuant to the Cash Management Agreement and the other cash management agreements relating to or contemplated by the Loan Documents.
CERCLA: The Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended.
Claims: As defined in Article 10.
Code: The Internal Revenue Code of 1986, as amended.
Commencement Date: As defined in Section 1.2.
Condemnation, Condemnor: As defined in Section 13.1.
Consumer Price Index: The "Consumer Price Index" published by the Bureau of Labor Statistics of the United States Department of Labor, U.S. City Average, All Items for Urban Wage Earners and Clerical Workers (1982-1984=100). If the Consumer Price Index is hereafter converted to a different standard reference base or otherwise revised, any determination hereunder that uses the Consumer Price Index shall be made with the use of such conversion factor, formula or table for converting the Consumer Price Index as may be published by the Bureau of Labor Statistics, or, if the bureau shall no longer publish the same, then with the use of such conversion factor, formula or table as may be published by Prentice Hall, Inc., or failing such publication, by any other nationally recognized publisher of similar statistical information.
Date of Taking: As defined in Section 13.1(b).
Eligible Independent Contractor: A management company that meets all of the following requirements:
(a) The management company does not own, directly or indirectly, more than thirty-five percent (35%) of the outstanding stock of REIT. |
(b) If the management company is a corporation (within the meaning of the Code), no more than thirty-five percent (35%) of the total combined voting power of such management company's outstanding stock (or thirty-five (35%) of the total shares of all classes of the outstanding stock) or, if it is not a corporation, no more than thirty-five percent (35%) of the ownership interest in its assets or profits is owned directly or indirectly, by one or more Persons owning thirty-five percent (35%) or more of the outstanding stock of REIT. |
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(c) Neither REIT, the Operating Lessor, the Operating Lessee, nor any Affiliate thereof derives any income from the management company. |
(d) At the time that the management company enters into a management agreement with the Operating Lessee to operate the Leased Property, the management company (or any "related persons" within the meaning of Section 856(d)(9)(F) of the Code) is actively engaged in the trade or business of operating "qualified lodging facilities" within the meaning of Section 856(d)(9)(D) of the Code for any Person who is not a "related persons" within the meaning of Section 856(d)(9)(F) of the Code with respect to REIT or the Operating Lessee (an "Unrelated Person"). For purposes of determining whether the requirement of this paragraph (d) has been met, a management company shall be treated as being actively engaged in such a trade or business if the management company (i) derives at least ten percent (10%) of both its profits and revenue from operating "qualified lodging facilities" within the meaning of Section 856(d)(9)(D) of the Code for Unrelated Persons or (ii) complies with any regulations or other administrative guidance under Section 856(d)(9) of the Code that provides a "safe harbor" rule with respect to the amount of hotel management business with Unrelated Persons that is necessary to qualify as an "eligible independent contractor" within the meaning of such Code section. |
Encumbrance: As defined in Section 32.1.
Environmental Authority: Any department, agency or other body or component of any Government that exercises any form of jurisdiction or authority under any Environmental Law.
Environmental Authorization: Any license, permit, order, approval, consent, notice, registration, filing or other form of permission or authorization required under any Environmental Law.
Environmental Laws: All applicable federal, state and local laws and regulations relating to pollution of the environment (including without limitation, ambient air, surface water, ground water, land surface or subsurface strata), including without limitation laws and regulations relating to emissions, discharges, Releases or threatened Releases of Hazardous Materials or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials. Environmental Laws include but are not limited to CERCLA, FIFRA, RCRA, SARA, TSCA, and all state and local counterparts.
Environmental Liabilities: Any and all obligations to pay the amount of any judgment or settlement, the cost of complying with any settlement, judgment or order for injunctive or other equitable relief, the cost of compliance or corrective action in response to any notice, demand or request from an Environmental Authority, the amount of any civil penalty or criminal fine, and any court costs and reasonable amounts for attorney's fees, fees for witnesses and experts, and costs of investigation and preparation for defense of any claim or any Proceeding, regardless of whether such Proceeding is threatened, pending or completed, that may be or have been asserted against or imposed upon Operating Lessor, Operating Lessee, any predecessor, the Leased Property or any property used therein and arising out of:
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(a) Failure of Operating Lessee, Operating Lessor, any predecessor or the Leased Property to comply at any time with all Environmental Laws; |
(b) Presence of any Hazardous Materials on, in, under, at the Leased Property; |
(c) A Release at any time of any Hazardous Materials on, in, at, under or in any way affecting the Leased Property; |
(d) Identification of Operating Lessee, Operating Lessor or any predecessor as a potentially responsible party under CERCLA, or under any Environmental Law similar to CERCLA; |
(e) Presence at any time of any above-ground and/or underground storage tanks, as defined in RCRA or in any applicable Environmental Law on, in, at or under the Leased Property or any adjacent site or facility; or |
(f) Any and all claims for injury or damage to persons or property arising out of exposure to Hazardous Materials originating or located at the Leased Property, or resulting from operation thereof or any adjoining property. |
Event of Default: As defined in Section 14.1
FF&E Reserve shall have the meaning given such term in Section 38.1.
Facility: Each hotel and/or other facility offering lodging and other services or amenities being operated or proposed to be operated on the Leased Property.
Facility Mortgage: shall mean, with respect to the Leased Property, any Lien placed by Landlord upon the Leased Property in accordance with Article 28.
Facility Mortgagee: shall mean the holder of a Facility Mortgage.
Fair Market Value: The fair market value of the Leased Property means an amount equal to the price that a willing buyer not compelled to buy would pay a willing seller not compelled to sell for such Leased Property, (a) assuming the same is unencumbered by this Lease, (b) assuming that such seller must pay customary closing costs and title premiums, and (c) taking into account the positive or negative effect on the value of the Leased Property attributable to the interest rate, amortization schedule, maturity date, prepayment penalty and other terms and conditions of any encumbrance that is assumed by the transferee. In addition, in determining the Fair Market Value with respect to damaged or destroyed Leased Property such value shall be determined as if such Leased Property has not been so damaged or destroyed.
FIFRA: The Federal Insecticide, Fungicide, and Rodenticide Act, as amended.
Final Working Capital: As defined in Section 5.3.
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Fiscal Year: The 12-month period from January 1 to December 31.
Fixtures: As defined in Section 1.1.
Food and Beverage Revenues: Shall mean (a) gross revenue from the sale of food and beverages that are prepared at the Facility and sold or delivered on or off the Facility by or on behalf of Operating Lessee (including, without limitation, revenues from mini bars), whether for cash or for credit, including in respect of guest rooms, banquet rooms, meeting rooms and other similar rooms and (b) gross revenue from the rental of banquet, meeting and other similar rooms. Food and Beverage Revenues shall be determined in a manner consistent with the Uniform System. Food and Beverage Revenues shall not include the following:
(i) sales by Operating Lessee's subtenants, licensees and concessionaires, the rent, license fees or concession payments from which are included in Gross Revenues, and any rent, license fees, concession payments or other amounts paid to Operating Lessee by any such subtenants, licensees and concessionaires; |
(ii) vending machine sales; |
(iii) any gratuities or service charges added to a customer's bill or statement in lieu of a gratuity that is paid directly to Facility employees, to the extent actually paid to such employees; |
(iv) credits, rebates or refunds; or |
(v) sales taxes or taxes of any other kind imposed on the sale of food or beverages. |
Franchise Agreement: Any franchise agreement or license agreement with a franchisor under which any Facility is operated.
Furniture and Equipment: As defined in Section 1.1.
Government: The United States of America, any state, district or territory thereof, any foreign nation, any state, district, department, territory or other political division thereof, or any political subdivision of any of the foregoing.
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Gross Operating Expenses: All salaries and employee expense and payroll taxes (including salaries, wages, bonuses and other compensation of all employees at the Facility, and benefits including life, medical and disability insurance and retirement benefits), payments made to any Manager under a Management Agreement, expenditures described in Section 7.1, operational supplies, utilities, cost of insurance to be provided by Operating Lessee, or otherwise reimbursed to Operating Lessor, under the terms of this Lease, management fees and expenses paid to any management company engaged by Operating Lessee for the operation of any Facility, governmental fees and assessments, food, beverages, laundry service expense, the cost of Inventories and fixed asset supplies, license fees, advertising, marketing, reservation systems and any and all other operating expenses as are reasonably necessary for the proper and efficient operation of each Facility incurred by Operating Lessee in accordance with the provisions hereof (excluding, however, (a) federal, state and municipal excise, sales and use taxes collected directly from patrons and guests or as a part of the sales price of any goods, services or displays, such as gross receipts, admissions, cabaret or similar or equivalent taxes paid over to federal, state or municipal governments, (b) the cost of insurance to be carried by Operating Lessor without reimbursement from Operating Lessee, (c) expenditures by Operating Lessor pursuant to Article 11 and (d) payments on any Mortgage or other mortgage or security instrument on any Facility); all determined in accordance with generally accepted accounting principles and the Uniform System. No part of Operating Lessee's central office overhead or general or administrative expense (as opposed to that of any Facility) shall be deemed to be a part of Gross Operating Expenses, as herein provided. Reasonable out-of-pocket expenses of Operating Lessee or of any Manager under a Management Agreement incurred for the account of or in connection with the Facility operations, including but not limited to, postage, telephone charges and reasonable travel expenses of employees, officers and other representatives and consultants of Operating Lessee or any Manager under a Management Agreement and their Affiliates, shall be deemed to be a part of Gross Operating Expenses and such persons shall be afforded reasonable accommodations, food, beverages, laundry, valet and other such services by and at the Facility without charge to such persons or Operating Lessee.
Gross Operating Profit: For any Fiscal Year, the excess of Gross Revenues for such Fiscal Year over Gross Operating Expenses for such Fiscal Year.
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Gross Revenues: All revenues, receipts, and income of any kind derived directly or indirectly by Operating Lessee from or in connection with any Facility (including rentals or other payments from tenants, lessees, licensees or concessionaires but not including their gross receipts) whether on a cash basis or credit, paid or collected, determined in accordance with generally accepted accounting principles and the Uniform System, including without limitation Food and Beverage Revenues, Room Revenues, Parking Revenues, Lease Space Revenues, Telecom Revenues, Resort Fee Revenues and Other Revenues, but excluding, however: (a) funds furnished by Operating Lessor, (b) federal, state and municipal excise, sales, and use taxes collected directly from patrons and guests or as a part of the sales price of any goods, services or displays, such as gross receipts, admissions, cabaret or similar or equivalent taxes and paid over to federal, state or municipal governments, (c) gratuities, (d) proceeds of insurance and condemnation, (e) proceeds from sales other than sales in the ordinary course of business, (f) all loan proceeds from financing or refinancings of the Facility or interests therein or components thereof, (g) judgments and awards, except any portion thereof arising from normal business operations of the hotel, and (h) items constituting "allowances" under the Uniform System.
Hazardous Materials: Any and all substances, materials, chemicals, wastes, pollutants, oils, or governmental regulated substances or contaminants as defined or designated as hazardous, toxic, radioactive, dangerous, or any other similar term in or under any of the statutes, laws, case law, regulations, and rules of the United States or the state of Minnesota, including without limitation:
(a) Solid or hazardous waste, as defined in RCRA or in any Environmental Law; |
(b) Hazardous substances, as defined in CERCLA, or in any Environmental Law; |
(c) Toxic substances, as defined in TSCA or in any Environmental Law; |
(d) Insecticides, fungicides, or rodenticides, as defined in FIFRA or in any Environmental Law; and |
(e) Gasoline or any other petroleum product or byproduct, polychlorinated biphenols, asbestos and urea formaldehyde. |
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Impositions: Collectively, all taxes (including, without limitation, all ad valorem, sales and use, single business, gross receipts, transaction privilege, rent or similar taxes as the same relate to or are imposed upon Operating Lessee or Operating Lessee's business conducted upon the Leased Property, including all personal property taxes on Operating Lessee's Personal Property and Inventory, together with all replacement, modifications, alterations and additions thereto), assessments (including, without limitation, all assessments for public improvements or benefit, whether or not commenced or completed prior to the date hereof and whether or not to be completed within the Term), ground rents, water, sewer or other rents and charges, excises, tax inspection, authorization and similar fees and all other governmental charges, in each case whether general or special, ordinary or extraordinary, or foreseen or unforeseen, of every character in respect of the Leased Property or the business conducted thereon by Operating Lessee (including all interest and penalties thereon caused by any failure in payment by Operating Lessee), which at any time prior to, during or with respect to the Term hereof may be assessed or imposed on or with respect to or be a lien upon (a) Operating Lessor's interest in the Leased Property, (b) the Leased Property, or any part thereof or any rent therefrom or any estate, right, title or interest therein, or (c) any occupancy, operation, use or possession of, or sales from, or activity conducted on or in connection with the Leased Property, or the leasing or use of the Leased Property or any part thereof by Operating Lessee. Nothing contained in this definition of Impositions shall be construed to require Operating Lessee to pay (1) any tax based on net income (whether denominated as a franchise or capital stock or other tax) imposed on Operating Lessor or any other Person, or (2) any net revenue tax of Operating Lessor or any other Person, or (3) any tax imposed with respect to the sale, exchange or other disposition by Operating Lessor of any Leased Property or the proceeds thereof, or (4) any single business, gross receipts (other than a tax on any rent received by Operating Lessor from Operating Lessee), transaction, privilege or similar taxes as the same relate to or are imposed upon Operating Lessor, except to the extent that any tax, assessment, tax levy or charge that Operating Lessee is obligated to pay pursuant to the first sentence of this definition and that is in effect at any time during the Term hereof is totally or partially repealed, and a tax, assessment, tax levy or charge set forth in clause (1) or (2) is levied, assessed or imposed expressly in lieu thereof.
Indemnified Party: Either of an Operating Lessee Indemnified Party or an Operating Lessor Indemnified Party.
Indemnifying Party: Any party obligated to indemnify an Indemnified Party pursuant to Section 6.3 or Article 20.
Independent Director: A director of Operating Lessee who is not at the time of initial appointment, or at any time while serving as a director of Operating Lessee, and has not been at any time during the preceding five years:
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(a) a stockholder, officer, director (other than as the Independent Director of Operating Lessee), employee, member, partner, attorney or counsel of Operating Lessee, Operating Lessor or any affiliate of Operating Lessee or Operating Lessor (unless such natural person is a director provided by a nationally recognized company that provides professional independent managers and which also provides other corporate services in the ordinary course of business, in which case such natural person may receive reasonable fees for serving as a director of Operating Lessee or an Affiliate); |
(b) a creditor, customer, supplier or other Person who derives any of its purchases or revenues from its activities (other than in payment for its role as Independent Director or costs related thereto) with Operating Lessee, Operating Lessor or any affiliate of either of them; |
(c) a Person controlling or under common control with any such stockholder, partner, member, creditor, customer, supplier or other Person (as used herein, the term "control" means the possession, directly or indirectly, of the power to direct or cause the direction of management, policies or activities of a Person, whether through ownership of voting securities, by contract or otherwise); or |
(d) a member of the immediate family of any such stockholder, director, officer, employee, partner, member, creditor, customer, supplier or other Person. |
(e) A natural person who satisfies the foregoing definition other than subsection (b) shall still be considered an Independent Director of Operating Lessee if such individual is an independent director provided by a nationally recognized company that provides professional independent directors and that also provides other corporate services in the ordinary course of business. A natural person who otherwise satisfies the foregoing definition except for being the independent director of a "special purpose entity" affiliated with Operating Lessee that does not own a direct or indirect equity interest in Operating Lessee shall still be considered an Independent Director of Operating Lessee if such individual is at the time of initial appointment an independent director provided by a nationally recognized company that provides professional independent directors. For purposes of this paragraph, a "special purpose entity" is an entity whose organizational documents contain restrictions on its activities substantially similar to those set forth in Article 17. |
Initial Working Capital: As defined in Section 5.3.
Insurance Requirements: All terms of any insurance policy required by this Lease and all requirements of the issuer of any such policy.
Inventory: Collectively, all "Inventories of Merchandise" and "Inventories of Supplies" as defined in the Uniform System, including, but not limited to, linens and other non-depreciable personal property.
Land: As defined in Article 1.
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Leased Improvements; Leased Property: Each as defined in Article 1.
Legal Requirements: All federal, state, county, municipal and other governmental statutes, laws, rules, orders, regulations, ordinances, judgments, decrees and injunctions affecting either the Leased Property or the maintenance, construction, use or alteration thereof (whether by Operating Lessee or otherwise), whether or not hereafter enacted and in force, including (a) all laws, rules or regulations pertaining to the environment, occupational health and safety and public health, safety or welfare, and (b) any laws, rules or regulations that may (1) require repairs, modifications or alterations in or to the Leased Property, or (2) in any way adversely affect the use and enjoyment thereof; and all permits, licenses and authorizations and regulations relating thereto and all covenants, agreements, restrictions and encumbrances contained in any instruments, either of record or known to Operating Lessee (other than encumbrances created by Operating Lessor without the consent of Operating Lessee), at any time in force affecting the Leased Property.
Lender: Such lender as may be designated by Operating Lessor to Operating Lessee from time to time, and such lender's successors and assigns.
Loan: The loan, if any, made by Lender pursuant to the Loan Documents.
Loan Agreement: If any Loan is then in place, the Loan Agreement by and among Operating Lessor, the other Borrowers listed therein and Lender.
Loan Documents: Collectively, the Loan Agreement and all other documentation related thereto (including, but not limited to, all mortgages, security agreements, promissory notes and other collateral documents).
Management Agreement: Any agreement entered into by Operating Lessee with any Eligible Independent Contractor for the management of any Facility.
Manager: Any Eligible Independent Contractor retained to manage a Facility under a Management Agreement.
Minimum Rent: Shall mean for each Fiscal Year the amount set forth on Schedule 3.1.1, as escalated pursuant to Section 3.1.4 hereof, and as adjusted in the event that a refinancing of the Leased Property occurs so that Minimum Rent shall continue to be sufficient to cover the principal and interest payments due following any such refinancing.
Note: Those certain Promissory Notes, if any, dated as of the date hereof by and among Owner, the other Borrowers listed therein and Lender.
Notice: A notice given pursuant to Article 30.
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Operating Lessee Indemnified Party: Operating Lessee, any Affiliate of Operating Lessee, any other Person against whom any claim for indemnification may be asserted hereunder as a result of a direct or indirect ownership interest (including a stockholder's interest) in Operating Lessee, the officers, directors, stockholders, employees, agents and representatives of Operating Lessee and any corporate stockholder, agent, or representative of Operating Lessee, and the respective heirs, personal representatives, successors and assigns of any such officer, director, stockholder, employee, agent or representative.
Operating Lessee's Personal Property: As defined in Section 4.2.
Operating Lessor Indemnified Party: Operating Lessor, any Affiliate of Operating Lessor, any other Person against whom any claim for indemnification may be asserted hereunder as a result of a direct or indirect ownership interest (including a stockholder's or partnership interest) in Operating Lessor, the officers, directors, stockholders, employees, agents and representatives of the general partner of Operating Lessor and any partner, agent or representative of Operating Lessor, and the respective heirs, successors and assigns of any such officer, director, partner, stockholder, employee, agent or representative.
Other Revenues: Any and all revenues generated by or at the Leased Property (other than Room Revenues, and Food and Beverage Revenues), including without limitation, gross revenues attributable to vending machines, movie rentals, concessions and similar services.
Overdue Rate: On any date, a rate equal to the Base Rate plus 1.0% per annum, but in no event greater than the maximum rate then permitted under applicable law.
Payment Date: Any due date for the payment of any installment of Rent.
Person: Any Government, natural person, corporation, partnership or other legal entity.
Personal Property Taxes: All personal property taxes imposed on the furnishings or other items of personal property located on, and used in connection with, the operation of the Leased Improvements as a hotel (other than such items that compose Operating Lessee's Personal Property and Inventory), together with all replacement, modifications, alterations and additions thereto.
Predecessor: Any Person whose liabilities arising under any Environmental Law have or may have been retained or assumed by Operating Lessee, either contractually or by operation of law, relating to the Leased Property.
Primary Intended Use: As defined in Section 5.2(b).
Proceeding: Any judicial action, suit or proceeding (whether civil or criminal), any administrative proceeding (whether formal or informal), any investigation by a governmental authority or entity (including a grand jury), and any arbitration, mediation or other non-judicial process for dispute resolution.
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Qualified Manager: A Manager that is (or is controlled by, controlling or under common control with) a professional management company which at the time of the Manager's engagement as Manager shall be the property manager for at least ten (10) hotel properties containing at least one thousand three hundred (1,300) rooms exclusive of the Leased Properties.
RCRA: The Resource Conservation and Recovery Act, as amended.
Real Estate Taxes: All real estate taxes, including general and special assessments, if any, which are imposed upon the Land, and any improvements thereon.
Release: A "Release" as defined in CERCLA, or in any Environmental Law, unless such Release has been properly authorized and permitted in writing by all applicable Environmental Authorities or is allowed by such Environmental Law without authorizations or permits.
Rent: Collectively, Minimum Rent and Adjusted Gross Rent and Additional Charges attributable to the term of this Lease.
Room Revenues: Shall mean gross revenues from the rental of guest rooms, whether to individuals, groups, or transients at the Facility, determined in a manner consistent with GAAP, excluding the following:
(a) the amount of all credits, rebates or refunds to customers, guests or patrons; |
(b) all sales taxes or any other taxes imposed on the rental of such guest rooms; |
(c) any fees collected for amenities including, but not limited to, telephone, room service, laundry, movies or concessions |
SARA: The Superfund Amendments and Reauthorization Act of 1986, as amended.
Specially Designated National or Blocked Person: (i) persons designated by the U.S. Department of Treasury's Office of Foreign Assets Control, or other governmental entity, from time to time as a "specially designated national or blocked person" or similar status, (ii) a person described in Section 1 of U.S. Executive Order 13224 issued on September 23, 2001, or (iii) a person otherwise identified by government or legal authority as a person with whom Operating Lessee or its Affiliates are prohibited from transacting business.
State: The State or Commonwealth of the United States in which the Leased Property is located.
Subsidiaries: Corporations in which Operating Lessee owns, directly or indirectly, more than fifty percent (50%) of the voting stock or control, as applicable.
Successor Operating Lessor: Shall have the meaning given such term in Section 28.2.
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Superior Operating Lessor: Shall have the meaning given such term in Section 28.2.
Superior Lease: Shall have the meaning given such term in Section 28.2.
Superior Mortgage: Shall have the meaning given such term in Section 28.2.
Superior Mortgagee: Shall have the meaning given such term in Section 28.2.
Taking: A taking or voluntary conveyance during the Term hereof of all or part of the Leased Property, or any interest therein or right accruing thereto or use thereof, as the result of, or in settlement of, any Condemnation or other eminent domain proceeding affecting the Leased Property whether or not the same shall have actually been commenced.
Term: As defined in Section 1.2.
TSCA: The Toxic Substances Control Act, as amended.
Unavoidable Delays: Delays due to strikes, lock-outs, labor unrest, inability to procure materials, power failure, acts of God, governmental restrictions, enemy action, civil commotion, fire, unavoidable casualty or other causes beyond the control of the party responsible for performing an obligation hereunder, provided that lack of funds shall not be deemed a cause beyond the control of either party hereto unless such lack of funds is caused by the failure of the other party hereto to perform any obligations of such party under this Lease or any guaranty of this Lease.
Uneconomic for its Primary Intended Use: A state or condition of any Facility such that, in the good faith judgment of Operating Lessee, reasonably exercised and evidenced by the resolution of the board of directors or other governing body of Operating Lessee, such Facility cannot be operated on a commercially practicable basis for its Primary Intended Use, taking into account, among other relevant factors, the number of usable rooms and projected revenues, such that Operating Lessee intends to, and shall, complete the cessation of operations from the Facility.
Uniform System: The Uniform System of Accounts for Hotels (11th Revised Edition, 2014) as published by the Hotel Association of New York City, Inc., as same may hereafter be revised.
Unsuitable for its Primary Intended Use: A state or condition of any Facility such that, in the good faith judgment of Operating Lessee, reasonably exercised and evidenced by the resolution of the board of directors or other governing body of Operating Lessee, due to casualty damage or loss through Condemnation, the Facility cannot function as an integrated hotel facility consistent with standards applicable to a well maintained and operated hotel.
Working Capital: As defined in Section 5.3.
Working Capital Note: As defined in Section 5.3.
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3.1 Rent. Operating Lessee shall pay to Operating Lessor, in lawful money of the United States of America which shall be legal tender for the payment of public and private debts, without offset, abatement, demand or deduction, Minimum Rent and Adjusted Gross Rent, as applicable, during the Term, except as hereinafter expressly provided. All payments to Operating Lessor shall be made by wire transfer of immediately available federal funds or by other means reasonably acceptable to Operating Lessor in its sole discretion.
3.1.1 Payment of Rent. On or before the second (2nd) Business Day after the required payment date under the Management Agreement for amounts due from Manager thereunder relating to each Accounting Period (whether or not such payment under the Management Agreement is made on the required payment date, Operating Lessee shall pay to Operating Lessor an amount of Rent equal to the product of (x) the Minimum Rent for the current Fiscal Year times (y) a fraction, the numerator of which is the number of elapsed Accounting Periods in such Fiscal Year (including the Accounting Period with respect to which payment of Rent is being made) and the denominator of which is 12. Additionally, annually the Operating Lessee shall pay to Operating Lessor an amount of Percentage Rent equal to the excess, if any, of "Adjusted Gross Rent," being XX% of the sum of (x) Excess Adjusted Revenues less (y) the Credit Amount plus (z) the Supplemental Amount, over (B) the aggregate amount of Minimum Rent previously paid pursuant to this Section 3.1.1 during such Fiscal Year (less the aggregate amount previously paid by Operating Lessor to Operating Lessee pursuant to the next sentence in this Section 3.1.1 during such Fiscal Year). In the event of a change in the Accounting Period during the Term which results in payment dates (and/or number of payments) different from the payment dates (and/or number of payments) provided for herein, the amount of subsequent installments of Minimum Rent shall be appropriately adjusted in a fair and equitable manner. In the absence of agreement between Operating Lessor and Operating Lessee on the appropriate adjustments, the matter may be submitted by either party to arbitration for resolution.
3.1.2 Excess Adjusted Revenues, Credit Amount and Supplemental Amount.
(a) The "Excess Adjusted Revenues" for the applicable Fiscal Year shall be the total of the following amounts: |
(1) an amount equal to the product of (a) Room Revenues times (b) the Room Revenues Percentage, plus |
(2) an amount equal to the product of (a) Food and Beverage Revenues times (b) the Food and Beverage Revenues Percentage, plus |
(3) an amount equal to the product of (a) Parking Revenues times (b) the Parking Revenues Percentage, plus |
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(4) an amount equal to the product of (a) Lease Space Revenues times (b) the Lease Space Revenues Percentage, plus |
(5) an amount equal to the product of (a) Retail Revenues times (b) the Retail Revenues Percentage, plus |
(6) an amount equal to the product of (a) Other Revenues times (b) the Other Revenues Percentage, less |
(7) an amount equal to the product of (a) the Occupied Rooms times (b) the Occupied Room Amount, less |
(8) an amount equal to the product of (a) Base Rent Credit times (b) a fraction, the numerator of which is the number of elapsed Accounting Periods in such Fiscal Year (including the Accounting Period with respect to which payment of Rent is being made) and the denominator of which is, less |
(9) if applicable, the amount equal to the product of (x) the difference, if any, positive or negative, as applicable, in the percentage of Gross Revenues required to be deposited by Operating Lessor in the FF&E Reserve and the FF&E Reserve Percentage on Schedule 3.1.2 and (y) Gross Revenues, such amount being the "FF&E Reserve Adjustment," and, less |
(10) if applicable, the amount, if any, that Operating Lessor funds for any capital expenditures or contributions to the FF&E Reserve (other than by reason of an increase in the FF&E Reserve Percentage), which results in a Deduction (as defined in the Management Agreement) being made by Manager from Gross Revenues in order to provide for the repayment of such funding, the amount of such Deduction being the "FF&E Loan Adjustment." |
(b) The "Credit Amount" for the applicable Fiscal Year shall be the greater of (1) Zero Dollars ($0.00) or (2) an amount equal to the product of (x) Excess Adjusted Revenues less the product of (i) Owner's Priority times (ii) a fraction, the numerator of which is the number of elapsed Accounting Periods in such Fiscal Year (including the Accounting Period with respect to which payment of Rent is being made) and the denominator of which is 12, times (y) the Percentage Factor. |
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(c) The "Supplemental Amount" for the applicable Fiscal Year shall be the sum of (1) the Base Supplemental Amount times a fraction, the numerator of which is the number of elapsed Accounting Periods in such Fiscal Year (including the Accounting Period with respect to which payment of Rent is being made) and the denominator of which is 12, and (2) the product of (x) Gross Revenues and (y) the Supplemental Percentage, (3) if applicable the FF&E Reserve Adjustment , and (4) if any, the FF&E Loan Adjustment. |
3.1.3 Confirmation of Rent.
(a) Operating Lessee shall submit to Operating Lessor on each rental payment date pursuant to Section 3.1.1 a reasonably detailed schedule (the "Adjusted Gross Rent Schedule"), signed and certified by Operating Lessee to be correct, showing the Computation of Adjusted Gross Rent (including Excess Adjusted Revenues, the Credit Amount and Supplemental Amount) with respect to the Facility for the preceding Accounting Period and the calculation of the amount of Rent owed on such date (other than Additional Charges) by Operating Lessee or the amount Operating Lessor is required to pay to Operating Lessee for such Accounting Period. Operating Lessee's Adjusted Gross Rent Schedule shall clearly indicate how much of the Gross Revenues is comprised by Room Revenues, Food and Beverage Revenues, Parking Revenues, Retail Revenues, Lease Space Revenues, and Other Revenues, and shall contain such detail and breakdown as Operating Lessor may reasonably require. If, after notice from Operating Lessor and the expiration of the cure period provided for in Section 14.1(c) of this Lease, Operating Lessee fails to submit the Adjusted Gross Rent Schedule to Operating Lessor when due, Operating Lessor, in addition to any other remedies Operating Lessor has, shall have the right (subject to compliance with the Management Agreement and the Consent and Assignment) to retain an independent certified public accountant, at Operating Lessee's sole expense, to prepare such Adjusted Gross Rent Schedule and to perform all inspections and audits related thereto. |
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(b) Operating Lessee shall maintain in accordance with the usual and customary practices of Operating Lessee and in accordance with GAAP during the Term, for the current Fiscal Year and for the immediately preceding Fiscal Year, (i) complete and accurate general books of account, which shall reflect Gross Revenues, and (ii) all other original records and other pertinent papers that will enable Operating Lessor to determine the Gross Revenues derived by Operating Lessee during the relevant Fiscal Year from Room Revenues, Food and Beverage Revenues, Parking Revenues, Retail Revenues, Lease Space Revenues, and Other Revenues, or as otherwise outlined in the Uniform System of Accounts. Such records for the current and most recent Fiscal Year shall be maintained at Operating Lessee's corporate headquarters. The provisions of this Section 3.1.3(b) shall survive the expiration or earlier termination of this Lease for a period of three (3) years thereafter, subject to extension upon Notice from Operating Lessor, provided that all storage and related expenses of maintaining records beyond such three-year period shall be at Operating Lessor's sole cost and expense. In addition to the audit rights set forth in Section 3.1.3(c) below, in the event Operating Lessor, any Lending Institution, any Facility Mortgagee, or any potential purchaser of the Leased Property, or any of their respective representatives, desires to audit Operating Lessee's financial records described in clauses (i) and (ii) above, Operating Lessee shall, at Operating Lessor's sole cost and expense, cooperate with such audit by making such records available at Operating Lessee's corporate headquarters during normal business hours upon reasonable prior Notice. |
(c) Operating Lessor shall have fifty (50) days after the receipt of the Year End Adjusted Gross Rent Schedule to have an independent certified public accountant examine Operating Lessee's records, during regular business hours upon reasonable prior Notice by Operating Lessor, of Room Revenues, Food and Beverage Revenues, and/or Other Revenues for the related Fiscal Year and all other relevant financial information. The acceptance by Operating Lessor of each periodic payment of Adjusted Gross Rent shall not prejudice Operating Lessor's right to proceed with such examination as described in the immediately preceding sentence. If Operating Lessor raises no objections within such fifty (50)-day period, the Year End Adjusted Gross Rent Schedule shall be deemed to have been accepted by Operating Lessor as true and correct, and Operating Lessor shall have no further right to question its accuracy. Notwithstanding the foregoing, if the Owner (as defined in the Management Agreement) has less than sixty (60) days to review the annual operating statement under the Management Agreement, the fifty (50) day period set forth above shall be reduced to a number of days equal to (i) the number of days Owner has to review the annual operating statement under the Management Agreement, less (ii) five (5) days. If Operating Lessor does raise such an objection, by Notice to Operating Lessee, Operating Lessor shall arrange for an independent certified public accountant to commence such examination within fifty (50) days after the date of such objection and shall cause such audit to be completed no later than one hundred eighty (180) days after Operating Lessor's receipt of the Year End Adjusted Gross Rent Schedule. Operating Lessor shall pay all costs and expenses of such audit; provided, however: |
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(i) if such audit discloses that the amount of Adjusted Gross Rent was underreported by Operating Lessee by five percent (5%) or more for such Fiscal Year, Operating Lessee shall pay to Operating Lessor, within fifteen (15) days of its receipt of Notice from Operating Lessor, the cost of the audit, as Additional Charges, in addition to any deficiency in Adjusted Gross Rent that may be due to Operating Lessor; or |
(ii) if the audit discloses that the amount of Adjusted Gross Rent either was not underreported or was underreported by Operating Lessee by less than five percent (5%), Operating Lessor shall be responsible for all costs associated with the audit and Operating Lessee shall pay, within fifteen (15) days of its receipt of Notice from Operating Lessor, any deficiency in Adjusted Gross Rent that may be due to Operating Lessor; or |
(iii) if the audit discloses that the Adjusted Gross Rent was over-reported by Operating Lessee for the related Fiscal Year, Operating Lessor shall be responsible for all costs associated with the audit, shall give Operating Lessee Notice of such over-reporting within fifteen (15) days of Operating Lessor's receipt of audit results, and shall reimburse the amount of such overpayment to Operating Lessee in cash along with delivery of such Notice to Operating Lessee. |
(iv) The provisions of this Section 3.1.3(c) shall survive the expiration or the earlier termination of this Lease for a period of one (1) year thereafter. |
3.1.4 Reserved.
3.1.5 Additional Charges.
In addition to the Minimum Rent and Adjusted Gross Rent payable hereunder, Operating Lessee shall pay and discharge as and when due and payable the following (collectively, "Additional Charges"):
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(a) Impositions. Subject to Article 10 relating to Permitted Contests and the right of any Facility Mortgagee to require tax escrows as described in the last sentence of this paragraph of subsection (a), Operating Lessee shall pay or cause to be paid all Impositions (other than Real and/or Personal Property Taxes of the Lessor which shall be paid by the Lessor) attributable to any period during the Term before any fine, penalty, interest or cost (other than any opportunity cost as a result of a failure to take advantage of any discount for early payment) may be added for nonpayment, such payments to be made directly to the taxing authorities where feasible, and shall promptly, upon request, furnish to Operating Lessor copies of official receipts or other satisfactory proof evidencing such payments. If any such Imposition may, at the option of the taxpayer, lawfully be paid in installments (whether or not interest shall accrue on the unpaid balance of such Imposition), Operating Lessee may exercise the option to pay the same (and any accrued interest on the unpaid balance of such Imposition) in installments and, in such event, shall pay such installments during the Term as the same become due and before any fine, penalty, premium, further interest or cost may be added thereto. Operating Lessor, at its expense, shall, to the extent required or permitted by Legal Requirements, prepare and file all tax returns required to be filed by Operating Lessor, including, without limitation, returns in respect of Operating Lessor's net income, gross receipts, sales and use, single business, transaction, privilege, rent, ad valorem, franchise taxes, Real Estate Taxes and other Operating Lessor Obligations, and taxes on its capital stock, and Operating Lessee, at its expense, shall, to the extent required or permitted by Legal Requirements, prepare and file all tax returns and reports required to be filed by Operating Lessee in respect of any Imposition as may be required by any Government Agency. Provided no monetary Default or Event of Default shall have occurred and be continuing, if any refund shall be due from any taxing authority in respect of any Imposition paid by Operating Lessee, the same shall be paid over to or retained by Operating Lessee. Operating Lessor and Operating Lessee shall each, upon request of the other, provide such data as is maintained by the party to whom the request is made with respect to the Leased Property as may be necessary to prepare any required returns and reports. All Impositions assessed against such personal property that comprises FF&E shall be (irrespective of whether Operating Lessor or Operating Lessee shall file the relevant return) paid by the party that owns the FF&E not later than the last date on which the same may be made without interest or penalty. All Impositions assessed against such personal property that comprises Operating Lessee's Personal Property shall be (irrespective of whether Operating Lessor or Operating Lessee shall file the relevant return) paid by Operating Lessee not later than the last date on which the same may be made without interest or penalty. If the provisions of any Facility Mortgage require deposits on account of Impositions to be made with the Facility Mortgagee, provided the Facility Mortgagee has not elected to waive such provision, Operating Lessee shall either pay Operating Lessor the monthly amounts required with respect to any such Impositions at the time and place that payments of Minimum Rent or Adjusted Gross Rent are required and Operating Lessor shall transfer such amounts to the Facility Mortgagee or, pursuant to written direction by Operating Lessor, Operating Lessee shall make such deposits directly with the Facility Mortgagee, and such payment to Operating Lessor or Facility Mortgagee shall be deemed to satisfy Operating Lessee's obligation hereunder to pay the Impositions. |
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Operating Lessor shall give prompt Notice to Operating Lessee of all Impositions payable by Operating Lessee hereunder of which Operating Lessor at any time has knowledge; provided, however, that Operating Lessor's failure to give any such Notice shall in no way diminish Operating Lessee's obligation hereunder to pay such Impositions, except that Operating Lessor shall be responsible for any interest and/or penalties incurred by Operating Lessee as a result of Operating Lessor's failure to forward any invoices, assessment notices or other bills to Operating Lessee and no Default or Event of Default shall be deemed to have occurred hereunder if Operating Lessee's failure to pay timely any Impositions is due to Operating Lessor's failure to give Operating Lessee such Notice at least ten (10) days before the amounts therein are due.
Operating Lessee shall give prompt Notice to Operating Lessor of all taxes included in Operating Lessor Obligations payable by Operating Lessor hereunder of which Operating Lessee at any time has knowledge; provided, however, that Operating Lessee's failure to give any such Notice shall in no way diminish Operating Lessor's obligation hereunder to pay such Operating Lessor Obligations, except that Operating Lessee shall be responsible for any interest and/or penalties incurred by Operating Lessor as a result of Operating Lessee's failure to forward any invoices, assessment notices or other bills to Operating Lessor and no Operating Lessor Default shall be deemed to have occurred hereunder if Operating Lessor's failure to pay timely any taxes included in Operating Lessor Obligations is due to Operating Lessee's failure to give Operating Lessor such Notice at least ten (10) days before the amounts therein are due.
(b) Utility Charges. Operating Lessee shall pay or cause to be paid all charges for electricity, power, gas, oil, water and other utilities used in connection with the Leased Property. |
(c) Insurance Premiums. Except as otherwise provided in Section 11, Operating Lessee shall pay or cause to be paid all premiums for the insurance coverage required to be maintained by it pursuant to Article 11. |
(d) Other Charges. Operating Lessee shall pay or cause to be paid all other amounts, liabilities and obligations that Operating Lessee assumes or agrees to pay under this Lease, including, without limitation, all agreements to indemnify Operating Lessor under Sections 6.3(c) and 20.1. |
(e) [Intentionally Omitted.] |
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(f) Reimbursement for Additional Charges. If Operating Lessee (as opposed to Manager) pays or causes to be paid Additional Charges attributable to periods before the Commencement Date, Operating Lessee shall provide Notice to Operating Lessor of such amounts and, within fifteen (15) days thereafter, Operating Lessor shall remit to Operating Lessee the amount of such Additional Charges paid. If Operating Lessee pays or causes to be paid Additional Charges attributable to periods after the end of the Term, Operating Lessee may, within sixty (60) days after the end of the Term, provide Notice to Operating Lessor of such amounts. Provided no uncured monetary Default or Event of Default then exists, Operating Lessor shall reimburse Operating Lessee for all payments of such Additional Charges that are attributable to any period after the expiration or earlier termination of the Term of this Lease within fifteen (15) days after its receipt of such Notice. Notwithstanding the foregoing, Operating Lessee shall only be reimbursed to the extent such Additional Charges are not taken into account in the calculation and settlement of Working Capital accounts as set forth in Section 5.3. In the event Manager pays for Additional Charges attributable to periods before the Commencement Date, Operating Lessee shall receive a payment as set forth in Section 3.1.6(g) below. Operating Lessee shall reimburse Operating Lessor within fifteen (15) days after receipt of Notice (which shall be given within sixty (60) days after the end of the Term) for any Additional Charges paid by Operating Lessor attributable to periods during the Term for which Operating Lessee received a credit in the settlement of Working Capital. |
3.1.6 Adjustments to/Abatements of Rent.
(a) FF&E Adjustment to Rent. Pursuant to the terms of Schedule 22.2, Rent shall be reduced by the amount of the FF&E Adjustments then in effect. In the event there is an FF&E Adjustment which commences on a day other than the first day of an Accounting Period in which such FF&E Adjustment occurs, Operating Lessor shall reimburse Operating Lessee in cash, within fifteen (15) days after such FF&E Adjustment, an amount equal to the amount by which Rent paid for the Accounting Period in which the FF&E Adjustment commenced exceeded the amount of Rent (as reduced by the FF&E Adjustment) owed for such Accounting Period. |
(b) Adjustment of Rent for Major Capital Expenditures. In the event of either a reduction or increase in Gross Revenues or an adverse or beneficial impact on the Facility's operations, in either case resulting from unforeseen delays, or changes in timing or scope of a Major Capital Expenditure, Operating Lessor and Operating Lessee shall, in good faith, negotiate possible modifications to the Minimum Rent and Adjusted Gross Rent to determine an appropriate temporary or permanent adjustment of Rent and the effective date of such adjustment. |
(c) Adjustment of Rent for Change in Manager. In the event of either a reduction or increase in Gross Revenues or an adverse or beneficial impact on the Facility's operations, in either case resulting generally from either a change in manager or a renewal of an existing management agreement, the Operating Lessor and Operating Lessee shall, in good faith, negotiate possible modifications to the Minimum Rent and Adjusted Gross Rent to determine an appropriate temporary or permanent adjustment of Rent and the effective date of such adjustment. |
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(d) Adjustment of Rent for Change in Franchisor. In the event of either a reduction or increase in Gross Revenues or an adverse or beneficial impact on the Facility's operations, in either case resulting from either a change in manager or a renewal of an existing management agreement, Operating Lessor and Operating Lessee shall, in good faith, negotiate possible modifications to the Minimum Rent and Adjusted Gross Rent to determine an appropriate temporary or permanent adjustment of Rent and the effective date of such adjustment. |
(e) Adjustment of Rent for Change in Major Tenant/Concessionaire. In the event of either a reduction or increase in Gross Revenues or an adverse or beneficial impact on the Facility's operations, in either case resulting from either a change in Major Tenant/Concessionaire, Operating Lessor and Operating Lessee shall, in good faith, negotiate possible modifications to the Minimum Rent and Adjusted Gross Rent to determine an appropriate temporary or permanent adjustment of Rent and the effective date of such adjustment. |
(f) Adjustment for Change in Collective Bargaining Agreements. In the event of adverse or beneficial impact on the Facility's operations, in either case resulting from either a change in or renewal of the current Collective Bargaining Agreement with _______________, Operating Lessor and Operating Lessee shall, in good faith, negotiate possible modifications to the Minimum Rent and Adjusted Gross Rent to determine an appropriate adjustment of Rent and the effective date of such adjustment. |
(g) Adjustment for Change in Condominium Agreement. In the event of an adverse or beneficial impact on the Facility's operations, in either case resulting from either a change in the Master Deed of __________ Condominium agreement dated _______ XX, XXXX, Operating Lessor and Operating Lessee shall, in good faith, negotiate possible modifications to the Minimum Rent and Adjusted Gross Rent to determine an appropriate adjustment of Rent and the effective date of such adjustment. |
(h) Adjustment for Change in Competitive Supply. In the event of adverse or beneficial impact on the Facility's operations, in either case resulting from a change in the Competitive Supply included in the boundaries set forth in the Area Protection Agreement contained in the ________ agreement, Operating Lessor and Operating Lessee shall, in good faith, negotiate possible modifications to the Minimum Rent and Adjusted Gross Rent to determine an appropriate adjustment of Rent and the effective date of such adjustment. |
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(i) If Operating Lessor and Operating Lessee are unable to agree that a reduction or increase in Gross Revenues or an adverse or beneficial impact on Facility operations, in either case resulting from either a change described in Section 3.1.6 above, has occurred, within thirty (30) days after the date of Notice from either party to the other that such event has occurred (accompanied by reasonably detailed computations and documentation to support such assertion), the matter may be submitted by either party to arbitration under Article 15 for resolution and for determination of the manner of adjustment to Minimum Rent and Adjusted Gross Rent contemplated hereby. For purposes of any such arbitration, the arbitrator shall assume that, except with respect to the proposed rent adjustment relating to a change described in Section 3.1.6 above, Operating Lessor and Operating Lessee regard the then-existing economic relationship between them as being fair and equitable and reflecting an arms-length transaction. Accordingly, the arbitrator shall not use such proposed rent adjustment as a basis for modifying in any material way the then-existing economic provisions and other material terms of the Lease, other than in respect of such proposed rent adjustment. The rent adjustment contemplated hereby shall reflect a fair market rent adjustment with respect to the reduction or increase in Gross Revenues or an adverse or beneficial impact on Facility operations, in either case resulting from either a change in manager or a renewal of an existing management agreement. Operating Lessee shall continue to pay Minimum Rent and Adjusted Gross Rent as required under Sections 3.1.1 through 3.1.5 of this Lease until such time as any adjustments to Adjusted Gross Rent are agreed upon or determined as set forth above. |
(j) Operating Lessee Reimbursement for Operating Lessor Obligations Paid by Manager or Operating Lessee. Operating Lessor shall reimburse Operating Lessee in cash for the amount of any Operating Lessor Obligations either (i) paid by Manager and deducted by Manager out of amounts owed to Operating Lessee in accordance with the Management Agreement or (ii) paid by Operating Lessee, such reimbursement to be paid within fifteen (15) days after receiving Notice thereof, provided no uncured monetary Default or Event of Default then exists. |
(k) Operating Lessee Reimbursement for Additional Charges Attributable to Periods prior to the Commencement Date and Paid by Manager. In the event Manager pays Additional Charges attributable to the period before the Commencement Date, and deducts the same from "Gross Revenues" (as defined in the Management Agreement) in accordance with the Management Agreement, and such Additional Charges were not taken into account in the calculation and settlement of Working Capital accounts as set forth in Section 5.3, such Additional Charges shall be the responsibility of Operating Lessor, and Operating Lessor shall remit to Operating Lessee in cash within fifteen (15) days after receiving Notice thereof the amount of such Additional Charges paid, provided no uncured monetary Default or Event of Default then exists. In the event any item of Gross Revenues attributable to periods prior to the Commencement Date is not properly reflected in the initial calculation of Working Capital pursuant to Section 5.3, Operating Lessee shall remit to Operating Lessor in cash within fifteen (15) days after receiving Notice thereof the amount of such item not properly reflected. |
(l) Abatement of Rent for Casualty. If and to the extent that any Casualty results in a reduction of Gross Revenues as provided in Article 12, then Rent shall be abated to the extent provided in Article 12.4. |
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(m) Abatement of Rent for Partial Condemnation. In the event of a partial Condemnation as described in Article 13 which does not result in a termination of this Lease by Operating Lessor pursuant to Section 13.4, the Rent shall be abated in the manner and to the extent provided in Section 13.4. |
3.2 Late Payment of Rent.
If any installment of (i) Minimum Rent, (ii) Adjusted Gross Rent or (iii) Additional Charges (but only as to those Additional Charges that are payable directly to Operating Lessor) shall not be paid on its due date, Operating Lessee shall pay Operating Lessor, on demand, as Additional Charges, a late charge (to the extent permitted by law) computed at the Overdue Rate on the amount of such installment, from the due date of such installment to the date of payment thereof. To the extent that Operating Lessee pays any Additional Charges directly to Operating Lessor or the Facility Mortgagee pursuant to any requirement of this Lease, Operating Lessee shall be relieved of its obligation to pay such Additional Charges to the Entity to which they would otherwise be due.
In the event of any failure by Operating Lessee to pay any Additional Charges when due to any Entity other than Operating Lessor, Operating Lessee shall promptly pay and discharge, as Additional Charges, every fine, penalty, interest and cost that may be added by the Entity to which such Additional Charges are due (other than Operating Lessor) for nonpayment or late payment of such items (subject to Operating Lessor's obligation to pay or reimburse as provided in Section 3.1.5(a)).
3.3 Net Lease.
The Rent shall be absolutely net to Operating Lessor so that this Lease shall yield to Operating Lessor the full amount of the installments or amounts of Rent throughout the Term, subject to any other provisions of this Lease which expressly provide for adjustment or abatement of such Rent or expressly provide that certain Operating Lessor Obligations and Capital Expenditures are to be paid and/or performed by Operating Lessor; provided, that no adjustment to Rent under this Section shall have the effect of basing Rent, in whole or in part, on the income or profits of any Person.
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3.4 No Termination, Abatement, Etc.
Except as otherwise specifically provided in this Lease, Operating Lessee, to the maximum extent permitted by law, shall remain bound by this Lease in accordance with its terms and shall neither take any action without the consent of Operating Lessor to modify, surrender or terminate this Lease, nor seek, nor be entitled to, any abatement, deduction, deferment or reduction of the Rent, or set off against the Rent, nor shall the respective obligations of Operating Lessor and Operating Lessee be otherwise affected by reason of (a) any damage to or destruction of the Leased Property or any portion thereof from whatever cause or any Condemnation; (b) the lawful or unlawful prohibition of, or restriction upon, Operating Lessee's use of the Leased Property, or any portion thereof, or the interference with such use by any Person, except to the extent that a court of competent jurisdiction has issued a final, non-appealable order determining that Operating Lessee was constructively evicted from the Leased Property; (c) any claim that Operating Lessee may have against Operating Lessor by reason of any default or breach of any warranty by Operating Lessor under this Lease or any other agreement between Operating Lessor and Operating Lessee, or to which Operating Lessor and Operating Lessee are parties (except for the Consent and Assignment); (d) any bankruptcy, insolvency, reorganization, composition, readjustment liquidation, dissolution, winding up or other proceedings affecting Operating Lessor or any assignee or transferee of Operating Lessor; or (e) any other cause whether similar or dissimilar to any of the foregoing, other than a discharge of Operating Lessee from any such obligations as a matter of law; provided, however, that the foregoing shall not apply or be construed to restrict any other rights Operating Lessee may have as a result of any act or omission by Operating Lessor constituting gross negligence or willful misconduct. Operating Lessee hereby waives all rights arising from any occurrence whatsoever, which may now or hereafter be conferred upon it by law, to (i) modify, surrender or terminate this Lease or quit or surrender the Leased Property or any portion thereof, or (ii) entitle Operating Lessee to any abatement, reduction, suspension or deferment of the Rent or other sums payable or other obligations to be performed by Operating Lessee hereunder, except as otherwise specifically provided in this Lease and except to the extent that a court of competent jurisdiction has issued a final, non-appealable order determining that Operating Lessee was constructively evicted from the Leased Property. The obligations of Operating Lessee hereunder shall be separate and independent covenants and agreements, and the Rent and all other sums payable by Operating Lessee hereunder shall continue to be payable in all events unless the obligations to pay the same shall be terminated pursuant to the express provisions of this Lease or this Lease shall be terminated. Notwithstanding anything set forth in this Lease to the contrary, in any instance where, after the occurrence of a Default or an Event of Default, this Lease expressly permits Operating Lessor to retain funds which, but for the Default or Event of Default, would be payable to Operating Lessee, Operating Lessor shall refund such funds to Operating Lessee to the extent the amount exceeds the amount estimated by Operating Lessor in good faith to be necessary to compensate Operating Lessor for any cost, loss, or damage incurred or reasonably expected to be incurred in connection with such Default or Event of Default.
3.5 Change in Franchise Affiliation. Operating Lessee shall not, without the prior written consent of Operating Lessor, which consent may be granted or withheld in Operating Lessor's sole discretion, replace the existing franchise affiliation for any Facility or select a franchise affiliation for an unaffiliated facility.
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3.6 Books and Records. Operating Lessee shall keep full and adequate books of account and other records reflecting the results of operation of each Facility on an accrual basis, all in accordance with the Uniform System and generally accepted accounting principles and the obligations of Operating Lessee under this Lease. The books of account and all other records relating to or reflecting the operation of each Facility shall be kept either at such Facility or at Operating Lessee's offices, and shall be available to Operating Lessor and Operating Lessor's representatives, auditors, accountants or lenders at all reasonable times for examination, audit, inspection and transcription. All of such books and records pertaining to each Facility including, without limitation, books of account, guest records and front office records, shall not be removed from such Facility or Operating Lessee's offices without the approval of Operating Lessor.
3.7 Operating Lessee Cure Right. Notwithstanding anything contained herein to the contrary, Operating Lessor authorizes Operating Lessee to take any and all action on Operating Lessor's behalf to cure or prevent any Default or Event of Default under the Loan Documents if Operating Lessee reasonably determines that taking such action would be required to protect Operating Lessee's rights under this Lease or in Operating Lessee's Personal Property.
ARTICLE 4
PERSONAL PROPERTY; LESSOR'S LIEN
4.1 Ownership of the Leased Property. Operating Lessee acknowledges that the Leased Property is the property of Operating Lessor and that Operating Lessee has only the right to the possession and use of the Leased Property upon the terms and conditions of this Lease.
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4.2 Operating Lessee's Personal Property. Operating Lessee will acquire and maintain throughout the Term such Inventory as is required to operate the Leased Property in the manner contemplated by this Lease. Operating Lessee may (and shall as provided hereinbelow), at Operating Lessee's expense, install, affix or assemble or place on any parcels of the Land or in any of the Leased Improvements, any items of tangible personal property (including Inventory) owned by Operating Lessee (collectively, the "Operating Lessee's Personal Property"), it being understood that all items of tangible personal property other than Furniture and Equipment and Fixtures located on, and used in connection with, the operation of the Leased Improvements as a hotel, together with all replacements, modifications, alterations and additions thereto, shall be deemed to be the Operating Lessee's Personal Property. All of Operating Lessee's Personal Property, other than Inventory (which shall remain with the Leased Premises and be conveyed to Operating Lessor at the expiration of the term at no cost to Operating Lessor), not removed by Operating Lessee within ten (10) days following the expiration or earlier termination of the Term shall be appropriated, sold, destroyed or otherwise disposed of by Operating Lessor without first giving Notice thereof to Operating Lessee, provided that Operating Lessor must compensate Operating Lessee for any of such Operating Lessee's Personal Property that it appropriates, sells, destroys or otherwise disposes of in an amount equal to the fair market value thereof as appraised in conformity with market appraisal standards then in use for the locality in which the property is located, except that the appraisers need not be members of the American Institute of Real Estate Appraisers, but rather shall be appraisers having at least 10 years of experience in valuing hotel tangible personal property. Operating Lessee will, at Operating Lessee's expense, restore the Leased Property to its original condition (ordinary wear and tear excepted), including repair of all damage to the Leased Property caused by the removal of Operating Lessee's Personal Property, whether effected by Operating Lessee or Operating Lessor. Operating Lessee may make such financing arrangements, title retention agreements, leases or other agreements with respect to the Operating Lessee's Personal Property as it sees fit; provided, that Operating Lessee first advises Operating Lessor of any such arrangement and such arrangement expressly provides that in the event of Operating Lessee's default thereunder, Operating Lessor (or Operating Lessor's designee) may cure such default and assume Operating Lessee's obligations and rights under such arrangement.
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4.3 Cash Management System. If the leased property is at any time subject to a loan which requires a Cash Management System, Operating Lessor directs Operating Lessee and Operating Lessee acknowledges and agrees, pursuant to the terms of the Cash Management Agreement, to deposit or cause to be deposited all Gross Revenue (less any amounts any Manager is entitled to withhold pursuant to the terms of the Management Agreement relating to any Facility) from the operation of the Leased Property and the Facilities into the Cash Management System so long as any amounts under the Loan are outstanding. For purposes of this Section 4.3 only, the term "Gross Revenues" shall be deemed to include (a) proceeds of insurance and condemnation, (b) judgments and awards and (c) items constituting "allowances" under the Uniform System. Operating Lessor hereby expressly authorizes Operating Lessee to receive any and all amounts released by Lender from the Cash Management System, including amounts deposited by Lender into any remainder account or sub account or released by Lender from any reserve or escrow account or sub account. For each month during the Term, all funds deposited by Operating Lessee into the Cash Management System less (i) any such funds deposited into the operating expense sub account or the extraordinary expense sub account thereunder and (ii) any other such funds deposited into the remainder sub account thereunder (the "Monthly Deposit Credit"), shall be deemed to offset and be applied to the payment of Rent owed by Operating Lessee for such month. If the Monthly Deposit Credit exceeds the amount of Rent owed by Operating Lessee for any given month (the "Excess Monthly Deposit Credit"), then the Excess Monthly Deposit Credit shall accrue interest at the Base Rate until paid or otherwise satisfied by Operating Lessor or applied as payment of rent in future periods; provided, however, that Operating Lessee hereby waives Operating Lessee's right to enforce or collect Excess Monthly Deposit Credits in cash against Operating Lessor until the date which is 12 months after the Loan has been indefeasibly paid in full and any such Excess Monthly Deposit Credits shall be subject to and subordinate in all respects to the Loan and the Loan Documents. Notwithstanding anything contained herein to the contrary, Excess Monthly Deposit Credits shall, upon their creation, be applied first, to reduce and satisfy any Accrued Rent and all accrued and unpaid interest thereon, until all Accrued Rent has been satisfied in full.
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ARTICLE 5
CONDITION OF LEASED PROPERTY; USE
5.1 Condition of the Leased Property. Operating Lessee acknowledges receipt and delivery of possession of the Leased Property. Operating Lessee has examined and otherwise has knowledge of the condition of the Leased Property and has found the same to be satisfactory for its purposes hereunder. Operating Lessee is leasing the Leased Property "as is" in its present condition. Operating Lessee waives any claim or action against Operating Lessor in respect of the condition of the Leased Property. LESSOR MAKES NO WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED, IN RESPECT OF THE LEASED PROPERTY, OR ANY PART THEREOF, EITHER AS TO ITS FITNESS FOR USE, DESIGN OR CONDITION FOR ANY PARTICULAR USE OF PURPOSE OR OTHERWISE, AS TO THE QUALITY OF THE MATERIAL OR WORKMANSHIP THEREIN, LATENT OR PATENT, IT BEING AGREED THAT ALL SUCH RISKS ARE TO BE BORNE BY LESSEE. LESSEE ACKNOWLEDGES THAT THE LEASED PROPERTY HAS BEEN INSPECTED BY LESSEE AND IS SATISFACTORY TO LESSEE. Provided, however, to the extent permitted by law, Operating Lessor hereby assigns to Operating Lessee all of Operating Lessor's rights to proceed against any predecessor in title other than Operating Lessee (or an Affiliate of Operating Lessee which conveyed the Property to Operating Lessor) or any contractor, materialmen or other similar Persons for breaches of warranties or representations or for latent defects in the Leased Property. Operating Lessor shall fully cooperate with Operating Lessee in the prosecution of any such claim, in Operating Lessor's or Operating Lessee's name, all at Operating Lessee's sole cost and expense. Operating Lessee hereby agrees to indemnify, defend and hold harmless Operating Lessor from and against any claims, obligations and liabilities against or incurred by Operating Lessor in connection with such cooperation.
5.2 Use of the Leased Property.
(a) Operating Lessee covenants that it will obtain and maintain all approvals needed to use and operate the Leased Property and the Facilities under applicable Legal Requirements. |
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(b) Operating Lessee shall use or cause to be used the Leased Property only as a hotel facility, and for such other uses as may be necessary or incidental to such use (the "Primary Intended Use"). Operating Lessee shall not use the Leased Property or any portion thereof for any other use without the prior written consent of Operating Lessor, which consent may be granted, denied or conditioned in Operating Lessor's reasonable discretion. No use shall be made or permitted to be made of the Leased Property, and no acts shall be done, which will cause the cancellation or increase the premium of any insurance policy covering the Leased Property or any part thereof (unless another adequate policy satisfactory to Operating Lessor is available and Operating Lessee pays any premium increase), nor shall Operating Lessee sell or permit to be kept, used or sold in or about the Leased Property any article which may be prohibited by law or fire underwriter's regulations. Operating Lessee shall, at Operating Lessee's sole cost, comply with all of the requirements pertaining to the Leased Property of any insurance board, association, organization or company necessary for the maintenance of insurance, as herein provided, covering the Leased Property and Operating Lessee's Personal Property. |
(c) Subject to the provisions of Articles 12, 13, 19 and 20, Operating Lessee covenants and agrees that during the Term it will (1) operate continuously the Leased Property for the Primary Intended Use, (2) keep in full force and effect and comply with all the provisions of any Franchise Agreement (except that Operating Lessee shall have no obligation to complete any capital improvements to the Leased Property required by the franchisor unless the Operating Lessor funds the cost thereof), (3) not terminate or amend any Franchise Agreement without the consent of Operating Lessor, (4) maintain appropriate certifications and licenses for such use, and (5) seek to maximize the Gross Revenues generated therefrom consistent with sound business practices, and (6) seek to keep the costs and expenses of the Leased Property payable by Operating Lessor at reasonable levels. |
(d) Operating Lessee shall not commit or suffer to be committed any waste on the Leased Property, or in the Facility, nor shall Operating Lessee cause or permit any nuisance thereon. |
(e) Operating Lessee shall neither suffer nor permit the Leased Property or any portion thereof, or Operating Lessee's Personal Property, to be used in such a manner as (1) might reasonably tend to impair Operating Lessor's (or Operating Lessee's, as the case may be) title thereto or to any portion thereof, or (2) may reasonably make possible a claim or claims of adverse usage or adverse possession by the public, as such, or of implied dedication of the Leased Property or any portion thereof, except as necessary in the ordinary and prudent operation of the Facility on the Leased Property. |
5.3 Working Capital.
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Operating Lessor hereby conveys, transfers, assigns, sells and delivers to Operating Lessee, effective as of the Commencement Date, all Working Capital (as defined below) existing on the Commencement Date (the "Initial Working Capital") at a purchase price equal to the fair market value of such assets (which Operating Lessor and Operating Lessee agree is equal to the book value of such assets on the Commencement Date after taking into account any depreciation as of the Commencement Date). The term "Working Capital" shall mean (a) funds held for use in the day-to-day operation of the Facility's business, including, without limitation, amounts held in change or petty cash funds, deposits, operating bank accounts, pooled concentration or disbursement accounts and payroll accounts, (b) prepaid expenses, (c) Inventories and Fixed Asset Supplies, (d) net receivables due from Manager, less (e) accounts payable, accrued payroll expenses and other accrued expenses and current liabilities related to the Facility. Except as provided in the next sentence, title to the Initial Working Capital so conveyed, transferred, assigned, sold and delivered by Operating Lessor was free and clear of any Liens of any nature whatsoever created by Operating Lessor or arising in respect of any obligation of Operating Lessor or arising by reason of any act or omission of Operating Lessor. Operating Lessee hereby purchases and accepts delivery of the Initial Working Capital and accepts and assumes all obligations with respect thereto, effective as of the Commencement Date, and expressly acknowledges and agrees that (i) it is acquiring the Initial Working Capital subject to the Facility Mortgagee's first priority lien, if any, on some or all of such Initial Working Capital, and shall acknowledge same in writing to the Facility Mortgagee and execute UCC-1 financing statements confirming same (at Operating Lessor's expense) in accordance with the Facility Mortgagee Agreement, which financing statements shall be prepared and filed by Operating Lessor at Operating Lessor's sole cost and expense, and (ii) the Initial Working Capital shall remain subject to the provisions of the Management Agreement. If the parties so choose, the purchase price for the Initial Working Capital may be paid by Operating Lessee's execution and delivery to Operating Lessor, as of the Commencement Date, of a Working Capital Note and Agreement in the form set forth on Exhibit B hereto (the "Working Capital Note" E), in the principal amount of said purchase price. The Working Capital Note provides that such interest is payable from time to time at such time as each payment of Rent is due under Section 3.1.1, and the amount of interest paid under the Working Capital Note on any interest payment date also shall be credited against Rent payable on such date. The Working Capital Note further provides that the principal amount thereof will be payable in full, together with accrued and unpaid interest thereon, upon the expiration or earlier termination of this Lease for any reason (including, without limitation, a termination by the Facility Mortgagee in accordance with Article 28 hereof) as follows: Upon such expiration or termination, Operating Lessee will transfer to Operating Lessor, in payment of the principal amount of the Working Capital Note and accrued and unpaid interest thereon, title to all Working Capital then owned by Operating Lessee (the "Final Working Capital"). To the extent that the fair market value of the Final Working Capital (which Operating Lessor and Operating Lessee agree shall be equal to the book value of such assets at such time after taking into account any depreciation as of such date) exceeds the principal amount of the Working Capital Note plus accrued and unpaid interest thereon, Operating Lessor shall pay to Operating Lessee an amount in cash equal to such excess; to the extent that such fair market value is less than the principal amount of the Working Capital Note plus accrued and unpaid interest thereon, Operating Lessee shall pay to Operating Lessor an amount in cash equal to such deficiency.
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In the event that this Lease is terminated by the Facility Mortgagee pursuant to the terms of Article 28 hereof, Operating Lessee agrees that it shall transfer title to the Final Working Capital (and pay in cash any deficiency due to Operating Lessor pursuant to the Working Capital Note) directly to the Facility Mortgagee or its designee, all in accordance with the terms of the Facility Mortgagee Agreement.
Operating Lessor and Operating Lessee agree that, following the sale of the Initial Working Capital, all Working Capital during the Term of this Lease shall be the property of Operating Lessee (and not Operating Lessor) for all purposes (subject, however, to the Liens hereinafter referred to in this paragraph), and neither Operating Lessor nor Operating Lessee shall at any time take a position (in its books and records or otherwise) or make an assertion inconsistent therewith. Operating Lessee has granted Operating Lessor a security interest in all such Working Capital pursuant to Article 28 hereof. Operating Lessee acknowledges that Operating Lessor has pledged and assigned to the Facility Mortgagee, as additional security for Operating Lessor's obligations under the loan secured by the Facility Mortgage, (or will pledge and assign to a Facility Mortgagee, as additional security for Operating Lessor's obligations under a loan to be secured by a Facility Mortgage), the Working Capital Note and Operating Lessor's rights and interest in respect of this Lease, including all Operating Lessor Liens with respect to any and all Operating Lessee's Personal Property, including, without limitation, all Working Capital owned by Operating Lessee during the Term of this Lease, securing Operating Lessee's obligations hereunder.
5.4 Operating Lessor to Grant Easements, Etc. Operating Lessor will, from time to time, so long as no Event of Default has occurred and is continuing, at the request of Operating Lessee and at Operating Lessee's cost and expense (but subject to the approval of Operating Lessor, which approval shall not be unreasonably withheld or delayed), (a) grant easements and other rights in the nature of easements with respect to the Leased Property to third parties, (b) release existing easements or other rights in the nature of easements which are for the benefit of the Leased Property, (c) dedicate or transfer unimproved portions of the Leased Property for road, highway or other public purposes, (d) execute petitions to have the Leased Property annexed to any municipal corporation or utility district, (e) execute any covenants and restrictions affecting the Leased Property and (f) execute and deliver to any Person any instrument appropriate to confirm or effect such grants, releases, dedications, transfers, petitions and amendments (to the extent of Operating Lessor's interests in the Leased Property), but only upon delivery to Operating Lessor of an officer's certificate stating that such grant, release, dedication, transfer, petition or amendment does not interfere with the proper conduct of the business of Operating Lessee on the Leased Property and does not materially reduce the value of the Leased Property.
5.5 Engagement of a Manager: Operating Lessee shall not engage a manager for the Leased Property other than a Qualified Manager without the written consent of the Operating Lessor, which may be given or withheld in Operating Lessor's reasonable discretion. Any management contract, agreement or other arrangement entered into by Operating Lessee shall not relieve Operating Lessee of any of Operating Lessee's obligations hereunder and any such agreement shall be expressly subordinate to the terms and conditions of this Lease.
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6.1 Compliance with Legal and Insurance Requirements, Etc. Subject to Section 6.3 below and Article 10 relating to permitted contests, Operating Lessee, at Operating Lessee's expense, will promptly (a) comply with all applicable Legal Requirements and Insurance Requirements in respect of the use, operation, maintenance, repair and restoration of the Leased Property, and (b) procure, maintain and comply with all appropriate licenses and other authorizations required for any use of the Leased Property and Operating Lessee's Personal Property then being made, and for the proper erection, installation, operation and maintenance of the Leased Property or any part thereof.
6.2 Legal Requirement Covenants. Subject to Section 6.3 below, Operating Lessee covenants and agrees that the Leased Property and Operating Lessee's Personal Property shall not be used for any unlawful purpose and that Operating Lessee shall not permit or suffer to exist any unlawful use of the Leased Property by others. Operating Lessee shall acquire and maintain all appropriate licenses, certifications, permits and other authorizations and approvals needed to operate the Leased Property in its customary manner for the Primary Intended Use, and any other lawful use conducted on the Leased Property as may be permitted from time to time hereunder. Operating Lessee further covenants and agrees that Operating Lessee's use of the Leased Property and maintenance, alteration, and operation of the same, and all parts thereof, shall at all times conform to all Legal Requirements, unless the same are finally determined by a court of competent jurisdiction to be unlawful (and Operating Lessee shall cause all tenants, invitee or others to so comply with all Legal Requirements). Operating Lessee may, however, upon prior Notice to Operating Lessor, contest the legality or applicability of any such Legal Requirement or any licensure or certification decision if Operating Lessee maintains such action in good faith, with due diligence, without prejudice to Operating Lessor's rights hereunder, and at Operating Lessee's sole expense. Operating Lessee may delay compliance with any such Legal Requirement pending the outcome of any such contest provided no lien, charge or civil or criminal liability would be incurred and imposed upon Operating Lessee, Operating Lessor or the Leased Property by reason of any such delay and provided Operating Lessee both (a) furnishes to Operating Lessor security reasonably satisfactory to Operating Lessor against any loss or injury by reason of such contest or delay and (b) prosecutes the contest with due diligence and in good faith.
6.3 Environmental Covenants. Operating Lessor and Operating Lessee (in addition to, and not in diminution of, Operating Lessee's covenants and undertakings in Sections 6.1 and 6.2 hereof) covenant and agree as follows:
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(a) At all times hereafter until the later of (i) such time as all liabilities, duties or obligations of Operating Lessee to the Operating Lessor under this Lease have been satisfied in full and (ii) such time as Operating Lessee completely vacates the Leased Property and surrenders possession of the same to Operating Lessor, Operating Lessee shall fully comply with all Environmental Laws applicable to the Leased Property and the operations thereon. Operating Lessee agrees to give Operating Lessor prompt written notice of (1) all Environmental Liabilities; (2) all pending, threatened or anticipated Proceedings, and all notices, demands, requests or investigations, relating to any Environmental Liability or relating to the issuance, revocation or change in any Environmental Authorization required for operation of the Leased Property; (3) all Releases at, on, in, under or in any way affecting the Leased Property, or any Release known by Operating Lessee at, on, in or under any property adjacent to the Leased Property; and (4) all facts, events or conditions that could reasonably lead to the occurrence of any of the above-referenced matters. |
(b) Operating Lessor hereby agrees to defend, indemnify and save harmless any and all Operating Lessee Indemnified Parties from and against any and all Environmental Liabilities other than Environmental Liabilities which were caused by the acts or grossly negligent failures to act of Operating Lessee, Operating Lessee's agents, employees, contractors, invitees or licensees. |
(c) Operating Lessee hereby agrees to defend, indemnify and save harmless any and all Operating Lessor Indemnified Parties from and against any and all Environmental Liabilities which were caused by the acts or grossly negligent failures to act of Operating Lessee, Operating Lessee's agents, employees, contractors, invitees or licensees. |
(d) If any Proceeding is brought against any Indemnified Party in respect of an Environmental Liability with respect to which such Indemnified Party may claim indemnification under either Section 6.3(b) or (c), the Indemnifying Party, upon request, shall at such Indemnifying Party's sole expense resist and defend such Proceeding, or cause the same to be resisted and defended by counsel designated by the Indemnified Party and approved by the Indemnifying Party, which approval shall not be unreasonably withheld; provided, however, that such approval shall not be required in the case of defense by counsel designated by any insurance company undertaking such defense pursuant to any applicable policy of insurance. Each Indemnified Party shall have the right to employ separate counsel in any such proceeding and to participate in the defense thereof, but the fees and expenses of such counsel will be at the sole expense of such Indemnified Party unless such counsel has been approved by the Indemnifying Party, which approval shall not be unreasonably withheld. The Indemnifying Party shall not be liable for any settlement of any such Proceeding made without its consent, which shall not be unreasonably withheld, but if settled with the consent of the Indemnifying Party, or if settled without such Indemnifying Party's consent (if its consent shall be unreasonably withheld), or if there be a final, non-appealable judgment for an adversary party in any such Proceeding, the Indemnifying Party shall indemnify and hold harmless the Indemnified Parties from and against any liabilities incurred by such Indemnified Parties by reason of such settlement or judgment. |
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(e) At any time any Indemnified Party has reason to believe circumstances exist which could reasonably result in an Environmental Liability, upon reasonable prior written notice to Operating Lessee stating such Indemnified Party's basis for such belief, an Indemnified Party shall be given immediate access to the Leased Property (including, but not limited to, the right to enter upon, investigate, drill wells, take soil borings, excavate, monitor, cap and use available land for the testing of remedial technologies), Operating Lessee's employees, and to all relevant documents and records regarding the matter as to which a responsibility, liability or obligation is asserted or which is the subject of any Proceeding, provided that such access may be conditioned or restricted as may be reasonably necessary to ensure compliance with law and the safety of personnel and facilities or to protect confidential or privileged information. All Indemnified Parties requesting such immediate access and cooperation shall endeavor to coordinate such efforts to result in as minimal interruption of the operation of the Leased Property as practicable. |
(f) The indemnification rights and obligations provided for in this Article 6 shall be in addition to any indemnification rights and obligations provided for elsewhere in this Lease. |
(g) The indemnification rights and obligations provided for in this Article 6 shall survive the termination of this Lease. |
(h) For purposes of this Section 6.3, all amounts for which any Indemnified Party seeks indemnification shall be computed net of (a) any actual income tax benefit resulting therefrom to such Indemnified Party, (b) any insurance proceeds received (net of tax effects) with respect thereto, and (c) any amounts recovered (net of tax effects) from any third parties based on claims the Indemnified Party has against such third parties which reduce the damages that would otherwise be sustained, provided that in all cases, the timing of the receipt or realization of insurance proceeds or income tax benefits or recoveries from third parties shall be taken into account in determining the amount of reduction of damages. Each Indemnified Party agrees to use its reasonable efforts to pursue, or assign to Operating Lessee or Operating Lessor, as the case may be, any Claims or rights it may have against any third party which would materially reduce the amount of damages otherwise incurred by such Indemnified Party. |
(i) Notwithstanding anything to the contrary contained in this Lease, if Operating Lessor shall become entitled to the possession of this Leased Property by virtue of the termination of this Lease or repossession of the Leased Property, then Operating Lessor may assign Operating Lessor's indemnification rights under Section 6.3 of this Lease (but not any other rights hereunder) to any Person to whom the Operating Lessor subsequently transfers the Leased Property, subject to the following conditions and limitations, each of which shall be deemed to be incorporated into the terms of such assignment, whether or not specifically referred to therein: |
(1) The indemnification rights referred to in this section may be assigned only if a known Environmental Liability then exists or if a proceeding is then pending or, to the knowledge of Operating Lessee or Operating Lessor, then threatened with respect to the Leased Property; |
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(2) Such indemnification rights shall be limited to Environmental Liabilities relating to or specifically affecting the Leased Property; and |
(3) Any assignment of such indemnification rights shall be limited to the immediate transferee of Operating Lessor, and shall not extend to any such transferee's successors or assigns. |
ARTICLE 7
IMPROVEMENTS; MAINTENANCE
7.1 Capital Improvements, Maintenance and Repair.
(a) Subject to Section 7.1(b), Operating Lessee shall (i) keep the Leased Property and all private roadways, sidewalks and curbs appurtenant thereto that are under Operating Lessee's control, including windows and plate glass, parking lots, mechanical, electrical and plumbing systems and equipment (including conduit and ductwork), and non-load bearing interior walls, in good order and repair, except for ordinary wear and tear (whether or not the need for such repairs occurred as a result of Operating Lessee's use, any prior use, the elements or the age of the Leased Property, or any portion thereof), and, (ii) except as otherwise provided in Articles 12 or 13, with reasonable promptness, make all necessary and appropriate repairs thereto of every kind and nature, whether interior or exterior, ordinary or extraordinary, foreseen or unforeseen or arising by reason of a condition existing prior to the commencement of the Term of this Lease (concealed or otherwise), or required by any governmental agency having jurisdiction over the Leased property, except as to the structural elements of the Leased Improvements and underground utilities. |
(b) Notwithstanding any other provision of this Lease, unless the need for compliance with Section 7.1(a) is caused by Operating Lessee's negligence or willful misconduct or that of Operating Lessee's employees or agents, Operating Lessee shall not be required to bear the costs of complying with Section 7.1(a) with respect to items classified as either (i) capital items under generally accepted accounting principles, or (ii) Fixtures in, on, or under any Facility or its components, except to the extent (X) that amounts are available therefor from Operating Lessor under Article 38 or otherwise, or (Y) required under Articles 12 and 13 on the conditions set forth therein. |
(c) Article 38 sets forth the only obligations of Operating Lessor to fund the cost of any repairs, replacements, alterations, restorations or renewals of any nature or description to the Leased Property, whether ordinary or extraordinary, foreseen or unforeseen, or to make any expenditure whatsoever with respect thereto, in connection with this Lease, or to maintain the Leased Property in any way. Operating Lessee hereby waives, to the extent permitted by law, the right to make repairs at the expense of Operating Lessor pursuant to any law in effect at the time of the execution of this Lease or hereafter enacted. Operating Lessor shall have the right to give, record and post, as appropriate, notices of nonresponsibility under any mechanic's lien laws now or hereafter existing. |
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(d) Nothing contained in this Lease and no action or inaction by Operating Lessor shall be construed as (i) constituting the request of Operating Lessor, expressed or implied, to any contractor, subcontractor, laborer, materialman or vendor to or for the performance of any labor or services or the furnishing of any materials or other property for the construction, alteration, additional repair or demolition of or to the Leased Property or any part thereof, or (ii) giving Operating Lessee any right, power or permission to contract for or permit the performance of any labor or services or the furnishing of any materials or other property in such fashion as would permit the making of any claim against Operating Lessor in respect thereof or to make any agreement that may create, or in any way be the basis for any right, title, interest, lien, claim or other encumbrance upon the estate of Operating Lessor in the Leased Property, or any portion thereof. |
(e) Operating Lessee will, upon the expiration or prior termination of the Term, vacate and surrender the Leased Property to Operating Lessor in the condition in which the Leased Property was originally received from Operating Lessor, except as repaired, rebuilt, restored, altered or added to as permitted or required by the provisions of this Lease and except for ordinary wear and tear (subject to the obligation of Operating Lessee to maintain the Leased Property in accordance with Section 7.1(a) above during the entire Term of this Lease), or damage by casualty or Condemnation (subject to the obligations of Operating Lessee to restore or repair as set forth in this Lease). |
7.2 Encroachments, Restrictions, Etc. If any of the Leased Improvements, at any time, materially encroach upon any property, street or right-of-way adjacent to the Leased Property, or violate the agreements or conditions contained in any lawful restrictive covenant or other agreement affecting the Leased Property, or any part thereof, or impair the rights of others under any easement or right-of-way to which the Leased Property is subject, then promptly upon the request of Operating Lessor or at the behest of any Person affected by any such encroachment, violation or impairment, Operating Lessee shall cooperate with Operating Lessor, at Operating Lessor's expense, subject to any title insurance insuring against such matter and any right to contest the existence of any encroachment, violation or impairment and, in such case, in the event of an adverse final determination, either (a) obtain valid and effective waivers or settlements of all claims, liabilities and damages resulting from each such encroachment, violation or impairment, whether the same shall affect Operating Lessor or Operating Lessee, or (b) make such changes in the Leased Improvements, and take such other actions, as are reasonably practicable to remove such encroachment, and to end such violation or impairment, including, if necessary, the alteration of any of the Leased Improvements, and in any event take all such actions as may be necessary in order to be able to continue the operation of the Leased Improvements for the Primary Intended Use substantially in the manner and to the extent the Leased Improvements were operated prior to the assertion of such violation, impairment or encroachment. Any such alterations shall be made by Operating Lessee in conformity with the applicable requirements of Article 8.
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8.1 Alterations. . Subject to the provisions of the Management Agreement, Operating Lessee shall have the right, at Operating Lessee's sole cost and expense, to make additions, modifications or improvements to the Leased Property which are not Capital Expenditures ("Alterations") and which have a total cost of completion of less than or equal to (a) $10,000, as to any individual Alteration, or (b) $50,000, as to all Alterations, in the aggregate, over a twelve-month period, from time to time as Operating Lessee, in its discretion, may deem desirable for the Primary Intended Use, provided that any such Alteration will not materially alter the character or purpose or materially detract from the value, operating efficiency or revenue producing capability of the Leased Property or adversely affect the ability of Operating Lessee to comply with the provisions of this Lease, and, without limiting the foregoing, will not violate any Legal Requirement or Insurance Requirement applicable to the Leased Property. Any Alteration estimated to exceed the applicable limits set forth above shall be subject to Operating Lessor's prior approval and the terms set forth in Section 6.1. All such Alterations shall, upon expiration or earlier termination of this Lease, pass to and become the property of Operating Lessor, free and clear of all liens and encumbrances, other than Permitted Liens.
8.2 Salvage. All materials which are scrapped or removed in connection with the making of repairs required by Articles 7 or 8 shall be or become the property of Operating Lessor or Operating Lessee depending on which party is paying for or providing the financing for such work.
8.3 Repairs and Improvements by Operating Lessor. Operating Lessor shall at all times have the right to make structural and non-structural repairs, additions and improvements to the Leased Improvements, including, without limitation, the addition of hotel rooms, the alteration of the facade of the Leased Property and the renovation of guest rooms. Operating Lessee shall cooperate in Operating Lessor's undertaking such work, provided Operating Lessee shall have no obligation to pay any third party costs in connection therewith, and further provided Operating Lessee acknowledges that, except as provided in Section 3.1.6 it shall not be entitled to any abatement of rent, offset or deduction as a result of such work, regardless of whether the work involves the temporary closure of the hotel or portions thereof.
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Subject to the provision of Article 10 relating to permitted contests, Operating Lessee will not directly or indirectly create or allow to remain and will promptly discharge at Operating Lessee's expense any lien, encumbrance, attachment, title retention agreement or claim upon the Leased Property or any attachment, levy, claim or encumbrance in respect of the Rent, not including, however, (a) this Lease, (b) the matters, if any, included as exceptions in the title policy insuring Operating Lessor's interest in the Leased Property, (c) restrictions, liens and other encumbrances which are consented to in writing by Operating Lessor or any easements granted pursuant to the provisions of Section 5.4 of this Lease, (d) liens for those taxes upon Operating Lessor which Operating Lessee is not required to pay hereunder, (e) subleases permitted by Article 21 hereof, (f) liens for Impositions or for sums resulting from noncompliance with Legal Requirements so long as (i) the same are not yet payable or are payable without the addition of any fine or penalty, or (ii) such liens are in the process of being contested as permitted by Article 10, (g) liens of mechanics, laborers, materialmen, suppliers or vendors for sums either disputed or not yet due, provided that (1) the payment of such sums shall not be postponed under any related contract for more than sixty (60) days after the completion of the action giving rise to such lien and such reserve or other appropriate provisions as shall be required by law or generally accepted accounting principles shall have been made therefore, or (2) any such liens are in the process of being contested as permitted by Article 10 hereof, (h) any liens created pursuant to the Loan Documents and (i) any liens which are the responsibility of Operating Lessor pursuant to the provisions of Article 32 of this Lease. Notwithstanding anything to contrary contained herein, Operating Lessee will not directly or indirectly create or allow to remain and will promptly discharge at Operating Lessee's expense any mortgage, deed of trust, lien, pledge, hypothecation, assignment, security interest, or any other encumbrance or charge on the Leased Property that is not permitted under the Loan Documents.
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After receiving the prior written approval of Operating Lessor, Operating Lessee, at Operating Lessee's own expense, may contest the amount or validity of any Imposition to be paid by Operating Lessee or any Legal Requirement or Insurance Requirement or any lien, attachment, levy, encumbrance, charge or claim ("Claims") not otherwise permitted by Article 9 by appropriate legal proceeding, promptly initiated and conducted in good faith and with due diligence, provided that (a) Operating Lessor would be permitted to do so under the provisions of any mortgage or deed of trust superior in lien to the this Lease; (b) such proceeding shall be permitted under and be conducted in accordance with the provisions of any other instrument to which Operating Lessor is subject and shall not constitute a default thereunder and such proceeding shall be conducted in accordance with all applicable statutes, laws and ordinances; (c) the Leased Property nor any part thereof or interest therein will be in imminent danger of being sold, forfeited, terminated, canceled or lost; (d) Operating Lessee shall promptly upon final determination thereof pay the amount of any such Claim, together with all costs, interest and penalties which may be payable in connection therewith; (e) such proceeding shall suspend the collection of such contested Claim from the Leased Property; and (f) Operating Lessee shall furnish such security as may be required in the proceeding, or as may be reasonably requested by Operating Lessor, to insure the payment of any such Claim, together with all interest and penalties thereon. Operating Lessee shall be entitled to any refund of any Claims and such charges and penalties or interest thereon which have been paid by Operating Lessee or paid by Operating Lessor and for which Operating Lessor has been fully reimbursed.
11.1 General Insurance Requirements.
(a) Coverages by Operating Lessor. During the Term of this Lease, Operating Lessor shall at Operating Lessor's expense, without reimbursement from Operating Lessee, at all times keep the Leased Property insured with the kinds and amounts of insurance described in the Loan Agreement (except to the extent such insurance is required to be kept by the Operating Lessee pursuant to Section 11.1(b) below). This insurance shall be written by companies authorized to issue insurance in the State. The policies must name Operating Lessor or Lender, if applicable, as the insured or as an additional named insured, as the case may be |
(b) Coverages by Operating Lessee. During the term of this Lease, and subject to any loan agreement in place, Operating Lessee shall at Operating Lessee's expense keep the insurance described below. This insurance shall be written by companies authorized to issue insurance in the State and otherwise acceptable to Operating Lessor. If required by Operating Lessor, the policies must name Operating Lessor or Lender as additional insureds, as applicable. |
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(i) Fidelity bonds with limits and deductibles as may be reasonably requested by Operating Lessor, covering Operating Lessee's employees in job classifications normally bonded under prudent hotel management practices in the United States or otherwise required by law; |
(ii) Workers' compensation insurance in accordance with all Legal Requirements for all persons employed by Operating Lessee on the Leased Property to the extent necessary to protect Operating Lessor and the Leased Property against Operating Lessee's worker's compensation claims; |
(iii) Vehicle liability insurance for owned, non-owned, and hired vehicles, including rented and leased vehicles containing minimum limits per occurrence of $1,000,000; |
(iv) Comprehensive casualty insurance providing protection against any peril included within the classification "all risks" insurance coverage, together with insurance against flood, sewage backup, sprinkler damage, vandalism, and malicious mischief, to the extent of the Full Replacement Cost of Operating Lessee's Personal Property and Inventory, the proceeds of which will be distributed in accordance with Section 12.1 below; and |
(v) Such other insurance as Operating Lessor may reasonably request, provided, that such other insurance is customary for facilities such as the Leased Property and the operation thereof. |
11.2 Replacement Cost. The term "Full Replacement Cost" as used herein shall mean the actual replacement cost of the Leased Property requiring replacement from time to time including an increased cost of construction endorsement, if available, and the cost of debris removal. In the event either party believes that full replacement cost (the then-replacement cost less such exclusions) has increased or decreased at any time during the Lease Term, it shall have the right to have such full replacement cost re-determined.
11.3 Waiver of Subrogation. All insurance policies carried by Operating Lessor or Operating Lessee covering the Leased Property, the Fixtures, any Facility or Operating Lessee's Personal Property, including, without limitation, contents, fire and casualty insurance, shall expressly waive any right of subrogation on the part of the insurer against the other party. The parties hereto agree that their policies will include such waiver clause or endorsement so long as the same are obtainable without extra cost, and in the event of such an extra charge the other party, at its election, may pay the same, but shall not be obligated to do so. Each party agrees to seek recovery from any applicable insurance coverage prior to seeking recovery against the other.
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11.4 Form Satisfactory, Etc. All of the policies of insurance referred to in this Article 11 shall be written in a form, with deductibles and by insurance companies reasonably satisfactory to Operating Lessor and also shall meet and satisfy the requirements of any ground lessor, lender or franchisor having any interest in the Leased Premises. Operating Lessee shall deliver to Operating Lessor policies or certificates of the insurance required under Section 11.1 above as of their effective date (and, with respect to any renewal policy, thirty (30) days prior to the expiration of the existing policy), and in the event of the failure of Operating Lessee either to obtain such insurance as herein called for or to pay the premiums therefor, or to deliver such policies or certificates thereof to Operating Lessor at the times required, Operating Lessor shall be entitled, but shall have no obligation, to obtain such insurance and pay the premiums therefor, and Operating Lessee shall reimburse Operating Lessor for any premium or premiums paid by Operating Lessor for the coverages required under this Section upon written demand therefor, and repay the same within thirty (30) days after Notice of such failure from Operating Lessor shall constitute an Event of Default within the meaning of Section 14.1(b). Each insurer mentioned in this Article 11 shall agree, by endorsement to the policy or policies issued by it, or by independent instrument furnished to Operating Lessor thirty (30) days' written notice before Operating Lessor, the policy or policies in question shall be materially altered, allowed to expire or canceled.
11.5 Blanket Policy. Notwithstanding anything to the contrary contained in this Article 11, Operating Lessee or Operating Lessor may bring the insurance provided for herein within the coverage of a so-called blanket policy or policies of insurance carried and maintained by Operating Lessee or Operating Lessor, provided, however, that the coverage afforded to Operating Lessor and Operating Lessee will not be reduced or diminished or otherwise be different from that which would exist under a separate policy meeting all other requirements of this Lease by reason of the use of such blanket policy of insurance, and provided further that the requirements of this Article 11 are otherwise satisfied.
11.6 Separate Insurance. Operating Lessee shall not on Operating Lessee's own or pursuant to the request or requirement of any third party, take out separate insurance concurrent in form or contributing in the event of loss with that required in this Article 11 to be furnished, or increase the amount of any then existing insurance by securing an additional policy or additional policies, unless all parties having an insurable interest in the subject matter of the insurance, including in all cases Operating Lessor, are included therein as additional insureds, and the loss is payable under such additional separate insurance in the same manner as losses are payable under this Lease. Operating Lessee shall immediately provide Notice to Operating Lessor that Operating Lessee has obtained any such separate insurance or of the increasing of any of the amounts of the then existing insurance.
11.7 Reports on Insurance Claims. Operating Lessee shall promptly investigate and make a complete and timely written report to the appropriate insurance company as to all accidents, claims for damage relating to the ownership, operation, and maintenance of any Facility, any damage or destruction to any Facility and the estimated cost of repair thereof and shall prepare any and all reports required by any insurance company in connection therewith. All such reports shall be timely filed with the insurance company as required under the terms of the insurance policy involved, and a final copy of such report shall be furnished to Operating Lessor.
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ARTICLE 12
DAMAGE AND DESTRUCTION
12.1 Insurance Proceeds. Subject to the rights of Lender under the Loan Documents, all proceeds payable by reason of any loss or damage to the Leased Property, or any portion thereof, and insured under any policy of insurance required by Article 11 of this Lease shall be paid to Lender and held in trust by Lender in an interest-bearing account for reconstruction or repair, as the case may be, of any damage to or destruction of the Leased Property, or any portion thereof, and, if applicable, shall be paid out by Lender from time to time for the reasonable costs of such reconstruction or repair in accordance with the terms of the Loan Documents; provided, however, in the event that the Leased Property is not covered by a Loan the foregoing provisions applicable to Lender shall apply to Operating Lessor and such proceeds shall be paid out by Operating Lessor from time to time for the reasonable costs of such reconstruction or repair upon satisfaction of reasonable terms and conditions specified by Operating Lessor. To the extent any such proceeds under such insurance policies are released or otherwise paid by Lender to Operating Lessor (or, if no Lender, received directly by Operating Lessor) and are not required to be applied in any manner under the terms and provisions of the Loan Documents, or this Lease, then such funds shall be immediately paid over by Operating Lessor to Operating Lessee as is required to fairly compensate Operating Lessee for any loss it suffers as a result of such loss or damage. All salvage resulting from any risk covered by insurance shall belong to Operating Lessor.
12.2 Reconstruction in the Event of Damage or Destruction.
(a) Total Destruction. If during the Term the Leased Property is totally destroyed and the Facility thereby is rendered Unsuitable for its Primary Intended Use, Operating Lessee shall restore the Facility to substantially the same condition as existed immediately before the damage or destruction and otherwise in accordance with the terms of this Lease. Such damage or destruction shall not terminate this Lease, and the insurance proceeds shall be paid out by Operating Lessor from time to time for the reasonable costs of such restoration upon satisfaction of reasonable terms and conditions specified by Operating Lessor, and any excess proceeds remaining after such restoration shall be retained by Operating Lessor. |
(b) Partial Damage. Except as otherwise provided in this Lease, if during the Term the Leased Property is partially destroyed, but the Facility is not thereby rendered Unsuitable for its Primary Intended Use, Operating Lessee shall restore the Facility to substantially the same condition as existed immediately before the damage or destruction and otherwise in accordance with the terms of this Lease. Such damage or destruction shall not terminate this Lease, and the insurance proceeds shall be paid out by Operating Lessor from time to time for the reasonable costs of such restoration upon satisfaction of reasonable terms and conditions specified by Operating Lessor, and any excess proceeds remaining after such restoration shall be retained by Operating Lessor. |
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12.3 Operating Lessee's Property. Operating Lessor shall have no obligation to insure Operating Lessee's Personal Property against any loss of or damage to any of Operating Lessee's Personal Property. Operating Lessee may separately insure its personal property, provided, however, no such payments under such insurance shall diminish or reduce the insurance payments otherwise payable to or for the benefit of Operating Lessor hereunder.
12.4 Abatement of Rent. Unless this Lease is terminated in accordance herewith, any damage or destruction due to casualty notwithstanding, this Lease shall remain in full force and effect and Operating Lessee's obligation to make rental payments and to pay all other charges required by this Lease shall be equitably abated during any period required for the applicable repair and restoration.
12.5 Damage Near End of Term. Notwithstanding any provisions of this Article 12 appearing to the contrary, if damage to or destruction of any Facility renders it unsuitable for its Primary Intended Use occurs during the last 24 months of the Term, then either party shall have the right to terminate this Lease with respect to such Facility by giving Notice to the other within thirty (30) days after the date of damage or destruction, whereupon all Accrued Rent with respect to such Facility shall be paid immediately, and this Lease shall automatically terminate with respect to such Facility five (5) days after the date of such Notice.
12.6 Waiver. Operating Lessee hereby waives any statutory or judicially created rights of termination that may arise by reason of any damage or destruction of any Facility that Operating Lessor is obligated to restore or may restore under any of the provisions of this Lease.
12.7 Deficiency in Insurance Proceeds. If the cost of the repair or restoration exceeds the amount of proceeds received by Operating Lessor from the insurance required under Article 11 and Operating Lessee is obligated to restore pursuant to Section 12.2 hereof, Operating Lessor agrees, subject to this Section 12.7, to contribute any excess amounts needed to restore the Facility prior to requiring Operating Lessee to commence such work. Such difference shall be made available by Operating Lessor, together with any insurance proceeds, for application to the cost of repair and restoration in accordance with the provisions of Section 12.1. In the event the sum of (a) the insurance proceeds released to Operating Lessor, and (b) that portion of the deductible, if any, which is greater than five percent (5%) of the cost of the repair, is equal to at least ninety-five percent (95%) of the cost of the repair or restoration, Operating Lessor shall fund the deficiency. In the event the sum of (y) the insurance proceeds, and (z) that portion of the deductible, if any, which is greater than five percent (5%) of the cost of the repair, is less than ninety five percent (95%) of the cost of the repair or restoration, Operating Lessor shall fund such deficiency in its sole discretion; provided, however, that in the event Operating Lessor does not agree to make such deficiency available for restoration, either Operating Lessor or Operating Lessee may terminate this Lease by written notice to the other, whereupon this Lease shall terminate as provided in Article 36 and Operating Lessor shall pay to Operating Lessee a termination fee as provided in Article 36.
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13.1 Definitions.
(a) "Condemnation" means a Taking resulting from (1) the exercise of any governmental power, whether by legal proceedings or otherwise, by a Condemnor, and (2) a voluntary sale or transfer by Operating Lessor to any Condemnor, either under threat of condemnation or while legal proceedings for condemnation are pending. |
(b) "Date of Taking" means the date the Condemnor has the right to possession of the property being condemned. |
(c) "Award" means all compensation, sums or anything of value awards, paid or received on a total or partial Condemnation. |
(d) "Condemnor" means any public or quasi-public authority, or private corporation or individual, having the power of Condemnation. |
13.2 Parties' Rights and Obligations. If during the Term there is a Condemnation of all or any part of the Leased Property at a particular Facility or any interest in this Lease, the rights and obligations of Operating Lessor and Operating Lessees shall be determined by this Article 13, subject in all respects to any and all rights of Lender under the Loan Documents. If Lender releases to Operating Lessor any Award in connection with a Condemnation or Taking of all or any part of the Leased Property at a Facility that is not required to be applied in any manner by the terms and provisions of the Loan Documents, then such funds shall be immediately paid over by Operating Lessor to Operating Lessee in such amounts as is required to fairly compensate Operating Lessee for any loss it suffers as a result of such Condemnation or Taking.
13.3 Total Taking. If title to the fee of the whole of the Leased Property at a particular Facility is condemned by any Condemner, this Lease shall cease and terminate as of the Date of Taking by the Condemner. If title to the fee of less than the whole of the Leased Property is so taken or condemned, which nevertheless renders the Leased Property Unsuitable or Uneconomic for its Primary Intended Use, Operating Lessee and Operating Lessor shall each have the option, by notice to the other, at any time prior to the Date of Taking, to terminate this Lease as of the Date of Taking. Upon such date, if such Notice has been given, this Lease shall thereupon cease and terminate. All Rent and Additional Charges paid or payable by Operating Lessee hereunder shall be apportioned as of the Date of Taking, and Operating Lessee shall promptly pay Operating Lessor such amounts.
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13.4 Partial Taking. If title to less than the whole of the Leased Property at a particular Facility is condemned, and such Leased Property is still suitable for its Primary Intended Use, and not Uneconomic for its Primary Intended Use, or if Operating Lessee or Operating Lessor is entitled but neither elects to terminate this Lease as provided in Section 13.3, (a) Operating Lessee, at Operating Lessee's sole cost and expense (subject to Operating Lessor's contribution as set forth below) shall with all reasonable dispatch restore the untaken portion of any Leased Improvements so that such Leased Improvements constitute a complete architectural unit of the same general character and condition (as nearly as may be possible under the circumstances) as the Leased Improvements existing immediately prior to the Condemnation, unless such restoration extends beyond the expiration of the Term, in which case Operating Lessee shall not be required to make such restoration, and (b) Operating Lessee shall continue to pay, in the manner and at the terms herein specified, full amounts of Rent and Additional Charges with an equitable reduction for the portion of the Leased Property so condemned.
13.5 Temporary Taking. If the whole or any part of the Leased Property at a particular Facility or of Operating Lessee's interest under this Lease is condemned by any Condemnor for its temporary use or occupancy, this Lease shall not terminate by reason thereof, but Operating Lessee shall continue to pay, in the manner and at the terms herein specified, full amounts of Rent and Additional Charges with an equitable reduction for the portion of the Leased Property so condemned. Except only to the extent that Operating Lessee may be prevented from so doing pursuant to the terms of the order of the Condemnor, Operating Lessee shall continue to perform and observe all of the other terms, covenants, conditions and obligations hereof on the part of the Operating Lessee to be performed and observed, as though such Condemnation had not occurred. In the event of any Condemnation described in this Section 13.5 the entire amount of any Award made for such Condemnation allocable to the Term of this Lease, whether paid by way of damages, rent or otherwise, shall be paid to Operating Lessor. Operating Lessee covenants that upon the termination of any such period of temporary use or occupancy Operating Lessee's will, at Operating Lessee's sole cost and expense, promptly commence and diligently prosecute the completion of the restoration of the Leased Property as nearly as possible to the condition the Leased Property was in immediately prior to such Condemnation, with such alterations as may be approved by Operating Lessor and otherwise in accordance with the terms of this Lease and Operating Lessor's obligations under the Loan Documents, unless such period of temporary use or occupancy extends beyond the expiration of the Term, in which case Operating Lessee shall not be required to make such restoration.
13.6 Allocation of Award. The total Award made with respect to the Leased Property or for loss of rent, or for Operating Lessor's loss of business beyond the Term, shall be solely the property of and payable to Operating Lessor. Any Award made for loss of Operating Lessee's business during the remaining Term, if any, for the taking of Operating Lessee's Personal Property, or for removal and relocation expenses of Operating Lessee in any such proceedings shall be the sole property of and payable to Operating Lessee. In any Condemnation proceedings Operating Lessor and Operating Lessee shall each seek its Award in conformity herewith, at its respective expense; provided, however, Operating Lessee shall not initiate, prosecute acquiesce in any proceedings that may result in a diminution of any Award payable to Operating Lessor.
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14.1 Events of Default. If any one or more of the following events (individually, an "Event of Default") occurs:
(a) Operating Lessee fails (i) to make any payment of the Minimum Rent or Adjusted Gross Rent payable hereunder when due and such failure continues for a period of ten (10) days after the date due, or (ii) subject to the right to contest same pursuant to Article 10 hereof, to make any required payments of Additional Charges within ten (10) days following Notice from Operating Lessor that such payment is due and owing and unpaid. |
(b) Operating Lessee fails to maintain the insurance coverages that it is required to maintain under Article 11. |
(c) if Operating Lessee fails to observe or perform any other term, covenant or condition of this Lease and such failure is not cured by Operating Lessee within a period of thirty (30) days after receipt by the Operating Lessee of Notice thereof from Operating Lessor, unless such failure cannot with due diligence be cured within a period of thirty (30) days, in which case it shall not be deemed an Event of Default if Operating Lessee proceeds promptly and with due diligence to cure the failure and diligently completes the curing thereof provided, however, in no event shall such cure period extend beyond ninety (90) days after such Notice; or |
(d) if the Operating Lessee shall file a petition in bankruptcy or reorganization for an arrangement pursuant to any federal or state bankruptcy law or any similar federal or state law, or shall be adjudicated a bankrupt or shall make an assignment for the benefit of creditors or shall admit in writing Operating Lessee's inability to pay its debts generally as they become due, or if a petition proposing the adjudication of the Operating Lessee as a bankrupt or its reorganization pursuant to any federal or state bankruptcy law or any similar federal or state law shall be filed in any court and the Operating Lessee shall be adjudicated a bankrupt and such adjudication shall not be vacated or set aside or stayed within sixty (60) days after the entry of an order in respect thereof, or if a receiver of the Operating Lessee or of the whole or substantially all of the assets of the Operating Lessee shall be appointed in any proceeding brought by the Operating Lessee or if any such receiver, trustee or liquidator shall be appointed in any proceeding brought against the Operating Lessee and shall not be vacated or set aside or stayed within sixth (60) days after such appointment; or |
(e) if Operating Lessee is liquidated or dissolved, or begins proceedings toward such liquidation or dissolution, or, in any manner, permits the sale or divestiture of substantially all of Operating Lessee's assets; or |
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(f) if the estate or interest of Operating Lessee in the Leased Property or any part thereof is voluntarily or involuntarily transferred, assigned, conveyed, levied upon or attached in any proceeding (unless Operating Lessee is contesting such lien or attachment in good faith in accordance with Article 10 hereof); or |
(g) if, except as a result of damage, destruction or a partial or complete Condemnation, Operating Lessee voluntarily ceases operations on the Leased Property; or |
(h) if the Franchise Agreement with respect to any Facility has been terminated by the franchisor as a result of any action or failure to act by the Operating Lessee, other than a failure to complete improvements required by the franchisor because the Operating Lessor has not provided funds for such improvements; |
(i) intentionally omitted |
(j) if Operating Lessee is or becomes a Specially Designated National or Blocked Person. |
then, and in any such event, Operating Lessor may exercise one or more remedies available to it herein or at law or in equity, including but not limited to Operating Lessor's right to terminate this Lease by giving Operating Lessee not less than ten (10) days Notice of such termination except in the case of a default under Sections 14.1(d) or (e) in which case no Notice shall be required.
No Event of Default (other than a failure to make a payment of money) shall be deemed to exist under clause (c) during any time the curing thereof is prevented by an Unavoidable Delay, provided that upon the cessation of such Unavoidable Delay, Operating Lessee remedies such default or Event of Default without further delay.
14.2 Surrender. If an Event of Default occurs (and the event giving rise to such Event of Default has not been cured within the curative period relating thereto as set forth in Section 14.1) and is continuing, whether or not this Lease has been terminated pursuant to Section 14.1, Operating Lessee shall, if requested by Operating Lessor so to do, immediately surrender and assign to Operating Lessor or Operating Lessor's designee the Leased Property including, without limitation, any and all books, records, files, licenses, permits and keys relating thereto, and quit the same and Operating Lessor may enter upon and repossess the Leased Property by reasonable force, summary proceedings, ejectment or otherwise, and may remove Operating Lessee and all other persons and any and all personal property from the Leased Property, subject to rights of any hotel guests and to any requirement of law. Operating Lessee hereby waives any and all requirements of applicable laws for service of notice to re-enter the Leased Property. Except as required by law, Operating Lessor shall be under no obligation to, but may if it so chooses, relet the Leased Property or otherwise mitigate Operating Lessor's damages.
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14.3 Damages. Neither (a) the termination of this Lease, (b) the repossession of the Leased Property, (c) the failure of Operating Lessor to relet the Leased Property, nor (d) the reletting of all or any portion thereof, shall relieve Operating Lessee of Operating Lessee's liability and obligations hereunder, all of which shall survive any such termination, repossession or reletting to the maximum extent permitted by law. In the event of any such termination, Operating Lessee shall forthwith pay to Operating Lessor all Rent due and payable with respect to the Leased Property to and including the date of such termination.
In addition, Operating Lessee shall forthwith pay to Operating Lessor, at Operating Lessor's option, as and for liquidated and agreed current damages for Operating Lessee's default, either:
(1) Without termination of Operating Lessee's right to possession of the Leased Property, each installment of Rent and other sums payable by Operating Lessee to Operating Lessor under this Lease as the same becomes due and payable, which Rent and other sums shall bear interest at the Overdue Rate from the date due until paid or otherwise discharged, and Operating Lessor may enforce, by action or otherwise, any other term or covenant of this Lease; or |
(2) the sum of: |
(A) the unpaid Rent which had been earned at the time of termination, repossession or reletting, and |
(B) the worth at the time of termination, repossession or reletting of the amount by which the unpaid Rent for the balance of the Term after the time of termination, repossession or reletting, exceeds the amount of such rental loss that Operating Lessee proves could be reasonably avoided and as reduced for rentals received after the time of termination, repossession or reletting, if and to the extent required by applicable law, and |
(C) any other amount necessary to compensate Operating Lessor for all the detriment proximately caused by Operating Lessee's failure to perform Operating Lessee's obligations under this Lease or which in the ordinary course of things, would be likely to result therefrom. The worth at the time of termination, repossession or reletting of the amount referred to in subparagraph (B) is computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%). |
14.4 Waiver. If this Lease is terminated pursuant to Section 14.1, Operating Lessee waives, to the extent permitted by applicable law, (a) any right to a trial by jury in the event of summary proceedings to enforce the remedies set forth in this Article 14, and (b) the benefit of any laws now or hereafter in force exempting property from liability for rent or for debt.
14.5 Application of Funds. Any payments received by Operating Lessor under any of the provisions of this Lease during the existence or continuance of any Event of Default shall be applied to Operating Lessee's obligations in the order that Operating Lessor may determine or as may be prescribed by the laws of the State.
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ARTICLE 15
LESSOR'S RIGHT TO CURE
If Operating Lessee fails to make any payment or to perform any act required to be made or performed under this Lease including, without limitation, Operating Lessee's failure to comply with the terms of any Franchise Agreement other than a failure to complete improvements required by the franchisor because the Operating Lessor has not provided Operating Lessee with the funds therefor, and fails to cure the same within the relevant time periods provided in Section 14.1, Operating Lessor, without waiving or releasing any obligation of Operating Lessee, and without waiving or releasing any obligation or default, may (but shall be under no obligation to) at any time thereafter make such payment or perform such act for the account and at the expense of Operating Lessee, and may, to the extent permitted by law, enter upon the Leased Property for such purpose and, subject to Section 14.4, take all such action thereon as, in Operating Lessor's opinion, may be necessary or appropriate therefor. No such entry shall be deemed an eviction of Operating Lessee. All sums so paid by Operating Lessor and all costs and expenses (including, without limitation, reasonable attorneys' fees and expenses, in each case to the extent permitted by law) so incurred, together with a late charge thereon (to the extent permitted by law) at the Overdue Rate from the date on which such sums or expenses are paid or incurred by Operating Lessor, shall be paid by Operating Lessee to Operating Lessor on demand. The obligations of Operating Lessee and rights of Operating Lessor contained in this Article 15 shall survive the expiration or earlier termination of this Lease.
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Operating Lessee understands that in order for REIT to qualify as a REIT, the following requirements (the "REIT Requirements") must be satisfied:
(a) Anything contained in this Lease to the contrary notwithstanding, the average of the Fair Market Value at the beginning and end of a Fiscal Year of Operating Lessor's personal Property that is leased to the Operating Lessee under this Lease shall not exceed fifteen percent 15% of the average of the aggregate fair market values of all of the Leased Property at the beginning and at the end of such Fiscal Year (the "Personal Property Limitation"). If Operating Lessor reasonably anticipates that the Personal Property Limitation will be exceeded with respect to the Leased Property for any Fiscal Year, Operating Lessor shall notify Operating Lessee, and Operating Lessee either (i) shall purchase at fair market value any personal property anticipated to be in excess of the Personal Property Limitation ("Excess Personal Property") either from the Operating Lessor or a third party or (ii) shall lease the Excess Personal Property from a third party. In either case, Operating Lessee's Rent obligation shall be equitably adjusted. In addition, in the case of the purchase or lease of Excess Personal Property by the Operating Lessee from a third party, the Operating Lessor's capital expenditure reserve obligation pursuant to Article 38 shall be appropriately decreased to reflect the reduced need for Operating Lessor-owned personal property. Notwithstanding anything to the contrary set forth above, Operating Lessee shall not be responsible in any way for determining whether or not Operating Lessee has exceeded or will exceed the Personal Property Limitation, and shall not be liable to Operating Lessor or any of Operating Lessor's shareholders in the event that the Personal Property Limitation is exceeded, as long as Operating Lessee meets Operating Lessee's obligation to acquire or lease any Excess Personal Property as provided above. This Section 16 is intended to ensure that the Rent qualifies as "rents from real property," within the meaning of Section 856(d) of the Code, or any similar or successor provisions thereto, and shall be interpreted in a manner consistent with such intent. |
(b) Anything contained in this Lease to the contrary notwithstanding, Operating Lessee shall not sublet the Leased Property on any basis such that the rental to be paid by the sublessee thereunder would be based, in whole or in part, on either (i) the net income or net profits derived by the business activities of the sublessee, or (ii) any other formula such that any portion of the Rent would fail to qualify as "rents from real property" within the meaning of Section 856(d) of the Code, or any similar or successor provision thereto. |
(c) Operating Lessee cannot sublet the Leased Property to any Person in which REIT, owns, directly or indirectly, a ten percent (10%) or more interest, within the meaning of Section 856(d)(2)(B) of the Code, or any similar or successor provisions thereto. |
(d) Reserved. |
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(e) Operating Lessee shall not (i) directly or indirectly operate or manage a "lodging facility" within the meaning of Section 856(d)(9)(D)(ii) of the Code or a "health care facility" within the meaning of Section 856(e)(6)(D)(ii) or (ii) directly or indirectly provide to any other Person (under a franchise, license, or otherwise) rights to any brand name under which any lodging facility or health care facility is operated; provided, however, that Operating Lessee may provide such rights to Manager to operate or manage a lodging facility as long as such rights are held by Operating Lessee as a franchisee, licensee, or in a similar capacity and such lodging facility is either owned by Operating Lessee or is leased to Operating Lessee by Operating Lessor or one of Operating Lessor's Affiliates. |
(f) Operating Lessee agrees, and agrees to use reasonable efforts to cause Operating Lessee's Affiliates, to use their best efforts to permit the REIT Requirements to be satisfied. Operating Lessee agrees and agrees to use reasonable efforts to cause Operating Lessee's Affiliates, to cooperate in good faith with REIT and Operating Lessor to ensure that the REIT Requirements are satisfied, including but not limited to, providing REIT with information about the ownership of Operating Lessee, and Operating Lessee's Affiliates to the extent that such information is reasonably available. Operating Lessee agrees, and agrees to use reasonable efforts to cause Operating Lessee's Affiliates, upon request by REIT, and, where appropriate, at REIT's expense, to take reasonable action necessary to ensure compliance with the REIT Requirements. Immediately after becoming aware that the REIT Requirements are not, or will not be, satisfied, Operating Lessee shall notify, or use reasonable efforts to cause Operating Lessee's Affiliates to notify, REIT of such noncompliance. |
(g) Both Operating Lessee and Operating Lessor agree that no provision of this lease shall be construed so as to cause REIT to fail to qualify as a REIT. |
(h) Operating Lessee shall not permit any wagering activities to be conducted at or in connection with the Leased Property by any Person who is engaged in the business of accepting wagers and who is legally authorized to engage in such business at or in connection with the Leased Property. |
ARTICLE 17
COMPLIANCE WITH SPECIAL PURPOSE PROVISIONS
17.1 Special Purpose Requirements.
(a) Operating Lessee shall not do any of the following, without the unanimous approval of Operating Lessee's Independent Directors, if any, and all other directors of Operating Lessee: |
(i) file or consent to the filing of any bankruptcy, insolvency or reorganization petition, case or proceeding, or institute any proceedings under any applicable insolvency law or otherwise seek relief under any laws relating to the relief from debts or the protection of debtors generally; |
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(ii) seek or consent to the appointment of a receiver, liquidator, assignee, trustee, sequestrator, custodian or any similar official for Operating Lessee or Operating Lessor or a substantial portion of any Facility; |
(iii) make any assignment for the benefit of the creditors of Operating Lessee or Operating Lessor; or |
(iv) take any action in furtherance of the foregoing subparagraphs (i) through (iii). |
(b) Special Purpose Covenants. Notwithstanding any other provision of this Lease and any provision of law that otherwise so empowers the Corporation, Operating Lessee shall at all times, on Operating Lessee's own behalf and acting as the lessee of the Leased Property: |
(i) remain solvent and pay Operating Lessee's debts and liabilities (including, as applicable, shared personnel and overhead expenses) from its assets as the same shall become due, and maintain adequate capital for the normal obligations reasonably foreseeable in a business of its size and character and in light of its contemplated business operations; |
(ii) correct any known misunderstanding regarding Operating Lessee's separate identity and not identify itself as a division of any other Person; |
(iii) maintain Operating Lessee's bank accounts, books of account, books and records separate from those of any other Person, file its own tax returns except to the extent that it is required by law to file consolidated tax returns; |
(iv) maintain Operating Lessee's own records, books, resolutions and By-laws; |
(v) not commingle Operating Lessee's funds or assets with those of any other Person nor participate in any cash management system with any other Person, except as contemplated by the Loan Documents; |
(vi) hold Operating Lessee's assets in its own name; |
(vii) conduct Operating Lessee's business in its own name or in a name franchised or licensed to it by an entity other than an Affiliate of itself or of Operating Lessor, except for services rendered under a business management services agreement with an Affiliate that complies with the terms contained in subparagraph (xxi) below, so long as the manager, or equivalent thereof, under such business management services agreement holds itself out as an agent of Operating Lessee; |
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(viii) (A) maintain Operating Lessee's financial statements, accounting records and other entity documents separate from those of any other Person; (B) in its financial statements, show its assets and liabilities separate and apart from those of any other Person except as required by GAAP in connection with the preparation of consolidated financial statements; and (C) not permit its assets to be listed as assets on the financial statement of any other Person except as required by GAAP in connection with the preparation of consolidated financial statements; provided, however, that any such consolidated financial statements referenced in clause (B) or (C) above shall contain a note indicating that it is a separate entity and that its separate assets and liabilities are neither available to pay the debts of the consolidated entity nor constitute obligations of the consolidated entity; |
(ix) pay Operating Lessee's own liabilities and expenses, including the salaries of its own employees, out of its own funds and assets, and maintain a sufficient number of employees in light of its contemplated business operations; |
(x) observe all corporate formalities; |
(xi) have no indebtedness except as expressly permitted by Operating Lessee's certificate of incorporation or other organizational documents as in effect on the date hereof; |
(xii) not assume or guarantee or become obligated for the debts of any other Person, hold out Operating Lessee's credit as being available to satisfy the obligations of any other Person; |
(xiii) not acquire obligations or securities of Operating Lessee's shareholders or any other Affiliate; |
(xiv) allocate fairly and reasonably any overhead expenses that are shared with any Affiliate, including, but not limited to, paying for shared office space and services performed by any employee of an Affiliate; |
(xv) maintain and use separate stationery, invoices and checks bearing Operating Lessee's name. The stationery, invoices, and checks utilized to collect its funds or pay its expenses shall bear its own name and shall not bear the name of any other entity unless such entity is clearly designated as being the other entity agent; |
(xvi) not pledge Operating Lessee's assets for the benefit of any other Person (other than Lender); |
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(xvii) hold itself out and identify itself as a separate and distinct entity under Operating Lessee's own name or in a name franchised or licensed to it by an entity other than an Affiliate of itself or of Operating Lessor and not as a division or part of any other Person, except for services rendered under a business management services agreement with an Affiliate that complies with the terms contained in subparagraph (xxi) below, so long as the manager, or equivalent thereof, under such business management services agreement holds itself out as an agent of Operating Lessor; |
(xviii) maintain Operating Lessee's assets in such a manner that it will not be costly or difficult to segregate, ascertain or identify its individual assets from those of any other Person; |
(xix) not make loans to any Person or hold evidence of indebtedness issued by any other Person or entity (other than cash and investment-grade securities issued by an entity that is not an Affiliate of or subject to common ownership with such entity) |
(xx) not identify Operating Lessee's shareholders or any Affiliate of any of them, as a division or part of it, and not identify itself as a division of any other Person; |
(xxi) not enter into or be a party to, any transaction with Operating Lessee's shareholders, or Affiliates except in the ordinary course of its business and on terms which are intrinsically fair, commercially reasonable and are no less favorable to it than would be obtained in a comparable arm's-length transaction with an unrelated third party; |
(xxii) not have any of Operating Lessee's obligations guaranteed by any Affiliate, except (x) that Operating Lessor may guarantee obligations relating to any franchise or management arrangements for the Leased Properties or (y) as contemplated by the Loan Documents; |
(xxiii) not form, acquire or hold any subsidiary, except that Operating Lessee may hold (x) subsidiaries solely for the purpose of holding liquor licenses and (y) a subsidiary solely for the purpose of holding title to the personal property at any Facility; |
(xxiv) comply with all of the terms and provisions contained in Operating Lessee's organizational documents; and |
(xxv) not engage in or seek to consent to any dissolution, winding up, liquidation, consolidation, merger, sale of all or substantially all of it assets, and have a Board of Directors separate from that of any other Person. |
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If Operating Lessee for any reason remains in possession of the Leased Property after the expiration or earlier termination of the Term, such possession shall be as a tenant at sufferance during which time Operating Lessee shall pay as rental each month two times the aggregate of (a) one-twelfth of the aggregate Rent payable with respect to the last Fiscal Year of the Term, (b) all Additional Charges accruing during the applicable month and (c) all other sums, if any, payable by Operating Lessee under this Lease with respect to the Leased Property. During such period, Operating Lessee shall be obligated to perform and observe all of the terms, covenants and conditions of this Lease, but shall have no rights hereunder other than the right, to the extent given by law to tenancies at sufferance, to continue Operating Lessee's occupancy and use of the Leased Property. Nothing contained herein shall constitute the consent, express or implied, of Operating Lessor to the holding over of Operating Lessee after the expiration or earlier termination of this Lease.
During the Term, the risk of loss or of the decrease in the enjoyment and beneficial use of the Leased Property in consequence of the damage or destruction thereof by fire, the elements, casualties, thefts, riots, wars or otherwise, or in consequence of foreclosures, attachments, levies or executions (other than those caused by Operating Lessor and those claiming from, through or under Operating Lessor) is assumed by Operating Lessee, and, in the absence of gross negligence, willful misconduct or breach of this Lease by Operating Lessor pursuant to Section 32.3, Operating Lessor shall in no event be answerable or accountable therefor, nor shall any of the events mentioned in this Section entitle Operating Lessee to any abatement of Rent except as specifically provided in this Lease.
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20.1 Operating Lessee Indemnification. Notwithstanding the existence of any insurance, and without regard to the policy limits of any such insurance or self-insurance, but subject to the last sentence of Section 11.4 if any insurance coverage is applicable, Section 14.4 and Article 6, Operating Lessee will protect, indemnify, hold harmless and defend Operating Lessor from and against all liabilities, obligations, claims, damages, penalties, causes of action, costs and expenses (including, without limitation, reasonable attorneys' fees and expenses), to the extent permitted by law, imposed upon or incurred by or asserted against Operating Lessor Indemnified Parties by reason of: (a) any accident, injury to or death of persons or loss of or damage to property occurring on or about the Leased Property or adjoining sidewalks, including without limitation any claims under liquor liability, "dram shop" or similar laws, (b) any past, present or future use, misuse, non-use, condition, management, maintenance or repair by Operating Lessee or any of Operating Lessee's agents, employees or invitee of the Leased Property or Operating Lessee's Personal Property or any litigation, proceeding or claim by governmental entitles or other third parties to which a Operating Lessor Indemnified Party is made a party or participant related to such use, misuse, non-use, condition, management, maintenance, or repair thereof by Operating Lessee or any of Operating Lessee's agents, employees or invitee, including any failure of Operating Lessee or any of Operating Lessee's agents, employees or invitee to perform any obligations under this Lease or imposed by applicable law (other than arising out of Condemnation proceedings), (c) any Impositions that are the obligations of Operating Lessee pursuant to the applicable provisions of this Lease, (d) any failure on the part of Operating Lessee to perform or comply with any of the terms of this Lease, and (e) the non-performance of any of the terms and provisions of any and all existing and future subleases of the Leased Property to be performed by the Operating Lessor thereunder.
20.2 Operating Lessor Indemnification. Operating Lessor shall indemnify, save harmless and defend Operating Lessee Indemnified Parties from and against all liabilities, obligations, claims, damages, penalties, causes of action, costs and expenses imposed upon or incurred by or asserted against Operating Lessee Indemnified Parties as a result of the gross negligence or willful misconduct of Operating Lessor arising in connection with this Lease.
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20.3 Payments by Indemnifying Party. Any amounts that become payable by an Indemnifying Party under this Article 20 shall be paid within ten (10) days after liability therefor on the part of the Indemnifying Party is determined by litigation or otherwise, and if not timely paid, shall bear a late charge (to the extent permitted by law) at the Overdue Rate from the date of such determination to the date of payment. An Indemnifying Party, at such Indemnifying Party's expense, shall contest, resist and defend any such claim, action or proceeding asserted or instituted against the Indemnified party. The Indemnified Party, at such Indemnifying Party's expense, shall be entitled to participate in any such claim, action or proceeding, and the Indemnifying Party may not compromise or otherwise dispose of the same without the consent of the Indemnified Party, which may not be unreasonably withheld. Nothing herein shall be construed as indemnifying a Operating Lessor Indemnified Party or a Operating Lessee Indemnified Party against its own grossly negligent acts or omissions or willful misconduct.
20.4 Survival. Operating Lessee's or Operating Lessor's liability for a breach of the provisions of this Article 20 shall survive any termination of this Lease.
ARTICLE 21
SUBLETTING AND ASSIGNMENT
21.1 Subletting and Assignment. Subject to the provisions of Article 17 and Section 1.2 and any other express conditions or limitations set forth herein or in the Loan Documents, Operating Lessee may, but only with the prior written consent of Operating Lessor to be granted or withheld in Operating Lessor's sole discretion, (a) assign this Lease or sublet all or any part of the Leased Property or (b) sublet any retail or restaurant portion of the Leased Improvements in the normal course of the Primary Intended Use . In the case of a subletting, the sublessee shall comply with the provisions of Section 21.2, and in the case of an assignment, the assignee shall assume in writing and agree to keep and perform all of the terms of this Lease on the part of Operating Lessee to be kept and performed and shall be, and become, jointly and severally liable with Operating Lessee for the performance thereof. Notwithstanding the above, Operating Lessee may assign this Lease to an Affiliate without the consent of Operating Lessor; provided that any such assignee assumes in writing and agrees to keep and perform all of the terms of this Lease on the part of the Operating Lessee to be kept and preformed and shall be and become jointly and severally liable with Operating Lessee for the performance thereof. In case of either an assignment or subletting made during the Term, Operating Lessee shall remain primarily liable, as principal rather than as surety, for the prompt payment of the Rent and for the performance and observance of all of the covenants and conditions to be performed by Operating Lessee hereunder. An original counterpart of each such sublease and assignment and assumption, duly executed by Operating Lessee and such sublessee or assignee, as the case may be, in form and substance satisfactory to Operating Lessor, shall be delivered promptly to Operating Lessor.
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21.2 Attornment. Operating Lessee shall insert in each sublease permitted under Section 21.1 provisions to the effect that (a) such sublease is subject and subordinate to all of the terms and provisions of this Lease and to the rights of Operating Lessor hereunder, (b) if this Lease terminates before the expiration of such sublease, the sublessee thereunder will, at Operating Lessor's option, attorn to Operating Lessor and waive any right the sublessee may have to terminate the sublease or to surrender possession thereunder as a result of the termination of this Lease, and (c) if the sublessee receives a written Notice from Operating Lessor or Operating Lessor's assignees, if any, stating that an uncured Event of Default exists under this Lease, the sublessee shall thereafter be obligated to pay all rentals accruing under said sublease directly to the party giving such Notice, or as such party may direct. All rentals received from the sublessee by Operating Lessor or Operating Lessor's assignees, if any, as the case may be, shall be credited against the amounts owing by Operating Lessee under this Lease.
ARTICLE 22
ESTOPPEL CERTIFICATES; FINANCIAL REPORTS
22.1 Estoppel Certificates. At any time and from time to time, upon not less than ten (10) Business Days prior Notice by either party, the non-requesting party shall furnish to the requesting party, or a designee thereof, an Officer's Certificate certifying that this Lease is unmodified and in full force and effect (or that this Lease is in full force and effect as modified and setting forth the modifications), the date to which the Rent has been paid, that to the knowledge of the certifying party, no Default or an Event of Default has occurred and is continuing or, if a Default or an Event of Default shall exist, specifying in reasonable detail the nature thereof and the steps being taken to remedy the same, and such additional information as the requesting party may reasonably request. Any such certificate furnished pursuant to this Section 17.1 may be relied upon by the requesting party, its lender, and any prospective purchaser or mortgagee of the Leased Property or the leasehold estate conveyed hereby.
22.2 Financial Statements. Operating Lessee shall furnish the following statements to Operating Lessor:
(a) [Intentionally Omitted]; |
(b) [Intentionally Omitted]; |
(c) within eighty (80) days after the end of each Fiscal Year, the results of operations of the Facility for the preceding Fiscal Year (the "Annual Operating Statement"), in the form received by Operating Lessee from Manager in accordance with the Management Agreement; |
(d) simultaneously with the payment of Rent under Section 3.1.1, the results of operations of the Facility for the preceding Accounting Period (the "Accounting Period Statement"), in the form received by Operating Lessee from Manager in accordance with the Management Agreement; |
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(e) simultaneously with the payment of Rent under Section 3.1.1, the Adjusted Gross Rent Schedule and, simultaneously with the payment of Rent with respect to the final Accounting Period of each Fiscal Year, the Year End Adjusted Gross Rent Schedule; |
(f) to the extent such information has been provided by Manager to Operating Lessee, not later than twenty-eight (28) days after the end of each Accounting Period, except as described below, the summary of operating results of the Facility. Notwithstanding the foregoing, for the first Accounting Period of each Fiscal Year, the Period Report will be provided to Operating Lessor not later than thirty five (35) days after the end of the prior Fiscal Year; |
(g) to the extent such information has been provided by Manager to Operating Lessee, not later than twenty-eight (28) days after each of the first three (3) quarters of any Fiscal Year, Operating Lessee will provide the forecast Gross Revenues, Room Revenues and EBITDA for the Facility. In addition, to the extent such information is available from Manager, Operating Lessee will provide forecast Gross Revenues by department by Accounting Period and for the Fiscal Year; |
(h) [Intentionally Omitted]; |
(i) promptly after the delivery thereof to Operating Lessee, a copy of any management letter or written report prepared by the independent certified public accountants with respect to the financial condition, operations, business or prospects of Operating Lessee, as the case may be; and |
(j) at the expense of Operating Lessor, at any time and from time to time upon not less than forty-five (45) days Notice from Operating Lessor, any financial reporting information required to be filed by Operating Lessor with any securities or exchange commission, the SEC or any successor agency, or any other governmental authority, or required pursuant to any order issued by any court, governmental authority or arbitrator in any litigation to which Operating Lessor is a party, for purposes of compliance therewith. Operating Lessor may at any time, and from time to time, provide the Facility Mortgagee with copies of any of the foregoing statements, provided that Operating Lessor has used commercially reasonable efforts to cause the Facility Mortgagee to execute and deliver a confidentiality agreement reasonably satisfactory to Operating Lessee. Upon reasonable Notice from Operating Lessor, Operating Lessee agrees to cooperate with Operating Lessor to provide to Operating Lessor the data, forecasts, and reports used in the preparation of the foregoing statements within a reasonable time frame after such data and reports become available to Operating Lessee, provided, however, that Operating Lessee makes no representation as to the accuracy of the data, forecasts and reports provided. |
22.3 Annual Budget. Within ninety (90) days after the date of this Lease, and not later than fifteen (15) days prior to the commencement of each Fiscal Year beginning with the Fiscal Year commencing January 1st of the first (1st) calendar year after the Commencement Date, Operating Lessee shall submit the Annual Budget to Operating Lessor. The Annual Budget shall be subject to the approval of Operating Lessor in Operating Lessor's sole discretion and shall contain the following:
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(a) Operating Lessee's reasonable estimate of Gross Revenues (including room rates and Room Revenues), Gross Operating Expenses, and Gross Operating Profits for the forthcoming Fiscal Year for each Facility itemized on schedules on a quarterly basis as approved by Operating Lessor and Operating Lessee, as same may be revised or replaced from time to time by Operating Lessee and approved by Operating Lessor, together with the assumptions, in narrative form, forming the basis of such schedules. |
(b) An estimate of the amounts to be spent for the repair, replacement, or refurbishment of Furniture and Equipment and/or Fixtures from FF&E Reserve Funds (as such term is defined in Section 38.1 below) or otherwise. In addition, to the extent required under any Loan Document, Operating Lessee will furnish to Operating Lessor, or Lender, on a monthly basis the monthly amount withheld from Gross Revenues for previous calendar month for Replacement Reserve Funds (together with the delivery of such amount to Lender, if required by Lender) and such other information required by Lender pertaining to Replacement Reserve Funds withheld and expenditures for the repair, replacement, or refurbishment of Furniture and Equipment and/or Fixtures. |
(c) An estimate of any amounts Operating Lessor will be required to provide (pursuant to franchise agreements, management agreements or otherwise) in the forthcoming Fiscal Year for required or desirable items which would be classified as capital items by generally accepted accounting principles, and projections of the amounts that may be required in the two succeeding Fiscal Years for such items. |
(d) A cash flow projection. |
(e) A narrative description of the program for advertising and marketing each Facility for the forthcoming Fiscal Year containing a detailed budget itemization of the proposed advertising expenditures by category and the assumptions, in narrative form, forming the basis of such budget itemization. |
22.4 Books and Records. Operating Lessee shall keep full and adequate books of account and other records reflecting the results of operation of each Facility on an accrual basis, all in accordance with the Uniform System and generally accepted accounting principles and the obligations of Operating Lessee under this Lease. The books of account and all other records relating to or reflecting the operation of each Facility shall be kept either at such Facility or at Operating Lessee's offices, and shall be available to Operating Lessor and Operating Lessor's representatives, auditors, accountants or lenders at all reasonable times for examination, audit, inspection and transcription. All of such books and records pertaining to each Facility including, without limitation, books of account, guest records and front office records, shall not be removed from such Facility or Operating Lessee's offices without the approval of Operating Lessor.
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ARTICLE 23
LESSOR'S RIGHT TO INSPECT
Operating Lessee shall permit Operating Lessor and Operating Lessor's authorized representatives as frequently as reasonably requested by Operating Lessor to inspect the Leased Property and Operating Lessee's accounts and records pertaining thereto, and all records maintained by any franchisor under a Franchise Agreement and make copies thereof, during usual business hours upon reasonable advance Notice, subject only to any business confidentiality requirements reasonably requested by Operating Lessee.
No failure by Operating Lessor or Operating Lessee to insist upon the strict performance of any term hereof or to exercise any right, power or remedy consequent upon a breach thereof, and no acceptance of full or partial payment of Rent during the continuance of any such breach, shall constitute a waiver of any such breach or of any such term. To the extent permitted by law, no waiver of any breach shall affect or alter this Lease, which shall continue in full force and effect with respect to any other than existing or subsequent breach.
To the extent permitted by law, each legal, equitable or contractual right, power and remedy of Operating Lessor or Operating Lessee now or hereafter provided either in this Lease or by statute or otherwise shall be cumulative and concurrent and shall be in addition to every other right, power and remedy and the exercise or beginning of the exercise by Operating Lessor or Operating Lessee of any one or more of such rights, powers and remedies shall not preclude the simultaneous or subsequent exercise by Operating Lessor or Operating Lessee of any or all of such other rights, powers and remedies.
ARTICLE 26
ACCEPTANCE OF SURRENDER
No surrender to Operating Lessor of this Lease or of the Leased Property or any part thereof, or of any interest therein, shall be valid or effective unless agreed to and accepted in writing by Operating Lessor and no act by Operating Lessor or any representative or agent of Operating Lessor, other than such a written acceptance by Operating Lessor, shall constitute an acceptance of any such surrender.
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There shall be no merger of this Lease or of the leasehold estate created hereby by reason of the fact that the same Person or entity may acquire, own or hold, directly or indirectly: (a) this Lease or the leasehold estate created hereby or any interest in this Lease or such leasehold estate and (b) the fee estate in the Leased Property.
ARTICLE 28
TRANSFER OF LEASED PROPERTY; SUBORDINATION
28.1 Conveyance by Operating Lessor. If Operating Lessor or any successor owner of the Leased Property conveys the Leased Property other than as security for a debt, and the grantee or transferee of the Leased Property expressly assumes all obligations of Operating Lessor hereunder arising or accruing from and after the date of such conveyance or transfer, Operating Lessor or such successor owner, as the case may be, shall thereupon be released from all future liabilities and obligations of Operating Lessor under this Lease arising or accruing from and after the date of such conveyance or other transfer as to the Leased Property and all such future liabilities and obligations shall thereupon be binding upon the new owner.
28.2 Subordination to Mortgage. Subject to the terms of Article 9, this Lease, and any and all rights of Operating Lessee hereunder, may and shall be subject and subordinate to any Facility Mortgage, any ground or master lease, and all renewals, extensions, modifications, consolidations and replacements thereof, and to each and every advance made or hereafter to be made under any such Facility Mortgage. This section shall be self-operative and no further instrument of subordination shall be required. In confirmation of such subordination, Operating Lessee shall promptly execute, acknowledge and deliver any instrument that Operating Lessor, the Operating Lessor under any such lease or the holder of any such mortgage or the trustee or beneficiary of any deed of trust or any of their respective successors in interest may reasonably request to evidence such subordination. Operating Lessee shall not unreasonably withhold its consent to any amendment to this Lease reasonably required by such lender or ground lessor, provided that such amendment does not (i) increase Operating Lessee's rental obligations or other financial obligations hereunder, or (ii) have a material adverse effect upon Operating Lessee's rights hereunder, or (iii) materially increase Operating Lessee's non economic obligations hereunder, or (iv) decrease Operating Lessor's obligations hereunder. Operating Lessor shall exercise commercially reasonable efforts to require any future Facility Mortgagee or Operating Lessor under a ground lease affecting the Leased Property to provide Operating Lessee with notice and an opportunity to cure Operating Lessor defaults under the respective Facility Mortgage or ground lease.
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Any lease to which this Lease is, at the time referred to, subject and subordinate is herein called a "Superior Lease," and the Operating Lessor of a Superior Lease or its successor in interest at the time referred to is herein called "Superior Operating Lessor"; the Facility Mortgage and any other mortgage or deed of trust to which this Lease is, at the time referred to, subject and subordinate, is herein called a "Superior Mortgage," and the Facility Mortgagee and any other holder, trustee or beneficiary of a Superior Mortgage is herein called "Superior Mortgagee." Operating Lessee shall have no obligations under any Superior Lease or Superior Mortgage.
Notwithstanding the obligations of Operating Lessee hereunder, neither any Superior Mortgagee nor any Superior Operating Lessor shall have an obligation to provide a non disturbance agreement to Operating Lessee. Any Superior Mortgagee or Superior Operating Lessor shall have the right to terminate this Lease upon the foreclosure, deed in lieu of foreclosure or exercise of the power of sale with respect to the Leased Property; provided that, if such right is exercised because of (a) a non-monetary default by Operating Lessor under the terms of the relevant loan agreement or ground lease not caused by an Event of Default hereunder or (b) a monetary default by Operating Lessor (including a misapplication of Rent paid by Operating Lessee) where Operating Lessee is not in Default in the payment of Rent hereunder beyond the expiration of applicable notice and cure periods, then Operating Lessor shall pay to Operating Lessee the Fair Market Value of Operating Lessee's leasehold estate as of the termination date in accordance with Article 36; provided further that (i) such fee shall be paid first by offsetting any amounts owed by Operating Lessee to Operating Lessor at such time and the balance (if any) shall be paid to Operating Lessee in cash and (ii) if such cash balance is insufficient to cover the entire Fair Market Value of Operating Lessee's leasehold estate, Operating Lessee agrees not to make any demand or claim therefor against Operating Lessor, the Facility Mortgagee, any purchaser in foreclosure or transferee by deed in lieu of foreclosure or other party claiming under any of the foregoing.
In the event a cash flow sweep structure is implemented by any Superior Mortgagee for any period during the continued implementation of such structure, (i) Operating Lessee's obligation to pay Rent or any other amounts payable hereunder shall be reduced by any amounts received by any Superior Mortgagee and (ii) Operating Lessor shall compensate Operating Lessee for any Operating Lessee Operating Profit not received because of the cash flow sweep structure (i.e., any amount swept in excess of the Rent and other amounts otherwise payable by Operating Lessee under this Lease) and any other costs incurred or advanced by Operating Lessee pursuant to this Lease. Likewise, for any period during which cash management procedures are implemented by or on behalf of any Superior Mortgagee, (a) Operating Lessee's obligation to pay Rent or any other amounts payable hereunder shall be reduced by any amounts received by any Superior Mortgagee and (b) Operating Lessor shall compensate Operating Lessee for any Operating Lessee Operating Profit not received because of the cash management procedures (i.e., any amount swept in excess of the Rent and other amounts otherwise payable by Operating Lessee under this Lease) and any other costs incurred or advanced by Operating Lessee pursuant to this Lease.
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Subject to the termination rights of any Superior Operating Lessor or Superior Mortgagee, if any, in the event that any Superior Operating Lessor or Superior Mortgagee or the nominee or designee of any Superior Operating Lessor or Superior Mortgagee shall succeed to the rights of Operating Lessor under this Lease (any such person, "Successor Operating Lessor"), whether through possession or foreclosure action or delivery of a new lease or deed, or otherwise, such Successor Operating Lessor shall recognize Operating Lessee's rights under this Lease as herein provided and Operating Lessee shall attorn to and recognize the Successor Operating Lessor as Operating Lessee's Operating Lessor under this Lease and Operating Lessee shall promptly execute and deliver any instrument that such Successor Operating Lessor may reasonably request to evidence such attornment (provided that such instrument does not alter the terms of this Lease), whereupon, this Lease shall continue in full force and effect as a direct lease between the Successor Operating Lessor and Operating Lessee upon all of the terms, conditions and covenants as are set forth in this Lease, except that the Successor Operating Lessor (unless formerly the Operating Lessor under this Lease or its nominee or designee) shall not be (a) liable in any way to Operating Lessee for any act or omission, neglect or default on the part of any prior Operating Lessor under this Lease, (b) responsible for any monies owing by or on deposit with any prior Operating Lessor to the credit of Operating Lessee (except to the extent actually paid or delivered to the Successor Operating Lessor), (c) subject to any counterclaim or setoff which theretofore accrued to Operating Lessee against any prior Operating Lessor, (d) bound by any modification of this Lease subsequent to such Superior Lease or Superior Mortgage, or by any previous prepayment of Minimum Rent or Adjusted Gross Rent for more than one (1) month in advance of the date due hereunder, which was not approved in writing by the Superior Operating Lessor or the Superior Mortgagee, (e) liable to Operating Lessee beyond the Successor Operating Lessor's interest in the Leased Property and the rents, income, receipts, revenues, issues and profits issuing from the Leased Property, (f) responsible for the performance of any work to be done by Operating Lessor under this Lease to render the Leased Property ready for occupancy by Operating Lessee or with respect to any insurance or Condemnation proceeds, or (g) required to remove any Person occupying the Leased Property or any part thereof, except if such Person claims by, through or under the Successor Operating Lessor. Operating Lessee agrees at any time and from time to time to execute a suitable instrument in confirmation of Operating Lessee's agreement to attorn, as aforesaid.
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So long a Operating Lessee pays all Rent as the same becomes due and complies with all of the terms of this Lease and performs Operating Lessee's obligations hereunder, in each case within the applicable grace periods, if any, Operating Lessee shall peaceably and quietly have, hold and enjoy the Leased Property for the Term hereof, free of any claim or other action by Operating Lessor or anyone claiming by, through or under Operating Lessor, but subject to all liens and encumbrances subject to which the Leased Property was conveyed to Operating Lessor or hereafter consented to by Operating Lessee or provided for herein. Notwithstanding the foregoing, Operating Lessee shall have the right by separate and independent action to pursue any claim it may have against Operating Lessor as a result of a breach by Operating Lessor of the covenant of quiet enjoyment contained in this Section.
All notices, demands, requests, consents, approvals and other communications ("Notice" or "Notices") hereunder shall be in writing and personally served or mailed (by registered or certified mail, return receipt requested and postage prepaid), if to Operating Lessor at ____________________, and if to Operating Lessee at ________________, or to such other address or addresses as either party may hereafter designate in accordance herewith. Personally delivered Notice shall be effective upon receipt, and Notice given by mail shall be complete at the time of deposit in the U.S. Mail system, but any prescribed period of Notice and any right or duty to do any act or make any response within any prescribed period or on a date certain after the service of such Notice given by mail shall be extended five (5) days.
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ARTICLE 32
LESSOR LIENS; LESSEE RIGHTS TO CURE
32.1 Operating Lessor May Grant Liens.
(a) Without the consent of Operating Lessee, Operating Lessor may, subject to the terms and conditions set forth below in this Article 32, from time to time, directly or indirectly, create or otherwise cause to exist any lien, encumbrance or title retention agreement ("Encumbrance") upon the Leased Property, or any portion thereof or interest therein, whether to secure any borrowing or other means of financing or refinancing. Pursuant to Article 28 hereof, this Lease shall automatically be subordinated to the lien of any such new mortgage on the Leased Property. |
(b) Upon Operating Lessor's request, Operating Lessee shall execute and deliver to Operating Lessor financing statements in form sufficient to perfect the security interest granted to Lender pursuant to the Mortgage in (i) Operating Lessee's Personal Property and the proceeds thereof and (ii) all leases, contracts, concession agreements and other agreements with respect to the Leased Property. |
32.2 Operating Lessee's Right to Cure. Subject to the provisions of Section 32.3, if Operating Lessor breaches any covenant to be performed by it under this Lease, Operating Lessee, after Notice to and demand upon Operating Lessor, without waiving or releasing any obligation hereunder, and in addition to all other remedies available to Operating Lessee, may (but shall be under no obligation at any time thereafter to) make such payment or perform such act for the account and at the expense of Operating Lessor. All sums so paid by Operating Lessee and all costs and expenses (including, without limitation, reasonable attorneys' fees) so incurred, together with interest thereon at the Overdue Rate from the date on which such sums or expenses are paid or incurred by Operating Lessee, shall be paid by Operating Lessor to Operating Lessee on demand or, following entry of a final, non-appealable judgment against Operating Lessor for such sums, may be offset by Operating Lessee against the Minimum Rent payments next accruing or coming due. The rights of Operating Lessee hereunder to cure and to secure payment from Operating Lessor in accordance with this Section 32.2 shall survive the termination of this Lease with respect to the Leased Property.
32.3 Breach by Operating Lessor. It shall be a breach of this Lease if Operating Lessor fails to observe or perform any term, covenant or condition of this Lease on Operating Lessor's part to be performed and such failure continues for a period of thirty (30) days after Notice thereof from Operating Lessee, unless such failure cannot with due diligence be cured within a period of thirty (30) days, in which case such failure shall not be deemed to continue if Operating Lessor, within such thirty (30)-day period, proceeds promptly and with due diligence to cure the failure and diligently completes the curing thereof for a period not to exceed ninety (90) days. The time within which Operating Lessor shall be obligated to cure any such failure also shall be subject to extension of time due to the occurrence of any Unavoidable Delay. Upon a breach by Operating Lessor, Operating Lessee shall be entitled to all available remedies at law and in equity.
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33.1 Miscellaneous.
(a) Survival of Claims. Anything contained in this Lease to the contrary notwithstanding, all claims against, and liabilities of, Operating Lessee or Operating Lessor arising prior to any date of termination of this Lease shall survive such termination. |
(b) Severability. If any term or provision of this Lease or any application thereof is invalid or unenforceable, the remainder of this Lease and any other application of such term or provisions shall not be affected thereby. |
(c) Maximum Interest Rate. If any late charges or any interest rate provided for in any provision of this Lease are based upon a rate in excess of the maximum rate permitted by applicable law, the parties agree that such charges shall be fixed at the maximum permissible rate. |
(d) Amendment. Neither this Lease nor any provision hereof may be changed, waived, discharged or terminated except by a written instrument signed by Operating Lessor and Operating Lessee. |
(e) Attorneys' Fees. If litigation is commenced with respect to any alleged default under this Lease, the prevailing party in such litigation shall receive, in addition to such prevailing party's damages incurred, such sum as the court shall determine as its reasonable attorneys' fees, and all costs and expenses incurred in connection therewith. |
(f) Successors and Assigns. All the terms and provisions of this Lease shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. |
(g) Headings. The headings in this Lease are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. |
(h) Governing Law. This Lease shall be governed by and construed in accordance with the laws of the State, but not including its conflicts of laws rules. |
33.2 Transition Procedures. Upon the expiration or termination of the Term of this Lease, for whatever reason, Operating Lessor and Operating Lessee shall do the following (and the provisions of this Section 33.2 shall survive the expiration or termination of this Lease until they have been fully performed) and, in general, shall cooperate in good faith to effect an orderly transition of the management or lease of any Facility.
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(a) Transfer of Licenses. Upon the expiration or earlier termination of the Term, Operating Lessee shall use Operating Lessee's best efforts (i) to the full extent possible to transfer to Operating Lessor or Operating Lessor's nominee all licenses, operating permits and other governmental authorizations and all contracts, including contracts with governmental or quasi-governmental entities, that may be necessary for the operation of any Facility, including any Franchise Agreement (collectively, "Licenses"), or (ii) if such transfer is prohibited by law or Operating Lessor otherwise elects, to cooperate with Operating Lessor or Operating Lessor's nominee in connection with the processing by Operating Lessor or Operating Lessor's nominee of any applications for, any such Licenses; provided, in either case, that the costs and expenses of any such transfer or the processing of any such application shall be paid by Operating Lessor or Operating Lessor's nominee. |
(b) Subleases and Concessions. Operating Lessee shall assign to Operating Lessor or Operating Lessor's nominee simultaneously with the termination of this Lease, and the assignee shall assume all subleases and concession agreements in effect with respect to each Facility then in Operating Lessee's name. |
(c) Books and Records. All books and records for each Facility kept by Operating Lessee (or the franchisor under any Franchise Agreement) shall be delivered promptly to Operating Lessor or Operating Lessor's nominee, simultaneously with the termination of this Lease, but such books and records shall thereafter be available to Operating Lessee at all reasonable times for inspection, audit, examination and transcription for a period of one (1) year and Operating Lessee may retain (on a confidential basis) copies or computer records thereof. |
(d) Remittance. Operating Lessee shall remit to Operating Lessor or Operating Lessor's nominee, simultaneously with the termination of this Lease, all funds remaining, if any, after payment of all accrued Gross Operating Expenses, and other amounts due Operating Lessee and after deducting the costs of any scheduled repair, replacement or refurbishment of Furniture and Equipment with respect to which deposits have been made. |
33.3 Waiver of Presentment, Etc. Operating Lessee waives all presentments, demands for payment and for performance, notices of nonperformance, protests, notices of protest, notices of dishonor, and notices of acceptance and waives all notices of the existence, creation, or incurring of new or additional obligations, except as expressly granted herein.
Operating Lessor and Operating Lessee shall promptly upon the request of either enter into a short form memorandum of this Lease, in form suitable for recording under the laws of the State in which reference to this Lease, and all options contained herein, shall be made. Operating Lessee shall pay all costs and expenses of recording such memorandum of this Lease.
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ARTICLE 36
LESSOR'S OPTION TO TERMINATE UPON SALE
In the event Operating Lessor enters into a bona fide contract to sell the Leased Property to a non-Affiliate, Operating Lessor may terminate this Lease by giving not less than thirty (30) days prior Notice to Operating Lessee of Operating Lessor's election to terminate this Lease effective upon the closing under such contract. Effective upon such closing, this Lease shall terminate and be of no further force and effect except as to any obligations of the parties existing as of such date that survive termination of this Lease. As compensation for an early termination, Operating Lessor must within one hundred and eighty (180) days after the closing either (a) pay to the Operating Lessee as a termination fee an amount equal to thirty-five percent (35%) of the net income (as calculated in accordance with GAAP) earned by Operating Lessee with respect to the Leased Property (but excluding any proceeds or other consideration attributable to the sale of the Leased Property) for the 12-month period ended as of the last day of the calendar month immediately preceding such termination; or (b) offer to lease to Operating Lessee one or more comparable substitute hotel facilities (which facilities must be satisfactory to Operating Lessee in Operating Lessee's reasonable discretion) pursuant to one or more leases that would create for Operating Lessee leasehold estates that have an aggregate fair market value equal to Operating Lessee's leasehold estate under the Lease determined as of the closing of the sale of the Leased Property. A termination payment is due to Operating Lessee only if Operating Lessee is not then in default in the payment of Rent for more than thirty (30) days.
To the extent any of the provisions of any Franchise Agreement impose a greater obligation on Operating Lessee than the corresponding provisions of this Lease, then Operating Lessee shall be obligated to comply with, and to take all reasonable actions necessary to prevent breaches or defaults under, the provisions of such Franchise Agreement. It is the intent of the parties hereto that, except as otherwise specifically provided by this Lease, Operating Lessee shall comply in every respect with the provisions of any Franchise Agreement so as to avoid any default thereunder during the term of this Lease. Operating Lessor and Operating Lessee agree to cooperate fully with each other in the event it becomes necessary to obtain a franchise extension or modification or a new franchise for the Leased Property, provided, however, that Operating Lessor shall pay the entire cost of any upgrades required by any franchisor.
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ARTICLE 38
ROOM SET-ASIDE; CAPITAL EXPENDITURES
38.1 FF&E Reserve. Operating Lessee shall cause Manager to establish and maintain a reserve account (the "FF&E Reserve") in accordance with the terms of the Management Agreement and to deposit into such account during each Fiscal Year monies for the account of Operating Lessor (which amounts shall be funds of Operating Lessor for all purposes and shall be reimbursed to Operating Lessee in accordance with Section 3.1.6(f)) in the amount required to be maintained pursuant to the Management Agreement and in accordance with established custom of Manager prior to the Commencement Date. Operating Lessor shall be responsible for the payment of all amounts required to be paid by "Owner" (as defined in the Management Agreement) pursuant to the Management Agreement to fund the FF&E Reserve, including, without limitation, any deficits therein, and for paying for all FF&E necessary for the continued operation of the Facility in accordance with First Class Operating Standards, subject to the provisions of Schedule 22.2. Operating Lessee shall make no expenditure for replacement of FF&E in excess of the amounts in the FF&E Reserve without first obtaining the written approval of Operating Lessor (unless Operating Lessee makes such expenditures from its own funds without any right to reimbursement hereunder). In the event Operating Lessee funds any amounts required to be funded by Operating Lessor for FF&E pursuant hereto or by "Owner" pursuant to the Management Agreement which Operating Lessor has approved, Operating Lessee shall receive a reimbursement in accordance with Section 3.1.6(f) hereof. Any additions to or replacements of furniture, fixtures, and equipment located at the Leased Property shall become part of the FF&E which is owned by Operating Lessor, subject to the limitations set forth in Schedule 22.2 hereof. Throughout the Term of this Lease, Operating Lessee shall, at its sole cost and expense but subject to the terms hereof and of the Management Agreement, cause all of the items of FF&E to be in proper working order and in good condition (ordinary wear and tear excepted).
38.2 Capital Expenditures. Subject to Section 7.1, Operating Lessor shall be obligated to pay the actual costs of any items that are classified as capital items under generally accepted accounting principles which are necessary in the reasonable judgment of Operating Lessor for the continued operation of any Facility in accordance with the operating standards of any Franchise Agreement, if applicable, and otherwise approved by Operating Lessor.
38.3 Subordination of Management Fee. Operating Lessee agrees that following receipt of written notice that an Event of Default hereunder has occurred, and prior to any cure thereof, Operating Lessee shall not pay Manager any fees or reimburse Manager for any expenses pursuant to the Management Agreement, regardless of whether accrued or not. Any payments made by Operating Lessee under the Management Agreement in violation of this Section 38.3 shall be returned by the Manager to the Operating Lessee upon written notice by the Operating Lessor to the Manager.
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ARTICLE 39
CHANGE IN REIT STATUS OR REIT REGULATIONS
In the event that REIT terminates its status as a real estate investment trust ("REIT") for tax purposes, or in the event that the Internal Revenue Code provisions are amended so that REITs are permitted to operate hotels, Operating Lessor may elect to terminate this Lease. In the event that this Lease is so terminated, Operating Lessor shall be obligated to pay to Operating Lessee a termination payment equal to the Net Present Value (as hereinafter defined), as of the termination date of this Lease, of the cash flow to Operating Lessee from the operations of the Leased Property (after payment of all Rent hereunder). The "Net Present Value" of the cash flow to Operating Lessee from the operations of the Leased Property shall be calculated by multiplying (a) the average annual EBITDA (as hereinafter defined) to Operating Lessee net of all Rent for the three (3) Fiscal Years ended immediately prior to the termination date, times (b) the number of Fiscal Years (or portions thereof) remaining in the Lease Term, times (c) one hundred percent (100%) plus the average annual percentage increase in the Consumer Price Index during the three (3) Fiscal Years ended immediately prior to the date of sale, and (d) discounting the product of (a) times (b) times (c) above by the Base Rate plus one percent. "EBITDA" means net earnings before interest, taxes, depreciation and amortization.
ARTICLE 40
ADDITIONAL COVENANTS
40.1 Indemnification Regarding Defaults Under Franchise Agreements.
(a) By Operating Lessee. The Operating Lessee hereby agrees, during the term of this Lease, to defend, indemnify and hold harmless the Operating Lessor for any unpaid franchise fees and termination fees under any Franchise Agreement, except for defaults resulting from the Operating Lessor's failure to pay for capital expenditures required under such Franchise Agreements, as provided in Section 37 hereof. |
(b) By Operating Lessor. The Operating Lessor hereby agrees to defend, indemnify and hold harmless the Operating Lessee for any defaults under the Franchise Agreements resulting from the Operating Lessor's failure to pay for capital expenditures required under any Franchise Agreements. |
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IN WITNESS WHEREOF, the parties have executed this Lease by their duly authorized officers as of the date first above written.
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EXHIBIT "A"
PROPERTY DESCRIPTION
[Attached as the immediately following page]
-00073/2-9-11/kme/kme
884670.02/LA
298671-00073/2-9-11/kme/kme
Exhibit “A”
1
EXHIBIT "B"
[ Optional ]
FORM OF
WORKING CAPITAL NOTE AND AGREEMENT
This Working Capital Note and Agreement (this "Note and Agreement") is made as of the ____ day of _____, _____, by __________________, a _____________________ (the "Maker"), and _______________________, a __________________ (the "Holder").
WHEREAS, the Maker and the Holder are parties to that certain Lease Agreement, dated as of _______________, _____ (as the same may be amended, supplemented or otherwise modified from time to time, the "Lease");
WHEREAS, pursuant to the Lease, the Holder is selling to the Maker on the date hereof the Working Capital (as defined in the Lease) existing as of the Commencement Date (as defined in the Lease) of the Lease (the "Initial Working Capital");
WHEREAS, the parties desire to enter into this Note and Agreement for the purpose, among others, of evidencing the obligation of the Maker to pay to the Holder the purchase price of the Initial Working Capital, together with interest thereon, as more fully hereinafter set forth;
NOW THEREFORE, in consideration of the foregoing and the agreements hereinafter set forth, the parties hereto hereby agree as follows:
1. FOR VALUE RECEIVED, the Maker promises to pay to the order of the Holder, at the address specified on Schedule A attached hereto ("Schedule A"), or at such other place as the Holder of this Note and Agreement may from time to time designate, the principal amount specified on Schedule A (the "Principal Amount"), together with interest on the Principal Amount from the date hereof until paid in full.
Such interest shall accrue at the rate, be calculated in the manner, and be due and payable at the times, provided in Schedule A. All interest payments shall be in cash, except as otherwise provided in the next paragraph.
Exhibit “B”
1
The Principal Amount and all accrued and unpaid interest thereon shall be due and payable in full, in the manner set forth herein below, upon the expiration or earlier termination of the Lease for any reason (including, without limitation, a termination of the Lease by the Facility Mortgagee (as defined in the Lease) in accordance with the terms of the Lease or this Note and Agreement). The date on which such expiration or termination occurs is sometimes hereinafter referred to as the "Maturity Date." Payment of the Principal Amount and all accrued and unpaid interest thereon shall be made as follows: (i) the Maker shall assign, transfer and deliver to the Holder title to all Working Capital owned by the Maker on the Maturity Date by means of one or more written instruments reasonably satisfactory in form and content to the Holder; and (ii) to the extent that the Principal Amount and all accrued and unpaid interest thereon exceeds the fair market value of such Working Capital so assigned, transferred and delivered by the Maker to the Holder (which the Maker and the Holder agree shall be equal to the book value of such Working Capital, after taking into account any depreciation as of the Maturity Date) (the "Fair Market Value"), the Maker shall pay to the Holder on the Maturity Date an amount in cash equal to the amount of such excess (the "Maker True-Up Amount"). Title to the Working Capital so assigned, transferred and delivered to the Holder shall be free and clear of any security interests, liens and other encumbrances of any nature whatsoever created by the Maker or arising in respect of any obligation of the Maker or arising by reason of any act or omission of the Maker.
All payments of cash hereunder shall be made in lawful money of the United States of America and, except as otherwise provided in a written agreement between the Maker and the Holder, without offset.
This Note and Agreement may not be prepaid in whole or in part.
The occurrence of one or more of the following events shall constitute an event of default ("Event of Default") hereunder: (i) the failure to make any payment in cash of interest hereunder when due on any interest payment date (other than the Maturity Date) if such failure continues for a period of 10 days after the due date therefor, or (ii) the failure to make any payment (in cash or in kind, as applicable) of all or any portion of the Principal Amount and all accrued and unpaid interest thereon on the Maturity Date.
Upon the occurrence of an Event of Default, the Holder shall have the option to terminate the Lease. In addition, the interest rate otherwise applicable pursuant to Schedule A shall be increased by two hundred basis points (two (2) percentage points (2%)) per annum from the date of the Event of Default until the date on which all obligations of the Maker pursuant to this Note and Agreement are paid (in cash or in kind, as applicable) in full. The rights and remedies provided in this paragraph are in addition to, and not in limitation of, any other rights and remedies that the Holder may have with respect to an Event of Default; it being agreed that all such rights and remedies shall be cumulative.
The Maker promises to pay all reasonable costs and expenses (including without limitation reasonable attorneys' fees and disbursements) incurred by Holder in connection with the collection or enforcement hereof.
Exhibit “B”
2
The Maker hereby waives presentment, protest, demand, notice of dishonor and all other notices, and all defenses and pleas on the grounds of any extension or extensions of the time of payments or the due date of this Note and Agreement, before or after maturity, with or without notice. No renewal or extension of this Note and Agreement, and no delay in enforcement of this Note and Agreement or in exercising any right or power hereunder, shall affect the liability of the Maker.
Whenever used herein, the words "Maker" and "Holder" shall be deemed to include their respective successors and assigns.
2. In the event the Maker has satisfied all of its obligations pursuant to Section 1 hereof and the Fair Market Value exceeds the Principal Amount and all accrued and unpaid interest thereon, the Holder shall pay to the Maker on the Maturity Date an amount in cash equal to the amount of such excess (the "Holder True-Up Amount").
3. Notwithstanding anything to the contrary set forth above, in the event that the Lease is terminated by the Facility Mortgagee pursuant to the terms thereof, the Maker agrees that it shall transfer title to the Working Capital owned by it on the Maturity Date (and pay any Maker True-Up Amount payable by it under Section 1 hereof) directly to the Facility Mortgagee or its designee and that it shall look only to _________ Partnership, LLC, a Delaware limited liability company, for payment of any Holder True-Up Amount payable pursuant to Section 2 hereof.
4. This Note and Agreement shall be governed by and construed under and in accordance with the laws of the State of Maryland (but not including the choice of law rules of such jurisdiction).
IN WITNESS WHEREOF, each of the parties hereto has caused this Note and Agreement to be duly executed on its behalf by its duly authorized representative on the date first set forth above.
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[MAKER] |
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[HOLDER] |
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Exhibit “B”
3
EXHIBIT "C"
RESERVED
[OPTIONAL]
ADDENDUM TO LEASE AGREEMENT
This ADDENDUM TO LEASE AGREEMENT (this "Addendum") is made and entered into by and between _______________, a ___________ ("Operating Lessor") and _______________, Inc., a _______________ ("Operating Lessee"), as of the date set forth on the first page of that certain Lease Agreement (the "Lease") between Operating Lessor and Operating Lessee to which this Addendum is attached and incorporated. The terms, covenants and conditions set forth herein are intended to and shall have the same force and effect as if set forth at length in the body of the Lease. To the extent that the provisions of this Addendum are inconsistent with any provisions of the Lease, the provisions of this Addendum shall supersede and control.
1. [INSERT ANY LENDER SPECIFIC PROVISIONS]
IN WITNESS WHEREOF, Operating Lessor and Operating Lessee have executed this Addendum concurrently with the Lease of even date herewith.
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"LESSOR" |
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_________________________, |
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a |
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By: |
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Printed Name: |
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Title: |
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"LESSEE" |
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___________________________, |
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a |
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By: |
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Printed Name: |
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Title: |
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1
Schedule 3.1.2
Percentages Used in Adjusted Gross Rent Calculation
|
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Yr 1 |
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Yr 2 |
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Yr 3 |
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Yr 4 |
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Room Revenues Percentage |
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xx.xx |
% |
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xx.xx |
% |
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xx.xx |
% |
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xx.xx |
% |
Food and Beverage Revenues Percentages |
|
|
xx.xx |
% |
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xx.xx |
% |
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xx.xx |
% |
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xx.xx |
% |
Parking Revenues Percentages |
|
|
xx.xx |
% |
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xx.xx |
% |
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xx.xx |
% |
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xx.xx |
% |
Retail Revenues Percentage |
|
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xx.xx |
% |
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xx.xx |
% |
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xx.xx |
% |
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xx.xx |
% |
Lease Space Revenues Percentages |
|
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xx.xx |
% |
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xx.xx |
% |
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xx.xx |
% |
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xx.xx |
% |
Other Revenues Percentage |
|
|
xx.xx |
% |
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xx.xx |
% |
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xx.xx |
% |
|
xx.xx |
% |
Supplemental Percentage |
|
|
xx.xx |
% |
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xx.xx |
% |
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xx.xx |
% |
|
xx.xx |
% |
FF&E Reserve Percentage |
|
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xx.xx |
% |
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xx.xx |
% |
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xx.xx |
% |
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xx.xx |
% |
Owners Priority |
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$ |
x,xxx,xxx |
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$ |
x,xxx,xxx |
|
$ |
x,xxx,xxx |
|
$ |
x,xxx,xxx |
|
Owners Priority Percentage Factor |
|
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xx.xx |
% |
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xx.xx |
% |
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xx.xx |
% |
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xx.xx |
% |
1
Schedule 3.1.1
Minimum Rent and Amounts Used in Adjusted Gross Rent Calculation (1)
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Yr 1 |
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Yr 2 |
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Yr 3 |
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Yr 4 |
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Minimum Rent for the first Fiscal year shall be: |
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$ |
x,xxx,xxx |
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$ |
x,xxx,xxx |
|
$ |
x,xxx,xxx |
|
$ |
x,xxx,xxx |
|
The Base Rent Credit for the first Fiscal Year shall be: |
|
$ |
x,xxx,xxx |
|
$ |
x,xxx,xxx |
|
$ |
x,xxx,xxx |
|
$ |
x,xxx,xxx |
|
The Occupied Room Amount for the first Fiscal Year shall be: |
|
$ |
xx.xx |
|
$ |
xx.xx |
|
$ |
xx.xx |
|
$ |
xx.xx |
|
The Base Supplemental Amount for the Respective Years shall be: |
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$ |
x,xxx,xxx |
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$ |
x,xxx,xxx |
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$ |
x,xxx,xxx |
|
$ |
x,xxx,xxx |
|
(1) |
The above amounts are full fiscal year amounts; in the event the Commencement Date is other than the first day of a Fiscal Year, the above amounts shall be prorated for such Fiscal Year, based on the number of calendar days from the Commencement Date through the end of such Fiscal Year. |
-1-
SCHEDULE 22.2
PROVISIONS RELATING TO EXCESS FF&E
(a) This Schedule 22.2 is intended to insure that all of the rent payable under this Lease qualifies as "rents from real property" within the meaning of Section 856(d) of the Code or any similar or successor provisions thereto. In furtherance of such purpose, the parties have agreed to the terms set forth in the following paragraphs of this Schedule 22.2 with the objective that, anything contained in this Lease to the contrary notwithstanding, the average of the adjusted tax basis of the items of "personal property" (within the meaning of Section 856(d)(i)(C) of the Code) that are leased to Operating Lessee under this Lease at the beginning and at the end of any calendar year shall not exceed fifteen percent (15%) of the average of the aggregate adjusted tax bases of the Leased Property at the beginning and at the end of each such calendar year (the "FF&E Limitation"). The provisions contained in the following paragraphs shall be interpreted in a manner consistent with the intent and objective described above (it being understood that this paragraph constitutes a statement of the parties' mutual intent only and that the failure to achieve such objective, absent any Default or Event of Default under the other paragraphs of this Schedule 22.2 or any other provisions of this Lease, shall not constitute a Default or an Event of Default hereunder). |
(b) If Operating Lessor reasonably anticipates and gives Notice (an "Excess FF&E Notice") and reasonably satisfactory evidence to Operating Lessee that the FF&E Limitation might be exceeded with respect to the Leased Property for any Fiscal Year, Operating Lessee shall, in accordance with the provisions set forth below and within sixty (60) days following the delivery of such Excess FF&E Notice, either (a) purchase from Operating Lessor those items or categories of FF&E to be acquired by Operating Lessor during such Fiscal Year which are designated in such Excess FF&E Notice as anticipated to cause Operating Lessor to exceed the FF&E Limitation ("Excess FF&E") or (b) arrange for ______ Subsidiary or another third party (in either case, a "Third Party Purchaser") to purchase such Excess FF&E from Operating Lessor and to lease it to Operating Lessee pursuant to a written lease agreement between such Third Party Purchaser and Operating Lessee (an "Excess FF&E Lease") that shall include the terms specified for an Excess FF&E Lease in this Schedule 22.2 and in Schedule 22.2-A hereto (it being understood that, without limiting the foregoing, Operating Lessor and Operating Lessee intend that each Excess FF&E Lease be structured in a manner intended to avoid the classification of Operating Lessee's obligations thereunder as Capitalized Lease Obligations). |
(c) Upon receiving an Excess FF&E Notice, Operating Lessee shall first offer to _______ Subsidiary the opportunity to purchase from Operating Lessor the Excess FF&E designated therein and to lease same to Operating Lessee pursuant to an Excess FF&E Lease. Each Excess FF&E Lease with _______ Subsidiary shall provide for an annual rental in an amount equal to the mathematical product of (i) the applicable Market Leasing Factor (as defined below) for all Excess FF&E subject to such Excess FF&E Lease multiplied by (ii) the Excess FF&E Value (as defined below) of the Excess FF&E subject to such Excess FF&E Lease. |
-1-
(d) If _______ Subsidiary does not agree to purchase and lease all the Excess FF&E which is the subject of an Excess FF&E Notice within fifteen (15) days after the date it receives Operating Lessee's offer with respect thereto, then Operating Lessee shall either purchase such Excess FF&E from Operating Lessor for Operating Lessee's own account or shall arrange for another Third Party Purchaser that has satisfied the requirements of paragraph (j) of this Schedule 22.2 to purchase such Excess FF&E from Operating Lessor and lease it to Operating Lessee pursuant to an Excess FF&E Lease. If a Third Party Purchaser that has satisfied the requirements of paragraph (j) of this Schedule 22.2 shall not have purchased such Excess FF&E from Operating Lessor and leased it to Operating Lessee under an Excess FF&E Lease within forty-five (45) days after Operating Lessor's delivery of the Excess FF&E Notice relating thereto, then Operating Lessee shall itself purchase such Excess FF&E from Operating Lessor as and when (but only after) Operating Lessor takes title to such Excess FF&E. Operating Lessee shall purchase, or shall cause each Third Party Purchaser to purchase, Excess FF&E with the purchaser's own funds. |
(e) With respect to any Excess FF&E first leased or purchased by Operating Lessee pursuant to the terms of this Schedule 22.2 during a particular calendar year, Operating Lessee's annual Rent obligations shall be reduced in the following manner (the "FF&E Adjustment"): |
(i) For the calendar year in which such Excess FF&E is first placed in service by either Operating Lessee or a Third-Party Purchaser, such reduction shall be in an amount (the "First Year FF&E Adjustment") equal to the mathematical product of (A) the Market Leasing Factor (as defined below) for personal property with an average expected useful life corresponding to the weighted average expected useful life (as determined in accordance with GAAP and rounded to the nearest whole year) of all Excess FF&E first placed in service by Operating Lessee or a Third-Party Purchaser during such calendar year (such weighted average, the "Applicable Expected Life") times (B) the Excess FF&E Cost (as defined below) of all Excess FF&E first placed in service by Operating Lessee or a Third-Party Purchaser during such calendar year times (C) either (x) 100% if Operating Lessee leases such Excess FF&E from _______ Subsidiary or (y) 110% if Operating Lessee purchases such Excess FF&E or leases such Excess FF&E from a Third-Party Purchaser other than ______ Subsidiary times (D) 50%; |
(ii) For each subsequent calendar year prior to the calendar year in which the Applicable Expected Life for such Excess FF&E expires, such reduction shall be in an amount equal to twice the First Year FF&E Adjustment; and |
(iii) For the calendar year in which the Applicable Expected Life for such Excess FF&E expires, such reduction shall be in an amount equal to the First Year FF&E Adjustment. |
-2-
It is contemplated that there would be a separate FF&E Adjustment for all Excess FF&E first placed in service during a single calendar year (with such FF&E Adjustment extending for a period equal to the lesser of the remaining Term or the Applicable Expected Life of the Excess FF&E acquired during such calendar year). The Rent payable by Operating Lessee for each Accounting Period in a calendar year to which one or more FF&E Adjustments apply shall be reduced by an amount equal to the mathematical product of (i) the amount of such applicable FF&E Adjustment (or if more than one FF&E Adjustment apply in such calendar year, the sum of such applicable FF&E Adjustments) times (ii) a fraction, the numerator of which is one and the denominator of which is the number of Accounting Periods in such calendar year. The "Excess FF&E Value" of any Excess FF&E shall be the fair market value of such Excess FF&E (which shall be the purchase price paid by the purchaser thereof from Operating Lessor, whether such purchaser is _____ Subsidiary, another Third Party Purchaser or Operating Lessee) plus the aggregate amount of out-of-pocket transactional costs (including, without limitation, reasonable attorneys' fees and any ad valorem, sales, transfer, transaction or similar tax, levy or other governmental charge) incurred by such purchaser in connection with its purchase of such Excess FF&E. The "Market Leasing Factor" (with there to be a separate Market Leasing Factor for each whole number of years of expected useful life of Excess FF&E) shall be determined by an independent valuation expert, acceptable to both Operating Lessor and Operating Lessee, who shall determine the Market Leasing Factors based on the median of the leasing rates of at least three nationally recognized companies engaged in the business of leasing similar FF&E or personal property and equipment with average expected useful lives equal to the weighted average of the expected useful lives set forth on Schedule 22.2-B. The cost of such expert shall be borne by Operating Lessor. The Market Leasing Factors shall take into account any use taxes and similar Impositions payable by Operating Lessee in connection with its leasing of Excess FF&E under the relevant Excess FF&E Leases, as well as the reasonably estimated anticipated out-of-pocket cost (including reasonable attorneys' and accountants' fees) to Operating Lessee of administering such Excess FF&E Leases during the Term, so that the economic burden of such Impositions and administration costs will be borne by Operating Lessor. The "Excess FF&E Cost" of any Excess FF&E shall be the Excess FF&E Value of such Excess FF&E plus, if Operating Lessee leases such Excess FF&E from a Third-Party Purchaser, the aggregate amount of out-of-pocket transactional costs (including, without limitation, reasonable attorneys' fees and any ad valorem, sales, transfer, transaction or similar tax, levy or other governmental charge) incurred by Operating Lessee in connection with its entry into an Excess FF&E Lease of such Excess FF&E in accordance with this Schedule 22.2.
-3-
(f) Operating Lessor and Operating Lessee agree to cause Manager to purchase all Excess FF&E for Operating Lessor's account with funds from the FF&E Reserve (or with funds otherwise made available by Operating Lessor). The parties specifically intend (and Operating Lessee hereby agrees to take such reasonable steps at Operating Lessor's expense as Operating Lessor may request to insure) that Operating Lessor shall own all Excess FF&E for a period of time sufficient to permit such Excess FF&E to become subject to any then existing Liens in favor of the Facility Mortgagee that encumber FF&E acquired by Operating Lessor; provided, however, that in no event shall Operating Lessor own any Excess FF&E (i) for more than five (5) Business Days, or (ii) so long that the FF&E Limitation would be exceeded at the beginning or end of any calendar year. Without limiting Operating Lessee's obligation under the immediately preceding sentence to take reasonable steps requested by Operating Lessor (at Operating Lessor's expense) to achieve the objective set forth therein, it is understood and agreed that the failure to achieve such objective, absent any Default or Event of Default under the other provisions of this Schedule 22.2 or any other provisions of this Lease, shall not constitute a Default or an Event of Default hereunder. Every purchase of Excess FF&E from Operating Lessor, whether by Operating Lessee or a Third Party Purchaser, shall be made expressly subject to any and all Liens encumbering such Excess FF&E in favor of any Facility Mortgagee. Following the purchase of any Excess FF&E by Operating Lessee or a Third Party Purchaser as contemplated by this Schedule 22.2, Operating Lessor shall not be considered to own or be the lessor of any of such Excess FF&E during the Term of this Lease for any purpose, nor shall any of such Excess FF&E be considered part of the Leased Property, and neither Operating Lessor nor Operating Lessee shall at any time take a position (in its books and records or otherwise) or make an assertion inconsistent therewith.
(g) In the event that Operating Lessee owns any Excess FF&E at the expiration or earlier termination of this Lease (including, without limitation, a termination in connection with a transfer of ownership of the Leased Property), Operating Lessor shall purchase from Operating Lessee and Operating Lessee shall sell to Operating Lessor (the "Excess FF&E Repurchase"), on the effective date of such expiration or termination, all such Excess FF&E (except for any Excess FF&E to which the terms of paragraph (i) of this Schedule 22.2 apply) for a purchase price equal to the fair market value (which the parties hereby agree shall not be less than the adjusted book value) of such Excess FF&E at such time (the "Excess FF&E Repurchase Price"). The Excess FF&E Repurchase Price shall be payable first by offset against any Rent owed by Operating Lessee to Operating Lessor as of such time and any amounts owed by Operating Lessee to Operating Lessor as of such time under the Working Capital Note, and the remainder (if any) shall be paid by Operating Lessor to Operating Lessee in cash within ten (10) days after the expiration or termination of this Lease.
-4-
(h) In the event that Operating Lessee is leasing any Excess FF&E from a Third Party Purchaser at the expiration or earlier termination of this Lease (including, without limitation, a termination resulting in connection with a transfer of ownership of the Leased Property), Operating Lessor shall purchase and assume from Operating Lessee, and Operating Lessee shall sell, assign and delegate to Operating Lessor, on the effective date of such expiration or termination all Operating Lessee's right, title and interest in and its obligations under each Excess FF&E Lease between Operating Lessee and such Third-Party Purchaser (an "Excess FF&E Leasehold Interest"). In the aforesaid transaction (an "Excess FF&E Leasehold Interest Transfer"), the transfer price for such Excess FF&E Leasehold Interest (the "Excess FF&E Leasehold Interest Transfer Price") shall be an amount equal to the fair market value of such Excess FF&E Leasehold Interest at such time (as determined in accordance with the procedure provided below) and shall be payable (i) by Operating Lessor if such fair market value is a positive number or (ii) by Operating Lessee if such fair market value is a negative number. The fair market value of the Excess FF&E Leasehold Interest shall be determined taking into account all relevant factors, including the remaining term thereof, the remaining expected useful life of the Excess FF&E (as determined in accordance with GAAP) subject to such leasehold, and the leasing rate that would apply, under market conditions at that time, if a new lease for such Excess FF&E were to be entered into with an unrelated party for a term equal to the term remaining for such Excess FF&E Leasehold Interest; provided, however, that in no event shall such fair market value be less than the adjusted book value of such Excess FF&E Leasehold Interest. Any amount payable pursuant to this paragraph shall be paid within ten (10) days after the expiration or termination of this Lease and, if due from Operating Lessor, shall be paid first by offset against any Rent owed by Operating Lessee to Operating Lessor as of such time and any amounts owed by Operating Lessee to Operating Lessor as of such time under the Working Capital Note, and the remainder (if any) shall be paid in cash.
(i) In the event that the Facility Mortgagee forecloses on its Lien on any Excess FF&E owned by Operating Lessee in connection with, but not separate from, a foreclosure of the Leased Property, Operating Lessor shall reimburse Operating Lessee for the loss of such Excess FF&E in an amount equal to the Excess FF&E Repurchase Price plus any reasonable costs and expenses (including, without limitation, reasonable attorneys' fees) incurred by Operating Lessee in complying with (but not contesting) such foreclosure (the "Excess FF&E Reimbursement Amount"). In the event that the Excess FF&E Reimbursement Amount becomes payable to Operating Lessee pursuant to the immediately preceding sentence, (i) it shall be paid first by offsetting any amounts owed by Operating Lessee to Operating Lessor as of such time and the balance (if any) shall be paid in cash, (ii) Operating Lessee agrees to seek payment of such cash balance (if any) solely from __________ Partnership, LLC pursuant to the terms of the Facility Mortgagee Agreement and shall not make any demand or claim therefor against Operating Lessor, the Facility Mortgagee, any purchaser in foreclosure or transferee by deed in lieu of foreclosure or other party claiming under any of the foregoing, and (iii) ________ Partnership, LLC agrees to pay any such cash balance.
-5-
(j) No Third Party Purchaser shall purchase any Excess FF&E from Operating Lessor unless and until such Third Party Purchaser shall have (i) agreed to purchase such Excess FF&E with cash from such Third Party Purchaser's own funds; (ii) agreed to lease such Excess FF&E to Operating Lessee under an Excess FF&E Lease; and (iii) entered into an agreement with Operating Lessor, the Facility Mortgagee and _____ Subsidiary pursuant to which (A) the Third Party Purchaser acknowledges to the Facility Mortgagee that all Excess FF&E purchased by such Third Party Purchaser while the Facility Mortgage is in effect is subject to the Facility Mortgagee's first-priority Lien (without Third Party Purchaser assuming any liability for Operating Lessor's obligations that are secured by or arise under any Facility Mortgage) and that the Facility Mortgagee's rights and remedies with respect to such Excess FF&E shall survive and be enforceable with respect thereto; (B) the Third Party Purchaser covenants to the Facility Mortgagee to execute and deliver UCC-1 financing statements prepared by Operating Lessor or any Facility Mortgagee confirming the foregoing for notice purposes, which UCC-1 financing statements may then be filed by Operating Lessor or the Facility Mortgagee at Operating Lessor's sole expense; (C) the Third-Party Purchaser covenants not to sell, lease, transfer or otherwise dispose of such Excess FF&E or any interest therein, or grant or cause or permit there to exist any lien, charge or encumbrance with respect thereto, other than the Lien in favor of the Facility Mortgagee, any other Liens which are the responsibility of Operating Lessor and any Lien arising pursuant to such agreement or the Excess FF&E Lease, (D) in the event that this Lease expires or is terminated prior to the expiration or termination of the Excess FF&E Lease, Operating Lessor agrees to purchase from the Third Party Purchaser, and the Third Party Purchaser agrees to sell to Operating Lessor, all Excess FF&E owned by the Third Party Purchaser at that time (other than any Excess FF&E to which clause (E) below applies) on the same terms as those applicable to the Excess FF&E Repurchase; and (E) if the Facility Mortgagee forecloses on its Lien with respect to Excess FF&E owned by the Third Party Purchaser: (x) Operating Lessor and ______ Subsidiary agree to reimburse the Third Party Purchaser for the loss of such Excess FF&E (such reimbursement to be paid first by offsetting any amounts owed by the Third Party Purchaser to Operating Lessor and the balance (if any) to be paid in cash); (y) ___________ Partnership, LLC agrees to pay the cash balance (if any) of such reimbursement amount directly to the Third Party Purchaser without the need for notice or demand on Operating Lessor; and (z) the Third Party Purchaser agrees to look only to __________ Partnership, LLC for payment of such cash balance.
(k) It is the intent of Operating Lessor and Operating Lessee that the leases of FF&E pursuant to any Excess FF&E Lease and this Lease shall be treated as operating leases and not Capitalized Lease Obligations under GAAP. Operating Lessor and Operating Lessee agree to cooperate to the extent feasible and consistent with the terms of this Lease to provide terms for such leases of FF&E that are so treated.
-6-
LEASE AGREEMENT
BETWEEN
_____________________,
AS LESSOR
AND
___________________________,
AS LESSEE
DATED AS OF __________ XX, 20XX
TABLE OF CONTENTS
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75 |
(i)
EXHIBIT A – PROPERTY DESCRIPTION |
|
EXHIBIT B – [OPTIONAL] FORM OF WORKING CAPITAL NOTE AND AGREEMENT |
|
EXHIBIT C – RESERVED |
|
[OPTIONAL] ADDENDUM TO LEASE AGREEMENT |
|
SCHEDULE 3.1.1 – MINIMUM RENT AND AMIUNTS USED IN ADJUSTED GROSS RENT CALCULATION |
|
SCHEDULE 3.1.2 – PERCENTAGES USED IN ADJUSTED GROSS RENT CALCULATION |
|
SCHEDULE 22.2 – PROVISIONS RELATED TO EXCESS FF&E |
|
(ii)
Sunstone Hotel Investors, Inc.
Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends
(in thousands, except ratio amounts)
|
|
Year Ended |
|
Year Ended |
|
Year Ended |
|
Year Ended |
|
Year Ended |
|
|||||
|
|
December 31, |
|
December 31, |
|
December 31, |
|
December 31, |
|
December 31, |
|
|||||
|
|
2014 |
|
2013 |
|
2012 |
|
2011 |
|
2010 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Earnings: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Income (loss) from continuing operations |
|
$ |
83,090 |
|
$ |
21,591 |
|
$ |
1,147 |
|
$ |
40,846 |
|
$ |
(30,689) |
|
Continuing operations: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Equity in net earnings of unconsolidated joint ventures |
|
— |
|
— |
|
— |
|
(21) |
|
(555) |
|
|||||
Distributions from unconsolidated joint ventures |
|
— |
|
— |
|
— |
|
— |
|
900 |
|
|||||
Interest expense and amortization of deferred financing fees |
|
72,315 |
|
72,239 |
|
76,821 |
|
74,195 |
|
58,931 |
|
|||||
Interest portion of rental expense |
|
5,984 |
|
6,475 |
|
6,602 |
|
6,125 |
|
3,218 |
|
|||||
Discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Interest expense and amortization of deferred financing fees |
|
— |
|
99 |
|
6,490 |
|
9,337 |
|
29,071 |
|
|||||
Interest portion of rental expense |
|
— |
|
— |
|
— |
|
— |
|
133 |
|
|||||
Total earnings |
|
$ |
161,389 |
|
$ |
100,404 |
|
$ |
91,060 |
|
$ |
130,482 |
|
$ |
61,009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Combined Fixed Charges and Preferred Stock Dividends: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Continuing operations: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Interest expense and amortization of deferred financing fees |
|
$ |
72,315 |
|
$ |
72,239 |
|
$ |
76,821 |
|
$ |
74,195 |
|
$ |
58,931 |
|
Interest portion of rental expense |
|
5,984 |
|
6,475 |
|
6,602 |
|
6,125 |
|
3,218 |
|
|||||
Preferred dividends |
|
9,200 |
|
19,013 |
|
29,748 |
|
27,321 |
|
20,652 |
|
|||||
Discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Interest expense and amortization of deferred financing fees |
|
— |
|
99 |
|
6,490 |
|
9,337 |
|
29,071 |
|
|||||
Interest portion of rental expense |
|
— |
|
— |
|
— |
|
— |
|
133 |
|
|||||
Total combined fixed charges and preferred stock dividends |
|
$ |
87,499 |
|
$ |
97,826 |
|
$ |
119,661 |
|
$ |
116,978 |
|
$ |
112,005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Ratio of earnings to combined fixed charges and preferred stock dividends |
|
1.84 |
|
1.03 |
|
— |
|
1.12 |
|
— |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Deficiency of earnings to combined fixed charges and preferred stock dividends |
|
$ |
— |
|
$ |
— |
|
$ |
(28,601) |
|
$ |
— |
|
$ |
(50,996) |
|
Exhibit 14.1
SUNSTONE HOTEL INVESTORS, INC.
CODE OF BUSINESS CONDUCT AND ETHICS
I.Introduction and Philosophy
Sunstone Hotel Investors, Inc. (with its subsidiaries, “Sunstone”) has adopted this Code of Business Conduct and Ethics (this “Code”) to:
· |
promote honest and ethical conduct, including fair dealing and the ethical handling of conflicts of interest; |
· |
promote full, fair, accurate, timely and understandable disclosure; |
· |
promote compliance with applicable laws and governmental rules and regulations; |
· |
ensure the protection of Sunstone’s legitimate business interests, including corporate opportunities, assets and confidential information; and |
· |
deter wrongdoing. |
We believe that long-term, trusting business relationships are built by being honest and fair. We strive to uphold the highest professional standards in all business operations and we expect that those with whom we do business will also adhere to these standards.
The basic principle underlying our business practices is good judgment. Laws and regulations help frame good judgment. This means that all Sunstone directors, officers and employees must follow the spirit of the law and act with integrity and ethics, even when the law is not specific.
This Code outlines the broad principles of legal and ethical business conduct embraced by Sunstone. It is not a complete list of legal or ethical issues a director, officer or employee might face in the course of business, and therefore, this Code must be applied using common sense and good judgment. All of Sunstone directors, officers and employees must conduct themselves according to these policies and seek to avoid even the appearance of improper behavior.
All directors, officers and employees of Sunstone are expected to be familiar with the Code and to adhere to its principles and procedures. Failure to comply with the Code can damage Sunstone’s good name, investor and customer relations and business opportunities. In addition, conduct that violates applicable laws and regulations can subject the individuals involved and Sunstone and its officers to civil liability and, in many cases, prosecution, imprisonment and fines. Therefore, Sunstone intends to prevent conduct that is not in compliance with the Code, stop any such conduct that may occur as soon as reasonably possible after its discovery, and discipline those who violate the Code and Sunstone’s related policies and procedures, including individuals who fail to exercise proper management and oversight to detect a violation. Such discipline may include termination of employment, referral for criminal prosecution, and commencement of civil proceedings for reimbursement of any losses or damage resulting from the violation. We will enforce this Code consistently, without regard to title or tenure.
As used in the Code, the word “you” is read to include every director, officer and employee of Sunstone, unless the context clearly indicates otherwise.
For purposes of this Code, the “Code of Ethics Contact Person” will be Sunstone’s in-house counsel.
Amended as of October 1, 2013
1
II.Honest and Candid Conduct
Each of you owes a duty to Sunstone to act with integrity. Integrity requires, among other things, being honest and candid. Deceit and subordination of principle are inconsistent with integrity.
Each director, officer and employee must:
· |
Act with integrity, including being honest and candid while still maintaining the confidentiality of information where required or consistent with Sunstone’s policies. |
· |
Observe both the form and spirit of laws and governmental rules and regulations, accounting standards and Sunstone policies. |
· |
Adhere to a high standard of business ethics. |
· |
Report, in one of the manners described in this Code, every work-related event of a fraudulent, dishonest or criminal nature. |
III.Conflicts of Interest
A “conflict of interest” occurs when an individual’s private interest interferes or appears to interfere with the interests of Sunstone. A conflict of interest can arise when you take actions or have interests that may make it difficult to perform your Sunstone work objectively and effectively. For example, a conflict of interest would arise if you, or a member of your family, receives improper personal benefits as a result of your position with Sunstone. Service to Sunstone should never be subordinated to personal gain and advantage. Any transaction, activity or relationship that could reasonably be expected to give rise to a conflict of interest or the appearance of a conflict of interest must be disclosed in writing and be discussed in advance (i.e., prior to pursuing the contemplated transaction or activity) with the Code of Ethics Contact Person or, if it involves the Code of Ethics Contact Person, with the Chair of the Nominating and Corporate Governance Committee or the Chair of the Audit Committee.
The Board has determined that any transaction involving Sunstone, on the one hand, and Sunstone’s directors, officers or employees, or entities in which any of Sunstone’s directors, officers or employees is employed or has an interest of more than 5%, on the other hand, requires the pre-approval of the Nominating and Corporate Governance Committee. This requirement does not apply to compensation arrangements approved by the Compensation Committee.
In addition, clear conflict of interest situations involving directors, officers and other employees may include any outside business activity that (a) competes or could potentially compete with Sunstone, (b) detracts from an individual’s ability to devote appropriate time and attention to his or her responsibilities with Sunstone or (c) results in a director, officer or employee being in the position of supervising, reviewing or having any influence on the job evaluation, pay or benefit of any immediate family member.
Anything that would present a conflict for a director, officer or employee would likely also present a conflict if it is related to a member of his or her family.
IV.Improper Payments and Gifts
No director, officer or employee may give or accept any gratuities, gifts (including gifts of equipment, discounts, or favored personal treatment) or anything else of value from an existing or prospective customer, supplier or vendor of Sunstone, or other outside party, where the intent or effect is to give unfair advantage or unfairly influence decisions with respect to any service, transactions or business of Sunstone. Moderate amounts of entertaining are part of normal business relationships with customers, suppliers, and other work-related contacts. However, certain types or amounts of entertainment can be misconstrued and are not appropriate.
2
The following are examples of prohibited gifts, meals and entertainment:
· |
Cash or securities. |
· |
Personal items, such as jewelry or appliances. |
· |
Lavish meals or entertainment which does not facilitate discussion of Sunstone business or otherwise serve a valid business purpose. |
If not prohibited, gifts, meals and entertainment may be acceptable if the following conditions are met:
· |
They are consistent with Sunstone’s business practices and there is no intent or effect to give an unfair advantage or unfairly influence decisions with respect to any service, transactions or business of Sunstone; |
· |
They do not violate any applicable law, such as state and federal procurement laws and regulations; and |
· |
Public disclosure would not embarrass Sunstone. |
If you have any question concerning these standards, you should consult with your manager, the Code of Ethics Contact Person or either of the Chair of the Nominating and Corporate Governance Committee or the Chair of the Audit Committee.
V.Compliance
Obeying the law, both in letter and in spirit, is one of the foundations on which our ethical policies are built. You must respect and comply with all applicable laws, rules and regulations, including, without limitation, laws relating to alcoholic beverages, anti-trust, campaign finance, civil rights, copyright protection, environmental protection, employment discrimination, health and workplace safety, foreign corrupt practices, securities and taxes. It is your personal responsibility to adhere to the standards and restrictions imposed by those laws, rules and regulations. You should not take at any time any action on behalf of Sunstone that you know or reasonably should know would violate any law or regulation. Although not all directors, officers or employees are expected to know the details of these laws, it is important to know enough to determine when to seek advice from supervisors, managers or other appropriate personnel.
VI.Corporate Opportunities
Directors, officers and employees owe a duty to Sunstone to advance Sunstone’s business interests when the opportunity to do so arises. Directors, officers and employees are prohibited from taking (or directing to a third party) a business opportunity that is discovered through the use of corporate property, information or position, unless Sunstone has already been offered the opportunity and turned it down, in which case the Nominating and Corporate Governance Committee must approve the director, officer or employee interest therein. More generally, directors, officers and employees are prohibited from using corporate property, information or position for personal gain.
Sometimes the line between personal and Company benefits is difficult to draw, and sometimes there are both personal and Company benefits in certain activities. Directors, officers and employees who intend to make use, or give the appearance of having made use, of Company property or services in a manner not solely for the benefit of Sunstone should consult beforehand with the Code of Ethics Contact Person or either of the Chair of the Nominating and Corporate Governance Committee or the Chair of the Audit Committee.
3
VII.Confidentiality
In carrying out Sunstone’s business, you will often learn confidential or proprietary information about Sunstone, its managers, franchisors, lenders, lessors, tenants, customers, suppliers or other parties. You must maintain the confidentiality of all information entrusted to you, except when disclosure is authorized or legally mandated. Confidential or proprietary information of Sunstone, and of other companies, includes any non-public information that would be harmful to the relevant company or useful or helpful to competitors if disclosed.
VIII.Insider Trading
Federal and state securities laws strictly forbid employees from buying or selling Sunstone securities while in possession of material nonpublic information about Sunstone. Similarly, you may not pass recommend buying or selling our securities to a family member, friend or other person when you are aware of such information. This practice, known as “tipping,” also violates securities laws. Any of these actions may amount to “insider trading”, are strictly prohibited and could result in termination, material monetary fines and/or imprisonment. You should refer to our Material Nonpublic Information and Insider Trading policy, which contains more detailed policies and rules relating to transactions in our securities.
IX.Fair Dealing
We have a history of succeeding through honest business competition. We do not seek competitive advantages through illegal or unethical business practices. You should deal fairly with Sunstone’s customers, service providers, suppliers, competitors and employees. No director, officer or employee should take unfair advantage, or give the appearance of having taken unfair advantage, of anyone through manipulation, concealment, abuse of privileged information, misrepresentation of material facts, or any unfair dealing practice.
X.Protection and Proper Use of Company Assets
All directors, officers and employees should protect Sunstone’s assets and ensure their efficient use. Theft, carelessness and waste have a direct impact on the Company’s profitability. The use of Company funds or assets, whether or not for personal gain, for any unlawful or improper purpose is prohibited.
To ensure the protection of the Company’s assets, each employee should:
· |
Exercise reasonable care to prevent theft, damage or misuse of Company property. |
· |
Report the actual or suspected theft, damage or misuse of Company property to a supervisor. |
· |
Use the Company’s telephone system, other electronic communication services and systems, written materials and other property primarily for business-related purposes. |
· |
Safeguard all electronic programs, data, communications and written materials from inadvertent access by others. |
Employees should be aware that Company property includes all data and communications transmitted or received to or by, or contained in, the Company’s electronic or telephonic systems. Company property also includes all written communications. Employees and other users of this property should have no expectation of privacy with respect to these communications and data. To the extent permitted by law, the Company has the ability, and reserves the right, to monitor all electronic and telephonic communication. These communications may also be subject to disclosure to law enforcement or government officials.
4
XI.Disclosure
Each director, officer or employee involved in Sunstone’s disclosure process, including the Chief Executive Officer, President, Chief Financial Officer, Treasurer, Vice President of Corporate Accounting, Vice President of Financial Reporting, Vice President of Tax, General Counsel and persons performing similar functions (the “Senior Financial Officers”), is required to be familiar with and comply with Sunstone's disclosure controls and procedures and internal control over financial reporting, to the extent relevant to his or her area of responsibility, so that Sunstone’s public reports and documents filed with the Securities and Exchange Commission (“SEC”) comply in all material respects with the applicable federal securities laws and SEC rules. In addition, each such person having direct or supervisory authority regarding these SEC filings or Sunstone’s other public communications concerning its general business, results, financial condition and prospects should, to the extent appropriate within his or her area of responsibility, consult with other Sunstone officers and employees and take other appropriate steps regarding these disclosures with the goal of making full, fair, accurate, timely and understandable disclosure.
Each director, officer or employee who is involved in Sunstone’s disclosure process, including without limitation the Senior Financial Officers, must:
· |
Familiarize himself or herself with the disclosure requirements applicable to Sunstone as well as the business and financial operations of Sunstone. |
· |
Not knowingly misrepresent, or cause others to misrepresent, facts about Sunstone to others, whether within or outside Sunstone, including to Sunstone’s independent auditors, governmental regulators and self-regulatory organizations. |
· |
Properly review and critically analyze proposed disclosure for accuracy and completeness (or, where appropriate, delegate this task to others). |
XII.Reporting and Accountability
The Nominating and Corporate Governance Committee (in the context of directors) and the Code of Ethics Contact Person (in the context of employees) are responsible for applying this Code to specific situations in which questions are presented to it or him/her, and have the authority to interpret this Code in any particular situation. Any director, officer or employee who becomes aware of any existing or potential violation of this Code is required to report that information promptly to the Code of Ethics Contact Person or through the Sunstone Business Conduct and Ethics Line (as described below). If you are unsure whether a situation violates this Code, you should discuss the situation with the Code of Ethics Contact Person or either of the Chair of the Nominating and Corporate Governance Committee or the Chair of the Audit Committee to prevent possible misunderstandings and embarrassment at a later date.
When reporting violations, consider giving your identity to allow Sunstone to contact you in the event further information is needed to pursue an investigation. Your identity will be maintained in confidence, to the extent practicable under the circumstances and consistent with enforcing the Code. You may, however, anonymously (without giving your name) report violations to the Sunstone Business Conduct and Ethics Line, which may be accessed online at www.ethicspoint.com or via telephone at (888) 304-7806. Any use of these reporting procedures in bad faith or in a false or frivolous manner will be considered a violation of this Code. In addition, you should not use the Sunstone Business Conduct and Ethics Line for personal grievances not involving this Code.
Sunstone will not tolerate retaliation against those who report misconduct in good faith and any employee who engages in such retaliation is subject to discipline, including termination and, in appropriate cases, civil and/or criminal liability.
5
The Nominating and Corporate Governance Committee and the Code of Ethics Contact Person shall take all action they consider appropriate to investigate any violations reported to them. If a violation has occurred, Sunstone will take such disciplinary or preventive action as it deems appropriate, after consultation with the Nominating and Corporate Governance Committee, in the case of a director or officer, or the Code of Ethics Contact Person, in the case of any other employees.
XIII.Waivers
From time to time, Sunstone may amend or waive some provisions of this Code. Any and all waivers of this Code must be approved in advance and in writing. Any amendment or waiver of the Code for officers or directors of Sunstone may be made only by the Board of Directors or the Nominating and Corporate Governance Committee of the Board and must be promptly disclosed if required by SEC or New York Stock Exchange rules. Any waiver for other employees may be made only by the Code of Ethics Contact Person, and must be reported in writing to the Nominating and Corporate Governance Committee.
6
SUBSIDIARIES OF
SUNSTONE HOTEL INVESTORS, INC.
Boston 1927 Lessee, Inc.
Boston 1927 Owner, LLC *
Buy Efficient, LLC
EP Holdings, LLC
One Park Boulevard, LLC
Pension Holding Corporation
Sun CHP I, Inc.
Sun SHP II, LLC
Sunstone 42nd Street Lessee, Inc.
Sunstone 42nd Street, LLC
Sunstone Atlantic Lender, LLC
Sunstone Broadway, LLC
Sunstone Canal Lessee, Inc.
Sunstone Canal, LLC *
Sunstone Center Court Lessee, Inc.
Sunstone Center Court, LLC
Sunstone Century Lessee, Inc.
Sunstone Century, LLC
Sunstone Cowboy, LP *
Sunstone Cowboy GP, LLC
Sunstone Cowboy Lessee, LP
Sunstone Cowboy Lessee GP, LLC
Sunstone East Grand Lessee, Inc.
Sunstone East Grand, LLC
Sunstone East Pratt, LP *
Sunstone East Pratt GP, LLC
Sunstone East Pratt Lessee, Inc.
Sunstone EC5 Lessee, Inc.
Sunstone EC5, LLC
Sunstone Hawaii 3-0 Lessee, Inc.
Sunstone Hawaii 3-0, LLC
Sunstone Holdco 3, LLC
Sunstone Holdco 4, LLC
Sunstone Holdco 5, LLC
Sunstone Holdco 6, LLC
Sunstone Holdco 7, LLC
Sunstone Holdco 8, LLC
Sunstone Holdco 9, LLC
Sunstone Holdco 10, LLC
Sunstone Hotel Acquisitions, LLC
Sunstone Hotel Partnership, LLC
Sunstone Hotel TRS Lessee, Inc.
Sunstone Jamboree Lessee, Inc.
Sunstone Jamboree, LLC
Sunstone K9 Lessee, Inc.
Sunstone K9, LLC *
Sunstone LA Airport Lessee, Inc.
Sunstone LA Airport, LLC
Sunstone Leesburg Lessee, Inc.
Sunstone Leesburg, LLC *
Sunstone Longhorn, LP *
Sunstone Longhorn GP, LLC
Sunstone Longhorn Holdco, LLC
Sunstone Longhorn Lessee, LP
Sunstone Longhorn Lessee GP, LLC
Sunstone MacArthur Lessee, Inc.
Sunstone MacArthur, LLC
Sunstone North State Lessee, Inc.
Sunstone North State, LLC *
Sunstone Ocean Lessee, Inc.
Sunstone Ocean, LLC
Sunstone Outparcel, LLC
Sunstone Park, LLC
Sunstone Park Lessee, LLC *
Sunstone Philly, LP *
Sunstone Philly GP, LLC
Sunstone Philly Lessee, Inc.
Sunstone Pledgeco, LLC
Sunstone Quincy Lessee, Inc.
Sunstone Quincy, LLC
Sunstone Red Oak Lessee, Inc.
Sunstone Red Oak, LLC
Sunstone Saint Clair, LLC
Sunstone Saint Clair Lessee, Inc.
Sunstone Sea Harbor Holdco, LLC
Sunstone Sea Harbor Lessee, Inc.
Sunstone Sea Harbor, LLC *
Sunstone Sidewinder Lessee, Inc
Sunstone Sidewinder, LLC *
Sunstone St. Charles Lessee, Inc.
Sunstone St. Charles, LLC
Sunstone Top Gun Lessee, Inc.
Sunstone Top Gun, LLC *
Sunstone Von Karman, LLC
Sunstone Westwood, LLC
Sunstone Wharf Lessee, Inc.
Sunstone Wharf, LLC
SWW No. 1, LLC
Times Square Hotel Operating Lessee, LLC
Times Square Hotel Owner, LLC *
Times Square Hotel Sub, LLC
WB Sunstone-Portland, Inc.
WB Sunstone-Portland, LLC
WHP Bevflow, LLC
WHP Texas Beverage 1, Inc.
WHP Texas Beverage 2, Inc.
* Designated as a separate Special Purpose Entity.
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the following Registration Statements:
(1) |
Registration Statement (Form S-3 No. 333-193311) of Sunstone Hotel Investors, Inc., |
(2) |
Registration Statement (Form S-8 No. 333-155098) pertaining to the securities to be offered to employees under the 2004 Long-Term Incentive Plan of Sunstone Hotel Investors, Inc., |
(3) |
Registration Statement (Form S-8 No. 333-170365) pertaining to the securities to be offered to employees under the 2004 Long-Term Incentive Plan of Sunstone Hotel Investors, Inc., and |
(4) |
Registration Statement (Form S-8 No. 333-199845) pertaining to the securities to be offered to employees under the 2004 Long-Term Incentive Plan of Sunstone Hotel Investors, Inc. |
of our reports dated February 19, 2015, with respect to the consolidated financial statements and schedule of Sunstone Hotel Investors, Inc. and the effectiveness of internal control over financial reporting of Sunstone Hotel Investors, Inc. included in this Annual Report (Form 10-K) of Sunstone Hotel Investors, Inc. for the year ended December 31, 2014.
|
/s/ Ernst & Young LLP |
|
|
|
|
Irvine, California |
|
February 19, 2015 |
|
Certification of Principal Executive Officer Pursuant to
Securities Exchange Act Rules 13a-14 and 15d-14
as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, John V. Arabia certify that:
1. |
I have reviewed this annual report on Form 10-K of Sunstone Hotel Investors, Inc.; |
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: February 19, 2015 |
/s/ John V. Arabia |
|
John V. Arabia |
|
Chief Executive Officer |
Certification of Principal Financial Officer Pursuant to
Securities Exchange Act Rules 13a-14 and 15d-14
as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, Bryan A. Giglia, certify that:
1. |
I have reviewed this annual report on Form 10-K of Sunstone Hotel Investors, Inc.; |
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: February 19, 2015 |
/s/ Bryan A. Giglia |
|
Bryan A. Giglia |
|
Chief Financial Officer |
Certification of Principal Executive Officer and Principal Financial Officer Pursuant to
18 U.S.C. Section 1350,
as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
The undersigned, the Chief Executive Officer and the Chief Financial Officer of Sunstone Hotel Investors, Inc. (the “Company”), each hereby certifies that to his knowledge on the date hereof:
(a) The Form 10-K of the Company for the year ended December 31, 2014, filed on the date hereof with the Securities and Exchange Commission (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(b) Information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: February 19, 2015 |
/s/ John V. Arabia |
|
John V. Arabia |
|
Chief Executive Officer |
|
|
Date: February 19, 2015 |
/s/ Bryan A. Giglia |
|
Bryan A. Giglia |
|
Chief Financial Officer |
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