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, 2016
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)
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Maryland |
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20-1296886 |
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(State or Other Jurisdiction of |
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(I.R.S. Employer |
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Incorporation or Organization) |
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Identification Number) |
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120 Vantis, Suite 350 |
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Aliso Viejo, California |
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92656 |
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(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:
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Title of Each Class |
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Name of Each Exchange on Which Registered |
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Common Stock, $0.01 par value |
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New York Stock Exchange |
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Series E Cumulative Redeemable Preferred Stock, $0.01 par value |
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New York Stock Exchange |
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Series F 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).
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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, 2016 as reported on the New York Stock Exchange (“NYSE”) was approximately $2.6 billion.
The number of shares of the registrant’s common stock outstanding as of February 10, 2017 was 220,073,140.
Documents Incorporated by Reference
Part III of this Report incorporates by reference information from the definitive Proxy Statement for the registrant’s 2017 Annual Meeting of Stockholders.
SUNSTONE HOTEL INVESTORS, INC.
ANNUAL REPORT ON
FORM 10-K
For the Year Ended December 31, 2016
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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, 2016, we had interests in 28 hotels (the “28 hotels”), including the Fairmont Newport Beach which we classified as held for sale and subsequently sold in February 2017, leaving 27 hotels currently held for investment (the “27 hotels”). The 27 hotels are comprised of 13,222 rooms, located in 13 states and in Washington, DC.
Our primary business is to acquire, own, asset manage and renovate primarily urban and resort upper upscale hotels 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 27 hotels are operated under nationally recognized brands such as Marriott, Hilton and Hyatt, which are among the most respected and widely recognized brands in the lodging industry. We believe the largest and most stable segment of travelers prefer the consistent service and quality associated with nationally recognized brands and well-known independent hotels. Our portfolio primarily consists of urban and resort upper upscale hotels in the United States. As of December 31, 2016, our 27 hotels include one luxury hotel and 26 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, 2016, our third-party managers included: subsidiaries of Marriott International, Inc. or Marriott Hotel Services, Inc. (collectively “Marriott”), managers of 11 of the Company’s 27 hotels; Interstate Hotels & Resorts, Inc. (“IHR”), manager of five of the Company’s 27 hotels; Highgate Hotels L.P. and an affiliate (“Highgate”), manager of three of the Company’s 27 hotels; Crestline Hotels & Resorts (“Crestline”), Hilton Worldwide (“Hilton”) and Hyatt Corporation (“Hyatt”), each a manager of two of the Company’s 27 hotels; and Davidson Hotels & Resorts (“Davidson”) and HEI Hotels & Resorts (“HEI”), each a manager of one of the Company’s 27 hotels.
Competitive Strengths
We believe the following competitive strengths distinguish us from other owners of lodging properties:
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Significant Cash Position. As of December 31, 2016, we had total cash of $437.5 million, including $67.9 million of restricted cash. Adjusting for the significant cash transactions that occurred in January 2017, |
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including the $119.8 million payment of our common and preferred dividends, the funding of $240.0 million in unsecured senior notes and the $176.0 million repayment of the mortgage secured by the Marriott Boston Long Wharf, our total pro forma cash including restricted cash as of December 31, 2016 would be $381.7 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, debt maturities, capital investment and acquisitions with cash on hand. |
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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, 2016, the weighted average term to maturity of our debt was approximately four years, and 76.2% of our debt was fixed rate with a weighted average interest rate of 4.74%, including the effects of our interest rate swap agreements. Including our variable-rate debt obligation based on the variable rate at December 31, 2016, the weighted average interest rate on our debt was 4.29%. Our mortgage debt is in the form of single asset non-recourse loans rather than in cross-collateralized multi-property pools. In addition to our mortgage debt, as of December 31, 2016, we had two unsecured corporate-level term loans, and in January 2017 we placed two series of senior unsecured corporate-level notes. The proceeds from the two series of senior unsecured corporate-level notes, along with cash on hand, were used to repay two mortgage loans totaling $242.1 million. 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 five 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 maintaining low leverage and high financial flexibility, we will position the Company to create value during cyclical downturns by acquiring distressed assets or securities. |
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Strong Access to Low Cost 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. In addition, 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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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 2016, approximately 88% of the revenues generated by the 27 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 97% of the hotel revenue generated by the 27 hotels during 2016, tend to outperform the lodging industry, particularly in the recovery phase of the lodging cycle. As of December 31, 2016, the hotels comprising our 27 hotel portfolio averaged 490 rooms in size. Our total 27 hotel portfolio RevPAR was $165.72 for the year ended December 31, 2016.
Nationally Recognized Brands. All but one (the Boston Park Plaza) of the 27 hotels are operated under nationally recognized brands, including Marriott, Hilton and Hyatt. 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.
Recently Renovated Hotels. From January 1, 2012 through December 31, 2016, we invested $663.8 million in capital renovations throughout the 27 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 “business plans,” which include positioning and capital renovation plans. We believe that a proactive asset management program can help 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 our investment dollars. We believe that our significant acquisition and disposition experience will allow us to continue to execute our strategy to redeploy capital from slower growth to higher growth hotels. From the date of our initial public offering through December 31, 2016, we acquired interests in 26 hotel properties and sold 44 hotel properties. In addition, we classified one hotel as held for sale as of December 31, 2016, which we subsequently sold in February 2017. We plan to capitalize on acquisition opportunities that may arise in 2017, as we believe our industry relationships may create opportunities for us to acquire individual hotel assets, or hotel portfolios, provided these opportunities are at attractive values relative to our cost of capital. We will also focus on capital recycling, and may selectively sell hotels that no longer fit our target profile, will not offer long-term returns in excess of our cost of capital, will achieve a sale price in excess of our internal valuation, or that have high risk relative to their anticipated returns.
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 throughout the cycle. During 2016, we reduced our total mortgage debt by $12.6 million through principal payments, and by an additional $138.7 million through repayment of two mortgages. We also repaid a $114.2 million mortgage loan using proceeds we received from a $100.0 million unsecured term loan, extending our term to maturity and reducing our average interest rate.
Business Strategy
Our mission is to create meaningful value for our stockholders by producing superior long-term returns through the ownership of long-term relevant lodging real estate. Our values include transparency, trust, ethical conduct, honest communication and discipline. As demand for lodging generally fluctuates with the overall economy, we seek to own hotels that will maintain a high appeal with travelers over long periods of time and will generate economic earnings materially in excess of recurring capital requirements. Our strategy over the next several years is to maximize stockholder value through focused asset management and disciplined capital recycling, which is likely to include selective acquisitions and dispositions, while maintaining balance sheet flexibility and strength. Our goal is to maintain low leverage and high financial flexibility to position the Company to create value throughout all phases of the operating and financial cycles.
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.
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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, national and international 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 27 hotels are managed by third parties pursuant to management agreements with our TRS Lessee or its subsidiaries. As of December 31, 2016, Marriott managed 11 of our hotels, IHR managed five of our hotels, Highgate managed three of our hotels, Crestline, Hilton and Hyatt each managed two of our hotels, and the remaining two hotels were individually managed by Davidson and HEI. The following is a general description of our third-party management agreements as of December 31, 2016.
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, 4.5% of gross revenue for 2014, 4.75% of gross revenue for 2015, 5.0% of gross revenue for the first seven months of 2016, and are capped at 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 of 2.0% of gross revenue; plus an incentive fee of 10.0% of the excess of net operating income over a certain threshold. The incentive fee, however, may not exceed 1.5% of the total revenue for all the hotels managed by IHR for any fiscal year. 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, 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 increased 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 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 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.
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Crestline. Our Embassy Suites Chicago and Hilton Garden Inn Chicago Downtown/Magnificent Mile hotels are operated under management agreements with Crestline. The management agreement at the Embassy Suites Chicago expires in 2019 (absent early termination by either party), and provides no renewal options. The agreement requires us to pay Crestline a base management fee of 1.5% of gross revenue through May 31, 2016, and 2.0% of gross revenue thereafter.
The management agreement at the Hilton Garden Inn Chicago Downtown/Magnificent Mile 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.
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 2026 (absent early termination by Hilton), and provides no renewal options. The agreement requires us to pay a base management fee of 2.25% of gross revenue through 2016, and 1.75% of gross revenue thereafter. There is no incentive fee under the agreement.
The management agreement at the Hilton San Diego Bayfront, which originally provided for an extension option at Hilton’s election up through 2033, was amended in February 2017, with the new expiration date established as December 31, 2046. The amended agreement provides no renewal options. 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.
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 Hyatt the opportunity to earn an incentive fee if gross operating profit exceeds certain thresholds.
Davidson. Our Hyatt Centric Chicago Magnificent Mile hotel is operated under a management agreement with Davidson. The management agreement at the Hyatt Centric 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 Centric 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 Centric 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.
HEI. Our Hilton New Orleans St. Charles hotel is operated under a management agreement with HEI. The agreement expires in 2017 (absent early termination by either party), and provides for automatic month-to-month renewals thereafter. The agreement requires us to pay 2.0% of gross revenue as a base management fee and calls for an incentive fee of 20.0% of the excess of adjusted gross operating profit over a certain threshold.
The existing management agreements with Marriott, Hilton and Hyatt 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.
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Franchise Agreements
As of December 31, 2016, 12 of the 27 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 payments under the franchise agreements to the franchisors; however, the Company guaranties certain obligations under a majority of the franchise agreements.
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 in order to satisfy the REIT distribution requirement. While REITs enjoy certain tax benefits relative to C corporations, as a REIT we may still 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. 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 that may be prohibited to a REIT. 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, provided certain conditions are satisfied. However, a hotel leased to a TRS still must be managed by an unaffiliated third party in the business of managing hotels because 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. 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.
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% (20% beginning after 2017) 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.
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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 gross 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 the TRS Lessee 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.
Ground, Building and Air Lease Agreements
At December 31, 2016, six of the 27 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, 2016, the remaining terms of these ground, building and air leases (including renewal options) range from approximately 27 to 81 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.
Two of the six 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.
Two of the six 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 lessors’ interests in the leases.
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, 2017, we had 48 employees. 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
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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 could produce meaningful levels of greenhouse gas emissions. As a result, we have not implemented a formal program to 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 and buyers of our properties. 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.
Inflation
Inflation may affect our expenses, including, without limitation, by increasing costs such as labor, food, taxes, property and casualty insurance, borrowing costs 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 website 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.
Information relating to revenue, operating profit and total assets is set forth in Part I, Item 6 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 evaluating our business and the other information in this Form 10-K. 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, civil unrest 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. For example, the civil unrest which occurred in Baltimore during the spring of 2015 resulted in group cancellations at our Renaissance Harborplace, causing decreases in both our average daily room rates and our occupancy. Also, 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 and civil unrest 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 both secured mortgage debt and unsecured corporate 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. In particular, rising interest rates could make it more difficult or expensive for us to obtain debt or equity capital in the future. 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 late 2016. In late 2016, however, interest rates increased, and may continue to do so in the future. Interest rate volatility, both in the U.S. and globally, could reduce our access to capital markets or increase the cost of funding our debt requirements. 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.
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As of December 31, 2016, we had approximately $0.9 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.
In January 2017, we completed the private placement of $240.0 million in senior unsecured notes. The private placement consisted of $120.0 million of notes bearing interest at a fixed rate of 4.69%, maturing in January 2026 (the “Series A Senior Notes”), and $120.0 million of notes bearing interest at a fixed rate of 4.79%, maturing in January 2028 (the “Series B Senior Notes”). We used a portion of the proceeds in January 2017 to repay the $176.0 million mortgage secured by the Marriott Boston Long Wharf, which was scheduled to mature in April 2017, and was available to be repaid without penalty in January 2017.
Of our total debt outstanding as of December 31, 2016, and including the effects of the above January debt-related transactions, approximately $289.6 million matures over the next four years (none in either 2017 or 2018, $213.5 million in 2019 and $76.1 million in 2020). The $289.6 million in debt maturities due over the next four years does not include $10.0 million of scheduled loan amortization payments due in 2017, $11.0 million due in 2018, $10.4 million due in 2019, or $8.0 million due in 2020. 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 or our existing hotels. In addition to our outstanding debt, at December 31, 2016, we had $0.5 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, preferred 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, and potential proceeds we would be able to secure from future debt refinancings may decrease, 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 and unsecured term loans, at December 31, 2016 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
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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.
Both our credit facility and unsecured term loans contain, 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.
Many of our existing mortgage debt agreements contain “cash trap” provisions that could limit our ability to use funds for other corporate purposes or 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, 2016, 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 use funds for other corporate purposes or 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, but not limited to, 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 use cash generated by those hotels for other corporate purposes or 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.
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, other REITs, and numerous local, regional, national and international owners, including franchisors, 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
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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.
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 combination 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 combination 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. As with previous acquisitions, should we acquire a hotel property or other entity as a purchase combination in the future, we will use all available information to make these fair value determinations, and engage independent valuation specialists to assist in the fair value determinations of the long-lived assets acquired and the liabilities assumed. 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 if successful, the sales may be recharacterized by the IRS as dealer sales and subject to 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.
The sale of a hotel or a portfolio of hotels is typically subject to contingencies, risks and uncertainties, any of which may cause us to be unsuccessful in completing the disposition.
We may not be successful in completing the sale of a hotel or a portfolio of hotels, which may negatively impact our business strategy. Hotel sales are typically subject to customary risks and uncertainties. In addition, there may be contingencies related to, among other items, seller financing, franchise agreements, ground leases and other agreements. As such, we can offer no assurances as to whether any closing conditions will be satisfied on a timely basis or at all, or whether the closing of a sale will fail to occur for these or any other reasons.
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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 noncontrolling interests in or sharing responsibility for managing the affairs of a property, partnership, joint venture or other entity. For example, in April 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. As of December 31, 2016, Hilton Worldwide, Inc. is the 25.0% minority equity partner in One Park. On January 4, 2017, Hilton Worldwide, Inc. completed its publicly announced spin-off of Park Hotels & Resorts, Inc. and Hilton Grand Vacations, Inc. Following San Diego Port Authority approval of the transfer in February 2017, the 25.0% interest in the Hilton San Diego Bayfront was transferred to Park Hotels & Resorts, Inc. 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 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 hotel loans in which we may invest in the future 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 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 and related goodwill for possible impairment. While we have not recognized any properties or other assets with indicators of impairment during the past four years, we have previously recognized impairment losses. In the future, our hotels and related goodwill may become impaired, or our hotels which have previously become impaired may become further impaired, which may adversely affect our financial condition and results of operations.
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We own primarily urban and resort 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, 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, 2016, seven of the 27 hotels are located in California, which is the largest concentration of our hotels in any state, representing 29% of our rooms and 34% of the revenue generated by the 27 hotels during 2016. In addition, as of December 31, 2016, three of the 27 hotels are located in each of the States of Illinois and Massachusetts, as well as in the greater Washington DC area. The three hotels located in Illinois represented 9% of our rooms and 7% of the revenue generated by the 27 hotels during 2016. The three hotels located in Massachusetts represented 15% of our rooms and 15% of the revenue generated by the 27 hotels during 2016. The three hotels located in the greater Washington DC area represented 14% of our rooms and 13% of the revenue generated by the 27 hotels during 2016. The concentration of our hotels in California, 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 these locales would disproportionately affect our hotel portfolio. The economies and tourism industries in these locales, 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, 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 these locales 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. Some of these contracts and events may also be cancelled, which could reduce our expectations for future revenues. 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.
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A substantial number of our hotels operate under a brand owned by Marriott, Hilton or Hyatt. Should any of these brands experience a negative event, or receive negative publicity, our operating results may be harmed.
We believe the largest and most stable segment of travelers prefer the consistent service and quality associated with nationally recognized brands. As of December 31, 2016, 16 of our 27 hotels utilized brands owned by Marriott. In addition, seven and three of our 27 hotels were utilized by Hilton and Hyatt brands, respectively. As a result, a significant concentration of our success is dependent in part on the success of Marriott, Hilton and Hyatt, or their respective brands. Consequently, if market recognition or the positive perception of Marriott, Hilton and/or Hyatt is reduced or compromised, the goodwill associated with our Marriott, Hilton and/or Hyatt branded hotels may be adversely affected, which may have an adverse affect on our results of operations, as well as our ability to make distributions to our stockholders. Additionally, any negative perceptions or negative impact to operating results from any proposed or future consolidations between nationally recognized brands could have an adverse affect on our results of operations, as well as our ability to make distributions to our stockholders.
In addition, during 2016, Marriott and Starwood Hotels & Resorts completed a merger between the two companies. While the impact upon our portfolio is currently being evaluated, the merger could reduce our bargaining power in negotiating management agreements and franchise agreements due to decreased competition among major brand companies, as well as contracts between our hotels and various unions. The combined company could have more leverage when negotiating for property improvement plans upon the acquisition of a hotel in cases where the franchisor or hotel brand requires renovations to bring the physical condition of a hotel into compliance with the specifications and standards each franchisor or hotel brand has developed. In addition, this could spur an increase in consolidation with other hotel brands.
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, 2016, all of the 27 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 and Hyatt. 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, 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 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
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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, such as our third-party managers’ frequent traveler programs, may be altered resulting in reduced revenue or increased costs to 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, 2016, our 27 hotels were managed as follows: Marriott 11 hotels; IHR five hotels; Highgate three hotels; Crestline two hotels; Hilton two hotels; Hyatt two hotels; and Davidson and HEI 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, two were entered into during 2015, one was entered into during 2014, and three were entered into during each of the years 2013 and 2012. 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 may affect our TRS’s ability to pay us rent and 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, which could increase our expenses or expose us to additional liabilities.
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. Increases in minimum wages, or changes in work rules, could negatively impact our operating results. Additionally, from time to time, hotel operations may be disrupted as a result of 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
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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.
The failure of tenants in our hotels to make rent payments under our retail and restaurant leases may adversely affect our results of operations.
A portion of the space in many of our hotels is leased to third-party tenants for retail or restaurant purposes. At times, we hold security deposits in connection with each lease, which may be applied in the event that a tenant under a lease fails or is unable to make its rent payments. In the event that a tenant continually fails to make rent payments, we may be able to apply the tenant’s security deposit to recover a portion of the rents due; however, we may not be able to recover all rents due to us, which may harm our operating results. Additionally, the time and cost associated with re-leasing our retail space could negatively impact our operating results.
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.
We and our third-party managers and franchisors rely on information technology networks and systems, including the Internet, to process, transmit and store electronic and customer information. These systems require the collection and retention of large volumes of our hotel guests’ personally identifiable information, including credit card numbers. 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. Any compromise of our third-party managers and franchisor information networks’ function, security and availability could result in disruptions to operations, delayed sales or bookings, lost guest reservations, increased costs, and lower margins. Any of these events could adversely affect our financial results, stock price and reputation, result in misstated financial reports, and subject us to potential litigation and liability.
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.
Although we have taken steps to protect the security of our information systems, and the data maintained in these systems, there can be no assurance that the security measures we have taken will prevent failures, inadequacies or interruptions in system services, or that system security will not be breached through physical or electronic break-ins, computer viruses or attacks by hackers. In addition, we rely on the security systems of our third-party managers and franchisors to protect proprietary and customer information from these threats.
Many of our managers carry cyber insurance policies to protect and offset a portion of potential costs that may be incurred from a security breach. Additionally, we currently have a cyber insurance policy to provide supplemental coverage above the coverage carried by our third-party managers. Despite various precautionary steps to protect our hotels from losses resulting from cyber-attacks, however, any occurrence of a cyber-attack could still result in losses at our properties, which could affect our results of operations.
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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 2016, we invested $182.2 million on capital improvements to our hotels. With the completion of a majority of the renovations and repositionings during 2016 at our recently acquired hotels, we expect our capital expenditures to be moderate during 2017. 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.
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Because six of the 27 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 six of the 27 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, 2016, the terms of these ground, building and air leases (including renewal options) range from approximately 27 to 81 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 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 ten “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. These restrictions will not apply if our board of directors determines that it no longer is in our best interests to continue to qualify as a REIT, or that compliance with the restrictions on transfer and ownership no longer is required for us to qualify as a REIT.
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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 may be amended, altered, repealed or rescinded (a) by our 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, except with respect to amendments to the provision of our bylaws regarding our opt out of the Maryland Business Combination and Control Share Acquisition Acts, which must be approved by the affirmative vote of a majority of votes cast by stockholders entitled to vote generally in the election of directors.
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.
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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. The loss of any of our executives could also disrupt our business and cause us to incur additional costs to hire replacement personnel.
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, changes in the European Union 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, civil unrest, 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, or alternative lodging options such as timeshare, vacation rentals or sharing services such as Airbnb, 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 requirements, 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.
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
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business and by events beyond our control, such as extreme weather conditions, terrorist attacks or alerts, civil unrest, public health concerns, airline strikes or reduced airline capacity, economic factors and other considerations affecting travel. 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.
In an effort to lure business away from internet travel intermediaries and to drive business on their own websites, our managers and franchisors may discount the room rates available on their websites even further, which may also significantly impact our business and profitability.
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.
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.
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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. If claims are made against a management company, it may seek to pass those expenses through to us. 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 27 hotels, seven 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.
Property and casualty insurance, including coverage for terrorism, can be difficult or expensive to obtain. 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.
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 September 11, 2001 and subsequent events underscore the possibility that large public facilities or economically important assets could become the target of terrorist attacks in the future. In particular, properties
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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:
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cause damage to one or more of our properties that may not be fully covered by insurance to the value of the damages; |
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cause all or portions of affected properties to be shut down for prolonged periods, resulting in a loss of income; |
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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; |
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expose us to a risk of monetary claims arising out of death, injury or damage to property caused by any such attacks; and |
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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.
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
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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 and certain relief provisions do not apply, 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, 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. At any time, new laws, interpretations or court decisions may change the federal tax laws or the federal income tax consequences of our qualification as a REIT. Moreover, our charter provides that our board of directors may revoke or otherwise terminate our REIT election, without the approval of our stockholders, if it determines that it is no longer in our best interest to continue to qualify as a REIT.
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. In addition, to the extent that we do not distribute all of our net long-term capital gain or distribute at least 90% of our REIT taxable income, we will be required to pay tax thereon at regular corporate tax rates. We may also decide to retain income we earn from the sale or other disposition of our property and pay federal 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.
Our taxable REIT subsidiary is subject to tax as a regular corporation. In addition, 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
27
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 annually, 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 subsidiary are held not to have been made on an arm’s-length basis, we or our taxable REIT subsidiary could be subject to income taxes. In order for rents paid to us by our taxable REIT subsidiary to qualify as “rents from real property,” such rents may not be based on net income or profits. Our leases provide for a base rent plus a variable rent based on occupied rooms and departmental revenues rather than on net income or profits. If the Internal Revenue Service, or the IRS, determines that the rents charged under our leases with our taxable REIT subsidiary are excessive, the deductibility thereof may be challenged, and to the extent rents exceed an arm’s-length amount, we could be subject to a 100% excise tax on “re-determined rent” or “re-determined deductions.” Recently enacted legislation has expanded the items subject to this 100% excise tax for tax years beginning on or after January 1, 2016. While we believe that our rents and other transactions with our taxable REIT subsidiary are based on arm’s-length amounts and reflect normal business practices, there can be no assurance that the IRS would agree.
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 intercompany 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 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 may be subject to corporate level income tax on certain built-in gains.
We may acquire properties in the future from C corporations, in which we must adopt the C corporation’s tax basis in the acquired asset as our tax basis. If the asset’s fair market value at the time of the acquisition exceeds its tax basis (a “built-in gain”), and we sell that asset within five years of the date on which we acquire it, then we generally will have to pay tax on the built-in gain at the highest regular corporate tax rate.
28
If a transaction intended to qualify as a Section 1031 Exchange is later determined to be taxable, we may face adverse consequences, and if the laws applicable to such transactions are amended or repealed, we may not be able to dispose of properties on a tax deferred basis.
From time to time we may dispose of properties in transactions that are intended to qualify as tax deferred exchanges under Section 1031 of the Code (a “Section 1031 Exchange”). If the qualification of a disposition as a valid Section 1031 Exchange is successfully challenged by the IRS, the disposition may be treated as a taxable exchange. In such case, our taxable income and earnings and profits would increase as would the amount of distributions we are required to make to satisfy the REIT distribution requirements. As a result, we may be required to make additional distributions or, in lieu of that, pay additional corporate income tax, including interest and penalties. To satisfy these obligations, we may be required to borrow funds. In addition, the payment of taxes could cause us to have less cash available to distribute to our stockholders. Moreover, it is possible that legislation could be enacted that could modify or repeal the laws with respect to Section 1031 Exchanges, which could make it more difficult, or not possible, for us to dispose of properties on a tax deferred basis.
Legislative or other actions affecting REITs could have a negative effect on us.
The rules dealing with federal income taxation are constantly under review by persons involved in the legislative process and by the IRS and the U.S. Department of the Treasury. Changes to the tax laws, with or without retroactive application, could adversely affect our investors or us. We cannot predict how changes in the tax laws might affect our investors or us. New legislation, Treasury Regulations, administrative interpretations or court decisions could significantly and negatively affect our ability to qualify as a REIT or the federal income tax consequences of such qualification, or the federal income tax consequences of an investment in us. Also, the law relating to the tax treatment of other entities, or an investment in other entities, could change, making an investment in such other entities more attractive relative to an investment in a REIT.
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 2016, our closing daily stock price fluctuated from a low of $10.13 to a high of $15.91. 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; |
29
|
· |
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.
During the past three years, we paid quarterly cash dividends to the stockholders of our Series D cumulative redeemable preferred stock (“Series D preferred stock”), Series E cumulative redeemable preferred stock (“Series E preferred stock”), Series F cumulative redeemable preferred stock (“Series F preferred stock”) and our common stock as follows:
|
|
Preferred Stock |
|
|
|
|
|||||||
|
|
Series D |
|
Series E |
|
Series F |
|
Common Stock |
|
||||
|
2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
January |
$ |
0.500000 |
|
$ |
— |
|
$ |
— |
|
$ |
0.05 |
|
|
April |
$ |
0.500000 |
|
$ |
— |
|
$ |
— |
|
$ |
0.05 |
|
|
July |
$ |
0.500000 |
|
$ |
— |
|
$ |
— |
|
$ |
0.05 |
|
|
October |
$ |
0.500000 |
|
$ |
— |
|
$ |
— |
|
$ |
0.05 |
|
|
2015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
January |
$ |
0.500000 |
|
$ |
— |
|
$ |
— |
|
$ |
0.36 |
(1) |
|
April |
$ |
0.500000 |
|
$ |
— |
|
$ |
— |
|
$ |
0.05 |
|
|
July |
$ |
0.500000 |
|
$ |
— |
|
$ |
— |
|
$ |
0.05 |
|
|
October |
$ |
0.500000 |
|
$ |
— |
|
$ |
— |
|
$ |
0.05 |
|
|
2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
January |
$ |
0.500000 |
|
$ |
— |
|
$ |
— |
|
$ |
1.26 |
(1) |
|
April |
$ |
0.527778 |
|
$ |
— |
|
$ |
— |
|
$ |
0.05 |
|
|
July |
$ |
— |
|
$ |
0.535700 |
|
$ |
0.201600 |
|
$ |
0.05 |
|
|
October |
$ |
— |
|
$ |
0.434375 |
|
$ |
0.403125 |
|
$ |
0.05 |
|
|
2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
January |
$ |
— |
|
$ |
0.434375 |
|
$ |
0.403125 |
|
$ |
0.53 |
|
|
(1) |
Paid in a combination of cash and shares of our common stock, pursuant to elections by individual stockholders. |
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 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 2017. To the extent that expected regular quarterly dividends for 2017 do not satisfy our annual distribution requirements, we expect to satisfy the annual distribution requirement by paying a “catch up” dividend in January 2018, 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.
30
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.
We have in the past, and may in the future, issue additional shares of common stock to raise the capital necessary to finance hotel acquisitions, fund capital expenditures, redeem our preferred stock, repay indebtedness or for other corporate purposes. 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. In addition, we have reserved approximately 12 million shares of our common stock for issuance under the Company’s long-term incentive plan, and 5,445,554 shares remained available for future issuance as of December 31, 2016.
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.
31
The following table sets forth additional summary information with respect to the 28 hotels we owned as of December 31, 2016:
|
Hotel |
|
City |
|
State |
|
Chain Scale |
|
Service |
|
Rooms |
|
Manager |
|
Boston Park Plaza |
|
Boston |
|
Massachusetts |
|
Upper Upscale |
|
Full Service |
|
1,060 |
|
Highgate |
|
Courtyard by Marriott Los Angeles (2) |
|
Los Angeles |
|
California |
|
Upscale |
|
Select Service |
|
187 |
|
IHR |
|
Embassy Suites Chicago |
|
Chicago |
|
Illinois |
|
Upper Upscale |
|
Full Service |
|
368 |
|
Crestline |
|
Embassy Suites La Jolla |
|
San Diego |
|
California |
|
Upper Upscale |
|
Full Service |
|
340 |
|
Hilton |
|
Fairmont Newport Beach (3) |
|
Newport Beach |
|
California |
|
Luxury |
|
Full Service |
|
444 |
|
Fairmont |
|
Hilton Garden Inn Chicago Downtown/Magnificent Mile |
|
Chicago |
|
Illinois |
|
Upscale |
|
Full Service |
|
361 |
|
Crestline |
|
Hilton New Orleans St. Charles |
|
New Orleans |
|
Louisiana |
|
Upper Upscale |
|
Full Service |
|
252 |
|
HEI |
|
Hilton North Houston |
|
Houston |
|
Texas |
|
Upper Upscale |
|
Full Service |
|
480 |
|
IHR |
|
Hilton San Diego Bayfront (2) (4) |
|
San Diego |
|
California |
|
Upper Upscale |
|
Full Service |
|
1,190 |
|
Hilton |
|
Hilton Times Square (2) |
|
New York City |
|
New York |
|
Upper Upscale |
|
Full Service |
|
478 |
|
Highgate |
|
Hyatt Centric 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 |
|
804 |
|
Hyatt |
|
JW Marriott New Orleans (2) |
|
New Orleans |
|
Louisiana |
|
Luxury |
|
Full Service |
|
501 |
|
Marriott |
|
Marriott Boston Long Wharf |
|
Boston |
|
Massachusetts |
|
Upper Upscale |
|
Full Service |
|
412 |
|
Marriott |
|
Marriott Houston |
|
Houston |
|
Texas |
|
Upper Upscale |
|
Full Service |
|
390 |
|
IHR |
|
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 |
|
Wailea Beach Resort |
|
Wailea |
|
Hawaii |
|
Upper Upscale |
|
Full Service |
|
543 |
|
Marriott |
|
Renaissance Harborplace |
|
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 ® (5) |
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total number of rooms |
|
|
|
|
|
|
|
|
|
13,666 |
|
|
|
(1) |
As defined by Smith Travel Research. |
|
(2) |
Subject to a ground, building or air lease with an unaffiliated third party. |
|
(3) |
Classified as held for sale as of December 31, 2016, and sold in February 2017. |
|
(4) |
75% ownership interest. |
|
(5) |
85% ownership interest. Pursuant to certain partnership loans, we recognize and expect to continue to recognize 100% of all economics from the property for the foreseeable future. |
Geographic Diversity
We own a geographically diverse portfolio of hotels located in 13 states and in Washington, DC. The following tables summarize our total portfolio of 28 hotels by region as of December 31, 2016, and the operating statistics by region for 2016, 2015 and 2014, including prior ownership results for the Wailea Beach Resort which we acquired in July 2014.
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of 2016 |
|
|
Region |
|
Number of Hotels |
|
Number of Rooms |
|
Revenues |
|
|
California (1) |
|
8 |
|
4,247 |
|
36.0 |
% |
|
Other West (2) |
|
5 |
|
1,861 |
|
10.5 |
% |
|
Midwest (3) |
|
3 |
|
1,148 |
|
7.2 |
% |
|
East (4) |
|
12 |
|
6,410 |
|
46.3 |
% |
|
|
|
|
|
|
|
|
|
|
Total |
|
28 |
|
13,666 |
|
100.0 |
% |
|
|
|
2016 |
|
2015 |
|
Change |
|
||||||||||||||||||||||
|
Region |
|
Occupancy |
|
ADR |
|
RevPAR |
|
Occupancy |
|
ADR |
|
RevPAR |
|
Occupancy |
|
ADR |
|
RevPAR |
|
||||||||||
|
California (1) |
|
85.9 |
% |
$ |
213.24 |
|
$ |
183.17 |
|
85.7 |
% |
$ |
204.87 |
|
$ |
175.57 |
|
20 |
bps |
4.1 |
% |
4.3 |
% |
||||||
|
Other West (2) |
|
76.4 |
% |
$ |
173.19 |
|
$ |
132.32 |
|
80.9 |
% |
$ |
179.61 |
|
$ |
145.30 |
|
(450) |
bps |
(3.6) |
% |
(8.9) |
% |
||||||
|
Midwest (3) |
|
82.7 |
% |
$ |
198.31 |
|
$ |
164.00 |
|
85.3 |
% |
$ |
201.76 |
|
$ |
172.10 |
|
(260) |
bps |
(1.7) |
% |
(4.7) |
% |
||||||
|
East (4) |
|
80.8 |
% |
$ |
199.45 |
|
$ |
161.16 |
|
79.6 |
% |
$ |
198.53 |
|
$ |
158.03 |
|
120 |
bps |
0.5 |
% |
2.0 |
% |
||||||
|
Total 28 hotel portfolio |
|
81.9 |
% |
$ |
200.51 |
|
$ |
164.22 |
|
82.2 |
% |
$ |
198.33 |
|
$ |
163.03 |
|
(30) |
bps |
1.1 |
% |
0.7 |
% |
||||||
|
|
|
2015 |
|
2014 |
|
Change |
|
||||||||||||||||
|
Region |
|
Occupancy |
|
ADR |
|
RevPAR |
|
Occupancy |
|
ADR |
|
RevPAR |
|
Occupancy |
|
ADR |
|
RevPAR |
|
||||
|
California (1) |
|
85.7 |
% |
$ |
204.87 |
|
$ |
175.57 |
|
84.6 |
% |
$ |
189.94 |
|
$ |
160.69 |
|
110 |
bps |
7.9 |
% |
9.3 |
% |
|
Other West (2) |
|
80.9 |
% |
$ |
179.61 |
|
$ |
145.30 |
|
81.1 |
% |
$ |
171.77 |
|
$ |
139.31 |
|
(20) |
bps |
4.6 |
% |
4.3 |
% |
|
Midwest (3) |
|
85.3 |
% |
$ |
201.76 |
|
$ |
172.10 |
|
80.5 |
% |
$ |
195.24 |
|
$ |
157.17 |
|
480 |
bps |
3.3 |
% |
9.5 |
% |
|
East (4) |
|
79.6 |
% |
$ |
198.53 |
|
$ |
158.03 |
|
80.3 |
% |
$ |
191.87 |
|
$ |
154.07 |
|
(70) |
bps |
3.5 |
% |
2.6 |
% |
|
Total 28 hotel portfolio |
|
82.2 |
% |
$ |
198.33 |
|
$ |
163.03 |
|
81.8 |
% |
$ |
188.80 |
|
$ |
154.44 |
|
40 |
bps |
5.0 |
% |
5.6 |
% |
|
(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. |
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 10, 2017, the last reported price per share of common stock on the NYSE was $15.25. 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 |
|
|||||
|
2015 |
|
|
|
|
|
|
|
|
|
|
||
|
First Quarter |
|
$ |
17.98 |
|
$ |
16.18 |
|
$ |
0.05 |
|
||
|
Second Quarter |
|
$ |
17.08 |
|
$ |
14.63 |
|
$ |
0.05 |
|
||
|
Third Quarter |
|
$ |
15.97 |
|
$ |
12.96 |
|
$ |
0.05 |
|
||
|
Fourth Quarter |
|
$ |
14.99 |
|
$ |
12.49 |
|
$ |
1.26 |
(1) |
||
|
2016 |
|
|
|
|
|
|
|
|
|
|
||
|
First Quarter |
|
$ |
14.00 |
|
$ |
10.13 |
|
$ |
0.05 |
|
||
|
Second Quarter |
|
$ |
13.85 |
|
$ |
11.37 |
|
$ |
0.05 |
|
||
|
Third Quarter |
|
$ |
13.89 |
|
$ |
12.03 |
|
$ |
0.05 |
|
||
|
Fourth Quarter |
|
$ |
15.91 |
|
$ |
12.20 |
|
$ |
0.53 |
|
||
|
(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 quarterly dividend of $0.05 per share of common stock throughout 2017. To the extent that expected regular quarterly dividends for 2017 do not satisfy our annual distribution requirements, we expect to satisfy the annual distribution requirement by paying a “catch up” dividend in January 2018.
As of February 10, 2017, 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 2016 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, 2016 — October 31, 2016 |
|
— |
|
$ |
— |
|
— |
|
|
|
|
|
November 1, 2016 — November 30, 2016 |
|
— |
|
$ |
— |
|
— |
|
|
|
|
|
December 1, 2016 — December 31, 2016 |
|
— |
|
$ |
— |
|
— |
|
|
|
|
|
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 $100.0 million of the Company’s common and preferred stock. As of December 31, 2016, no shares of either the Company’s common or preferred stock have been repurchased. Future purchases will depend on various factors, including the Company’s capital needs, as well as the Company’s common and preferred stock price. |
34
Item 6.Selected Financial Data
The following table sets forth selected financial information for the Company that has been derived from the consolidated financial statements and notes. This information should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.
|
|
|
Year Ended December 31, |
|
|||||||||||||
|
|
|
2016 |
|
2015 |
|
2014 |
|
2013 |
|
2012 |
|
|||||
|
Operating Data ($ in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Room |
|
$ |
824,340 |
|
$ |
874,117 |
|
$ |
811,709 |
|
$ |
653,955 |
|
$ |
576,146 |
|
|
Food and beverage |
|
|
294,415 |
|
|
293,892 |
|
|
259,358 |
|
|
213,346 |
|
|
200,810 |
|
|
Other operating |
|
|
70,585 |
|
|
81,171 |
|
|
70,931 |
|
|
56,523 |
|
|
52,128 |
|
|
Total revenues |
|
|
1,189,340 |
|
|
1,249,180 |
|
|
1,141,998 |
|
|
923,824 |
|
|
829,084 |
|
|
OPERATING EXPENSES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Room |
|
|
211,947 |
|
|
224,035 |
|
|
214,899 |
|
|
170,361 |
|
|
147,932 |
|
|
Food and beverage |
|
|
204,102 |
|
|
204,932 |
|
|
180,053 |
|
|
147,713 |
|
|
139,106 |
|
|
Other operating |
|
|
16,684 |
|
|
21,335 |
|
|
21,012 |
|
|
16,819 |
|
|
16,162 |
|
|
Advertising and promotion |
|
|
60,086 |
|
|
61,892 |
|
|
54,992 |
|
|
47,306 |
|
|
42,474 |
|
|
Repairs and maintenance |
|
|
44,307 |
|
|
46,557 |
|
|
45,901 |
|
|
35,884 |
|
|
32,042 |
|
|
Utilities |
|
|
30,424 |
|
|
34,543 |
|
|
34,141 |
|
|
27,006 |
|
|
25,596 |
|
|
Franchise costs |
|
|
36,647 |
|
|
40,096 |
|
|
38,271 |
|
|
32,932 |
|
|
30,067 |
|
|
Property tax, ground lease and insurance |
|
|
82,979 |
|
|
94,967 |
|
|
84,665 |
|
|
79,004 |
|
|
66,830 |
|
|
Other property-level expenses |
|
|
142,742 |
|
|
142,332 |
|
|
126,737 |
|
|
103,454 |
|
|
94,642 |
|
|
Corporate overhead |
|
|
25,991 |
|
|
33,339 |
|
|
28,739 |
|
|
26,671 |
|
|
24,316 |
|
|
Depreciation and amortization |
|
|
163,016 |
|
|
164,716 |
|
|
155,845 |
|
|
137,476 |
|
|
130,907 |
|
|
Total operating expenses |
|
|
1,018,925 |
|
|
1,068,744 |
|
|
985,255 |
|
|
824,626 |
|
|
750,074 |
|
|
Operating income |
|
|
170,415 |
|
|
180,436 |
|
|
156,743 |
|
|
99,198 |
|
|
79,010 |
|
|
Interest and other income |
|
|
1,800 |
|
|
3,885 |
|
|
3,479 |
|
|
2,821 |
|
|
297 |
|
|
Interest expense |
|
|
(50,283) |
|
|
(66,516) |
|
|
(72,315) |
|
|
(72,239) |
|
|
(76,821) |
|
|
Loss on extinguishment of debt |
|
|
(284) |
|
|
(2,964) |
|
|
(4,638) |
|
|
(44) |
|
|
(191) |
|
|
Gain on sale of assets |
|
|
18,413 |
|
|
226,217 |
|
|
— |
|
|
— |
|
|
— |
|
|
Income before income taxes and discontinued operations |
|
|
140,061 |
|
|
341,058 |
|
|
83,269 |
|
|
29,736 |
|
|
2,295 |
|
|
Income tax benefit (provision) |
|
|
616 |
|
|
(1,434) |
|
|
(179) |
|
|
(8,145) |
|
|
(1,148) |
|
|
Income from continuing operations |
|
|
140,677 |
|
|
339,624 |
|
|
83,090 |
|
|
21,591 |
|
|
1,147 |
|
|
Income from discontinued operations, net of tax |
|
|
— |
|
|
15,895 |
|
|
4,849 |
|
|
48,410 |
|
|
48,410 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME |
|
|
140,677 |
|
|
355,519 |
|
|
87,939 |
|
|
70,001 |
|
|
49,557 |
|
|
Income from consolidated joint ventures attributable to noncontrolling interests |
|
|
(6,480) |
|
|
(8,164) |
|
|
(6,708) |
|
|
(4,045) |
|
|
(1,792) |
|
|
Preferred stock dividends and redemption charges |
|
|
(15,964) |
|
|
(9,200) |
|
|
(9,200) |
|
|
(19,013) |
|
|
(29,748) |
|
|
INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS |
|
$ |
118,233 |
|
$ |
338,155 |
|
$ |
72,031 |
|
$ |
46,943 |
|
$ |
18,017 |
|
|
Income (loss) from continuing operations attributable to common stockholders per diluted common share |
|
$ |
0.55 |
|
$ |
1.54 |
|
$ |
0.34 |
|
$ |
(0.01) |
|
$ |
(0.24) |
|
|
Distributions declared per common share |
|
$ |
0.68 |
|
$ |
1.41 |
|
$ |
0.51 |
|
$ |
0.10 |
|
$ |
— |
|
|
Balance Sheet Data ($ in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in hotel properties, net (1) |
|
$ |
3,158,219 |
|
$ |
3,230,852 |
|
$ |
3,542,155 |
|
$ |
3,235,433 |
|
$ |
2,682,326 |
|
|
Total assets |
|
$ |
3,739,234 |
|
$ |
3,865,093 |
|
$ |
3,921,443 |
|
$ |
3,505,067 |
|
$ |
3,127,414 |
|
|
Total debt, net (1) |
|
$ |
931,303 |
|
$ |
1,096,595 |
|
$ |
1,421,744 |
|
$ |
1,396,293 |
|
$ |
1,353,679 |
|
|
Total liabilities |
|
$ |
1,207,402 |
|
$ |
1,513,973 |
|
$ |
1,652,609 |
|
$ |
1,552,668 |
|
$ |
1,508,101 |
|
|
Equity |
|
$ |
2,531,832 |
|
$ |
2,351,120 |
|
$ |
2,268,834 |
|
$ |
1,952,399 |
|
$ |
1,519,313 |
|
|
(1) |
Does not include hotels or debt which have been reclassified to discontinued operations, or which have been classified as held for sale. Total debt, net reflects the retrospective adoption of Accounting Standards Update No. 2015-03. |
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 corporation that directly or indirectly owns real estate assets and has elected to be taxable as a real estate investment trust. To qualify for taxation as a REIT, the REIT must meet certain requirements, including regarding the composition of its assets and the sources of its income. REITs generally are not subject to federal income taxes at the corporate level as long as they pay stockholder dividends equivalent to 100% of their taxable income. REITs are required to distribute to stockholders at least 90% of their REIT taxable income. We own, directly or indirectly, 100% of the interests of Sunstone Hotel Partnership, LLC (the “Operating Partnership”), which is the entity that directly or indirectly owns our hotel properties. We also own 100% of the interests of our taxable REIT subsidiary, Sunstone Hotel TRS Lessee, Inc., which leases all of our hotels from the Operating Partnership, and engages independent third-parties to manage our hotels.
We own primarily urban and resort upper upscale hotels in the United States. As of December 31, 2016, we had interests in 28 hotels, including the Fairmont Newport Beach which we classified as held for sale and subsequently sold in February 2017, leaving 27 hotels currently held for investment (the “27 hotels”). Of the 27 hotels, we classify 24 as upper upscale, two as upscale and one as luxury as defined by Smith Travel Research, Inc. All but one (the Boston Park Plaza) of our 27 hotels are operated under nationally recognized brands such as Marriott, Hilton and Hyatt, which are among the most respected and widely recognized brands in the lodging industry. We believe the largest and most stable segment of travelers prefer the consistent service and quality associated with nationally recognized brands and well-known independent hotels.
We seek to own hotels primarily in urban and resort locations that benefit from significant barriers to entry by competitors and diverse economic drivers. As of December 31, 2016, the hotels comprising our 27 hotel portfolio average 490 rooms in size.
2016 Highlights
In January 2016, we drew the available funds of $100.0 million under an unsecured term loan agreement, and used the proceeds in February 2016, combined with cash on hand, to repay the $114.2 million loan secured by the Boston Park Plaza. The Boston Park Plaza loan was scheduled to mature in February 2018, and was available to be repaid without penalty in February 2016. The $100.0 million unsecured term loan matures in January 2023, and bears interest based on a pricing grid with a range of 180 to 255 basis points over LIBOR, depending on our leverage ratios. We entered into a forward swap agreement in December 2015 that fixed the LIBOR rate at 1.853% for the duration of the $100.0 million term loan. Based on our current leverage and the swap in place, the loan bears interest at an effective rate of 3.653%.
In March 2016, we issued 4,600,000 shares of 6.95% Series E Cumulative Redeemable Preferred Stock (“Series E preferred stock”) with a liquidation preference of $25.00 per share for gross proceeds of $115.0 million. On or after March 11, 2021, the Series E preferred stock will be redeemable at our option, in whole or in part, at any time or from time to time, for cash at a redemption price of $25.00 per share, plus accrued and unpaid dividends up to, but not including, the redemption date.
In April 2016, using the net proceeds from the offering of the Series E preferred stock and cash on hand, we redeemed all 4,600,000 shares of 8.0% Series D Cumulative Redeemable Preferred Stock (“Series D preferred stock”) at a redemption price of $25.00 per share, plus accrued and unpaid dividends up to, but not including, the redemption date.
In May 2016, we issued 3,000,000 shares of 6.45% Series F Cumulative Redeemable Preferred Stock (“Series F preferred stock”) with a liquidation preference of $25.00 per share for gross proceeds of $75.0 million. On or after May 17, 2021, the Series F preferred stock will be redeemable at our option, in whole or in part, at any time or from time to time, for cash at a redemption price of $25.00 per share, plus accrued and unpaid dividends up to, but not including, the redemption date.
36
In May 2016, we sold the leasehold interest in the 203-room Sheraton Cerritos for net proceeds of $41.2 million, and recognized a net gain on the sale of $18.2 million. The sale did not represent a strategic shift that had a major impact on our business plan or our primary markets, and, therefore, did not qualify as a discontinued operation.
Additionally in May 2016, we repaid $72.6 million of debt secured by the Renaissance Orlando at SeaWorld®, using proceeds received from our issuance of the Series F preferred stock. The Renaissance Orlando at SeaWorld® loan was scheduled to mature in July 2016, and was available to be repaid without penalty in May 2016.
In June 2016, we purchased the air rights associated with our Renaissance Harborplace for $2.4 million, resulting in a $2.4 million intangible asset with an indefinite life.
In December 2016, we sold an undeveloped parcel of land for net proceeds of $0.4 million, and recognized a net gain on the sale of $0.2 million.
Also in December 2016, we issued 3,564,047 shares of our common stock for gross proceeds of $55.1 million. The shares were issued in connection with the “At the Market” Agreements (“ATM Agreements”) which we entered into during 2014 with Wells Fargo Securities, LLC and Merrill Lynch Pierce, Fenner & Smith Incorporated. Under the ATM Agreements, we are authorized to issue common stock having an aggregate offering amount of up to $150.0 million. As of December 31, 2016, we have $73.3 million available for sale under the ATM Agreements.
Additionally in December 2016, we repaid $66.1 million of debt secured by the Embassy Suites Chicago using cash on hand. The Embassy Suites Chicago loan was scheduled to mature in March 2017, and was available to be repaid without penalty at the end of December 2016. After repayment of the Embassy Suites Chicago loan, we have 22 unencumbered hotels.
As of December 31, 2016, the weighted average term to maturity of our debt is approximately four years, and 76.2% of our debt, including the effects of interest rate swap agreements, is fixed rate with a weighted average interest rate of 4.74%. The weighted average interest rate on all of our debt, which includes our variable-rate debt obligation based on the variable rate at December 31, 2016, is 4.29%.
Operating Activities
Revenues. Substantially all of our revenues are derived from the operation of our hotels. Specifically, our revenues consist of the following:
|
· |
Room revenue, which is the product of the number of rooms sold and the average daily room rate (“ADR” defined below); |
|
· |
Food and beverage revenue, which is comprised of revenue realized in the hotel food and beverage outlets as well as banquet and catering events; and |
|
· |
Other operating revenue, which includes ancillary hotel revenue and other items primarily driven by occupancy such as telephone/internet, parking, spa, resort and other facility fees, entertainment and other guest services. Additionally, this category includes, among other things, attrition revenue, tenant revenue derived from hotel space leased by third parties, and any performance guarantee payments, as well as operating revenue from BuyEfficient, LLC Inc. (“BuyEfficient”), an electronic purchasing platform that allowed members to procure food, operating supplies, furniture, fixtures and equipment, prior to its sale in September 2015. |
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; |
37
|
· |
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; |
|
· |
Other property-level expenses, which includes our property-level general and administrative expenses, such as payroll and related costs, contract and professional fees, credit and collection expenses, employee recruitment, relocation and training expenses, management fees and other costs. Additionally, this category includes general and administrative expenses from BuyEfficient prior to its sale in September 2015; |
|
· |
Corporate overhead expense, which includes our corporate-level expenses, such as payroll and related costs, amortization of deferred stock compensation, acquisition and due diligence costs, legal expenses, contract and professional fees, entity-level state franchise and minimum taxes, travel expenses, office rent and other costs; and |
|
· |
Depreciation and amortization expense, which includes depreciation on our hotel buildings, improvements, furniture, fixtures and equipment, along with amortization on our franchise fees and certain intangibles. Additionally, this category includes depreciation and amortization related to furniture, fixtures, and equipment (“FF&E”) for both our corporate office and BuyEfficient, as well as BuyEfficient’s intangible assets prior to its sale in September 2015. |
Other Revenue and Expense. Other revenue and expense consists of the following:
|
· |
Interest and other income, which includes interest we have earned on our restricted and unrestricted cash accounts and on the 11.0% yield from the $25.0 million equity investment (the “Preferred Equity Investment”) we received from the buyer in conjunction with our 2013 sale of the “Rochester Portfolio,” which included four hotels and a laundry facility in Rochester, Minnesota prior to its sale in July 2015, as well as any energy rebates we have received or any gains or losses we have recognized on sales or redemptions of assets other than real estate investments; |
|
· |
Interest expense, which includes interest expense incurred on our outstanding fixed and variable-rate debt and capital lease obligation, gains or losses on derivatives, amortization of deferred financing fees, and any loan fees incurred on our debt; |
|
· |
Loss on extinguishment of debt, which includes losses recognized on amendments or early repayments of mortgages or other debt obligations from the accelerated amortization of deferred financing fees, along with any costs incurred; |
|
· |
Gain on sale of assets, which includes the gains we recognized on our sales of the Sheraton Cerritos in 2016 as well as BuyEfficient and the Doubletree Guest Suites Times Square in 2015, as none of these sales qualified as a discontinued operation; |
|
· |
Income tax benefit (provision), which includes federal and state income taxes related to continuing operations charged to the Company net of any refunds received, and any adjustments to unrecognized tax positions, along with any related interest and penalties incurred; |
|
· |
Income from discontinued operations, net of tax, which includes the results of operations for any hotels or other real estate investments sold during the reporting period that qualify as a discontinued operation, along with the gain or loss realized on the sale of these assets and any extinguishments of related debt or income tax provisions; |
38
|
· |
Income from consolidated joint ventures attributable to noncontrolling interests, which includes net income attributable to the outside 25.0% interest in the joint venture that owns the Hilton San Diego Bayfront, as well as preferred dividends, including related administrative fees, earned by preferred investors on their $0.1 million preferred equity interest in a subsidiary captive REIT that owned the Doubletree Guest Suites Times Square prior to its sale in December 2015; and |
|
· |
Preferred stock dividends and redemption charge, which includes dividends accrued on our Series D preferred stock until its redemption in April 2016, as well as dividends accrued on our Series E preferred stock and our Series F preferred stock both of which were issued in 2016, along with any redemption charges for preferred stock redemptions made in excess of net carrying values. |
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 renovation or repositioning and those hotels whose room counts have materially changed during either the current or prior year. For hotels that were not owned for the entirety of the comparison periods, comparable RevPAR is calculated using RevPAR generated during periods of prior ownership. We refer to this subset of our hotels used to calculate comparable RevPAR as our “Comparable Portfolio.” Currently our Comparable Portfolio includes 26 hotels, and is comprised of our total portfolio as of December 31, 2016, with the exception of the Wailea Beach Resort due to its extensive repositioning disruption during the fourth quarter of 2015 as well as all of 2016, and the Fairmont Newport Beach which we classified as held for sale and subsequently sold in February 2017; |
|
· |
RevPAR index, which is the quotient of a hotel’s RevPAR divided by the average RevPAR of its competitors, multiplied by 100. A RevPAR index in excess of 100 indicates a hotel is achieving higher RevPAR than the average of its competitors. In addition to absolute RevPAR index, we monitor changes in RevPAR index; |
|
· |
EBITDA, which is net income (loss) excluding: noncontrolling interests; interest expense; benefit or provision for income taxes, including income taxes applicable to the sale of assets; and depreciation and amortization; |
|
· |
Adjusted EBITDA, which is EBITDA adjusted to exclude: amortization of deferred stock compensation; the impact of any gain or loss from asset sales; impairment charges; prior year property tax assessments or credits; and any other non-recurring identified adjustments; |
|
· |
Funds from operations (“FFO”) attributable to common stockholders, which is net income (loss), excluding: preferred stock dividends and any redemption charges; noncontrolling interests; gains and losses from sales of property; real estate-related depreciation and amortization (excluding amortization of deferred financing costs); and real estate-related impairment losses; and |
|
· |
Adjusted FFO attributable to common stockholders, which is FFO attributable to common stockholders adjusted to exclude: penalties; written-off deferred financing costs; non-real estate-related impairment losses; income tax benefits or provisions associated with the application of net operating loss carryforwards and uncertain tax positions; and any other non-recurring identified adjustments. |
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.
39
|
· |
Demand. The demand for lodging generally fluctuates with the overall economy. In aggregate, demand for our hotels has improved each year since 2010. In 2015, Comparable Portfolio RevPAR increased 5.8% as compared to 2014, with a 60 basis point increase in occupancy. These improving demand trends continued, albeit at a moderate pace, in 2016. As a result, our Comparable Portfolio RevPAR increased 1.3% in 2016 as compared to 2015, with a 10 basis point increase in occupancy. |
|
· |
Supply. The addition of new competitive hotels affects the ability of existing hotels to absorb demand for lodging and therefore impacts the ability to drive RevPAR and profits. The development of new hotels is largely driven by construction costs and expected performance of existing hotels. In aggregate, we expect the U.S. hotel supply to increase over the near term. On a market-by-market basis, some markets may experience new hotel room openings at or greater than historic levels, including in Chicago, Houston, New York City and Washington DC where there are currently higher-than-average supplies of new hotel room openings. Additionally, an increase in the supply of vacation rental or sharing services such as Airbnb also affects the ability of existing hotels to absorb demand for lodging. |
|
· |
Revenues and expenses. We believe that marginal improvements in RevPAR index, even in the face of declining revenues, are a good indicator of the relative quality and appeal of our hotels, and our operators’ effectiveness in maximizing revenues. Similarly, we also evaluate our operators’ effectiveness in minimizing incremental operating expenses in the context of increasing revenues or, conversely, in reducing operating expenses in the context of declining revenues. |
With respect to improving RevPAR index, we continue to work with our hotel operators to optimize revenue management initiatives while taking into consideration market demand trends and the pricing strategies of competitor hotels in our markets. We also develop capital investment programs designed to ensure each of our hotels is well renovated and positioned to appeal to groups and individual travelers fitting target guest profiles. Increased capital investment in our properties may lead to short-term revenue disruption and negatively impact RevPAR index. Our revenue management initiatives are generally oriented towards maximizing ADR even if the result may be lower occupancy than may be achieved through lower ADR. Increases in RevPAR attributable to increases in ADR may be accompanied by minimal additional expenses, while increases in RevPAR attributable to higher occupancy may result in higher variable expenses such as housekeeping, labor and utilities expense. In 2015, our Comparable Portfolio RevPAR index increased by 130 points as compared to 2014 due in part to increased revenue at our newly renovated hotels, partially offset by renovation disruption at the Boston Park Plaza. In 2016, our Comparable Portfolio RevPAR index decreased by 140 points as compared to 2015 due in part to decreased rate at our Chicago hotels due to a weak market in this area and at our Houston hotels due to a weak energy market and loss of contract business, combined with renovation-related revenue disruption at the Marriott Philadelphia.
We continue to work with our operators to identify operational efficiencies designed to reduce expenses while minimally affecting guest experience and hotel employee satisfaction. Key asset management initiatives include optimizing hotel staffing levels, increasing the efficiency of the hotels, such as installing energy efficient management and inventory control systems, and selectively combining certain food and beverage outlets. Our operational efficiency initiatives may be difficult to implement, as most categories of variable operating expenses, such as utilities and housekeeping labor costs, fluctuate with changes in occupancy. Furthermore, our hotels operate with significant fixed costs, such as general and administrative expense, insurance, property taxes, and other expenses associated with owning hotels, over which our operators have little control. We have experienced either currently or in the past, increases in hourly wages, employee benefits (especially health insurance), utility costs and property insurance, which have negatively affected our operating margins. Moreover, there are limits to how far our operators can reduce expenses without affecting brand standards or the competitiveness of our hotels.
Operating Results. The following table presents our operating results for our total portfolio for the years ended December 31, 2016 and 2015, including the amount and percentage change in the results between the two periods.
40
|
|
|
2016 |
|
2015 |
|
Change $ |
|
Change % |
|
|||
|
|
|
(dollars in thousands, except statistical data) |
|
|||||||||
|
REVENUES |
|
|
|
|
|
|
|
|
|
|
|
|
|
Room |
|
$ |
824,340 |
|
$ |
874,117 |
|
$ |
(49,777) |
|
(5.7) |
% |
|
Food and beverage |
|
|
294,415 |
|
|
293,892 |
|
|
523 |
|
0.2 |
% |
|
Other operating |
|
|
70,585 |
|
|
81,171 |
|
|
(10,586) |
|
(13.0) |
% |
|
Total revenues |
|
|
1,189,340 |
|
|
1,249,180 |
|
|
(59,840) |
|
(4.8) |
% |
|
OPERATING EXPENSES |
|
|
|
|
|
|
|
|
|
|
|
|
|
Hotel operating |
|
|
687,176 |
|
|
728,357 |
|
|
(41,181) |
|
(5.7) |
% |
|
Other property-level expenses |
|
|
142,742 |
|
|
142,332 |
|
|
410 |
|
0.3 |
% |
|
Corporate overhead |
|
|
25,991 |
|
|
33,339 |
|
|
(7,348) |
|
(22.0) |
% |
|
Depreciation and amortization |
|
|
163,016 |
|
|
164,716 |
|
|
(1,700) |
|
(1.0) |
% |
|
Total operating expenses |
|
|
1,018,925 |
|
|
1,068,744 |
|
|
(49,819) |
|
(4.7) |
% |
|
Operating income |
|
|
170,415 |
|
|
180,436 |
|
|
(10,021) |
|
(5.6) |
% |
|
Interest and other income |
|
|
1,800 |
|
|
3,885 |
|
|
(2,085) |
|
(53.7) |
% |
|
Interest expense |
|
|
(50,283) |
|
|
(66,516) |
|
|
16,233 |
|
24.4 |
% |
|
Loss on extinguishment of debt |
|
|
(284) |
|
|
(2,964) |
|
|
2,680 |
|
90.4 |
% |
|
Gain on sale of assets |
|
|
18,413 |
|
|
226,217 |
|
|
(207,804) |
|
(91.9) |
% |
|
Income before income taxes and discontinued operations |
|
|
140,061 |
|
|
341,058 |
|
|
(200,997) |
|
(58.9) |
% |
|
Income tax benefit (provision) |
|
|
616 |
|
|
(1,434) |
|
|
2,050 |
|
143.0 |
% |
|
Income from continuing operations |
|
|
140,677 |
|
|
339,624 |
|
|
(198,947) |
|
(58.6) |
% |
|
Income from discontinued operations, net of tax |
|
|
— |
|
|
15,895 |
|
|
(15,895) |
|
(100.0) |
% |
|
NET INCOME |
|
|
140,677 |
|
|
355,519 |
|
|
(214,842) |
|
(60.4) |
% |
|
Income from consolidated joint ventures attributable to noncontrolling interests |
|
|
(6,480) |
|
|
(8,164) |
|
|
1,684 |
|
20.6 |
% |
|
Preferred stock dividends and redemption charge |
|
|
(15,964) |
|
|
(9,200) |
|
|
(6,764) |
|
(73.5) |
% |
|
INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS |
|
$ |
118,233 |
|
$ |
338,155 |
|
$ |
(219,922) |
|
(65.0) |
% |
The following table presents our operating results for our total portfolio for the years ended December 31, 2015 and 2014, including the amount and percentage change in the results between the two periods.
41
|
|
|
2015 |
|
2014 |
|
Change $ |
|
Change % |
|
|||
|
|
|
(dollars in thousands, except statistical data) |
|
|||||||||
|
REVENUES |
|
|
|
|
|
|
|
|
|
|
|
|
|
Room |
|
$ |
874,117 |
|
$ |
811,709 |
|
$ |
62,408 |
|
7.7 |
% |
|
Food and beverage |
|
|
293,892 |
|
|
259,358 |
|
|
34,534 |
|
13.3 |
% |
|
Other operating |
|
|
81,171 |
|
|
70,931 |
|
|
10,240 |
|
14.4 |
% |
|
Total revenues |
|
|
1,249,180 |
|
|
1,141,998 |
|
|
107,182 |
|
9.4 |
% |
|
OPERATING EXPENSES |
|
|
|
|
|
|
|
|
|
|
|
|
|
Hotel operating |
|
|
728,357 |
|
|
673,934 |
|
|
54,423 |
|
8.1 |
% |
|
Other property-level expenses |
|
|
142,332 |
|
|
126,737 |
|
|
15,595 |
|
12.3 |
% |
|
Corporate overhead |
|
|
33,339 |
|
|
28,739 |
|
|
4,600 |
|
16.0 |
% |
|
Depreciation and amortization |
|
|
164,716 |
|
|
155,845 |
|
|
8,871 |
|
5.7 |
% |
|
Total operating expenses |
|
|
1,068,744 |
|
|
985,255 |
|
|
83,489 |
|
8.5 |
% |
|
Operating income |
|
|
180,436 |
|
|
156,743 |
|
|
23,693 |
|
15.1 |
% |
|
Interest and other income |
|
|
3,885 |
|
|
3,479 |
|
|
406 |
|
11.7 |
% |
|
Interest expense |
|
|
(66,516) |
|
|
(72,315) |
|
|
5,799 |
|
8.0 |
% |
|
Loss on extinguishment of debt |
|
|
(2,964) |
|
|
(4,638) |
|
|
1,674 |
|
36.1 |
% |
|
Gain on sale of assets |
|
|
226,217 |
|
|
— |
|
|
226,217 |
|
100.0 |
% |
|
Income before income taxes and discontinued operations |
|
|
341,058 |
|
|
83,269 |
|
|
257,789 |
|
309.6 |
% |
|
Income tax provision |
|
|
(1,434) |
|
|
(179) |
|
|
(1,255) |
|
(701.1) |
% |
|
Income from continuing operations |
|
|
339,624 |
|
|
83,090 |
|
|
256,534 |
|
308.7 |
% |
|
Income from discontinued operations, net of tax |
|
|
15,895 |
|
|
4,849 |
|
|
11,046 |
|
227.8 |
% |
|
NET INCOME |
|
|
355,519 |
|
|
87,939 |
|
|
267,580 |
|
304.3 |
% |
|
Income from consolidated joint ventures attributable to noncontrolling interests |
|
|
(8,164) |
|
|
(6,708) |
|
|
(1,456) |
|
(21.7) |
% |
|
Preferred stock dividends |
|
|
(9,200) |
|
|
(9,200) |
|
|
— |
|
— |
% |
|
INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS |
|
$ |
338,155 |
|
$ |
72,031 |
|
$ |
266,124 |
|
369.5 |
% |
Operating Statistics. The following tables include comparisons of the key operating metrics for both our Total Portfolio (28 hotels) and our Comparable Portfolio (26 hotels).
|
|
|
2016 |
|
2015 |
|
Change |
|
||||||||||||||||
|
|
|
Occ% |
|
ADR |
|
RevPAR |
|
Occ% |
|
ADR |
|
RevPAR |
|
Occ% |
|
ADR |
|
RevPAR |
|
||||
|
Total Portfolio |
|
81.9 |
% |
$ |
200.51 |
|
$ |
164.22 |
|
82.2 |
% |
$ |
198.33 |
|
$ |
163.03 |
|
(30) |
bps |
1.1 |
% |
0.7 |
% |
|
Comparable Portfolio |
|
82.4 |
% |
$ |
198.73 |
|
$ |
163.75 |
|
82.3 |
% |
$ |
196.34 |
|
$ |
161.59 |
|
10 |
bps |
1.2 |
% |
1.3 |
% |
|
|
|
2015 |
|
2014 |
|
Change |
|
||||||||||||||||||||||||||
|
|
|
Occ% |
|
ADR |
|
RevPAR |
|
Occ% |
|
ADR |
|
RevPAR |
|
Occ% |
|
ADR |
|
RevPAR |
|
||||||||||||||
|
Total Portfolio |
|
82.2 |
% |
$ |
198.33 |
|
$ |
163.03 |
|
81.8 |
% |
$ |
188.80 |
|
$ |
154.44 |
|
40 |
bps |
5.0 |
% |
5.6 |
% |
||||||||||
|
Comparable Portfolio |
|
82.3 |
% |
$ |
196.34 |
|
$ |
161.59 |
|
81.7 |
% |
$ |
186.86 |
|
$ |
152.66 |
|
60 |
bps |
5.1 |
% |
5.8 |
% |
||||||||||
Room revenue. Room revenue decreased $49.8 million, or 5.7%, in 2016 as compared to 2015 as follows:
We sold one hotel each year during 2016 and 2015: the Sheraton Cerritos in May 2016; and the Doubletree Guest Suites Times Square in December 2015 (the “Two Sold Hotels”). The sale of the Two Sold Hotels caused room revenue to decrease by $59.6 million in 2016 as compared to 2015.
Room revenue generated by the 28 hotels we owned prior to January 1, 2015 (our “Existing Portfolio”), increased $9.8 million during 2016 as compared to 2015 due to an ADR increase of $12.2 million partially offset by an occupancy decrease of $2.4 million. The increase in ADR was primarily driven by strong demand, allowing for double-digit ADR growth in San Francisco (primarily due to the Super Bowl, which took place in the San Francisco Bay Area during the first quarter of 2016), Los Angeles and Orlando. These increases to ADR were partially offset by a weak Chicago market, increased competition in New York City and weak energy markets in both New Orleans and Houston, combined with a loss of contract business in Houston.
42
Although we increased our total number of rooms sold by 4,565 during 2016 as compared to 2015, occupancy decreased year-over-year as we increased our total rooms available by 18,971 due to 2016 being a leap year and due to the addition of rooms resulting from repositioning and renovation at the Boston Park Plaza and the Hilton Times Square. The overall increase in our total rooms sold during 2016 as compared to 2015 was comprised of an 8,294 increase in group room nights, partially offset by a 3,729 decrease in transient room nights. Group room nights increased in Orlando and San Diego due to strong convention activity in these locales. Overall, transient room nights decreased due to a weak Chicago market, displacement from the complete hotel repositioning at the Wailea Beach Resort, and weak energy markets in both New Orleans and Houston.
During both 2016 and 2015, the most significant renovation impacts to room revenue occurred at the Boston Park Plaza and the Wailea Beach Resort. During 2016, a combined total of 33,165 room nights were out of service at these two hotels, displacing approximately $8.0 million in room revenue based on the hotels achieving a combined potential 78.7% occupancy rate and RevPAR of $180.20 without the renovations. During 2015, a combined total of 18,607 room nights were out of service at these two hotels, displacing approximately $2.9 million in room revenue based on the hotels achieving a combined potential 75.9% occupancy rate and RevPAR of $144.40 without the renovations.
Room revenue increased $62.4 million, or 7.7%, in 2015 as compared to 2014 as follows:
We acquired one hotel subsequent to January 1, 2014, the Wailea Beach Resort in July 2014, which contributed additional room revenue of $25.6 million during 2015. In addition, we sold one hotel subsequent to January 1, 2014, the Doubletree Guest Suites Times Square on December 18, 2015. Room revenue generated by the Doubletree Guest Suites Times Square decreased $5.4 million in 2015 as compared to 2014.
Room revenue generated by the 28 hotels we owned prior to January 1, 2014 (our “2014-2015 Existing Portfolio”) increased $42.2 million during 2015 as compared to 2014 due to increases in both occupancy ($4.5 million) and ADR ($37.7 million). The increases in occupancy and ADR were driven by an additional 29,025 group room nights, partially offset by 3,446 fewer transient room nights. Group room nights increased primarily due to a concerted effort to capture a higher portion of group business in Houston, as well as strong group markets in San Francisco, Orlando and Washington DC, partially offset by a decrease in groups due to civil unrest in Baltimore. The decrease in transient room nights was primarily due to a soft business transient market in Houston driven by a weak energy market, as well as a revenue management strategy to decrease the availability of lower-rated transient rooms in Orlando and Washington DC in order to increase the supply of both higher-rated group and business transient rooms, combined with civil unrest in Baltimore. These decreases in transient room nights were partially offset by strong transient markets in both San Francisco and San Diego.
In addition, both group and transient nights increased in 2015 as compared to 2014 at four hotels that were undergoing major renovations during 2014: the Hilton Garden Inn Chicago Downtown/Magnificent Mile; the Renaissance Long Beach; the Hyatt Regency San Francisco; and the Boston Park Plaza (together the “four 2014 renovation hotels”). During 2014, the four 2014 renovation hotels caused a total of 14,221 room nights to be out of service, displacing approximately $3.0 million in room revenue based on the hotels achieving a combined potential 78.4% occupancy rate and RevPAR of $167.06 without the renovations. In comparison, room nights during 2015 were negatively impacted by major renovations at both the Boston Park Plaza and the Wailea Beach Resort, which together caused a total of 18,607 room nights to be out of service, displacing approximately $2.9 million in room revenue based on the hotels achieving a combined potential 75.9% occupancy rate and RevPAR of $144.40 without the renovations.
Food and beverage revenue. Food and beverage revenue increased $0.5 million, or 0.2%, in 2016 as compared to 2015 as follows:
Food and beverage revenue generated by our Existing Portfolio increased $7.4 million in 2016 as compared to 2015 primarily due to increased banquet and outlet revenue caused by the increase in group room nights. In addition, outlet revenue increased, the majority of which occurred at the Hyatt Regency San Francisco due to the redesign of certain restaurant and lounge areas and the introduction of a new grab-and-go concept, as well as at the Boston Park Plaza due to additional restaurant options available post-repositioning. Food and beverage revenue also increased at the Renaissance Harborplace during 2016 as compared to 2015, as the hotel’s operations suffered during 2015 due to civil unrest in Baltimore. These increases in food and beverage revenue were partially offset by a decrease in banquet revenue at the Hilton Times Square due to the conversion of meeting space to guest rooms in 2016, and a decrease in room service revenue at the Hyatt Regency San Francisco due to the elimination of this dining option in 2016.
43
The increase in our Existing Portfolio’s food and beverage revenue was partially offset by the Two Sold Hotels, which decreased food and beverage revenue by $6.9 million in 2016 as compared to 2015.
Food and beverage revenue increased $34.5 million, or 13.3%, in 2015 as compared to 2014 as follows:
The Wailea Beach Resort contributed an additional $5.7 million to food and beverage revenue during 2015. In addition, food and beverage revenue generated by the Doubletree Guest Suites Times Square increased $0.1 million in 2015 as compared to 2014.
Food and beverage revenue in our 2014-2015 Existing Portfolio increased $10.0 million in 2015 as compared to 2014, primarily due to increased banquet and related service charge revenue at the majority of our hotels due to the increase in group room nights. Outlet revenue in our 2014-2015 Existing Portfolio also increased in 2015 as compared to 2014 due to the strong markets in both San Francisco and San Diego, along with an increase in outlet revenue generated in 2015 by the four 2014 renovation hotels. These increases in food and beverage revenue in 2015 as compared to 2014 were partially offset by a decrease in revenue at the Renaissance Harborplace due to the civil unrest in Baltimore, as well as the weak transient market in Houston, combined with a decrease in revenue due to a major renovation at the Boston Park Plaza and outlet renovation at the JW Marriott New Orleans.
In addition, food and beverage revenue in our 2014-2015 Existing Portfolio increased $18.7 million in 2015 as compared to 2014 due to our January 1, 2015 adoption of the American Hotel & Lodging Association’s Uniform System of Accounts for the Lodging Industry, Eleventh Revised Edition (the “USALI Eleventh Revised Edition”), which affected the classification of mandatory service charges to guests for banquets and events that are paid out as gratuities to hotel employees. Previously, these charges reduced our food and beverage revenue. Beginning in 2015, these charges are included in food and beverage expense.
Other operating revenue. Other operating revenue decreased $10.6 million, or 13.0%, in 2016 as compared to 2015 as follows:
The Two Sold Hotels decreased other operating revenue by $7.1 million in 2016 as compared to 2015. In addition, BuyEfficient, which we sold in September 2015, decreased other operating revenue by $5.7 million in 2016 as compared to 2015.
Other operating revenue in our Existing Portfolio increased $2.2 million in 2016 as compared to 2015. A substantial portion of our other operating revenue in 2016 resulted from a $5.0 million performance guarantee provided by the manager of the Wailea Beach Resort. Marriott, the hotel manager, provided the performance guarantee as operational support for our significant repositioning of the hotel. Additionally, other operating revenue in our Existing Portfolio increased in 2016 as compared to 2015 due to increases in resort fees, as well as attrition and cancellation revenue. Partially offsetting these increases to other operating revenue, our Existing Portfolio recognized decreases in parking revenue, telephone/internet revenue, and spa revenue. In addition, tenant lease revenue decreased as 2016 includes the renovation-related write-offs of a total of $0.2 million in above/below market lease intangibles at the Wailea Beach Resort, as compared to the write off of a total of $1.8 million in below market lease intangibles due to the terminations of two tenant leases at the Boston Park Plaza in 2015. Additionally, other operating revenue decreased during 2016 as compared to 2015 due to our recognition of $0.6 million in business interruption proceeds during 2015 for our Renaissance Harborplace related to a settled claim filed in response to the disruption caused at the hotel during the periods of civil unrest in Baltimore earlier in the year.
Other operating revenue increased $10.2 million, or 14.4%, in 2015 as compared to 2014 as follows:
The Wailea Beach Resort contributed an additional $5.7 million to other operating revenue in 2015. Other operating revenue generated by the Doubletree Guest Suites Times Square increased $0.3 million in 2015 as compared to 2014. In addition, BuyEfficient’s revenue decreased $1.1 million in 2015 as compared to 2014 due our sale of BuyEfficient in September 2015.
Other operating revenue in our 2014-2015 Existing Portfolio increased $5.4 million in 2015 as compared to 2014, primarily due to increases in parking revenue, tenant lease revenue (including the write-off of a total of $1.8 million in below market lease intangible liabilities due to the terminations of two tenant leases at the Boston Park Plaza during 2015), resort fees, cancellation revenue, attrition revenue and other miscellaneous revenue. In addition, we recognized $0.6 million
44
in business interruption insurance proceeds during the third quarter of 2015 for our Renaissance Harborplace related to a settled claim filed in response to the disruption caused at the hotel during the periods of civil unrest in Baltimore earlier in the year. These increases in other operating revenue in 2015 as compared to 2014 were partially offset by decreased telephone/internet revenue.
Hotel operating expenses. Hotel operating expenses, which are comprised of room, food and beverage, advertising and promotion, repairs and maintenance, utilities, franchise costs, property tax, ground lease and insurance, and other hotel operating expenses decreased $41.2 million, or 5.7%, in 2016 as compared to 2015 as follows:
The Two Sold Hotels decreased hotel operating expenses by $49.1 million in 2016 as compared to 2015.
Hotel operating expenses in our Existing Portfolio increased $7.9 million in 2016 as compared to 2015. This increase in hotel operating expenses is primarily related to the corresponding increased room revenue and food and beverage revenue. In addition, hotel operating expenses in our Existing Portfolio increased in 2016 as compared to 2015 due to the following increased expenses: food and beverage due to $1.5 million in severance incurred at several hotels in conjunction with the elimination of various outlets and banquet areas; both advertising and promotion and repairs and maintenance due to increased hotel payroll and related expenses in these two departments, including $0.1 million in severance incurred at one of our hotels; franchise costs due to the increase in revenues; and ground lease expense due to increased percentage rent at several of our hotels caused by the increase in revenues, as well as the expiration of a ground rent abatement given to the Hilton San Diego Bayfront. These increases were partially offset by decreased telephone/internet expense due to the corresponding decreased telephone/internet revenue, combined with decreased utilities as well as decreased Hawaii general excise tax due to lower revenue at the Wailea Beach Resort while undergoing a complete hotel repositioning. In addition, property taxes decreased in 2016 as compared to 2015 due to refunds received during 2016 at several of our hotels related to prior years, combined with lower current year assessments at our Chicago hotels.
Hotel operating expenses increased $54.4 million, or 8.1%, in 2015 as compared to 2014 as follows:
The Wailea Beach Resort contributed an additional $20.2 million to hotel operating expenses in 2015. Hotel operating expenses generated by the Doubletree Guest Suites Times Square decreased $0.7 million in 2015 as compared to 2014.
Hotel operating expenses in our 2014-2015 Existing Portfolio increased $34.9 million in 2015 as compared to 2014. This increase in hotel operating expenses is primarily related to the corresponding increased room revenue, food and beverage revenue, and parking revenue, as well as the changes stipulated by the USALI Eleventh Revised Edition. In addition, hotel operating expenses in our 2014-2015 Existing Portfolio increased in 2015 as compared to 2014 due to the following increased expenses: franchise costs due to the increase in revenues; advertising and promotion due to increased hotel sales and marketing departmental payroll and related expenses; property taxes due to increased assessments received at our Chicago hotels combined with the year-over-year effect of refunds and lower property tax assessments received at several of our hotels during 2014; and ground lease expense due to increased percentage rent at several of our hotels caused by the increase in revenues. These increases were partially offset by decreased telephone/internet expense due to the corresponding decreased telephone/internet revenue, combined with decreased repairs and maintenance expenses, utilities expenses and real estate tax appeal fees.
Other property-level expenses. Other property-level expenses increased $0.4 million, or 0.3%, in 2016 as compared to 2015 as follows:
Other property-level expenses in our Existing Portfolio increased $12.2 million in 2016 as compared to 2015, primarily due to increases in the following expenses caused by higher room revenue: payroll and related expenses; management fees; credit and collection expenses; and supplies. In addition, legal fees increased as the Company recognized $1.4 million in 2016 to terminate tenant leases at two hotels, and $0.4 million related to a hotel wage measure that increased payroll costs at one of our hotels. In addition, contract and professional fees also increased in 2016 as compared to 2015, partially offset by decreased employee training.
The Two Sold Hotels and BuyEfficient decreased other property-level expenses by $6.5 million and $5.3 million, respectively, in 2016 as compared to 2015.
45
Other property-level expenses increased $15.6 million, or 12.3%, in 2015 as compared to 2014 as follows:
The Wailea Beach Resort contributed an additional $3.9 million to other property-level expenses during 2015. Other property-level expenses generated by the Doubletree Guest Suites Times Square decreased $0.4 million in 2015 as compared to 2014. In addition, although we sold BuyEfficient in September 2015, other property-level expenses generated by BuyEfficient during 2015 increased $0.9 million as compared to 2014 due to $1.6 million in severance costs incurred coterminous with the sale.
Other property-level expenses in our 2014-2015 Existing Portfolio increased $11.2 million in 2015 as compared to 2014, primarily due to increases in the following expenses due to the increases in room and food and beverage revenue: payroll and related expenses; management fees; credit and collection expenses; contract and professional fees; supplies; employee recruitment, relations, relocation and training expenses; legal expenses; and licenses and permits.
Corporate overhead expense. Corporate overhead expense decreased $7.3 million, or 22.0%, in 2016 as compared to 2015, primarily due to decreased payroll and related expenses ($4.2 million), deferred stock compensation expense ($2.8 million), legal expense ($0.3 million), contract and professional fees ($0.3 million) and donations ($0.1 million). The decreases in payroll and related costs and deferred stock compensation expense were primarily due to $6.9 million in costs recognized in January 2015 related to the departure of our former chief executive officer. These decreases were partially offset by increased bad debt expense ($0.2 million), due diligence expense ($0.1 million), and employee relations, recruitment and relocation expense ($0.1 million). Bad debt expense increased in 2016 as compared to 2015 as 2015 includes the recovery of $0.2 million in expense as noted below in the discussion regarding 2015 as compared to 2014.
Corporate overhead expense increased $4.6 million, or 16.0%, in 2015 as compared to 2014, primarily due to increased payroll and related expenses ($5.1 million) and deferred stock compensation expense ($0.6 million). These increases were due to $6.9 million in costs related to the departure of our former chief executive officer in January 2015, partially offset by the reversal of some deferred compensation expenses. A portion of deferred stock compensation decreased in 2015 as compared to 2014 due to employee turnover. In accordance with the Compensation – Stock Compensation Topic of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”), we reversed the deferred stock compensation expense previously recorded during 2015 for terminated employees. These increases to corporate overhead were partially offset by decreases in due diligence expense ($0.3 million), legal expense ($0.3 million), bad debt expense ($0.2 million), contract and professional fees ($0.2 million) and employee relations expense ($0.1 million). Bad debt expense decreased in 2015 as compared to 2014 due to the recovery of $0.2 million in bad debt expense which was originally recognized during the fourth quarter of 2012, as we reserved the entire $0.2 million outstanding balance of a subordinate note secured by a boutique hotel known as the Twelve Atlantic Station in Atlanta, Georgia, since the note was in default (see the discussion below regarding interest and other income).
Depreciation and amortization expense. Depreciation and amortization expense decreased $1.7 million, or 1.0%, in 2016 as compared to 2015 as follows:
The Two Sold Hotels and BuyEfficient decreased depreciation and amortization by $7.0 million and $0.7 million, respectively, in 2016 as compared to 2015.
Depreciation and amortization expense in our Existing Portfolio increased $6.0 million in 2016 as compared to 2015, due to additional depreciation recognized on hotel renovations and purchases of FF&E for our Existing Portfolio. This increase was partially offset by a $0.4 million year-over-year decrease in our write-off of in-place lease intangibles; we recognized $0.3 million in renovation-related write-offs of three in-place lease intangibles in 2016 as compared to $0.7 million due to the termination of two tenant leases in 2015.
Depreciation and amortization expense increased $8.9 million, or 5.7%, in 2015 as compared to 2014 as follows:
The Wailea Beach Resort contributed an additional $5.0 million to depreciation and amortization in 2015. Depreciation and amortization expense generated by the Doubletree Guest Suites Times Square decreased $0.1 million in 2015 as compared to 2014. In addition, BuyEfficient’s depreciation and amortization expense decreased $0.2 million in 2015 as compared to 2014.
46
Depreciation and amortization expense in our 2014-2015 Existing Portfolio increased $4.2 million in 2015 as compared to 2014, which includes the write-off of a total of $0.7 million related to in-place lease intangibles due to the termination of two tenant leases at one of our hotels during 2015. In addition, depreciation and amortization increased due to additional depreciation recognized on hotel renovations and purchases of FF&E for our 2014-2015 Existing Portfolio.
Interest and other income. Interest and other income totaled $1.8 million in 2016, $3.9 million in 2015 and $3.5 million in 2014. In 2016, we recognized $1.1 million in interest and miscellaneous income and $0.7 million in energy rebates due to energy efficient renovations at our hotels.
In 2015, we recognized $1.6 million in interest income on the Preferred Equity Investment, which we sold in July 2015 (see the discussion regarding “Income from discontinued operations, net of tax”). In 2015, we also recognized $0.9 million in energy rebates due to energy efficient renovations at our hotels, and $0.4 million in other interest and miscellaneous income. In addition, in 2015, we recognized a $0.9 million gain due to our receipt of a payment from an unsecured note on a boutique hotel known as the Twelve Atlantic Station in Atlanta, Georgia. We originally purchased a $5.0 million subordinate note secured by the Twelve Atlantic Station in 2010 for $0.5 million. As we did not consider the expected cash flows from the loan to be reasonably probable and estimable, we accounted for the subordinate note using the cost recovery method until we wrote off the remaining $0.2 million balance to bad debt expense in the fourth quarter of 2012. In June 2014, the subordinate note was restructured into a new $1.125 million 7.0% unsecured note maturing at the earlier of June 2015 or upon disposition of the Twelve Atlantic Station. We continued to account for the note receivable using the cost recovery method as we were uncertain as to its collectability. In May 2015, we received the entire $1.125 million note receivable balance. We reversed $0.2 million in bad debt expense, and recognized a $0.9 million gain which is included in interest and other income.
In 2014, we recognized $2.8 million in interest 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.
Interest expense. Interest expense is as follows (in thousands):
|
|
|
2016 |
|
2015 |
|
2014 |
|
|||
|
Interest expense on debt and capital lease obligations |
|
$ |
49,509 |
|
$ |
63,677 |
|
$ |
70,067 |
|
|
Gain on derivatives, net |
|
|
(1,426) |
|
|
(309) |
|
|
(529) |
|
|
Amortization of deferred financing fees |
|
|
2,200 |
|
|
3,148 |
|
|
2,777 |
|
|
Total interest expense |
|
$ |
50,283 |
|
$ |
66,516 |
|
$ |
72,315 |
|
Interest expense decreased $16.2 million, or 24.4%, in 2016 as compared to 2015. Interest expense on our debt and capital lease obligations decreased $14.2 million in 2016 as compared to 2015, as a result of lower balances due to monthly amortization, loan repayments during 2015 and 2016, and lower interest rates from our 2015 and 2016 debt transactions. Partially offsetting these decreases, interest expense on our debt and capital lease obligations increased due to higher interest rates on our variable rate debt, as well as interest on our two unsecured term loans entered into October 2015 and January 2016. Interest expense related to the amortization of deferred financing fees decreased $0.9 million in 2016 as compared to 2015 primarily due to the accelerated amortization of $0.5 million of deferred financing fees related to our prior credit facility during the second quarter of 2015, as well as to lower amortization resulting from our loan repayments during 2015 and 2016. Interest expense in 2016 further decreased as compared to 2015 due to a $1.4 million gain we recognized on our interest rate derivatives during 2016 as compared to a $0.3 million gain recognized during 2015.
Interest expense decreased $5.8 million, or 8.0%, in 2015 as compared to 2014. The decrease in interest expense in 2015 as compared to 2014 is due to a $6.4 million decrease in expense on our debt and capital lease obligations, resulting from lower balances due to monthly amortization, loan repayments during 2015, and lower interest rates from both 2015 and 2014 debt transactions. Partially offsetting the decrease in interest expense caused by our debt and capital lease obligations, interest expense increased $0.2 million in 2015 as compared by 2014 due to a decrease in the gain we recorded on our interest rate derivatives, combined with a $0.4 million increase in the amortization of deferred financing fees.
Our weighted average interest rate per annum, including our variable-rate debt obligations, was approximately 4.29% at December 31, 2016, 4.45% at December 31, 2015, and 4.50% at December 31, 2014. At December 31, 2016, 2015 and 2014, approximately 76.2%, 79.5% and 71.6%, respectively, of our outstanding notes payable had fixed interest rates, including the effects of interest rate swap agreements.
47
For a discussion regarding our 2016, 2015 and 2014 debt transactions, see the discussion included in “Liquidity and Capital Resources—Debt.”
Loss on extinguishment of debt. Loss on extinguishment of debt totaled $0.3 million in 2016, $3.0 million in 2015 and $4.6 million in 2014. In 2016, we recognized losses of $0.1 million and $0.2 million related to our repayments of debt secured by the Boston Park Plaza and the Renaissance Orlando at SeaWorld®, respectively, as well as a nominal loss related to our repayment of debt secured by the Embassy Suites Chicago.
During 2015, we recognized a loss on extinguishment of debt of $2.9 million related to our repayment of debt secured by the Doubletree Guest Suites Times Square, and a total of $0.1 million related to our repayments of debt secured by six of our hotels: the Marriott Houston; the Marriott Park City; the Marriott Philadelphia; the Marriott Tysons Corner; the Renaissance Harborplace; and the Hilton North Houston.
In conjunction with our 2014 financing transactions regarding the debt secured by the Hilton San Diego Bayfront, the JW Marriott New Orleans and the Embassy Suites La Jolla, 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.
Gain on sale of assets. Gain on sale of assets totaled $18.4 million in 2016, $226.2 million in 2015 and zero in 2014. None of these sales represented a strategic shift that had a major impact on our business plan or our primary markets; therefore, none of these sales qualified as a discontinued operation. During 2016, we sold the leasehold interest in the Sheraton Cerritos for net proceeds of $41.2 million, and recognized a net gain on the sale of $18.2 million. In addition, we sold an undeveloped parcel of land for net proceeds of $0.4 million, and recognized a net gain on the sale of $0.2 million.
During 2015, we sold BuyEfficient for net proceeds of $26.4 million, and recognized a net gain on the sale of $11.7 million. In addition, during 2015, we sold our interests in the Doubletree Guest Suites Times Square for net proceeds of $522.7 million, and recognized a net gain of $214.5 million.
Income tax benefit (provision). Income tax benefit (provision) totaled a benefit of $0.6 million in 2016, a provision of $1.4 million in 2015 and a provision of $0.2 million in 2014. We lease our hotels to the TRS Lessee and its subsidiaries, which are subject to federal and state income taxes. In addition, the REIT and Operating Partnership may also be subject to various state and local income taxes. As part of our ongoing evaluations of our uncertain tax positions, during 2016, we reversed a $1.5 million income tax accrual that we previously recorded during 2013, plus $0.1 million in accrued interest, through the 2016 tax year. The reversal was due to the expiration of the statute of limitations for the 2012 tax year. This income tax benefit was partially offset as we recognized combined federal and state income tax expense of $1.0 million based on 2016 projected taxable income net of operating loss carryforwards for our taxable entities.
During 2015, we recognized combined federal and state income tax expense of $0.7 million related to our sale of BuyEfficient. In addition, we recognized $0.7 million based on 2015 projected taxable income net of operating loss carryforwards for our taxable entities.
During 2014, we 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 our taxable entities.
Income from discontinued operations, net of tax. Though we have not sold any hotels or businesses that qualified as a discontinued operation since 2013, we recognized items related to prior year sales as follows (in thousands):
|
|
|
2016 |
|
2015 |
|
2014 |
|
|||
|
Operating expenses |
|
$ |
— |
|
$ |
— |
|
$ |
(350) |
|
|
Income tax provision |
|
|
— |
|
|
(105) |
|
|
— |
|
|
Gain on sale of hotels and other assets, net |
|
|
— |
|
|
16,000 |
|
|
5,199 |
|
|
Income from discontinued operations, net of tax |
|
$ |
— |
|
$ |
15,895 |
|
$ |
4,849 |
|
48
Income from discontinued operations, net of tax for the year ended December 31, 2015 includes adjustments related to our 2013 sale of the Rochester Portfolio. Upon sale of the Rochester Portfolio, we retained the Preferred Equity Investment, and provided the buyer of the Rochester Portfolio with a $3.7 million working capital loan, resulting in a $28.7 million deferred gain on the sale. The gain was to be deferred until the Preferred Equity Investment was either redeemed or sold and the working capital loan was repaid. Both the Preferred Equity Investment and the working capital loan were carried net of deferred gains, resulting in zero balances on our balance sheet.
In July 2015, we sold the Preferred Equity Investment and settled the working capital loan for an aggregate payment of $16.0 million, plus accrued interest. We recognized a $16.0 million gain on the sale of the Rochester Portfolio, along with related income tax expense of $0.1 million, in discontinued operations, net of tax during the year ended December 31, 2015, as these additional sales proceeds could not be recognized until realized.
Income from discontinued operations, net of tax for the year ended December 31, 2014 includes two adjustments also 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 our gain 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, net of tax 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 related 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 when we sold the Rochester Portfolio in January 2013 related to these potential future costs. During the second quarter of 2014, we accrued an additional $1.8 million in accordance with the Contingencies Topic of the FASB ASC, which is included in discontinued operations, net of tax for the year ended December 31, 2014. The contingency was paid in full by the end of the first quarter of 2015.
Income from discontinued operations, net of tax 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 consolidated joint ventures attributable to noncontrolling interests. Income from consolidated joint ventures attributable to noncontrolling interests totaled $6.5 million in 2016, $8.2 million in 2015 and $6.7 million in 2014. Consistent with the Presentation Topic of the FASB ASC, our net income for the years ended December 31, 2016, 2015 and 2014 includes 100% of the net income generated by the entity that owns the Hilton San Diego Bayfront. The outside 25.0% interest in the entity that owns the Hilton San Diego Bayfront earned net income of $6.5 million, $8.1 million and $6.7 million for the years ended December 31, 2016, 2015 and 2014, respectively. In addition, prior to our sale of the Doubletree Guest Suites Times Square in December 2015, income from consolidated joint ventures attributable to noncontrolling interests included a nominal amount of preferred dividends earned by preferred investors in the entity that owned the Doubletree Guest Suites Times Square, including related administrative fees.
Preferred stock dividends and redemption charge. Preferred stock dividends and redemption charge were incurred as follows (in thousands):
|
|
|
2016 |
|
2015 |
|
2014 |
|
|||
|
Series D preferred stock |
|
$ |
2,428 |
|
$ |
9,200 |
|
$ |
9,200 |
|
|
Series E preferred stock |
|
|
6,460 |
|
|
— |
|
|
— |
|
|
Series F preferred stock |
|
|
3,024 |
|
|
— |
|
|
— |
|
|
Redemption charge on Series D preferred stock |
|
|
4,052 |
|
|
— |
|
|
— |
|
|
|
|
$ |
15,964 |
|
$ |
9,200 |
|
$ |
9,200 |
|
49
We redeemed all 4,600,000 shares of our Series D preferred stock in April 2016. We recorded a redemption charge of $4.1 million during the second quarter of 2016 related to the original issuance costs of these shares, which were previously included in additional paid in capital. In March 2016, we issued 4,600,000 shares of Series E preferred stock, and in May 2016, we issued 3,000,000 shares of Series F preferred stock.
Non-GAAP Financial Measures. We use the following “non-GAAP financial measures” that we believe are useful to investors as key supplemental measures of our operating performance: EBITDA, Adjusted EBITDA, FFO attributable to common stockholders, Adjusted FFO attributable to common stockholders and Comparable Portfolio revenues. These measures should not be considered in isolation or as a substitute for measures of performance in accordance with GAAP. EBITDA, Adjusted EBITDA, FFO attributable to common stockholders, Adjusted FFO attributable to common stockholders and Comparable Portfolio revenues, as calculated by us, may not be comparable to other companies that do not define such terms exactly as the Company. These non-GAAP measures are used in addition to and in conjunction with results presented in accordance with GAAP. They should not be considered as alternatives to operating profit, cash flow from operations, or any other operating performance measure prescribed by GAAP. These non-GAAP financial measures reflect additional ways of viewing our operations that we believe, when viewed with our GAAP results and the reconciliations to the corresponding GAAP financial measures, provide a more complete understanding of factors and trends affecting our business than could be obtained absent this disclosure. For example, we believe that Comparable Portfolio revenues are useful to both us and investors in evaluating our operating performance by removing the impact of non-hotel results such as BuyEfficient (which we sold in September 2015) and the amortization of favorable and unfavorable tenant lease contracts. We also believe that our use of Comparable Portfolio revenues is useful to both us and our investors as it facilitates the comparison of our operating results from period to period by removing fluctuations caused by any acquisitions or dispositions, as well as by those hotels that we classify as held for sale, those hotels that are undergoing a material renovation or repositioning and those hotels whose room counts have materially changed during either the current or prior year. We strongly encourage investors to review our financial information in its entirety and not to rely on a single financial measure.
EBITDA and Adjusted EBITDA are commonly used measures of performance in many industries. We believe EBITDA and Adjusted EBITDA are useful to investors in evaluating our operating performance because these measures help investors evaluate and compare the results of our operations from period to period by removing the impact of our capital structure (primarily interest expense) and our asset base (primarily depreciation and amortization) from our operating results. We also believe the use of EBITDA and Adjusted EBITDA facilitate comparisons between us and other lodging REITs, hotel owners who are not REITs and other capital-intensive companies. In addition, certain covenants included in our indebtedness use EBITDA as a measure of financial compliance. We also use EBITDA and Adjusted EBITDA as measures in determining the value of hotel acquisitions and dispositions.
Historically, we have adjusted EBITDA when evaluating our performance because we believe that the exclusion of certain additional items described below provides useful information to investors regarding our operating performance, and that the presentation of Adjusted EBITDA, when combined with the primary GAAP presentation of net income, is beneficial to an investor’s complete understanding of our operating performance. We adjust EBITDA for the following items, which may occur in any period, and refer to this measure as Adjusted EBITDA:
|
· |
Amortization of deferred stock compensation: we exclude the noncash expense incurred with the amortization of deferred stock compensation as this expense is based on historical stock prices at the date of grant to our corporate employees and does not reflect the underlying performance of our hotels. |
|
· |
Amortization of favorable and unfavorable contracts: we exclude the noncash amortization of the favorable management contract asset recorded in conjunction with our acquisition of the Hilton Garden Inn Chicago Downtown/Magnificent Mile, along with the favorable and unfavorable tenant lease contracts, as applicable, recorded in conjunction with our acquisitions of the Boston Park Plaza, the Hilton Garden Inn Chicago Downtown/Magnificent Mile, the Hilton New Orleans St. Charles, the Hyatt Regency San Francisco and the Wailea Beach Resort. We exclude the noncash amortization of favorable and unfavorable contracts because it is based on historical cost accounting and is of lesser significance in evaluating our actual performance for the current period. |
|
· |
Ground rent adjustments: we exclude the noncash expense incurred from straight-lining our ground lease obligations as this expense does not reflect the actual rent amounts due to the respective lessors in the current |
50
period and is of lesser significance in evaluating our actual performance for the current period. We do, however, include an adjustment for the cash ground lease expense recorded on the Hyatt Centric Chicago Magnificent Mile’s building lease. Upon acquisition of this hotel, we determined that the building lease was a capital lease, and, therefore, we include a portion of the capital lease payment each month in interest expense. We include an adjustment for ground lease expense on capital leases in order to more accurately reflect the actual rent due to the hotel’s lessor in the current period, as well as the operating performance of the Hyatt Centric Chicago Magnificent Mile. |
|
· |
Real estate transactions: we exclude the effect of gains and losses on the disposition of depreciable assets because we believe that including them in Adjusted EBITDA is not consistent with reflecting the ongoing performance of our assets. In addition, material gains or losses from the depreciated value of the disposed assets could be less important to investors given that the depreciated asset value often does not reflect its market value. |
|
· |
Gains or losses from debt transactions: we exclude the effect of finance charges and premiums associated with the extinguishment of debt, including the acceleration of deferred financing costs from the original issuance of the debt being redeemed or retired because, like interest expense, their removal helps investors evaluate and compare the results of our operations from period to period by removing the impact of our capital structure. |
|
· |
Acquisition costs: under GAAP, costs associated with completed acquisitions that meet the definition of a business in accordance with the Business Combinations Topic of the FASB ASC are expensed in the year incurred. We exclude the effect of these costs because we believe they are not reflective of the ongoing performance of the Company or our hotels. |
|
· |
Noncontrolling interests: we deduct the noncontrolling partner’s pro rata share of any EBITDA adjustments related to our consolidated Hilton San Diego Bayfront partnership, as well as any preferred dividends earned by preferred investors in an entity that owned the Doubletree Guest Suites Times Square, including related administrative fees, prior to the hotel’s sale in December 2015. |
|
· |
Cumulative effect of a change in accounting principle: from time to time, the FASB promulgates new accounting standards that require the consolidated statement of operations to reflect the cumulative effect of a change in accounting principle. We exclude these one-time adjustments, which include the accounting impact from prior periods, because they do not reflect our actual performance for that period. |
|
· |
Impairment losses: we exclude the effect of impairment losses because we believe that including them in Adjusted EBITDA is not consistent with reflecting the ongoing performance of our remaining assets. In addition, we believe that impairment charges, which are based off of historical cost account values, are similar to gains (losses) on dispositions and depreciation expense, both of which are also excluded from Adjusted EBITDA. |
|
· |
Other adjustments: we exclude other adjustments that we believe are outside the ordinary course of business because we do not believe these costs reflect our actual performance for that period and/or the ongoing operations of our hotels. Such items may include: executive severance costs; lawsuit settlement costs; prior year property tax assessments or credits; property-level restructuring, severance and management transition costs; lease terminations; and any gains or losses we have recognized on sales or redemptions of assets other than real estate investments. |
51
The following table reconciles our net income to EBITDA and Adjusted EBITDA for our total portfolio for the years ended December 31, 2016, 2015 and 2014 (in thousands):
|
|
|
2016 |
|
2015 |
|
2014 |
|
|||
|
Net income |
|
$ |
140,677 |
|
$ |
355,519 |
|
$ |
87,939 |
|
|
Operations held for investment: |
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
163,016 |
|
|
164,716 |
|
|
155,845 |
|
|
Amortization of lease intangibles |
|
|
252 |
|
|
3,791 |
|
|
4,113 |
|
|
Interest expense |
|
|
50,283 |
|
|
66,516 |
|
|
72,315 |
|
|
Income tax (benefit) provision |
|
|
(616) |
|
|
1,434 |
|
|
179 |
|
|
Noncontrolling interests: |
|
|
|
|
|
|
|
|
|
|
|
Income from consolidated joint ventures attributable to noncontrolling interests |
|
|
(6,480) |
|
|
(8,164) |
|
|
(6,708) |
|
|
Depreciation and amortization |
|
|
(3,480) |
|
|
(3,432) |
|
|
(3,335) |
|
|
Interest expense |
|
|
(1,684) |
|
|
(1,537) |
|
|
(2,020) |
|
|
Discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
Income tax provision |
|
|
— |
|
|
105 |
|
|
— |
|
|
EBITDA |
|
|
341,968 |
|
|
578,948 |
|
|
308,328 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations held for investment: |
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred stock compensation |
|
|
7,157 |
|
|
6,536 |
|
|
6,221 |
|
|
Amortization of favorable and unfavorable contracts, net |
|
|
394 |
|
|
(1,623) |
|
|
166 |
|
|
Noncash straight-line lease expense |
|
|
1,878 |
|
|
1,987 |
|
|
2,021 |
|
|
Capital lease obligation interest — cash ground rent |
|
|
(1,404) |
|
|
(1,404) |
|
|
(1,404) |
|
|
Gain on sale of assets, net |
|
|
(18,422) |
|
|
(226,234) |
|
|
(93) |
|
|
Severance costs associated with sale of BuyEfficient |
|
|
— |
|
|
1,636 |
|
|
— |
|
|
Loss on extinguishment of debt |
|
|
284 |
|
|
2,964 |
|
|
4,638 |
|
|
Gain on redemption of note receivable |
|
|
— |
|
|
(939) |
|
|
— |
|
|
Closing costs — completed acquisitions |
|
|
— |
|
|
— |
|
|
541 |
|
|
Prior year property tax adjustments, net |
|
|
(3,971) |
|
|
(865) |
|
|
(3,305) |
|
|
Property-level restructuring, severance and management transition costs |
|
|
1,578 |
|
|
1,219 |
|
|
675 |
|
|
Lease termination costs |
|
|
1,000 |
|
|
300 |
|
|
— |
|
|
Costs associated with CEO severance |
|
|
— |
|
|
5,257 |
|
|
— |
|
|
Noncontrolling interests: |
|
|
|
|
|
|
|
|
|
|
|
Noncash straight-line lease expense |
|
|
(450) |
|
|
(450) |
|
|
(450) |
|
|
Loss on extinguishment of debt |
|
|
— |
|
|
— |
|
|
(133) |
|
|
Prior year property tax adjustments, net |
|
|
— |
|
|
— |
|
|
696 |
|
|
Discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of assets, net |
|
|
— |
|
|
(16,000) |
|
|
(5,199) |
|
|
|
|
|
(11,956) |
|
|
(227,616) |
|
|
4,374 |
|
|
Adjusted EBITDA |
|
$ |
330,012 |
|
$ |
351,332 |
|
$ |
312,702 |
|
Adjusted EBITDA was $330.0 million in 2016, as compared to $351.3 million in 2015 and $312.7 million in 2014.
Adjusted EBITDA decreased $21.3 million in 2016 as compared to 2015 primarily due to the sales of the Sheraton Cerritos, the Doubletree Guest Suites Times Square and BuyEfficient in May 2016, December 2015 and September 2015, respectively. In addition, Adjusted EBITDA was negatively impacted during 2016 by decreased earnings generated by our Houston hotels due to weak market conditions and the loss of contract business, along with decreased earnings generated by the Hilton Times Square due to additional hotel supply in New York City, by the Boston Park Plaza and the Wailea Beach Resort due to complete hotel repositionings, and by our Hilton San Diego Bayfront due to higher ground lease expense. Partially offsetting these decreases, Adjusted EBITDA increased due to strong market conditions and expense management at the Renaissance Orlando at SeaWorld®, Renaissance Washington DC, Hyatt Regency San Francisco and our Los Angeles hotels.
Adjusted EBITDA increased $38.6 million in 2015 as compared to 2014 in part due to additional earnings generated by the one hotel we acquired in 2014 (the Wailea Beach Resort acquired in July 2014), combined with an increase in
52
earnings at the four 2014 renovation hotels, partially offset by a decrease in earnings at the Boston Park Plaza and the Wailea Beach Resort due to complete hotel repositionings during all or part of 2015.
We believe that the presentation of FFO attributable to common stockholders provides useful information to investors regarding our operating performance because it is a measure of our operations without regard to specified noncash items such as real estate depreciation and amortization, amortization of lease intangibles, any real estate impairment loss and any gain or loss on sale of real estate assets, all of which are based on historical cost accounting and may be of lesser significance in evaluating our current performance. Our presentation of FFO attributable to common stockholders conforms to the National Association of Real Estate Investment Trusts’ (“NAREIT”) definition of “FFO applicable to common shares.” Our presentation may not be comparable to FFO reported by other REITs that do not define the terms in accordance with the current NAREIT definition, or that interpret the current NAREIT definition differently than we do.
We also present Adjusted FFO attributable to common stockholders when evaluating our operating performance because we believe that the exclusion of certain additional items described below provides useful supplemental information to investors regarding our ongoing operating performance, and may facilitate comparisons of operating performance between periods and our peer companies. We adjust FFO attributable to common stockholders for the following items, which may occur in any period, and refer to this measure as Adjusted FFO attributable to common stockholders:
|
· |
Amortization of favorable and unfavorable contracts: we exclude the noncash amortization of the favorable management contract asset recorded in conjunction with our acquisition of the Hilton Garden Inn Chicago Downtown/Magnificent Mile, along with the favorable and unfavorable tenant lease contracts, as applicable, recorded in conjunction with our acquisitions of the Boston Park Plaza, the Hilton Garden Inn Chicago Downtown/Magnificent Mile, the Hilton New Orleans St. Charles, the Hyatt Regency San Francisco and the Wailea Beach Resort. We exclude the noncash amortization of favorable and unfavorable contracts because it is based on historical cost accounting and is of lesser significance in evaluating our actual performance for the current period. |
|
· |
Noncash ground rent adjustments: we exclude the noncash expense incurred from straight-lining our ground lease obligations as this expense does not reflect the actual rent amounts due to the respective lessors in the current period and is of lesser significance in evaluating our actual performance for the current period. |
|
· |
Gains or losses from debt transactions: we exclude the effect of finance charges and premiums associated with the extinguishment of debt, including the acceleration of deferred financing costs from the original issuance of the debt being redeemed or retired, as well as the noncash gains or losses on our derivatives. We believe that these items are not reflective of our ongoing finance costs. |
|
· |
Acquisition costs: under GAAP, costs associated with completed acquisitions that meet the definition of a business in accordance with the Business Combinations Topic of the FASB ASC are expensed in the year incurred. We exclude the effect of these costs because we believe they are not reflective of the ongoing performance of the Company or our hotels. |
|
· |
Impairment losses: we exclude the effect of non-real estate impairment losses because we believe that including them in Adjusted FFO attributable to common stockholders is not consistent with reflecting the ongoing performance of our remaining assets. |
|
· |
Noncontrolling interests: we deduct the noncontrolling partner’s pro rata share of any FFO adjustments related to our consolidated Hilton San Diego Bayfront partnership, as well as any preferred dividends earned by preferred investors in an entity that owned the Doubletree Guest Suites Times Square, including related administrative fees, prior to the hotel’s sale in December 2015. |
|
· |
Other adjustments: we exclude other adjustments that we believe are outside the ordinary course of business because we do not believe these costs reflect our actual performance for that period and/or the ongoing operations of our hotels. Such items may include: executive severance costs; lawsuit settlement costs; prior year property tax assessments or credits; property-level restructuring, severance and management transition costs; lease terminations; any gains or losses we have recognized on redemptions of assets other than real estate |
53
investments; and income tax benefits or provisions associated with the application of net operating loss carryforwards, uncertain tax positions or with the sale of assets other than real estate investments. |
The following table reconciles our net income to FFO attributable to common stockholders and Adjusted FFO attributable to common stockholders for our total portfolio for the years ended December 31, 2016, 2015 and 2014 (in thousands):
|
|
|
2016 |
|
2015 |
|
2014 |
|
|||
|
Net income |
|
$ |
140,677 |
|
$ |
355,519 |
|
$ |
87,939 |
|
|
Preferred stock dividends and redemption charge |
|
|
(15,964) |
|
|
(9,200) |
|
|
(9,200) |
|
|
Operations held for investment: |
|
|
|
|
|
|
|
|
|
|
|
Real estate depreciation and amortization |
|
|
162,431 |
|
|
163,361 |
|
|
154,253 |
|
|
Amortization of lease intangibles |
|
|
252 |
|
|
3,791 |
|
|
4,113 |
|
|
Gain on sale of assets, net |
|
|
(18,422) |
|
|
(226,234) |
|
|
(93) |
|
|
Noncontrolling interests: |
|
|
|
|
|
|
|
|
|
|
|
Income from consolidated joint ventures attributable to noncontrolling interests |
|
|
(6,480) |
|
|
(8,164) |
|
|
(6,708) |
|
|
Real estate depreciation and amortization |
|
|
(3,480) |
|
|
(3,432) |
|
|
(3,335) |
|
|
Discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of assets, net |
|
|
— |
|
|
(16,000) |
|
|
(5,199) |
|
|
FFO attributable to common stockholders |
|
|
259,014 |
|
|
259,641 |
|
|
221,770 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations held for investment: |
|
|
|
|
|
|
|
|
|
|
|
Write-off of deferred financing fees |
|
|
— |
|
|
455 |
|
|
— |
|
|
Amortization of favorable and unfavorable contracts, net |
|
|
394 |
|
|
(1,623) |
|
|
166 |
|
|
Noncash straight-line lease expense |
|
|
1,878 |
|
|
1,987 |
|
|
2,021 |
|
|
Noncash interest related to gain on derivatives, net |
|
|
(1,426) |
|
|
(309) |
|
|
(529) |
|
|
Loss on extinguishment of debt |
|
|
284 |
|
|
2,964 |
|
|
4,638 |
|
|
Gain on redemption of note receivable |
|
|
— |
|
|
(939) |
|
|
— |
|
|
Closing costs — completed acquisitions |
|
|
— |
|
|
— |
|
|
541 |
|
|
Prior year property tax adjustments, net |
|
|
(3,971) |
|
|
(865) |
|
|
(3,305) |
|
|
Property-level restructuring, severance and management transition costs |
|
|
1,578 |
|
|
1,219 |
|
|
675 |
|
|
Lease termination costs |
|
|
1,000 |
|
|
300 |
|
|
— |
|
|
Income tax benefit related to prior years |
|
|
(1,596) |
|
|
— |
|
|
(762) |
|
|
Preferred stock redemption charge |
|
|
4,052 |
|
|
— |
|
|
— |
|
|
Costs associated with CEO severance |
|
|
— |
|
|
5,257 |
|
|
— |
|
|
Amortization of deferred stock compensation associated with CEO severance |
|
|
— |
|
|
1,623 |
|
|
— |
|
|
Severance costs associated with sale of BuyEfficient |
|
|
— |
|
|
1,636 |
|
|
— |
|
|
Income tax provision related to gain on sale of BuyEfficient |
|
|
— |
|
|
720 |
|
|
— |
|
|
Noncontrolling interests: |
|
|
|
|
|
|
|
|
|
|
|
Noncash straight-line lease expense |
|
|
(450) |
|
|
(450) |
|
|
(450) |
|
|
Noncash interest related to loss on derivative, net |
|
|
— |
|
|
(3) |
|
|
— |
|
|
Loss on extinguishment of debt |
|
|
— |
|
|
— |
|
|
(133) |
|
|
Prior year property tax adjustments, net |
|
|
— |
|
|
— |
|
|
696 |
|
|
Discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
Income tax provision |
|
|
— |
|
|
105 |
|
|
— |
|
|
|
|
|
1,743 |
|
|
12,077 |
|
|
3,558 |
|
|
Adjusted FFO attributable to common stockholders |
|
$ |
260,757 |
|
$ |
271,718 |
|
$ |
225,328 |
|
Adjusted FFO attributable to common stockholders was $260.8 million in 2016 as compared to $271.7 million in 2015 and $225.3 million in 2014.
Adjusted FFO attributable to common stockholders decreased $11.0 million in 2016 as compared to 2015 primarily due to the same reasons noted in the discussion regarding Adjusted EBITDA. These decreases in earnings were partially offset by a decrease in interest expense on our debt and capital lease obligations due to our 2015 repayments of six separate
54
mortgages and refinancing of one mortgage with a lower interest rate unsecured term loan, as well as our 2016 repayments of two mortgages and refinancing of one mortgage with a lower interest rate unsecured term loan.
Adjusted FFO attributable to common stockholders increased $46.4 million in 2015 as compared to 2014 due in part to additional earnings generated by the one hotel we acquired in 2014 (the Wailea Beach Resort acquired in July 2014), combined with an increase in earnings at the four 2014 renovation hotels, as well as a decrease in interest expense, partially offset by decreases in earnings at both the Boston Park Plaza and the Wailea Beach Resort, due to complete hotel repositionings during all or part of 2015.
Investing Activities
The following table summarizes our total portfolio and room data from January 1, 2014 through December 31, 2016, adjusted for the hotels acquired and sold during the respective periods.
|
|
|
|
|
|
|
|
|
|
|
|
2016 |
|
2015 |
|
2014 |
|
|
Portfolio Data—Hotels |
|
|
|
|
|
|
|
|
Number of hotels—beginning of period |
|
29 |
|
30 |
|
29 |
|
|
Add: Acquisitions |
|
— |
|
— |
|
1 |
|
|
Less: Dispositions |
|
(1) |
|
(1) |
|
— |
|
|
Number of hotels—end of period |
|
28 |
(1) |
29 |
|
30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
2016 |
|
2015 |
|
2014 |
|
|
Portfolio Data—Rooms |
|
|
|
|
|
|
|
|
Number of rooms—beginning of period |
|
13,845 |
|
14,303 |
|
13,744 |
|
|
Add: Acquisitions |
|
— |
|
— |
|
544 |
|
|
Add: Room expansions, net |
|
24 |
|
10 |
|
15 |
|
|
Less: Dispositions |
|
(203) |
|
(468) |
|
— |
|
|
Number of rooms—end of period |
|
13,666 |
|
13,845 |
|
14,303 |
|
|
Average rooms per hotel—end of period |
|
488 |
|
477 |
|
477 |
|
|
(1) |
We classified one of the 28 hotels owned as of December 31, 2016 as held for sale, and subsequently sold the hotel in February 2017. |
Acquisitions. We did not acquire any hotels during either 2016 or 2015. In 2014, we acquired the Wailea Beach Resort in Maui, Hawaii 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).
In addition to the above noted hotel, in 2016, we purchased the air rights associated with our Renaissance Harborplace for $2.4 million, resulting in a $2.4 million intangible asset with an indefinite life. In 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 ATM Agreements, combined with cash on hand. Prior to our acquisition, the land was leased to us by a third party.
While our primary focus is on acquiring branded, urban and resort upper upscale hotels, our acquisition program is aimed at generating attractive risk-adjusted returns on our investment dollars, and therefore we may target lodging assets outside of the typical branded, urban, upper upscale profile represented by our Existing Portfolio in order to capitalize on opportunities which may arise. We intend to select the brands and operators for our hotels that we believe will lead to the highest returns. Additionally, the scope of our acquisitions program may include large hotel portfolios or hotel loans. Future acquisitions, if any, may be funded with cash on hand, by our issuance of additional debt or equity securities, including our common and preferred OP units provided that our stock price is at an attractive level, by draws on our $400.0 million senior unsecured credit facility, or by proceeds received from sales of existing assets.
Dispositions. We have from time to time divested of assets that no longer fit our target profile, will not offer long-term returns in excess of our cost of capital, will achieve a sale price in excess of our internal valuation, or that have high risk relative to their anticipated returns. In 2016, we sold the 203-room Sheraton Cerritos for net proceeds of $41.2 million,
55
and recognized a net gain on the sale of $18.2 million. The sale of the leasehold interest in the Sheraton Cerritos did not represent a strategic shift that had a major impact on our business plan or our primary markets, and therefore, did not qualify as a discontinued operation.
In 2015, one of our subsidiaries sold 100% of its membership interests in Times Square Hotel Sub, LLC, the indirect holder of 100% of the leasehold interests through which the Doubletree Guest Suites Times Square located in New York City, New York, is operated. We received net proceeds of $522.7 million, and recognized a net gain on the sale of $214.5 million. Concurrent with the sale, we wrote off $83.9 million of net intangible assets, which reduced our gain on the sale. In addition, we repaid the remaining $175.0 million balance of the mortgage secured by the hotel, incurred a prepayment penalty of $1.2 million, and wrote off $1.7 million in related deferred financing fees. The sale of the Doubletree Guest Suites Times Square did not represent a strategic shift that had a major impact on our business plan or our primary markets, and therefore, did not qualify as a discontinued operation.
In addition to the above noted hotels, in 2016, we sold an undeveloped parcel of land for net proceeds of $0.4 million, and recognized a net gain on the sale of $0.2 million. In 2015, we sold BuyEfficient for net proceeds of $26.4 million, and recognized a net gain on the sale of $11.7 million. Also in 2015, we sold the Preferred Equity Investment and settled the working capital loan related to the Rochester Portfolio, which we sold in 2013. We received an aggregate payment of $16.0 million, plus accrued interest. In accordance with the Real Estate Subtopic of the FASB ASC, we recognized a $16.0 million gain on the sale of the Rochester Portfolio, along with related income tax expense of $0.1 million, in discontinued operations, net of tax during the year ended December 31, 2015, as these additional sales proceeds could not be recognized until realized.
Renovations. We invested $182.2 million, $164.2 million and $126.0 million in capital improvements to our hotel portfolio during the years ended December 31, 2016, 2015 and 2014, respectively. Consistent with our strategy, during 2016, 2015 and 2014, we undertook major renovations, repositionings and ordinary course rooms and public space renovations. During both 2016 and 2015, our most significant renovations occurred at the Boston Park Plaza and the Wailea Beach Resort. During 2014, our most significant major renovations, repositionings and ordinary course rooms and public space renovations, occurred at the Boston Park Plaza and the Hyatt Regency San Francisco. As a result of our major renovations and repositionings, we incurred revenue disruption of approximately $8.0 million in 2016, $2.9 million in 2015 and $3.0 million in 2014, 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 and redemptions of hotels and other assets, as well as proceeds from our credit facility, term loan agreements and common and preferred stock offerings. Our primary uses of cash were for capital expenditures for hotels, acquisitions of a hotel and other assets, operating expenses, repayment of notes payable and our credit facility, redemption of our Series D preferred stock, dividends on our common and preferred stock and distributions to our joint venture partners. We cannot be certain that traditional sources of funds will be available in the future.
Operating activities. Our net cash provided by or used in operating activities fluctuates primarily as a result of changes in RevPAR and the operating cash flow of our hotels. Our net cash provided by or used in operating activities may also be affected by changes in our portfolio resulting from hotel acquisitions, dispositions or renovations. Net cash provided by operating activities was $305.4 million for 2016, compared to $309.3 million for 2015 and $282.4 million for 2014.
The net decrease in cash provided by operating activities during 2016 was primarily due to decreased cash generated by both the Boston Park Plaza and the Wailea Beach Resort, which were undergoing complete hotel repositionings during 2016, partially offset by increased cash generated by our other hotels, combined with the release of restricted lender reserves upon our repayments of the loans secured by the Boston Park Plaza and the Renaissance Orlando at SeaWorld®.
The net increase in cash provided by operating activities during 2015 was primarily due to additional cash generated by the Wailea Beach Resort which was acquired mid-year during 2014, combined with an increase in cash generated by our recently renovated hotels. The increase in net cash provided by operating activities in 2015 was partially offset by decreased cash generated by the Boston Park Plaza, which was undergoing a complete hotel repositioning during 2015.
56
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 or provided by investing activities in 2016, 2015 and 2014 was as follows (in thousands):
|
|
|
2016 |
|
2015 |
|
2014 |
|
|||
|
Proceeds from sales of assets |
|
$ |
41,587 |
|
$ |
565,115 |
|
$ |
110 |
|
|
Disposition deposit |
|
|
250 |
|
|
— |
|
|
— |
|
|
Proceeds from redemption of note receivable |
|
|
— |
|
|
1,125 |
|
|
— |
|
|
Restricted cash — replacement reserve |
|
|
(9,368) |
|
|
(2,642) |
|
|
(4,311) |
|
|
Acquisitions of hotel properties and other assets |
|
|
(2,447) |
|
|
— |
|
|
(276,558) |
|
|
Renovations and additions to hotel properties |
|
|
(182,185) |
|
|
(164,232) |
|
|
(125,975) |
|
|
Payment for interest rate derivative |
|
|
— |
|
|
(13) |
|
|
— |
|
|
Net cash (used in) provided by investing activities |
|
$ |
(152,163) |
|
$ |
399,353 |
|
$ |
(406,734) |
|
During 2016, we received a total of $41.6 million in net proceeds from the following sales: $41.2 million from the Sheraton Cerritos; and $0.4 million from an undeveloped parcel of land. In addition, we received a deposit of $0.3 million from the potential buyer of the Fairmont Newport Beach. These cash inflows were offset as we increased our restricted cash replacement reserve accounts by $9.4 million, paid $2.4 million to acquire the air rights at our Renaissance Harborplace and paid $182.2 million for renovations and additions to our portfolio.
During 2015, we received a total of $565.1 million in proceeds from the following sales: $522.7 million from the Doubletree Guest Suites Times Square; $26.4 million from BuyEfficient; $16.0 million from the Preferred Equity Investment combined with the settlement of a working capital loan provided to the buyer of the Rochester Portfolio; and $0.1 million from surplus FF&E. In addition, we received $1.1 million from the redemption of an unsecured note receivable. These cash inflows were partially offset as we increased the balance of our restricted cash replacement reserve accounts by $2.6 million, paid $164.2 million for renovations and additions to our portfolio, and paid $13,000 for an interest rate cap agreement on our variable-rate mortgage secured by the Hilton San Diego Bayfront.
During 2014, we paid cash of $265.6 million to acquire the Wailea Beach Resort, 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.
Financing activities. Our net cash provided by or used in financing activities fluctuates primarily as a result of our issuance of common stock, our issuance and repayment of notes payable and our credit facility, and our issuance and redemption of other forms of capital, including preferred equity. Net cash used in or provided by financing activities in 2016, 2015 and 2014 was as follows (in thousands):
|
|
|
2016 |
|
2015 |
|
2014 |
|
|||
|
Proceeds from preferred stock offerings |
|
$ |
190,000 |
|
$ |
— |
|
$ |
— |
|
|
Payment of preferred stock offering costs |
|
|
(6,640) |
|
|
— |
|
|
— |
|
|
Redemption of preferred stock |
|
|
(115,000) |
|
|
— |
|
|
— |
|
|
Proceeds from common stock offerings |
|
|
55,133 |
|
|
— |
|
|
284,390 |
|
|
Payment of common stock offering costs |
|
|
(941) |
|
|
— |
|
|
(1,000) |
|
|
Repurchase of common stock for employee withholding obligations |
|
|
(2,641) |
|
|
(9,264) |
|
|
(3,774) |
|
|
Proceeds from notes payable and credit facility |
|
|
100,000 |
|
|
123,000 |
|
|
178,250 |
|
|
Payments on notes payable and credit facility |
|
|
(265,536) |
|
|
(450,812) |
|
|
(153,033) |
|
|
Payments for costs related to extinguishment of notes payable |
|
|
(173) |
|
|
(1,245) |
|
|
(4,051) |
|
|
Payments of deferred financing costs |
|
|
(1,759) |
|
|
(5,861) |
|
|
(2,346) |
|
|
Dividends and distributions paid |
|
|
(227,486) |
|
|
(77,544) |
|
|
(47,850) |
|
|
Distributions to noncontrolling interests |
|
|
(7,737) |
|
|
(9,981) |
|
|
(8,488) |
|
|
Net cash (used in) provided by financing activities |
|
$ |
(282,780) |
|
$ |
(431,707) |
|
$ |
242,098 |
|
Net cash used in financing activities during 2016 consisted of the following cash outflows: $115.0 million paid to redeem our Series D preferred stock; $2.6 million paid to repurchase common shares to satisfy the statutory minimum federal and state tax obligations of certain employees in connection with the vesting of restricted common shares issued to
57
such employees; $265.5 million in principal payments on our notes payable, including $114.2 million for the loan secured by the Boston Park Plaza, $72.6 million for the loan secured by the Renaissance Orlando at SeaWorld®, $66.1 million for the loan secured by the Embassy Suites Chicago and $12.6 million in principal payments on our notes payable; $0.2 million in costs paid to extinguish the loans secured by the Renaissance Orlando at SeaWorld® and the Embassy Suites Chicago; $1.8 million in deferred financing costs related to our new $100.0 million unsecured term loan, our credit facility and our new private placement of $240.0 million unsecured senior notes which were funded in January 2017; $227.5 million in dividends and distributions to our common and preferred stockholders; and $7.7 million in distributions to the noncontrolling interest in the Hilton San Diego Bayfront. These cash outflows were slightly offset by total net proceeds of $183.4 million received from our preferred stock offerings, including $111.0 million from the issuance of our Series E preferred stock and $72.4 million from the issuance of our Series F preferred stock, $54.2 million in net proceeds received from the sale of 3,564,047 shares of our common stock under our ATM Agreements, and $100.0 million in proceeds received from our new unsecured term loan.
During 2015, we paid $9.3 million to repurchase common shares to satisfy the statutory minimum federal and state tax obligations of certain employees in connection with the vesting of restricted common shares issued to such employees. We also paid $450.8 million in principal payments on our notes payable and credit facility, including: $99.1 million in total to repay four loans each separately secured by either the Marriott Philadelphia, the Marriott Park City, the Marriott Houston or the Marriott Tysons Corner; $85.9 million to repay the loan secured by the Renaissance Harborplace; $30.7 million to repay the loan secured by the Hilton North Houston; $175.0 million to repay the loan secured by the Doubletree Guest Suites Times Square; $38.0 million to repay a draw on our credit facility; and $22.1 million in principal payments on our notes payable. In addition, during 2015 we paid a total of $1.2 million in fees upon our repayment of the loans noted above, and $5.9 million in deferred financing costs related to our new $400.0 million senior unsecured credit facility which we entered into in April 2015, as well as the two new unsecured term loan agreements entered into in September 2015 and December 2015, and the new loans entered into in December 2014 secured by the Embassy Suites La Jolla and the JW Marriott New Orleans. We also paid $77.5 million in dividends to our common and preferred stockholders, and $10.0 million in distributions to the noncontrolling interests in our hotels. These cash outflows were slightly offset by a total of $123.0 million in proceeds from debt obligations, including $85.0 million received from an unsecured term loan and $38.0 million received from our credit facility.
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 $3.8 million paid to repurchase common shares to satisfy the statutory minimum federal and state tax obligations of certain employees in connection with the vesting of restricted common shares issued to such employees, and $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 noncontrolling interests in our hotels.
Future. We expect our primary uses of cash to be for operating expenses, capital investments in our hotels, repayment of principal on our notes payable and credit facility, interest expense, dividends on our common and preferred stock, potential repurchases of our common stock, and acquisitions of hotels, including possibly hotel portfolios. We expect our primary sources of cash will continue to be our operating activities, working capital, notes payable and our credit facility, dispositions of hotel properties, and proceeds from public and private offerings of debt securities and common and preferred stock. Our financial objectives include the maintenance of our credit ratios, appropriate levels of liquidity and continued balance sheet strength. Consistent with maintaining our low leverage and balance sheet strength, in the near-term, we expect to fund future acquisitions, if any, largely through cash on hand, the issuance of common or preferred equity, provided that our stock price is at an attractive level, or by proceeds received from sales of existing assets in order to selectively grow the quality and scale of our portfolio. Our ability to raise funds through the issuance of equity securities depends on, among other things, general market conditions for hotel companies and REITs and market perceptions about
58
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 ATM Agreements we entered into in February 2014. Under the terms of the agreements, we may issue and sell from time to time through or to the managers, as sales agents and/or principals, shares of our common stock having an aggregate offering amount of up to $150.0 million. Through December 31, 2016, we have received $76.7 million in gross proceeds and issued 4,916,750 shares of our common stock in connection with the ATM Agreements, leaving $73.3 million available for sale. However, when needed, the capital markets may not be available to us on favorable terms or at all.
In January 2017, we received $240.0 million from the private placement of senior unsecured notes. The private placement consisted of $120.0 million of notes with a nine-year term bearing interest at a fixed rate of 4.69%, and $120.0 million of notes with an eleven-year term bearing interest at a fixed rate of 4.79%. Proceeds from the new unsecured senior notes were used to repay in full the $176.0 million 5.58% mortgage loan secured by the Marriott Boston Long Wharf in January 2017.
In February 2017, we sold the Fairmont Newport Beach for a gross sales price of $125.0 million.
Cash Balance. As of December 31, 2016, our unrestricted cash balance was $369.5 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 (including payment of cash dividends on our common stock, if declared) and near-term debt maturities with our cash on hand.
Debt. As of December 31, 2016, we had $0.9 billion of consolidated debt, $437.5 million of cash and cash equivalents, including restricted cash, and total assets of $3.7 billion. We believe that by controlling debt levels, staggering maturity dates and maintaining a highly flexible capital structure, we can maintain lower capital costs than more highly leveraged companies, or companies with limited flexibility due to restrictive corporate-level financial covenants.
The weighted average term to maturity of our debt as of December 31, 2016, is approximately four years, and 76.2% of our debt, including the effects of interest rate swap agreements, is fixed rate with a weighted average interest rate of 4.74%. Including our variable-rate debt obligation based on the variable rate at December 31, 2016, the weighted average interest rate on our debt is 4.29%.
As of December 31, 2016, all of our outstanding debt had fixed interest rates or had been swapped to fixed interest rates, except the $222.3 million non-recourse mortgage on the Hilton San Diego Bayfront, which is subject to an interest rate cap agreement that caps the interest rate at 4.25% until May 2017. Our mortgage debt is in the form of single asset non-recourse loans rather than cross-collateralized multi-property pools. In addition to our mortgage debt, as of December 31, 2016, we have two unsecured corporate-level term loans. We currently believe this structure is appropriate for the operating characteristics of our business as it isolates risk and provides flexibility for various portfolio management initiatives, including the sale of individual hotels subject to existing debt.
Each of our debt transactions for the years ended December 31, 2016, 2015 and 2014 are discussed below.
2016. In January 2016, we drew the available funds of $100.0 million under an unsecured term loan agreement, and used the proceeds in February 2016, combined with cash on hand, to repay the $114.2 million loan secured by the Boston Park Plaza. The Boston Park Plaza loan was scheduled to mature in February 2018, and was available to be repaid without penalty in February 2016. The $100.0 million unsecured term loan matures in January 2023, and bears interest based on a pricing grid with a range of 180 to 255 basis points over LIBOR, depending on our leverage ratios. We entered into a forward swap agreement in December 2015 that fixed the LIBOR rate at 1.853% for the duration of the $100.0 million term loan. Based on our current leverage and the swap in place, the loan bears interest at an effective rate of 3.653%.
In May 2016, we repaid $72.6 million of debt secured by the Renaissance Orlando at SeaWorld®, using proceeds received from our issuance of the Series F preferred stock. The Renaissance Orlando at SeaWorld® loan was scheduled to mature in July 2016, and was available to be repaid without penalty in May 2016.
59
In December 2016, we repaid $66.1 million of debt secured by the Embassy Suites Chicago using cash on hand. The Embassy Suites Chicago loan was scheduled to mature in March 2017, and was available to be repaid without penalty at the end of December 2016. After repayment of the Embassy Suites Chicago loan, we have 22 unencumbered hotels.
2015. In April 2015, we entered into a $400.0 million senior unsecured credit facility, which replaced our prior $150.0 million senior unsecured credit facility. The credit facility’s interest rate is based on a pricing grid with a range of 155 to 230 basis points over LIBOR, depending on our leverage ratios, and represents a decline in pricing from the prior credit facility of approximately 30 to 60 basis points. The initial term of the credit facility is four years, expiring in April 2019, with an option to extend for an additional one year subject to the satisfaction of certain customary conditions. The credit facility also includes an accordion option, which allows us to request additional lender commitments for up to a total capacity of $800.0 million. As of December 31, 2016, we have no outstanding amounts due under our credit facility.
In May 2015, we repaid $99.1 million of debt secured by four of our hotels: the Marriott Houston, the Marriott Park City, the Marriott Philadelphia and the Marriott Tysons Corner.
In October 2015, we drew down $85.0 million in funds available from a term loan supplement agreement under our credit facility and used the proceeds, combined with cash on hand, to repay the $85.9 million loan secured by the Renaissance Harborplace. Interest on the term loan is based on a pricing grid with a range of 180 to 255 basis points over LIBOR, depending on our leverage ratios. Additionally, we entered into a swap agreement effective October 29, 2015, fixing the LIBOR rate at 1.591% for the duration of the $85.0 million term loan. Based on our current leverage, the loan reflects a fixed rate of 3.391%.
In December 2015, we repaid the $30.7 million loan secured by the Hilton North Houston, which loan was scheduled to mature in March 2016.
Additionally, in December 2015, we repaid the remaining $175.0 million balance of the loan secured by the Doubletree Guest Suites Times Square concurrent with the sale of the hotel. We incurred a $1.2 million prepayment penalty upon the loan’s repayment, and wrote off $1.7 million in deferred financing fees, both of which are included in loss on extinguishment of debt on our consolidated statements of operations.
2014. 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 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.
60
We may in the future seek to obtain mortgages on one or all of our 22 unencumbered hotels, 14 of which are currently held by subsidiaries whose interests are pledged to our credit facility entered into in April 2015. Our 22 unencumbered hotels include: Boston Park Plaza; Courtyard by Marriott Los Angeles; Embassy Suites Chicago; Fairmont Newport Beach; Hilton Garden Inn Chicago Downtown/Magnificent Mile; Hilton New Orleans St. Charles; Hilton North Houston; Hyatt Centric Chicago Magnificent Mile; Hyatt Regency Newport Beach; Hyatt Regency San Francisco; Marriott Houston; Marriott Park City; Marriott Philadelphia; Marriott Portland; Marriott Quincy; Marriott Tysons Corner; Renaissance Harborplace; Renaissance Long Beach; Renaissance Los Angeles Airport; Renaissance Orlando at SeaWorld®; Renaissance Westchester; and Wailea Beach Resort. After our repayment of the loan secured by the Marriott Boston Long Wharf in January 2017, and the sale of the Fairmont Newport Beach in February 2017, we will continue to have 22 unencumbered hotels. Should we obtain secured financing on any or all of our unencumbered hotels, the amount of capital available through our credit facility may be reduced.
Contractual Obligations
The following table summarizes our payment obligations and commitments as of December 31, 2016 (in thousands):
|
Payment due by period |
|||||||||||||||||||||||||||||||
|
Less Than |
1 to 3 |
3 to 5 |
More than |
||||||||||||||||||||||||||||
|
Total |
1 year |
years |
years |
5 years |
|||||||||||||||||||||||||||
|
Notes payable (1) |
$ |
935,944 |
$ |
186,034 |
$ |
234,886 |
$ |
195,384 |
$ |
319,640 | |||||||||||||||||||||
|
Interest obligations on notes payable (2) |
153,259 | 33,500 | 59,113 | 37,621 | 23,025 | ||||||||||||||||||||||||||
|
Capital lease obligations |
15,575 | 1 | 2 | 3 | 15,569 | ||||||||||||||||||||||||||
|
Interest obligations on capital leases |
98,047 | 1,402 | 2,804 | 2,803 | 91,038 | ||||||||||||||||||||||||||
|
Operating lease obligations |
360,045 | 10,184 | 20,155 | 20,059 | 309,647 | ||||||||||||||||||||||||||
|
Construction commitments |
37,961 | 37,961 |
— |
— |
— |
||||||||||||||||||||||||||
|
Employment obligations |
1,281 | 948 | 333 |
— |
— |
||||||||||||||||||||||||||
|
Total |
$ |
1,602,112 |
$ |
270,030 |
$ |
317,293 |
$ |
255,870 |
$ |
758,919 | |||||||||||||||||||||
|
(1) |
Notes payable does not include the $240.0 million in senior unsecured notes funded in January 2017, $120.0 million of which are due in January 2026, with the remaining $120.0 million due in January 2028, but does include the $176.0 million mortgage loan due to mature in 2017, which was repaid in January 2017. |
|
(2) |
Interest on our variable-rate debt obligation is calculated based on the variable rate at December 31, 2016, and includes the effect of our interest rate derivative agreements. |
Capital Expenditures and Reserve Funds
We believe we maintain each of our hotels in good repair and condition and in general conformity with applicable franchise and management agreements, ground, building and air leases, laws and regulations. Our capital expenditures primarily relate to the ongoing maintenance of our hotels and are budgeted in the reserve accounts described in the following paragraph. We also incur capital expenditures for cyclical renovations, hotel repositionings and development. We invested $182.2 million in our portfolio during 2016, $164.2 million in 2015 and $126.0 million in 2014. As of December 31, 2016, we have contractual construction commitments totaling $38.0 million. If we renovate or develop additional hotels in the future, our capital expenditures will likely increase.
With respect to our hotels that are operated under management or franchise agreements with major national hotel brands and for all of our hotels subject to first mortgage liens, we are obligated to maintain an FF&E reserve account for future planned and emergency-related capital expenditures at these hotels. The amount funded into each of these reserve accounts is determined pursuant to the management, franchise and loan agreements for each of the respective hotels, ranging between zero and 5.0% of the respective hotel’s total annual revenue. As of December 31, 2016, our balance sheet includes restricted cash of $62.0 million which was held in FF&E reserve accounts for future capital expenditures at the majority of our 27 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.
61
Seasonality and Volatility
As is typical of the lodging industry, we experience some seasonality in our business as indicated in the table below. Revenue for certain of our hotels is generally affected by seasonal business patterns (e.g., the first quarter is strong in Orlando, the second quarter is strong for the Mid-Atlantic business hotels, and the fourth quarter is strong for New York City and Hawaii). Quarterly revenue also may be adversely affected by renovations and repositionings, our managers’ effectiveness in generating business and by events beyond our control, such as extreme weather conditions, terrorist attacks or alerts, civil unrest, public health concerns, airline strikes or reduced airline capacity, economic factors and other considerations affecting travel. Revenues for our 26 hotel Comparable Portfolio by quarter for 2014, 2015 and 2016 were as follows (dollars in thousands):
|
|
|
First |
|
Second |
|
Third |
|
Fourth |
|
|
|
|
||||||||||||||||||
|
|
|
Quarter |
|
Quarter |
|
Quarter |
|
Quarter |
|
Total |
|
|||||||||||||||||||
|
2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||
|
Total revenues |
|
$ |
243,483 |
|
$ |
300,852 |
|
$ |
307,783 |
|
$ |
289,880 |
|
$ |
1,141,998 |
|
||||||||||||||
|
Non-comparable hotel revenues (1) |
|
|
(17,415) |
|
|
(13,469) |
|
|
(13,748) |
|
|
(15,760) |
|
|
(60,392) |
|
||||||||||||||
|
Held for sale hotel revenues (2) |
|
|
(7,172) |
|
|
(7,589) |
|
|
(8,639) |
|
|
(7,110) |
|
|
(30,510) |
|
||||||||||||||
|
Prior ownership revenues (3) |
|
|
17,415 |
|
|
13,469 |
|
|
2,485 |
|
|
— |
|
|
33,369 |
|
||||||||||||||
|
Sold hotel revenues (4) |
|
|
(15,595) |
|
|
(21,296) |
|
|
(21,898) |
|
|
(23,817) |
|
|
(82,606) |
|
||||||||||||||
|
Non-hotel revenues (5) |
|
|
(1,621) |
|
|
(1,852) |
|
|
(1,904) |
|
|
(1,797) |
|
|
(7,174) |
|
||||||||||||||
|
Total Comparable Portfolio revenues (6) |
|
$ |
219,095 |
|
$ |
270,115 |
|
$ |
264,079 |
|
$ |
241,396 |
|
$ |
994,685 |
|
||||||||||||||
|
Quarterly Comparable Portfolio revenues as a percentage of total annual revenues |
|
|
22.0 |
% |
|
27.2 |
% |
|
26.5 |
% |
|
24.3 |
% |
|
100 |
% |
||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||
|
2015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||
|
Total revenues |
|
$ |
284,385 |
|
$ |
339,267 |
|
$ |
324,595 |
|
$ |
300,933 |
|
$ |
1,249,180 |
|
||||||||||||||
|
Non-comparable hotel revenues (1) |
|
|
(19,065) |
|
|
(16,316) |
|
|
(14,467) |
|
|
(14,168) |
|
|
(64,016) |
|
||||||||||||||
|
Held for sale hotel revenues (2) |
|
|
(8,372) |
|
|
(8,115) |
|
|
(8,415) |
|
|
(6,969) |
|
|
(31,871) |
|
||||||||||||||
|
Sold hotel revenues (4) |
|
|
(15,449) |
|
|
(21,156) |
|
|
(22,627) |
|
|
(19,152) |
|
|
(78,384) |
|
||||||||||||||
|
Non-hotel revenues (5) |
|
|
(2,097) |
|
|
(2,044) |
|
|
(2,076) |
|
|
(1,605) |
|
|
(7,822) |
|
||||||||||||||
|
Total Comparable Portfolio revenues (6) |
|
$ |
239,402 |
|
$ |
291,636 |
|
$ |
277,010 |
|
$ |
259,039 |
|
$ |
1,067,087 |
|
||||||||||||||
|
Quarterly Comparable Portfolio revenues as a percentage of total annual revenues |
|
|
22.4 |
% |
|
27.3 |
% |
|
26.0 |
% |
|
24.3 |
% |
|
100 |
% |
||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||
|
2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||
|
Total revenues |
|
$ |
274,292 |
|
$ |
322,160 |
|
$ |
303,304 |
|
$ |
289,584 |
|
$ |
1,189,340 |
|
||||||||||||||
|
Non-comparable hotel revenues (1) |
|
|
(18,745) |
|
|
(13,813) |
|
|
(10,934) |
|
|
(16,243) |
|
|
(59,735) |
|
||||||||||||||
|
Held for sale hotel revenues (2) |
|
|
(7,893) |
|
|
(8,657) |
|
|
(8,373) |
|
|
(7,373) |
|
|
(32,296) |
|
||||||||||||||
|
Sold hotel revenues (4) |
|
|
(3,355) |
|
|
(1,491) |
|
|
— |
|
|
— |
|
|
(4,846) |
|
||||||||||||||
|
Non-hotel revenues (5) |
|
|
(121) |
|
|
(99) |
|
|
210 |
|
|
(5,066) |
|
|
(5,076) |
|
||||||||||||||
|
Total Comparable Portfolio revenues (6) |
|
$ |
244,178 |
|
$ |
298,100 |
|
$ |
284,207 |
|
$ |
260,902 |
|
$ |
1,087,387 |
|
||||||||||||||
|
Quarterly Comparable Portfolio revenues as a percentage of total annual revenues |
|
|
22.5 |
% |
|
27.4 |
% |
|
26.1 |
% |
|
24.0 |
% |
|
100 |
% |
||||||||||||||
|
(1) |
Non-comparable hotel revenues include those generated by the Wailea Beach Resort due to its extensive repositioning disruption during the fourth quarter of 2015 as well as all of 2016. |
|
(2) |
Held for sale hotel revenues include those generated by the Fairmont Newport Beach. We classified the hotel as held for sale as of December 31, 2016, and subsequently sold the hotel in February 2017. |
|
(3) |
Prior ownership revenues include those generated by the Wailea Beach Resort before we acquired the hotel in 2014. We obtained this information from the hotel’s previous owner during our due diligence period before our acquisition of the hotel. |
|
(4) |
Sold hotel revenues include those generated by the Sheraton Cerritos and the Doubletree Guest Suites Times Square, which we sold in May 2016 and December 2015, respectively. |
|
(5) |
Non-hotel revenues include those generated by BuyEfficient before its sale in September 2015, as well as the amortization of favorable and unfavorable tenant lease contracts received in conjunction with our acquisitions of the Boston Park Plaza, the Hilton Garden Inn Chicago Downtown/Magnificent Mile, the Hilton New Orleans St. Charles, the Hyatt Regency San Francisco and the Wailea Beach Resort. Non-hotel revenues for both the fourth quarter and full year 2016 also include a $5.0 million performance guarantee provided by the manager of the Wailea Beach Resort. |
|
(6) |
Total Comparable Portfolio revenues include those generated by our 26 hotel Comparable Portfolio. |
62
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. We periodically review each property 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. |
|
· |
Acquisition related assets and liabilities. Accounting for the acquisition of a hotel property or other entity as a business combination requires an allocation of the purchase price to the assets acquired and the liabilities assumed in the transaction at their respective estimated fair values. The most difficult estimations of individual fair values are those involving long-lived assets, such as property, equipment, intangible assets and capital lease obligations that are assumed as part of the acquisition of a leasehold interest. When we acquire a hotel property or other entity as a business combination, we use all available information to make these fair value determinations, and engage independent valuation specialists to assist in the fair value determinations of the long-lived assets acquired and the liabilities assumed. Due to the inherent subjectivity in determining the estimated fair value of long-lived assets, we believe that the recording of acquired assets and liabilities is a critical accounting policy. |
|
· |
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 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
63
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 was originally to be effective during the first quarter of 2017; however, the FASB issued a one-year deferral in July 2015 so that it now becomes effective during the first quarter of 2018. ASU No. 2014-09 will require either a full retrospective approach or a modified retrospective approach, with early adoption permitted as of the original effective date.
In March 2016, the FASB clarified the principal versus agent guidance in ASU No. 2014-09 with it issuance of Accounting Standards Update No. 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)” (“ASU No. 2016-08”). In particular, ASU No. 2016-08 clarifies how an entity should identify the unit of accounting for the principal versus agent evaluation and how it should apply the control principle to certain types of arrangements, such as service transactions by explaining what a principal controls before the specified good or service is transferred to the customer. In addition, ASU No. 2016-08 reframes the indicators to focus on evidence that an entity is acting as a principal rather than as an agent. ASU No. 2016-08 will become effective, along with ASU No. 2014-09, during the first quarter of 2018. Similar to ASU No. 2014-09, ASU No. 2016-08 will require either a full retrospective approach or a modified retrospective approach, with early adoption permitted as of the original effective date.
In May 2016, the FASB amended ASU No. 2014-09’s guidance on transition, collectability, noncash consideration and the presentation of sales and other similar taxes with its issuance of Accounting Standards Update No. 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients” (“ASU No. 2016-12”). The amendments clarify that, for a contract to be considered completed at transition, all (or substantially all) of the revenue must have been recognized under legacy GAAP. This clarification is important because entities that use the modified retrospective transition approach need to apply the standard only to contracts that are not complete as of the date of initial application, and entities that use the full retrospective approach may apply certain practical expedients to completed contracts. In addition, ASU No. 2016-12 clarifies that an entity should consider the probability of collecting substantially all of the consideration to which it will be entitled in exchange for goods and services expected to be transferred to the customer rather than the total amount promised for all the goods or services in the contract. ASU No. 2016-12 also clarifies that an entity may consider its ability to manage its exposure to credit risk as part of the collectability assessment, as well as that the fair value of noncash consideration should be measured at contract inception when determining the transaction price. Finally, ASU No. 2016-12 allows an entity to make an accounting policy election to exclude from the transaction price certain types of taxes collected from a customer if it discloses that policy. ASU No. 2016-12 will become effective, along with ASU No. 2014-09, during the first quarter of 2018. Similar to ASU No. 2014-09, ASU No. 2016-12 will require either a full retrospective approach or a modified retrospective approach, with early adoption permitted as of the original effective date.
We are in the process of evaluating the impact that ASU No. 2014-09, along with the related clarifications and amendments in ASU No. 2016-08 and ASU No. 2016-12, will have on our recognition of revenue included in our consolidated financial statements. While we are still evaluating the impact that the ASUs will have on accounting for the gain recognized upon the sale of a hotel, there is a possibility that the adoption of ASU No. 2014-09 will affect the timing of any gain recognition in the consolidated financial statements. For example, under current guidance, a gain on the sale of hotel properties with contingencies and some future involvement is deferred until all contingencies have been removed. Under the new guidance, however, the entire gain on sale may be recognized upon the close of escrow. We expect to adopt the new ASUs under the modified retrospective approach.
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 No. 2014-12 became effective during the first quarter of 2016, requiring either a prospective or a modified retrospective approach. Our adoption of ASU No. 2014-12 did not have an effect on our consolidated financial statements, and will not have an effect in the future unless we issue grants that fall within its scope.
In August 2014, the FASB issued Accounting Standards Update No. 2014-15, “Presentation of Financial Statements – Going Concern (Subtopic 205-40)” (“ASU No. 2014-15”), which requires management to evaluate an entity’s ability to
64
continue as a going concern within one year after the date that the financial statements are issued (or available to be issued, when applicable). The evaluation requires management to perform two steps. Management must first evaluate whether there are conditions and events that raise substantial doubt about the entity’s ability to continue as a going concern (step 1). If management concludes that substantial doubt is raised, management also is required to consider whether its plans alleviate that doubt (step 2). Disclosures in the notes to the financial statements are required if management concludes that substantial doubt exists or that its plans alleviate substantial doubt that was raised. ASU No. 2014-15 requires that management perform a going concern evaluation for annual periods beginning in 2016, and for interim periods within annual periods beginning with the first quarter of 2017. Our adoption of ASU No. 2014-15 in 2016 did not have an effect on our financial statements; however, if in the future we determine that there is substantial doubt about our ability to continue as a going concern, we will be required to provide the additional disclosures outlined in ASU No. 2014-15 steps 1 and 2 in our consolidated financial statements.
In February 2015, the FASB issued Accounting Standards Update No. 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis” (“ASU No. 2015-02”), which eliminates the option allowing entities with interests in certain investment funds to follow previous consolidation guidance and makes other changes to both the variable interest model and the voting model. While ASU No. 2015-02 is aimed at asset managers, it will affect all reporting entities involved with limited partnerships or similar entities. In some cases consolidation conclusions will change. In other cases, reporting entities will need to provide additional disclosures about entities that currently aren’t considered VIEs but will be considered VIEs under the new guidance when they have a variable interest in those VIEs. Regardless of whether conclusions change or additional disclosure requirements are triggered, reporting entities will need to re-evaluate limited partnerships or similar entities for consolidation and revise their documentation. ASU No. 2015-02 changes (1) the identification of variable interests (fees paid to a decision maker or service provider), (2) the VIE characteristics for a limited partnership or similar entity and (3) the primary beneficiary determination. ASU No. 2015-02 became effective during the first quarter of 2016, requiring a modified retrospective approach. Our adoption of ASU No. 2015-02 did not have a material effect on our consolidated financial statements.
In September 2015, the FASB issued Accounting Standards Update No. 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments” (“ASU No. 2015-16”), which eliminates the requirement for an acquirer in a business combination to account for measurement-period adjustments retrospectively. In a business combination, if the initial accounting is incomplete as of the end of the reporting period in which the acquisition occurs, the acquirer records provisional amounts based on information available at the acquisition date. The acquirer then adjusts these amounts as it obtains more information about facts and circumstances that existed as of the acquisition date. This period is called the measurement period. It ends when the acquirer receives the information it was seeking about facts and circumstances that existed as of the acquisition date or when it determines that it cannot obtain more information. The measurement period cannot exceed one year from the date of the acquisition. Under the previous guidance, an acquirer must recognize adjustments to provisional amounts during the measurement period retrospectively (i.e., as if the accounting for the business combination had been completed at the acquisition date). That is, the acquirer was required to revise comparative information on the income statement and balance sheet for any prior periods affected. Under ASU No. 2015-16, an acquirer will now recognize measurement-period adjustments during the period in which it determines the amount of the adjustment. The acquirer still must disclose the amounts and reasons for adjustments to the provisional amounts. The acquirer also must disclose, by line item, the amount of the adjustment reflected in the current-period income statement that would have been recognized in previous periods if the adjustment to provisional amounts had been recognized as of the acquisition date. Alternatively, an acquirer may present those amounts separately on the face of the income statement. ASU No. 2015-16 became effective during the first quarter of 2016, requiring a prospective approach. Our adoption of ASU No. 2015-16 will have an effect on our consolidated financial statements and related disclosures when and if we have a business combination that requires a significant measurement-period adjustment.
In January 2016, the FASB issued Accounting Standards Update No. 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU No. 2016-01”), which makes targeted amendments to guidance on classifying and measuring financial instruments. ASU No. 2016-01 provides disclosure relief for public companies by eliminating the requirement to disclose the method(s) and significant assumptions used to estimate the fair value of financial instruments measured at amortized cost. ASU No. 2016-01 will become effective during the first quarter of 2018, with early adoption permitted. We chose to early adopt ASU No. 2016-01 effective January 1, 2016, and eliminated the disclosure in our consolidated financial statements of the methods and significant assumptions we use to calculate the fair value of our debt.
65
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, “Leases (Topic 842)” (“ASU No. 2016-02”), which will require lessees to put most leases on their balance sheets but recognize expenses in the income statement in a manner similar to today’s accounting. The guidance also eliminates today’s real estate-specific provisions and changes the guidance on sale-leaseback transactions, initial direct costs and lease executory costs for all entities. For lessors, the standard modifies the classification criteria and the accounting for sales-type and direct financing leases. All entities will classify leases to determine how to recognize lease-related revenue and expense. Classification will continue to affect amounts that lessors record on the balance sheet. ASU No. 2016-02 will become effective during the first quarter of 2019, and will require a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. We are currently evaluating the impact that ASU No. 2016-02 will have on our consolidated financial statements, and, other than the inclusion of operating leases on our balance sheet, such effects have not yet been determined.
In March 2016, the FASB issued Accounting Standards Update No. 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (“ASU No. 2016-09”), which changes certain aspects of accounting for share-based payments to employees. The new guidance will require all income tax effects of awards to be recognized in the income statement when the awards vest or are settled. It also will allow an employer to repurchase more of an employee’s shares for tax withholding purposes without triggering liability accounting and to make a policy election to account for forfeitures as they occur. ASU No. 2016-09 will become effective during the first quarter of 2017, with early adoption permitted, and will require a modified retrospective approach. We chose to early adopt ASU No. 2016-09 effective January 1, 2016. In accordance with the transition provisions of the new guidance, we adjusted items on our consolidated balance sheet and consolidated statement of equity to reverse the effects of forfeitures recognized in prior years, and on our consolidated statement of cash flows to reclassify the repurchase of employee common stock for employee withholding obligations from an operating activity to a financing activity. For details on these adjustments, see “Item 8. Financial Statements and Supplementary Data - Note 2. Summary of Significant Accounting Policies.” Upon adoption of ASU No. 2016-09, we elected to account for forfeitures as they occur. In addition, pursuant to employee statutory withholding obligations, we may repurchase more of an employee’s shares for tax withholding purposes up to the maximum statutory tax rate in the employee’s applicable jurisdictions.
In June 2016, the FASB issued Accounting Standards Update No. 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU No. 2016-13”), which will replace today’s “incurred loss” approach with an “expected loss” model for instruments measured at amortized cost. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, entities will be required to use a new forward looking “expected loss” model that generally will result in the earlier recognition of allowances for losses. In addition, entities will have to disclose significantly more information, including information they use to track credit quality by year of origination for most financing receivables. ASU No. 2016-13 is effective during the first quarter of 2020. ASU No. 2016-13 will require a modified retrospective approach, with early adoption permitted during the first quarter of 2019. We are currently evaluating the impact that ASU No. 2016-13 will have on our consolidated financial statements.
In September 2016, the FASB issued Accounting Standards Update No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force)” (“ASU No. 2016-15”), which clarifies how entities should classify certain cash receipts and cash payments on the statement of cash flows. ASU No. 2016-15 addresses certain issues where diversity in practice was identified. It amends existing guidance, which is principles based and often requires judgment to determine the appropriate classification of cash flows as operating, investing or financing activities. In addition, ASU No. 2016-15 clarifies how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. ASU No. 2016-15 is effective during the first quarter of 2018, and will generally require a retrospective approach. Early adoption is permitted. We do not believe that the adoption of ASU No. 2016-15 will have a material effect on our consolidated financial statements.
In November 2016, the FASB issued Accounting Standards Update No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force)” (“ASU No. 2016-18”), which will require entities to show the changes in total cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. As a result, entities will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. When cash, cash equivalents, restricted cash and restricted cash equivalents are presented in more than one line item on the balance sheet, the new guidance requires a reconciliation of the totals in the statement of cash flows to the related caption in the balance sheet. This reconciliation can be presented
66
either on the face of the statement of cash flows or in the notes to the financial statements. ASU No. 2016-18 is effective in the first quarter of 2018, and will require a retrospective approach. Early adoption in an interim period is permitted, but any adjustments must be reflected as of the beginning of the fiscal year that includes the interim period. We are currently evaluating the impact that ASU No. 2016-18 will have on our consolidated financial statements.
In January 2017, the FASB issued Accounting Standards Update No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business” (“ASU No. 2017-01”), which changes the definition of a business to assist entities with evaluating when a set of transferred assets and activities is a business. Under the new guidance, an entity first determines whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. If this threshold is met, the set of transferred assets and activities is not a business. If it is not met, the entity then evaluates whether the set meets the requirement that a business include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs. ASU No. 2017-01 is effective in the first quarter of 2018, and the guidance is to be applied prospectively. Early adoption is permitted. Once adopted, we will be required to analyze future hotel acquisitions to determine if the transaction qualifies as the purchase of a business or an asset. Depending on our conclusion, ASU No. 2017-01 may have an effect on our consolidated financial statements.
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, which are intended to manage interest rate risks.
As of December 31, 2016, 76.2% of our debt obligations are fixed in nature, which largely mitigates the effect of changes in interest rates on our cash interest payments. If the market rate of interest on our variable rate debt increases or decreases by 100 basis points, interest expense would increase or decrease, respectively, our future earnings and cash flows by approximately $2.0 million based on the variable rate at December 31, 2016. After adjusting for the noncontrolling interest in the Hilton San Diego Bayfront, this increase or decrease in interest expense would increase or decrease, respectively, our future earnings and cash flows by $1.5 million based on the variable rate at December 31, 2016.
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.
67
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, 2016.
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 69, on the effectiveness of our internal control over financial reporting.
(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.
68
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of
Sunstone Hotel Investors, Inc.
We have audited Sunstone Hotel Investors, Inc.’s internal control over financial reporting as of December 31, 2016, 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, 2016, 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, 2016 and 2015, 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, 2016 of Sunstone Hotel Investors, Inc. and our report dated February 23, 2017 expressed an unqualified opinion thereon.
|
|
/s/ Ernst & Young LLP |
|
|
|
|
Irvine, California |
|
|
February 23, 2017 |
|
69
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, 2016:
Equity Compensation Plan Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of securities |
|
|
|
|
|
|
|
|
remaining available |
|
|
|
|
|
|
|
|
for future issuance |
|
|
|
|
|
|
|
|
under the Long-term |
|
|
|
Number of securities to |
|
Weighted-average |
|
Incentive Plan |
|
|
|
|
be issued upon exercise |
|
exercise price of |
|
(excluding securities |
|
|
|
|
of outstanding awards |
|
outstanding awards |
|
reflected in column a) |
|
|
|
|
(a) |
|
(b) |
|
(c) |
|
|
Equity compensation plans approved by the Company’s stockholders: |
|
|
|
|
|
|
|
|
- 2004 Long-Term Incentive Plan |
|
200,000 |
|
$ |
17.71 |
(1) |
5,445,554 |
|
(1) |
The weighted-average exercise price is for the 200,000 options outstanding as of December 31, 2016. |
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.
70
Item 15.Exhibits and Financial Statement Schedules
|
(a)(1) |
|
Financial Statements. See Index to Financial Statements and Schedules on page F-1. |
|
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|
|
|
(a)(2) |
|
Financial Statement Schedules. See Index to Financial Statements and Schedules on page F-1. |
|
|
|
|
|
(a)(3) |
|
Exhibits. The following exhibits are filed (or incorporated by reference herein) as a part of this Annual Report on Form 10-K: |
|
Exhibit |
|
|
|
Number |
|
Description |
|
|
|
|
|
3.1 |
|
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). |
|
|
|
|
|
3.2 |
|
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). |
|
|
|
|
|
3.3 |
|
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). |
|
|
|
|
|
3.4 |
|
Second Amendment to the Amended and Restated Bylaws of Sunstone Hotel Investors, Inc., effective as of February 13, 2015 (incorporated by reference to Exhibit 3.4 to Form 10-K, filed by the Company on February 19, 2015). |
|
|
|
|
|
3.5 |
|
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). |
|
|
|
|
|
3.6 |
|
Articles Supplementary for Series E preferred stock (incorporated by reference to Exhibit 3.5 to the registration statement on Form 8-A, filed by the Company on March 10, 2016). |
|
|
|
|
|
3.7 |
|
Articles Supplementary for Series F preferred stock (incorporated by reference to Exhibit 3.5 to the registration statement on Form 8-A, filed by the Company on May 16, 2016). |
|
|
|
|
|
4.1 |
|
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). |
|
|
|
|
|
4.2 |
|
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). |
|
|
|
|
|
4.3 |
|
Form of Specimen Certificate of Series E Preferred Stock of Sunstone Hotel Investors, Inc. (incorporated by reference to Exhibit 4.1 to the registration statement on Form 8-A, filed by the Company on March 10, 2016). |
|
|
|
|
|
4.4 |
|
Form of Specimen Certificate of Series F Preferred Stock of Sunstone Hotel Investors, Inc. (incorporated by reference to Exhibit 4.1 to the registration statement on Form 8-A, filed by the Company on May 16, 2016). |
|
|
|
|
|
10.1 |
|
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). |
|
|
|
|
|
10.2 |
|
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). |
71
|
|
|
|
|
10.3 |
|
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). |
|
|
|
|
|
10.3.1 |
|
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). |
|
|
|
|
|
10.3.2 |
|
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). |
|
|
|
|
|
10.4 |
|
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). |
|
|
|
|
|
10.4.1 |
|
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). |
|
|
|
|
|
10.5 |
|
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). |
|
|
|
|
|
10.6 |
|
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). |
|
|
|
|
|
10.7 |
|
Form of Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.7 to Form 10-K filed by the Company on February 19, 2015). |
|
|
|
|
|
10.8 |
|
Form of Restricted Stock Award Certificate (incorporated by reference to Exhibit 10.8 to Form 10-K filed by the Company on February 19, 2015). |
|
|
|
|
|
10.9 |
|
Form of TRS Lease (incorporated by reference to Exhibit 10.9 to Form 10-K filed by the Company on February 19, 2015). |
|
|
|
|
|
10.11 |
|
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). |
|
|
|
|
|
10.12 |
|
Fourth 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 March 11, 2016). |
|
|
|
|
|
10.12.1 |
|
Fifth 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 May 17, 2016). |
|
|
|
|
|
10.13 |
|
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). |
|
|
|
|
|
10.14 |
|
Amended and Restated Employment Agreement dated as of January 27, 2017, by and among Sunstone Hotel Investors, Inc., Sunstone Hotel Partnership, LLC and Marc A. Hoffman (incorporated by reference to Exhibit 10.3 to Form 8-K, filed by the Company on January 27, 2017). |
|
|
|
|
|
10.15 |
|
Amended and Restated Employment Agreement dated as of January 27, 2017, by and among Sunstone Hotel Investors, Inc., Sunstone Hotel Partnership, LLC and John V. Arabia (incorporated by reference to Exhibit 10.1 to Form 8-K, filed by the Company on January 27, 2017). |
|
|
|
|
72
|
10.16 |
|
Employment Agreement, dated as of January 27, 2017, by and between Sunstone Hotel Investors, Inc. and Robert Springer (incorporated by reference to Exhibit 10.4 to Form 8-K, filed by the Company on January 27, 2017). |
|
|
|
|
|
10.17 |
|
Employment Agreement, dated as of January 27, 2017, by and between Sunstone Hotel Investors, Inc. and Bryan A. Giglia (incorporated by reference to Exhibit 10.2 to Form 8-K, filed by the Company on January 27, 2017). |
|
|
|
|
|
10.18 |
|
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). |
|
|
|
|
|
10.18.1 |
|
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). |
|
|
|
|
|
10.19 |
|
Credit Agreement, dated April 2, 2015, among Sunstone Hotel Investors, Inc., Sunstone Hotel Partnership, LLC, Wells Fargo Bank, National Association, Bank of America, N.A., JPMORGAN Chase Bank, N.A. and certain other lenders named therein (incorporated by reference to Exhibit 10.1 to Form 8-K, filed by the Company on April 2, 2015). |
|
|
|
|
|
10.19.1 |
|
Term Loan Supplement Agreement, dated September 3, 2015, among Sunstone Hotel Partnership, LLC, Sunstone Hotel Investors, Inc., Wells Fargo Bank, National Association and certain other lenders named therein (incorporated by reference to Exhibit 10.1 to Form 10-Q, filed by the Company on November 3, 2015). |
|
|
|
|
|
10.20 |
|
Note and Guarantee Agreement, dated December 20, 2016, among Sunstone Hotel Partnership, LLC, Sunstone Hotel Investors, Inc., the Initial Subsidiary Guarantors named therein, and the Purchasers named therein. |
|
|
|
|
|
12 |
|
Computation of Ratios of Earnings to Fixed Charges and Preferred Stock Dividends. |
|
|
|
|
|
21.1 |
|
List of subsidiaries. |
|
|
|
|
|
23.1 |
|
Consent of Ernst & Young LLP. |
|
|
|
|
|
31.1 |
|
Certification of Principal Executive Officer (Section 302 Certification). |
|
|
|
|
|
31.2 |
|
Certification of Principal Financial Officer (Section 302 Certification). |
|
|
|
|
|
32.1 |
|
Certification of Principal Executive Officer and Principal Financial Officer (Section 906 Certification). |
|
|
|
|
|
101.INS |
|
XBRL Instance Document * |
|
|
|
|
|
101.SCH |
|
XBRL Taxonomy Extension Schema Document * |
|
|
|
|
|
101.CAL |
|
XBRL Taxonomy Extension Calculation Linkbase Document * |
|
|
|
|
|
101.LAB |
|
XBRL Taxonomy Extension Label Linkbase Document * |
|
|
|
|
|
101.PRE |
|
XBRL Taxonomy Extension Presentation Linkbase Document * |
|
|
|
|
|
101.DEF |
|
XBRL Taxonomy Extension Definition Linkbase Document * |
73
*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, 2016 and December 31, 2015; (ii) the Consolidated Statements of Operations for the years ended December 31, 2016, 2015 and 2014; (iii) the Consolidated Statements of Comprehensive Income for the years ended December 31, 2016, 2015 and 2014; (iv) the Consolidated Statements of Equity for the years ended December 31, 2016, 2015 and 2014 (v) the Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015 and 2014; and (vi) Notes to Consolidated Financial Statements that have been detail tagged.
74
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.
|
|
Sunstone Hotel Investors, Inc. |
|
|
|
|
Date: February 23, 2017 |
/S/ Bryan A. Giglia |
|
|
Bryan A. Giglia |
|
|
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 |
|
Title |
|
Date |
|
|
|
|
|
|
|
/S/ DOUGLAS M. PASQUALE |
Non-Executive Chairman |
February 23, 2017 |
||
|
Douglas M. Pasquale |
|
|
|
|
|
|
|
|
|
|
|
/S/ JOHN V. ARABIA |
|
Director, President and Chief Executive Officer |
|
February 23, 2017 |
|
John V. Arabia |
|
(Principal Executive Officer) |
|
|
|
|
|
|
|
|
|
/S/ W. BLAKE BAIRD |
|
Director |
|
February 23, 2017 |
|
W. Blake Baird |
|
|
|
|
|
|
|
|
|
|
|
/S/ ANDREW BATINOVICH |
|
Director |
|
February 23, 2017 |
|
Andrew Batinovich |
|
|
|
|
|
|
|
|
|
|
|
/S/ Z. JAMIE BEHAR |
|
Director |
|
February 23, 2017 |
|
Z. Jamie Behar |
|
|
|
|
|
|
|
|
|
|
|
/S/ THOMAS A. LEWIS, JR. |
|
Director |
|
February 23, 2017 |
|
Thomas A. Lewis, Jr. |
|
|
|
|
|
|
|
|
|
|
|
/S/ KEITH M. LOCKER |
|
Director |
|
February 23, 2017 |
|
Keith M. Locker |
|
|
|
|
|
|
|
|
|
|
|
/S/ MURRAY J. MCCABE |
|
Director |
|
February 23, 2017 |
|
Murray J. McCabe |
|
|
|
|
|
|
|
|
|
|
|
/S/ KEITH P. RUSSELL |
|
Director |
|
February 23, 2017 |
|
Keith P. Russell |
|
|
|
|
75
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Sunstone Hotel Investors, Inc.
We have audited the accompanying consolidated balance sheets of Sunstone Hotel Investors, Inc. as of December 31, 2016 and 2015, 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, 2016. 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, 2016 and 2015, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2016, 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 certain aspects of its accounting for share-based payments to employees as a result of the adoption of the amendments to the FASB Accounting Standards Codification resulting from Accounting Standards Update No. 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting,” effective January 1, 2016.
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, 2016, 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 23, 2017 expressed an unqualified opinion thereon.
|
|
/s/ Ernst & Young LLP |
|
|
|
|
Irvine, California |
|
|
February 23, 2017 |
|
F-2
SUNSTONE HOTEL INVESTORS, INC.
(In thousands, except share data)
|
|
|
December 31, 2016 |
|
December 31, 2015 |
|
||
|
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
369,537 |
|
$ |
499,067 |
|
|
Restricted cash |
|
|
67,923 |
|
|
76,180 |
|
|
Accounts receivable, net |
|
|
39,337 |
|
|
32,024 |
|
|
Inventories |
|
|
1,225 |
|
|
1,395 |
|
|
Prepaid expenses |
|
|
10,489 |
|
|
10,879 |
|
|
Assets held for sale, net |
|
|
79,113 |
|
|
— |
|
|
Total current assets |
|
|
567,624 |
|
|
619,545 |
|
|
Investment in hotel properties, net |
|
|
3,158,219 |
|
|
3,230,852 |
|
|
Deferred financing fees, net |
|
|
4,002 |
|
|
4,310 |
|
|
Other assets, net |
|
|
9,389 |
|
|
10,386 |
|
|
Total assets |
|
$ |
3,739,234 |
|
$ |
3,865,093 |
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses |
|
$ |
36,110 |
|
$ |
30,193 |
|
|
Accrued payroll and employee benefits |
|
|
24,896 |
|
|
28,023 |
|
|
Dividends and distributions payable |
|
|
119,847 |
|
|
265,124 |
|
|
Other current liabilities |
|
|
39,869 |
|
|
42,174 |
|
|
Current portion of notes payable, net |
|
|
184,929 |
|
|
85,776 |
|
|
Liabilities of assets held for sale |
|
|
3,153 |
|
|
— |
|
|
Total current liabilities |
|
|
408,804 |
|
|
451,290 |
|
|
Notes payable, less current portion, net |
|
|
746,374 |
|
|
1,010,819 |
|
|
Capital lease obligations, less current portion |
|
|
15,574 |
|
|
15,575 |
|
|
Other liabilities |
|
|
36,650 |
|
|
36,289 |
|
|
Total liabilities |
|
|
1,207,402 |
|
|
1,513,973 |
|
|
Commitments and contingencies (Note 12) |
|
|
|
|
|
|
|
|
Equity: |
|
|
|
|
|
|
|
|
Stockholders’ equity: |
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value, 100,000,000 shares authorized: |
|
|
|
|
|
|
|
|
8.0% Series D Cumulative Redeemable Preferred Stock, zero shares issued and outstanding at December 31, 2016 and 4,600,000 shares issued and outstanding at December 31, 2015, stated at liquidation preference of $25.00 per share |
|
|
— |
|
|
115,000 |
|
|
6.95% Series E Cumulative Redeemable Preferred Stock, 4,600,000 shares issued and outstanding at December 31, 2016 and zero shares issued and outstanding at December 31, 2015, stated at liquidation preference of $25.00 per share |
|
|
115,000 |
|
|
— |
|
|
6.45% Series F Cumulative Redeemable Preferred Stock, 3,000,000 shares issued and outstanding at December 31, 2016 and zero shares issued and outstanding at December 31, 2015, stated at liquidation preference of $25.00 per share |
|
|
75,000 |
|
|
— |
|
|
Common stock, $0.01 par value, 500,000,000 shares authorized, 220,073,140 shares issued and outstanding at December 31, 2016 and 207,604,391 shares issued and outstanding at December 31, 2015 |
|
|
2,201 |
|
|
2,076 |
|
|
Additional paid in capital |
|
|
2,596,620 |
|
|
2,458,889 |
|
|
Retained earnings |
|
|
786,901 |
|
|
652,704 |
|
|
Cumulative dividends and distributions |
|
|
(1,092,952) |
|
|
(927,868) |
|
|
Total stockholders’ equity |
|
|
2,482,770 |
|
|
2,300,801 |
|
|
Noncontrolling interest in consolidated joint venture |
|
|
49,062 |
|
|
50,319 |
|
|
Total equity |
|
|
2,531,832 |
|
|
2,351,120 |
|
|
Total liabilities and equity |
|
$ |
3,739,234 |
|
$ |
3,865,093 |
|
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, 2016 |
|
December 31, 2015 |
|
December 31, 2014 |
|
|||
|
REVENUES |
|
|
|
|
|
|
|
|
|
|
|
Room |
|
$ |
824,340 |
|
$ |
874,117 |
|
$ |
811,709 |
|
|
Food and beverage |
|
|
294,415 |
|
|
293,892 |
|
|
259,358 |
|
|
Other operating |
|
|
70,585 |
|
|
81,171 |
|
|
70,931 |
|
|
Total revenues |
|
|
1,189,340 |
|
|
1,249,180 |
|
|
1,141,998 |
|
|
OPERATING EXPENSES |
|
|
|
|
|
|
|
|
|
|
|
Room |
|
|
211,947 |
|
|
224,035 |
|
|
214,899 |
|
|
Food and beverage |
|
|
204,102 |
|
|
204,932 |
|
|
180,053 |
|
|
Other operating |
|
|
16,684 |
|
|
21,335 |
|
|
21,012 |
|
|
Advertising and promotion |
|
|
60,086 |
|
|
61,892 |
|
|
54,992 |
|
|
Repairs and maintenance |
|
|
44,307 |
|
|
46,557 |
|
|
45,901 |
|
|
Utilities |
|
|
30,424 |
|
|
34,543 |
|
|
34,141 |
|
|
Franchise costs |
|
|
36,647 |
|
|
40,096 |
|
|
38,271 |
|
|
Property tax, ground lease and insurance |
|
|
82,979 |
|
|
94,967 |
|
|
84,665 |
|
|
Other property-level expenses |
|
|
142,742 |
|
|
142,332 |
|
|
126,737 |
|
|
Corporate overhead |
|
|
25,991 |
|
|
33,339 |
|
|
28,739 |
|
|
Depreciation and amortization |
|
|
163,016 |
|
|
164,716 |
|
|
155,845 |
|
|
Total operating expenses |
|
|
1,018,925 |
|
|
1,068,744 |
|
|
985,255 |
|
|
Operating income |
|
|
170,415 |
|
|
180,436 |
|
|
156,743 |
|
|
Interest and other income |
|
|
1,800 |
|
|
3,885 |
|
|
3,479 |
|
|
Interest expense |
|
|
(50,283) |
|
|
(66,516) |
|
|
(72,315) |
|
|
Loss on extinguishment of debt |
|
|
(284) |
|
|
(2,964) |
|
|
(4,638) |
|
|
Gain on sale of assets |
|
|
18,413 |
|
|
226,217 |
|
|
— |
|
|
Income before income taxes and discontinued operations |
|
|
140,061 |
|
|
341,058 |
|
|
83,269 |
|
|
Income tax benefit (provision) |
|
|
616 |
|
|
(1,434) |
|
|
(179) |
|
|
Income from continuing operations |
|
|
140,677 |
|
|
339,624 |
|
|
83,090 |
|
|
Income from discontinued operations, net of tax |
|
|
— |
|
|
15,895 |
|
|
4,849 |
|
|
NET INCOME |
|
|
140,677 |
|
|
355,519 |
|
|
87,939 |
|
|
Income from consolidated joint ventures attributable to noncontrolling interests |
|
|
(6,480) |
|
|
(8,164) |
|
|
(6,708) |
|
|
Preferred stock dividends and redemption charge |
|
|
(15,964) |
|
|
(9,200) |
|
|
(9,200) |
|
|
INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS |
|
$ |
118,233 |
|
$ |
338,155 |
|
$ |
72,031 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted per share amounts: |
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations attributable to common stockholders |
|
$ |
0.55 |
|
$ |
1.54 |
|
$ |
0.34 |
|
|
Income from discontinued operations, net of tax |
|
|
— |
|
|
0.08 |
|
|
0.03 |
|
|
Basic and diluted income attributable to common stockholders per common share |
|
$ |
0.55 |
|
$ |
1.62 |
|
$ |
0.37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average common shares outstanding |
|
|
214,966 |
|
|
207,350 |
|
|
192,674 |
|
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, 2016 |
|
December 31, 2015 |
|
December 31, 2014 |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
140,677 |
|
$ |
355,519 |
|
$ |
87,939 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from consolidated joint ventures attributable to noncontrolling interests |
|
|
(6,480) |
|
|
(8,164) |
|
|
(6,708) |
|
|
Preferred stock dividends and redemption charge |
|
|
(15,964) |
|
|
(9,200) |
|
|
(9,200) |
|
|
Comprehensive income attributable to common stockholders |
|
$ |
118,233 |
|
$ |
338,155 |
|
$ |
72,031 |
|
See accompanying notes to consolidated financial statements.
F-5
SUNSTONE HOTEL INVESTORS, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(In thousands, except share data)
|
|
|
Preferred Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling |
|
|
|
|
|||||||||||||||
|
|
|
Series D |
|
Series E |
|
Series F |
|
Common Stock |
|
Additional |
|
|
|
|
Cumulative |
|
Interests in |
|
|
|
|
||||||||||||||||
|
|
|
Number of |
|
|
|
|
Number of |
|
|
|
|
Number of |
|
|
|
|
Number of |
|
|
|
|
Paid in |
|
Retained |
|
Dividends and |
|
Consolidated |
|
|
|
|
|||||
|
|
|
Shares |
|
Amount |
|
Shares |
|
Amount |
|
Shares |
|
Amount |
|
Shares |
|
Amount |
|
Capital |
|
Earnings |
|
Distributions |
|
Joint Ventures |
|
Total |
|
||||||||||
|
Balance at December 31, 2013 |
|
4,600,000 |
|
$ |
115,000 |
|
— |
|
$ |
— |
|
— |
|
$ |
— |
|
180,858,699 |
|
$ |
1,809 |
|
$ |
2,068,721 |
|
$ |
224,240 |
|
$ |
(511,444) |
|
$ |
54,073 |
|
$ |
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 |
|
|
|
Deferred stock compensation, net |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
520,346 |
|
|
5 |
|
|
6,690 |
|
|
— |
|
|
— |
|
|
— |
|
|
6,695 |
|
|
|
Distributions to noncontrolling interests |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(8,488) |
|
|
(8,488) |
|
|
|
Common stock distributions and distributions 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 |
|
|
305,503 |
|
|
(624,545) |
|
|
52,261 |
|
|
2,268,834 |
|
|
|
Deferred stock compensation, net |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
710,108 |
|
|
7 |
|
|
2,840 |
|
|
— |
|
|
— |
|
|
— |
|
|
2,847 |
|
|
|
Distributions to noncontrolling interests |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(9,981) |
|
|
(9,981) |
|
|
|
Sale of noncontrolling interest |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(125) |
|
|
(125) |
|
|
|
Issuance of common stock distributions declared in 2014 at $0.36 per share |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
2,127,565 |
|
|
21 |
|
|
37,328 |
|
|
— |
|
|
— |
|
|
— |
|
|
37,349 |
|
|
|
Common stock distributions and distributions payable at $1.41 per share |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(294,123) |
|
|
— |
|
|
(294,123) |
|
|
|
Series D preferred dividends and dividends payable at $2.00 per share |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(9,200) |
|
|
— |
|
|
(9,200) |
|
|
|
Net income |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
— |
|
|
347,355 |
|
|
— |
|
|
8,164 |
|
|
355,519 |
|
|
|
Modified retrospective adjustment due to adoption of ASU No. 2016-09 |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
154 |
|
|
(154) |
|
|
— |
|
|
— |
|
|
— |
|
|
|
Balance at December 31, 2015 |
|
4,600,000 |
|
|
115,000 |
|
— |
|
|
— |
|
— |
|
|
— |
|
207,604,391 |
|
|
2,076 |
|
|
2,458,889 |
|
|
652,704 |
|
|
(927,868) |
|
|
50,319 |
|
|
2,351,120 |
|
|
|
Redemption of preferred stock |
|
(4,600,000) |
|
|
(115,000) |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
4,052 |
|
|
— |
|
|
(4,052) |
|
|
— |
|
|
(115,000) |
|
|
|
Net proceeds from sales of preferred stock |
|
— |
|
|
— |
|
4,600,000 |
|
|
115,000 |
|
3,000,000 |
|
|
75,000 |
|
— |
|
|
— |
|
|
(6,640) |
|
|
— |
|
|
— |
|
|
— |
|
|
183,360 |
|
|
|
Net proceeds from sale of common stock |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
3,564,047 |
|
|
36 |
|
|
54,156 |
|
|
— |
|
|
— |
|
|
— |
|
|
54,192 |
|
|
|
Deferred stock compensation, net |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
1,482,621 |
|
|
15 |
|
|
7,414 |
|
|
— |
|
|
— |
|
|
— |
|
|
7,429 |
|
|
|
Distributions to noncontrolling interest |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(7,737) |
|
|
(7,737) |
|
|
|
Issuance of common stock distributions declared in 2015 at $1.26 per share |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
7,422,081 |
|
|
74 |
|
|
78,749 |
|
|
— |
|
|
— |
|
|
— |
|
|
78,823 |
|
|
|
Common stock distributions and distributions payable at $0.68 per share |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(149,120) |
|
|
— |
|
|
(149,120) |
|
|
|
Series D preferred stock dividends at $0.527778 per share through redemption date |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(2,428) |
|
|
— |
|
|
(2,428) |
|
|
|
Series E preferred stock dividends and dividends payable at $1.40445 per share |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(6,460) |
|
|
— |
|
|
(6,460) |
|
|
|
Series F preferred stock dividends and dividends payable at $1.00785 per share |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(3,024) |
|
|
— |
|
|
(3,024) |
|
|
|
Net income |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
— |
|
|
134,197 |
|
|
— |
|
|
6,480 |
|
|
140,677 |
|
|
|
Balance at December 31, 2016 |
|
— |
|
$ |
— |
|
4,600,000 |
|
$ |
115,000 |
|
3,000,000 |
|
$ |
75,000 |
|
220,073,140 |
|
$ |
2,201 |
|
$ |
2,596,620 |
|
$ |
786,901 |
|
$ |
(1,092,952) |
|
$ |
49,062 |
|
$ |
2,531,832 |
|
|
See accompanying notes to consolidated financial statements
F-6
SUNSTONE HOTEL INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
|
|
Year Ended |
|
Year Ended |
|
Year Ended |
|
|||
|
|
|
December 31, 2016 |
|
December 31, 2015 |
|
December 31, 2014 |
|
|||
|
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
140,677 |
|
$ |
355,519 |
|
$ |
87,939 |
|
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
Bad debt expense |
|
|
618 |
|
|
238 |
|
|
368 |
|
|
Gain on sale of assets, net |
|
|
(18,422) |
|
|
(242,234) |
|
|
(5,292) |
|
|
Loss on extinguishment of debt |
|
|
284 |
|
|
2,964 |
|
|
4,638 |
|
|
Gain on redemption of note receivable |
|
|
— |
|
|
(939) |
|
|
— |
|
|
Gain on derivatives, net |
|
|
(1,426) |
|
|
(309) |
|
|
(529) |
|
|
Depreciation |
|
|
159,919 |
|
|
160,405 |
|
|
152,581 |
|
|
Amortization of franchise fees and other intangibles |
|
|
3,743 |
|
|
6,479 |
|
|
7,543 |
|
|
Amortization of deferred financing fees |
|
|
2,200 |
|
|
3,148 |
|
|
2,777 |
|
|
Amortization of deferred stock compensation |
|
|
7,157 |
|
|
9,695 |
|
|
9,063 |
|
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
Restricted cash |
|
|
17,625 |
|
|
8,536 |
|
|
11,543 |
|
|
Accounts receivable |
|
|
(8,401) |
|
|
1,775 |
|
|
(1,532) |
|
|
Inventories |
|
|
40 |
|
|
44 |
|
|
100 |
|
|
Prepaid expenses and other assets |
|
|
977 |
|
|
1,445 |
|
|
3,121 |
|
|
Accounts payable and other liabilities |
|
|
476 |
|
|
4,619 |
|
|
7,273 |
|
|
Accrued payroll and employee benefits |
|
|
(54) |
|
|
(2,060) |
|
|
2,776 |
|
|
Net cash provided by operating activities |
|
|
305,413 |
|
|
309,325 |
|
|
282,369 |
|
|
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sales of assets |
|
|
41,587 |
|
|
565,115 |
|
|
110 |
|
|
Disposition deposit |
|
|
250 |
|
|
— |
|
|
— |
|
|
Proceeds from redemption of note receivable |
|
|
— |
|
|
1,125 |
|
|
— |
|
|
Restricted cash — replacement reserve |
|
|
(9,368) |
|
|
(2,642) |
|
|
(4,311) |
|
|
Acquisitions of hotel properties and other assets |
|
|
(2,447) |
|
|
— |
|
|
(276,558) |
|
|
Renovations and additions to hotel properties |
|
|
(182,185) |
|
|
(164,232) |
|
|
(125,975) |
|
|
Payment for interest rate derivative |
|
|
— |
|
|
(13) |
|
|
— |
|
|
Net cash (used in) provided by investing activities |
|
|
(152,163) |
|
|
399,353 |
|
|
(406,734) |
|
|
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
Proceeds from preferred stock offerings |
|
|
190,000 |
|
|
— |
|
|
— |
|
|
Payment of preferred stock offering costs |
|
|
(6,640) |
|
|
— |
|
|
— |
|
|
Redemption of preferred stock |
|
|
(115,000) |
|
|
— |
|
|
— |
|
|
Proceeds from common stock offerings |
|
|
55,133 |
|
|
— |
|
|
284,390 |
|
|
Payment of common stock offering costs |
|
|
(941) |
|
|
— |
|
|
(1,000) |
|
|
Repurchase of common stock for employee withholding obligations |
|
|
(2,641) |
|
|
(9,264) |
|
|
(3,774) |
|
|
Proceeds from notes payable and credit facility |
|
|
100,000 |
|
|
123,000 |
|
|
178,250 |
|
|
Payments on notes payable and credit facility |
|
|
(265,536) |
|
|
(450,812) |
|
|
(153,033) |
|
|
Payments for costs related to extinguishment of notes payable |
|
|
(173) |
|
|
(1,245) |
|
|
(4,051) |
|
|
Payments of deferred financing costs |
|
|
(1,759) |
|
|
(5,861) |
|
|
(2,346) |
|
|
Dividends and distributions paid |
|
|
(227,486) |
|
|
(77,544) |
|
|
(47,850) |
|
|
Distributions to noncontrolling interests |
|
|
(7,737) |
|
|
(9,981) |
|
|
(8,488) |
|
|
Net cash (used in) provided by financing activities |
|
|
(282,780) |
|
|
(431,707) |
|
|
242,098 |
|
|
Net (decrease) increase in cash and cash equivalents |
|
|
(129,530) |
|
|
276,971 |
|
|
117,733 |
|
|
Cash and cash equivalents, beginning of year |
|
|
499,067 |
|
|
222,096 |
|
|
104,363 |
|
|
Cash and cash equivalents, end of year |
|
$ |
369,537 |
|
$ |
499,067 |
|
$ |
222,096 |
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION |
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
50,107 |
|
$ |
63,552 |
|
$ |
69,511 |
|
|
Cash paid for income taxes, net of refunds received |
|
$ |
1,241 |
|
$ |
583 |
|
$ |
273 |
|
|
NONCASH INVESTING ACTIVITY |
|
|
|
|
|
|
|
|
|
|
|
Increase in accounts payable related to renovations and additions to hotel properties and other assets |
|
$ |
6,429 |
|
$ |
8,268 |
|
$ |
8,670 |
|
|
Amortization of deferred stock compensation — construction activities |
|
$ |
591 |
|
$ |
580 |
|
$ |
474 |
|
|
NONCASH FINANCING ACTIVITY |
|
|
|
|
|
|
|
|
|
|
|
Preferred stock redemption charge |
|
$ |
4,052 |
|
$ |
— |
|
$ |
— |
|
|
Issuance of common stock distributions |
|
$ |
78,823 |
|
$ |
37,349 |
|
$ |
— |
|
|
Issuance of common stock in connection with acquisition of hotel property |
|
$ |
— |
|
$ |
— |
|
$ |
60,000 |
|
|
Dividends and distributions payable |
|
$ |
119,847 |
|
$ |
265,124 |
|
$ |
76,694 |
|
See accompanying notes to consolidated financial statements.
F-7
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. 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, in transactions that are intended to generate qualifying income. As of December 31, 2016, the Company had interests in 28 hotels (the “28 hotels”), one of which was considered held for sale, leaving 27 hotels currently held for investment (the “27 hotels”). 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. |
|
5 |
|
|
Highgate Hotels L.P. and an affiliate |
|
3 |
|
|
Crestline Hotels & Resorts |
|
2 |
|
|
Hilton Worldwide |
|
2 |
|
|
Hyatt Corporation |
|
2 |
|
|
Davidson Hotels & Resorts |
|
1 |
|
|
Fairmont Hotels & Resorts (U.S.) |
|
1 |
(1) |
|
HEI Hotels & Resorts |
|
1 |
|
|
|
|
|
|
|
Total hotels owned as of December 31, 2016 |
|
28 |
|
|
(1) |
The Fairmont Newport Beach, California, was considered held for sale as of December 31, 2016, and subsequently sold in February 2017 (see Note 14). |
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements as of December 31, 2016 and 2015, and for the years ended December 31, 2016, 2015 and 2014, include the accounts of the Company, the Operating Partnership, the TRS Lessee and their subsidiaries. All significant intercompany balances and transactions have been eliminated. If the Company determines that it has an interest in a variable interest entity within the meaning of the Consolidation Topic of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”), the Company will consolidate the entity when it is determined to be the primary beneficiary of the entity. Based on its review, the Company determined that all of its subsidiaries were properly consolidated as of December 31, 2016 and 2015, and for the years ended December 31, 2016, 2015 and 2014.
Noncontrolling interest at both December 31, 2016 and 2015 represents the outside 25.0% equity interest in the Hilton San Diego Bayfront, which the Company includes in its financial statements on a consolidated basis.
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.
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
F-8
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.
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, 2016 and 2015, the Company had amounts in banks that were in excess of federally insured amounts.
Restricted Cash
Restricted cash is comprised of reserve accounts for debt service, interest reserves, seasonality 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 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 and $0.1 million at December 31, 2016 and 2015, respectively.
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 business combination 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. When we acquire a hotel property or other entity as a business combination, we use all available information to make these fair value determinations, and engage independent valuation specialists to assist in the fair value determinations of the long-lived assets acquired and the liabilities assumed. Due to the inherent subjectivity in determining the estimated fair value of long-lived assets, 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
F-9
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. Based on the Company’s review, management believes that there were no impairments on its long-lived assets in 2016, 2015 and 2014, and that the carrying values of its hotel properties and other assets are recoverable at December 31, 2016.
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 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 may be considered 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, the buyer waives any closing contingencies, there are no third party approvals necessary 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 December 31, 2016, the Company’s Fairmont Newport Beach, California, was considered held for sale, and subsequently sold in February 2017 (see Note 14). Based on the criteria noted above, the hotel was not included in discontinued operations. As of December 31, 2015, the Company had no hotels or other assets held for sale.
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 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.
Deferred financing fees related to both the Company’s undrawn credit facility and unfunded senior unsecured notes are included on the Company’s consolidated balance sheets as an asset. Deferred financing fees related to the Company’s undrawn credit facility are amortized ratably over the term of the line of credit arrangement, regardless of whether there are any outstanding borrowings on the line of credit arrangement. Deferred financing fees related to the Company’s unfunded senior unsecured notes will be reclassified to the appropriate current and long-term debt liabilities during the first quarter of 2017 once amounts are funded (see Note 14). Deferred financing fees related to the Company’s outstanding debt are included on the Company’s consolidated balance sheets as a contra-liability (see Note 7) and subsequently amortized ratably over the term of the related debt.
Interest Rate Derivatives
The Company’s objective in holding interest rate derivatives is to manage its exposure to the interest rate risks related to its floating rate debt. To accomplish this objective, the Company uses interest rate caps and swaps, none of which qualifies for effective hedge accounting treatment. 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.
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 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, parking, spa, entertainment and other guest services, along with tenant lease revenues related to hotel space leased by third parties, any cancellation
F-10
or attrition revenue and any performance guarantees. During 2016, the Company recognized $5.0 million in other operating revenue from a performance guarantee received from Marriott related to the Wailea Beach Resort. In addition, prior to its sale in September 2015, other operating revenue also included revenue generated by BuyEfficient, LLC Inc. (“BuyEfficient”), an electronic purchasing platform that allowed members to procure food, operating supplies, furniture, fixtures and equipment. 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 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.
Noncontrolling Interests
The Company’s financial statements include entities in which the Company has a controlling financial interest. Noncontrolling interest is the portion of equity (net assets) in a subsidiary not attributable, directly or indirectly, to a parent. Such noncontrolling 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 noncontrolling interests. Income or loss is allocated to noncontrolling 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, noncontrolling interests and total equity.
At December 31, 2016, 2015 and 2014, the noncontrolling interests reported in the Company’s financial statements included Hilton Worldwide’s 25.0% ownership in the Hilton San Diego Bayfront. Additionally, prior to the Company’s sale of its interests in the Doubletree Guest Suites Times Square in December 2015, the noncontrolling interests reported in the Company’s financial statements also included preferred investors that owned a $0.1 million preferred equity interest in a subsidiary captive REIT that owned the Doubletree Guest Suites Times Square.
Dividends
Under current federal income tax laws related to REITs, the Company is required to distribute at least 90% of its net taxable income to its stockholders. Currently, the Company pays quarterly cash dividends to its common stockholders, as well as to the preferred stockholders of its 6.95% Series E Cumulative Redeemable Preferred Stock (“Series E preferred stock”) and its 6.45% Series F Cumulative Preferred Stock (“Series F preferred stock”) as declared by the Company’s board of directors. Prior to its
F-11
redemption date in April 2016, the Company also paid quarterly cash dividends to the preferred stockholders of its 8.0% Series D Cumulative Redeemable Preferred Stock (“Series D preferred stock”) as declared by the Company’s 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, the net income per share for each class of stock (common stock and convertible preferred stock) is 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. Unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are considered participating securities and shall be included in the computation of earnings per share pursuant to the two-class method.
In accordance with the Earnings Per Share Topic of the FASB ASC, basic earnings (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 (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, 2016 |
|
December 31, 2015 |
|
December 31, 2014 |
|
|||
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
140,677 |
|
$ |
355,519 |
|
$ |
87,939 |
|
|
Income from consolidated joint ventures attributable to noncontrolling interests |
|
|
(6,480) |
|
|
(8,164) |
|
|
(6,708) |
|
|
Preferred stock dividends and redemption charge |
|
|
(15,964) |
|
|
(9,200) |
|
|
(9,200) |
|
|
Dividends paid on unvested restricted stock compensation |
|
|
(754) |
|
|
(1,405) |
|
|
(969) |
|
|
Undistributed income allocated to unvested restricted stock compensation |
|
|
— |
|
|
(155) |
|
|
— |
|
|
Numerator for basic and diluted income attributable to common stockholders |
|
$ |
117,479 |
|
$ |
336,595 |
|
$ |
71,062 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic and diluted common shares outstanding |
|
|
214,966 |
|
|
207,350 |
|
|
192,674 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted income attributable to common stockholders per common share |
|
$ |
0.55 |
|
$ |
1.62 |
|
$ |
0.37 |
|
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, 2016, 2015 and 2014, as their inclusion would have been anti-dilutive.
Segment Reporting
The Company considers each of its hotels to be an operating segment, none of which meets the threshold for a separate reportable segment in accordance with the Segment Reporting Topic of the FASB ASC. Currently, the Company operates in one segment, hotel ownership.
Recent Accounting Pronouncements
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
F-12
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 was originally to be effective during the first quarter of 2017; however, the FASB issued a one-year deferral in July 2015 so that it now becomes effective during the first quarter of 2018. ASU No. 2014-09 will require either a full retrospective approach or a modified retrospective approach, with early adoption permitted as of the original effective date.
In March 2016, the FASB clarified the principal versus agent guidance in ASU No. 2014-09 with it issuance of Accounting Standards Update No. 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)” (“ASU No. 2016-08”). In particular, ASU No. 2016-08 clarifies how an entity should identify the unit of accounting for the principal versus agent evaluation and how it should apply the control principle to certain types of arrangements, such as service transactions by explaining what a principal controls before the specified good or service is transferred to the customer. In addition, ASU No. 2016-08 reframes the indicators to focus on evidence that an entity is acting as a principal rather than as an agent. ASU No. 2016-08 will become effective, along with ASU No. 2014-09, during the first quarter of 2018. Similar to ASU No. 2014-09, ASU No. 2016-08 will require either a full retrospective approach or a modified retrospective approach, with early adoption permitted as of the original effective date.
In May 2016, the FASB amended ASU No. 2014-09’s guidance on transition, collectability, noncash consideration and the presentation of sales and other similar taxes with its issuance of Accounting Standards Update No. 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients” (“ASU No. 2016-12”). The amendments clarify that, for a contract to be considered completed at transition, all (or substantially all) of the revenue must have been recognized under legacy GAAP. This clarification is important because entities that use the modified retrospective transition approach need to apply the standard only to contracts that are not complete as of the date of initial application, and entities that use the full retrospective approach may apply certain practical expedients to completed contracts. In addition, ASU No. 2016-12 clarifies that an entity should consider the probability of collecting substantially all of the consideration to which it will be entitled in exchange for goods and services expected to be transferred to the customer rather than the total amount promised for all the goods or services in the contract. ASU No. 2016-12 also clarifies that an entity may consider its ability to manage its exposure to credit risk as part of the collectability assessment, as well as that the fair value of noncash consideration should be measured at contract inception when determining the transaction price. Finally, ASU No. 2016-12 allows an entity to make an accounting policy election to exclude from the transaction price certain types of taxes collected from a customer if it discloses that policy. ASU No. 2016-12 will become effective, along with ASU No. 2014-09, during the first quarter of 2018. Similar to ASU No. 2014-09, ASU No. 2016-12 will require either a full retrospective approach or a modified retrospective approach, with early adoption permitted as of the original effective date.
The Company is in the process of evaluating the impact that ASU No. 2014-09, along with the related clarifications and amendments in ASU No. 2016-08 and ASU No. 2016-12, will have on its recognition of revenue included in its consolidated financial statements. While the Company is still evaluating the impact that the ASUs will have on accounting for the gain recognized upon the sale of a hotel, there is a possibility that the adoption of ASU No. 2014-09 will affect the timing of any gain recognition in the consolidated financial statements. For example, under current guidance, a gain on the sale of hotel properties with contingencies and some future involvement is deferred until all contingencies have been removed. Under the new guidance, however, the entire gain on sale may be recognized upon the close of escrow. The Company expects to adopt the new ASUs under the modified retrospective approach.
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 No. 2014-12 became effective during the first quarter of 2016, requiring either a prospective or a modified retrospective approach. The Company’s adoption of ASU No. 2014-12 did not have an effect on its consolidated financial statements, and will not have an effect in the future unless the Company issues grants that fall within its scope.
In August 2014, the FASB issued Accounting Standards Update No. 2014-15, “Presentation of Financial Statements – Going Concern (Subtopic 205-40)” (“ASU No. 2014-15”), which requires management to evaluate an entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or available to be issued, when applicable). The evaluation requires management to perform two steps. Management must first evaluate whether there are conditions and events that raise substantial doubt about the entity’s ability to continue as a going concern (step 1). If management concludes that substantial doubt is raised, management also is required to consider whether its plans alleviate that doubt (step 2). Disclosures in the notes to the financial statements are required if management concludes that substantial doubt exists or that its plans alleviate substantial doubt that was raised. ASU No. 2014-15 requires that management perform a going concern evaluation for annual periods beginning in 2016, and for interim periods within annual periods beginning with the first quarter of 2017. The Company’s adoption of ASU No. 2014-15 in 2016 did not have an effect on its financial statements; however, if in the future the Company determines that there is substantial
F-13
doubt about the Company’s ability to continue as a going concern, the Company will be required to provide the additional disclosures outlined in ASU No. 2014-15 steps 1 and 2 in its consolidated financial statements.
In February 2015, the FASB issued Accounting Standards Update No. 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis” (“ASU No. 2015-02”), which eliminates the option allowing entities with interests in certain investment funds to follow previous consolidation guidance and makes other changes to both the variable interest model and the voting model. While ASU No. 2015-02 is aimed at asset managers, it will affect all reporting entities involved with limited partnerships or similar entities. In some cases consolidation conclusions will change. In other cases, reporting entities will need to provide additional disclosures about entities that currently aren’t considered VIEs but will be considered VIEs under the new guidance when they have a variable interest in those VIEs. Regardless of whether conclusions change or additional disclosure requirements are triggered, reporting entities will need to re-evaluate limited partnerships or similar entities for consolidation and revise their documentation. ASU No. 2015-02 changes (1) the identification of variable interests (fees paid to a decision maker or service provider), (2) the VIE characteristics for a limited partnership or similar entity and (3) the primary beneficiary determination. ASU No. 2015-02 became effective during the first quarter of 2016, requiring a modified retrospective approach. The Company’s adoption of ASU No. 2015-02 did not have a material effect on its consolidated financial statements.
In September 2015, the FASB issued Accounting Standards Update No. 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments” (“ASU No. 2015-16”), which eliminates the requirement for an acquirer in a business combination to account for measurement-period adjustments retrospectively. In a business combination, if the initial accounting is incomplete as of the end of the reporting period in which the acquisition occurs, the acquirer records provisional amounts based on information available at the acquisition date. The acquirer then adjusts these amounts as it obtains more information about facts and circumstances that existed as of the acquisition date. This period is called the measurement period. It ends when the acquirer receives the information it was seeking about facts and circumstances that existed as of the acquisition date or when it determines that it cannot obtain more information. The measurement period cannot exceed one year from the date of the acquisition. Under the previous guidance, an acquirer must recognize adjustments to provisional amounts during the measurement period retrospectively (i.e., as if the accounting for the business combination had been completed at the acquisition date). That is, the acquirer was required to revise comparative information on the income statement and balance sheet for any prior periods affected. Under ASU No. 2015-16, an acquirer will now recognize measurement-period adjustments during the period in which it determines the amount of the adjustment. The acquirer still must disclose the amounts and reasons for adjustments to the provisional amounts. The acquirer also must disclose, by line item, the amount of the adjustment reflected in the current-period income statement that would have been recognized in previous periods if the adjustment to provisional amounts had been recognized as of the acquisition date. Alternatively, an acquirer may present those amounts separately on the face of the income statement. ASU No. 2015-16 became effective during the first quarter of 2016, requiring a prospective approach. The Company’s adoption of ASU No. 2015-16 will have an effect on its consolidated financial statements and related disclosures when and if the Company has a business combination that requires a significant measurement-period adjustment.
In January 2016, the FASB issued Accounting Standards Update No. 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU No. 2016-01”), which makes targeted amendments to guidance on classifying and measuring financial instruments. ASU No. 2016-01 provides disclosure relief for public companies by eliminating the requirement to disclose the method(s) and significant assumptions used to estimate the fair value of financial instruments measured at amortized cost. ASU No. 2016-01 will become effective during the first quarter of 2018, with early adoption permitted. The Company chose to early adopt ASU No. 2016-01 effective January 1, 2016, and eliminated the disclosure in its consolidated financial statements of the methods and significant assumptions the Company use to calculate the fair value of its debt.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, “Leases (Topic 842)” (“ASU No. 2016-02”), which will require lessees to put most leases on their balance sheets but recognize expenses in the income statement in a manner similar to today’s accounting. The guidance also eliminates today’s real estate-specific provisions and changes the guidance on sale-leaseback transactions, initial direct costs and lease executory costs for all entities. For lessors, the standard modifies the classification criteria and the accounting for sales-type and direct financing leases. All entities will classify leases to determine how to recognize lease-related revenue and expense. Classification will continue to affect amounts that lessors record on the balance sheet. ASU No. 2016-02 will become effective during the first quarter of 2019, and will require a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. The Company is currently evaluating the impact that ASU No. 2016-02 will have on its consolidated financial statements, and, other than the inclusion of operating leases on the Company’s balance sheet, such effects have not yet been determined.
In March 2016, the FASB issued Accounting Standards Update No. 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (“ASU No. 2016-09”), which changes certain aspects of accounting for share-based payments to employees. The new guidance will require all income tax effects of awards to be recognized in the income statement when the awards vest or are settled. It also will allow an employer to repurchase more of an employee’s
F-14
shares for tax withholding purposes without triggering liability accounting and to make a policy election to account for forfeitures as they occur. ASU No. 2016-09 will become effective during the first quarter of 2017, with early adoption permitted, and will require a modified retrospective approach. As noted below, the Company chose to early adopt ASU No. 2016-09 effective January 1, 2016.
Upon adoption of ASU No. 2016-09, the Company elected to account for forfeitures as they occur. In addition, pursuant to employee statutory withholding obligations, the Company may repurchase more of an employee’s shares for tax withholding purposes up to the maximum statutory tax rate in the employee’s applicable jurisdictions.
In accordance with the transition provisions of the new guidance, the Company adjusted items on its consolidated balance sheet, consolidated statement of equity and consolidated statement of cash flows. The following financial statement line items have been adjusted on the Company’s consolidated balance sheet and consolidated statement of equity for the year ended December 31, 2015 in order to reverse the effects of forfeitures recognized in prior years, and on the consolidated statement of cash flows for the years ended December 31, 2015 and 2014 to reclassify the repurchase of employee common stock for employee withholding obligations from an operating activity to a financing activity (in thousands):
|
|
|
|
|
Effect of Change in |
|
|
|
|
||
|
|
|
As Originally Reported |
|
Accounting Principle |
|
As Adjusted |
|
|||
|
2015: |
|
|
|
|
|
|
|
|
|
|
|
Consolidated Balance Sheet and Consolidated Statement of Equity as of December 31, 2015: |
|
|
|
|
|
|
|
|
|
|
|
Additional paid in capital |
|
$ |
2,458,735 |
|
$ |
154 |
|
$ |
2,458,889 |
|
|
Retained earnings |
|
$ |
652,858 |
|
$ |
(154) |
|
$ |
652,704 |
|
|
|
|
|
|
|
|
|
|
|||
|
Consolidated Statement of Cash Flows for the year ended December 31, 2015: |
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred stock compensation |
|
$ |
6,536 |
|
$ |
3,159 |
|
$ |
9,695 |
|
|
Accrued payroll and employee benefits |
|
$ |
(8,165) |
|
$ |
6,105 |
|
$ |
(2,060) |
|
|
Net cash provided by operating activities |
|
$ |
300,061 |
|
$ |
9,264 |
|
$ |
309,325 |
|
|
Repurchase of common stock for employee withholding obligations |
|
$ |
— |
|
$ |
(9,264) |
|
$ |
(9,264) |
|
|
Net cash used in financing activities |
|
$ |
(422,443) |
|
$ |
(9,264) |
|
$ |
(431,707) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014: |
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statement of Cash Flows for the year ended December 31, 2014: |
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred stock compensation |
|
$ |
6,221 |
|
$ |
2,842 |
|
$ |
9,063 |
|
|
Accrued payroll and employee benefits |
|
$ |
1,844 |
|
$ |
932 |
|
$ |
2,776 |
|
|
Net cash provided by operating activities |
|
$ |
278,595 |
|
$ |
3,774 |
|
$ |
282,369 |
|
|
Repurchase of common stock for employee withholding obligations |
|
$ |
— |
|
$ |
(3,774) |
|
$ |
(3,774) |
|
|
Net cash provided by financing activities |
|
$ |
245,872 |
|
$ |
(3,774) |
|
$ |
242,098 |
|
In June 2016, the FASB issued Accounting Standards Update No. 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU No. 2016-13”), which will replace today’s “incurred loss” approach with an “expected loss” model for instruments measured at amortized cost. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, entities will be required to use a new forward looking “expected loss” model that generally will result in the earlier recognition of allowances for losses. In addition, entities will have to disclose significantly more information, including information they use to track credit quality by year of origination for most financing receivables. ASU No. 2016-13 is effective during the first quarter of 2020. ASU No. 2016-13 will require a modified retrospective approach, with early adoption permitted during the first quarter of 2019. The Company is currently evaluating the impact that ASU No. 2016-13 will have on its consolidated financial statements.
F-15
In September 2016, the FASB issued Accounting Standards Update No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force)” (“ASU No. 2016-15”), which clarifies how entities should classify certain cash receipts and cash payments on the statement of cash flows. ASU No. 2016-15 addresses certain issues where diversity in practice was identified. It amends existing guidance, which is principles based and often requires judgment to determine the appropriate classification of cash flows as operating, investing or financing activities. In addition, ASU No. 2016-15 clarifies how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. ASU No. 2016-15 is effective during the first quarter of 2018, and will generally require a retrospective approach. Early adoption is permitted. The Company does not believe that the adoption of ASU No. 2016-15 will have a material effect on its consolidated financial statements.
In November 2016, the FASB issued Accounting Standards Update No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force)” (“ASU No. 2016-18”), which will require entities to show the changes in total cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. As a result, entities will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. When cash, cash equivalents, restricted cash and restricted cash equivalents are presented in more than one line item on the balance sheet, the new guidance requires a reconciliation of the totals in the statement of cash flows to the related caption in the balance sheet. This reconciliation can be presented either on the face of the statement of cash flows or in the notes to the financial statements. ASU No. 2016-18 is effective in the first quarter of 2018, and will require a retrospective approach. Early adoption in an interim period is permitted, but any adjustments must be reflected as of the beginning of the fiscal year that includes the interim period. The Company is currently evaluating the impact that ASU No. 2016-18 will have on its consolidated financial statements.
In January 2017, the FASB issued Accounting Standards Update No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business” (“ASU No. 2017-01”), which changes the definition of a business to assist entities with evaluating when a set of transferred assets and activities is a business. Under the new guidance, an entity first determines whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. If this threshold is met, the set of transferred assets and activities is not a business. If it is not met, the entity then evaluates whether the set meets the requirement that a business include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs. ASU No. 2017-01 is effective in the first quarter of 2018, and the guidance is to be applied prospectively. Early adoption is permitted. Once adopted, the Company will be required to analyze future hotel acquisitions to determine if the transaction qualifies as the purchase of a business or an asset. Depending on the Company’s conclusion, ASU No. 2017-01 may have an effect on its consolidated financial statements.
3. Investment in Hotel Properties
Investment in hotel properties, net consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|||||
|
|
|
2016 |
|
2015 |
|
|||
|
Land |
|
$ |
531,660 |
|
$ |
542,660 |
|
|
|
Buildings and improvements |
|
|
3,135,806 |
|
|
3,109,562 |
|
|
|
Furniture, fixtures and equipment |
|
|
512,372 |
|
|
480,832 |
|
|
|
Intangibles |
|
|
49,015 |
|
|
47,578 |
|
|
|
Franchise fees |
|
|
1,021 |
|
|
1,082 |
|
|
|
Construction in process |
|
|
65,449 |
|
|
97,974 |
|
|
|
Investment in hotel properties, gross |
|
|
4,295,323 |
|
|
4,279,688 |
|
|
|
Accumulated depreciation and amortization |
|
|
(1,137,104) |
|
|
(1,048,836) |
|
|
|
Investment in hotel properties, net |
|
$ |
3,158,219 |
|
$ |
3,230,852 |
|
|
Acquisitions - 2016
In June 2016, the Company purchased the air rights intangible asset associated with its Renaissance Harborplace for $2.4 million, including closing costs. The air rights intangible asset, which has an indefinite useful life, and therefore, is not amortized, is included with intangibles in the Company’s investment in hotel properties on its consolidated balance sheet. This non-amortizable asset will be reviewed annually for impairment and more frequently if events or circumstances indicate that the asset may be impaired. If the 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.
F-16
Acquisitions - 2015
The Company did not acquire any hotel properties or other assets during 2015.
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 ATM Agreements (see Note 10), 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 Wailea Beach Resort 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 Wailea Beach Resort 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 Wailea Beach Resort 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 Wailea Beach Resort have been included in the Company’s consolidated statements of operations from the acquisition date of July 17, 2014 through the year ended December 31, 2016.
Unaudited Pro Forma Results
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 land underlying the Fairmont Newport Beach in June 2014, and the Wailea Beach Resort in July 2014 had occurred on January 1, 2014. 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 |
|
|
|
Revenues |
|
$ |
1,175,367 |
|
|
|
|
|
|
|
|
Income attributable to common stockholders from continuing operations |
|
$ |
74,811 |
|
|
|
|
|
|
|
|
Income per diluted share attributable to common stockholders from continuing operations |
|
$ |
0.39 |
|
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 hotel acquisition.
F-17
Intangible Assets
Intangible assets included in the Company’s investment in hotel properties, net consisted of the following (in thousands):
|
|
|
December 31, |
|
||||
|
|
|
|
2016 |
|
|
2015 |
|
|
Advanced bookings (1) |
|
$ |
10,621 |
|
$ |
10,621 |
|
|
Easement agreement (2) |
|
|
9,727 |
|
|
9,727 |
|
|
Ground lease/air rights (3) |
|
|
24,107 |
|
|
21,660 |
|
|
In-place lease agreements (4) |
|
|
1,616 |
|
|
2,264 |
|
|
Above market lease agreements (5) |
|
|
94 |
|
|
456 |
|
|
Below market management agreement (6) |
|
|
2,850 |
|
|
2,850 |
|
|
|
|
|
49,015 |
|
|
47,578 |
|
|
Accumulated amortization |
|
|
(13,192) |
|
|
(10,140) |
|
|
|
|
$ |
35,823 |
|
$ |
37,438 |
|
Amortization expense on these intangible assets for the years ended December 31, 2016, 2015 and 2014 consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016 |
|
2015 |
|
2014 |
|
|||
|
Advanced bookings (1) |
|
$ |
2,340 |
|
$ |
2,340 |
|
$ |
1,769 |
|
|
Ground lease/air rights (3) |
|
|
255 |
|
|
3,794 |
|
|
4,115 |
|
|
In-place lease agreements (4) |
|
|
697 |
|
|
1,455 |
|
|
830 |
|
|
Above market lease agreements (5) |
|
|
301 |
|
|
90 |
|
|
83 |
|
|
Below market management agreement (6) |
|
|
469 |
|
|
469 |
|
|
469 |
|
|
|
|
$ |
4,062 |
|
$ |
8,148 |
|
$ |
7,266 |
|
|
(1) |
Advanced bookings as of December 31, 2016 consist of advance deposits related to the purchases of the Boston Park Plaza, the Hyatt Regency San Francisco, and the Wailea Beach Resort. 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 Wailea Beach Resort 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 lease/air rights as of December 31, 2016 include a ground lease at the Hilton Times Square and an air rights asset at the Renaissance Harborplace. The ground lease agreement at the Hilton Times Square was valued at fair value at the date of acquisition. The agreement is amortized using the straight-line method over the remaining non-cancelable 74-year lease term as of December 31, 2016. The amortization expense for the agreement is included in property tax, ground lease and insurance expense in the Company’s consolidated statements of operations. As noted above in the discussion regarding 2016 acquisitions, during 2016, the Company purchased the air rights intangible asset associated with the Renaissance Harborplace for $2.4 million, including closing costs. The air rights asset has an indefinite useful life, and therefore, is not amortized. During 2015, the Company wrote off $81.5 million related to the air lease intangible asset net of accumulated amortization at the Doubletree Guest Suites Times Square due to the Company’s December 2015 sale of its interests in the hotel, which reduced the gain recognized on the sale. |
|
(4) |
In-place lease agreements as of December 31, 2016 include in-place lease agreements at the Hilton New Orleans St. Charles, the Hilton San Diego Bayfront, the Hyatt Regency San Francisco and the Wailea Beach Resort. The 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 and 30 months as of December 31, 2016. The amortization expense for the agreements is included in depreciation and amortization expense in the Company’s consolidated statements of operations. During 2015, the Company wrote off $2.4 million related to in-place lease intangible assets net of accumulated |
F-18
amortization at the Doubletree Guest Suites Times Square due to the Company’s December 2015 sale of its interests in the hotel, which reduced the gain recognized on the sale. |
|
(5) |
The above market lease agreements as of December 31, 2016 consist of favorable tenant lease assets at the Hilton New Orleans St. Charles and the Hyatt Regency San Francisco. 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 and 19 months as of December 31, 2016. 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 seven months and six years each as of December 31, 2016. The amortization expense for the agreement is included in other property-level expenses 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):
|
|
|
|
|
|
|
2017 |
|
$ |
3,109 |
|
|
2018 |
|
$ |
1,739 |
|
|
2019 |
|
$ |
382 |
|
|
2020 |
|
$ |
347 |
|
|
2021 |
|
$ |
347 |
|
4. Disposals and Discontinued Operations
Disposals
The Company classified the Fairmont Newport Beach as held for sale as of December 31, 2016, and subsequently sold the hotel in February 2017 (see Note 14). The sale does not represent a strategic shift that will have a major impact on the Company’s business plan or its primary markets, and therefore, the sale of the hotel did not qualify as a discontinued operation. The Company has classified the assets and liabilities related to the Fairmont Newport Beach as held for sale as follows (in thousands):
|
|
|
December 31, |
|
|
|
|
2016 |
|
|
Accounts receivable, net |
|
$ |
452 |
|
Inventories |
|
|
126 |
|
Prepaid expenses |
|
|
386 |
|
Investment in hotel property, net |
|
|
77,971 |
|
Other assets, net |
|
|
178 |
|
Assets held for sale, net |
|
$ |
79,113 |
|
|
|
|
|
|
Accounts payable and accrued expenses |
|
$ |
781 |
|
Accrued payroll and employee benefits |
|
|
751 |
|
Other current liabilities |
|
|
1,473 |
|
Other liabilities |
|
|
148 |
|
Liabilities of assets held for sale |
|
$ |
3,153 |
In May 2016, the Company sold the leasehold interest in the 203-room Sheraton Cerritos located in Cerritos, California for net proceeds of $41.2 million. The Company recognized a net gain on the sale of $18.2 million. The sale did not represent a strategic shift that had a major impact on the Company’s business plan or its primary markets, and therefore, the sale of the hotel did not qualify as a discontinued operation.
In September 2015, the Company sold BuyEfficient for net proceeds of $26.4 million. The Company recognized a net gain on the sale of $11.7 million. The sale did not represent a strategic shift that had a major impact on the Company’s business plan or its primary markets, and therefore, the sale of BuyEfficient did not qualify as a discontinued operation. Coterminous with the sale of BuyEfficient, the Company wrote off $8.4 million of goodwill, along with net intangible assets of $6.2 million related to certain trademarks, customer and supplier relationships and intellectual property related to internally developed software, both of which reduced the Company’s gain on the sale of BuyEfficient.
F-19
In December 2015, the Company sold its interests in the 468-room Doubletree Guest Suites Times Square located in New York City, New York for net proceeds of $522.7 million. The Company recognized a net gain on the sale of $214.5 million. The sale did not represent a strategic shift that had a major impact on the Company’s business plan or its primary markets, and therefore, the sale of the hotel did not qualify as a discontinued operation. Concurrent with the sale, the Company wrote off $83.9 million of net intangible assets (see Note 3), which reduced the Company’s gain on the sale. In addition, the Company repaid the remaining $175.0 million balance of the mortgage secured by the hotel, and wrote off $1.7 million in related deferred financing fees (see Note 7).
The following table provides summary results of operations for the Sheraton Cerritos, BuyEfficient and the Doubletree Guest Suites Times Square, which are included in continuing operations (in thousands):
|
|
|
2016 |
|
2015 |
|
2014 |
||||||||
|
Total revenues |
|
$ |
4,846 |
|
$ |
84,114 |
|
$ |
89,476 | |||||
|
Income before income taxes and discontinued operations (1) |
|
$ |
876 |
|
$ |
4,973 |
|
$ |
9,625 | |||||
|
Gain on sale of assets |
|
$ |
18,223 |
|
$ |
226,217 |
|
$ |
— |
|||||
|
(1) |
Income before income taxes and discontinued operations for the year ended December 31, 2015 includes $1.6 million in severance costs related to the Company’s sale of BuyEfficient. These costs are included in other property-level expenses on the Company’s statement of operations. Income before income taxes and discontinued operations does not include the gain recognized on the sales of the Sheraton Cerritos, BuyEfficient and the Doubletree Guest Suites Times Square. |
Discontinued Operations
The following table sets forth the discontinued operations for the years ended December 31, 2016, 2015 and 2014 for the 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, which the Company sold in 2013, as well as the expense recognized in 2014 for the hotels sold in 2004, 2005, 2010 and 2013 (in thousands):
|
|
|
2016 |
|
2015 |
|
2014 |
|
|||
|
Operating expenses |
|
$ |
— |
|
$ |
— |
|
$ |
(350) |
|
|
Income tax provision |
|
|
— |
|
|
(105) |
|
|
— |
|
|
Gain on sale of hotels and other assets, net |
|
|
— |
|
|
16,000 |
|
|
5,199 |
|
|
Income from discontinued operations, net of tax |
|
$ |
— |
|
$ |
15,895 |
|
$ |
4,849 |
|
In January 2013, the Company sold the Rochester Portfolio to an unaffiliated third party. The Company reclassified the Rochester Portfolio’s results of operations for January 2013 to discontinued operations, net of tax on its consolidated statements of operations.
Upon sale of the Rochester Hotels in January 2013, the Company retained a $25.0 million preferred equity investment (the “Preferred Equity Investment”) in the Rochester Hotels, and provided the buyer of the Rochester Portfolio with a $3.7 million working capital loan, resulting in a $28.7 million deferred gain on the sale. The gain was to be deferred until the Preferred Equity Investment was either redeemed or sold and the working capital loan was repaid. Both the Preferred Equity Investment and the working capital loan were carried net of deferred gains, resulting in zero balances on the Company’s balance sheet.
In July 2015, the Company sold the Preferred Equity Investment and settled the working capital loan for an aggregate payment of $16.0 million, plus accrued interest. In accordance with the Real Estate Subtopic of the FASB ASC, the Company recognized a $16.0 million gain on the sale of the Rochester Portfolio, along with related income tax expense of $0.1 million, in discontinued operations, net of tax during the year ended December 31, 2015, as these additional sales proceeds could not be recognized until realized.
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, net of tax for the year ended December 31, 2014. The pension plan liability totals $7.0 million as of both December 31, 2016 and 2015, and is included in other liabilities on the Company’s consolidated balance sheets. The remaining $7.0 million 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.
F-20
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 in January 2013 related to potential future costs for certain capital expenditures at one of the hotels in the Rochester Portfolio. During 2014, the Company accrued an additional $1.8 million in accordance with the Contingencies Topic of the FASB ASC, which is included in discontinued operations, net of tax for the year ended December 31, 2014. The contingency was paid in full by the end of the first quarter of 2015.
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.
5. Fair Value Measurements and Interest Rate Derivatives
Fair Value Measurements
As of December 31, 2016 and 2015, 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 of December 31, 2016 and 2015, the only financial instruments that the Company measures at fair value are its interest rate derivatives, along with a life insurance policy and a related retirement benefit agreement. In accordance with the Fair Value Measurement and Disclosure Topic of the FASB ASC, the Company estimates the fair value of its interest rate derivatives using Level 2 measurements based on quotes obtained from the counterparties, which are based upon the consideration that would be required to terminate the agreements. Both the life insurance policy and the related retirement benefit agreement, which are for a former Company associate, are valued using Level 2 measurements.
F-21
The following table presents the Company’s assets measured at fair value on a recurring and non-recurring basis at December 31, 2016 and 2015 (in thousands):
|
|
|
|
|
|
Fair Value Measurements at Reporting Date |
|
|||||||
|
|
|
Total |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
||||
|
December 31, 2016: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate cap derivative |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
|
Interest rate swap derivatives |
|
|
1,749 |
|
|
— |
|
|
1,749 |
|
|
— |
|
|
Life insurance policy (1) |
|
|
861 |
|
|
— |
|
|
861 |
|
|
— |
|
|
Total assets measured at fair value at December 31, 2016 |
|
$ |
2,610 |
|
$ |
— |
|
$ |
2,610 |
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate cap derivative |
|
$ |
1 |
|
$ |
— |
|
$ |
1 |
|
$ |
— |
|
|
Interest rate swap derivative |
|
|
759 |
|
|
|
|
|
759 |
|
|
|
|
|
Life insurance policy (1) |
|
|
964 |
|
|
— |
|
|
964 |
|
|
— |
|
|
Total assets measured at fair value at December 31, 2015 |
|
$ |
1,724 |
|
$ |
— |
|
$ |
1,724 |
|
$ |
— |
|
|
(1) |
Includes the split life insurance policy for a former Company associate. 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, 2016 and 2015 (in thousands):
|
|
|
|
|
|
Fair Value Measurements at Reporting Date |
|
|||||||
|
|
|
Total |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
||||
|
December 31, 2016: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement benefit agreement (1) |
|
$ |
861 |
|
$ |
— |
|
$ |
861 |
|
$ |
— |
|
|
Total liabilities measured at fair value at December 31, 2016 |
|
$ |
861 |
|
$ |
— |
|
$ |
861 |
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap derivative |
|
$ |
437 |
|
$ |
— |
|
$ |
437 |
|
$ |
— |
|
|
Retirement benefit agreement (1) |
|
|
964 |
|
|
— |
|
|
964 |
|
|
— |
|
|
Total liabilities measured at fair value at December 31, 2015 |
|
$ |
1,401 |
|
$ |
— |
|
$ |
1,401 |
|
$ |
— |
|
|
(1) |
Includes the retirement benefit agreement for a former Company associate. The agreement calls for the balance of the retirement benefit agreement to be paid out to the former associate in ten annual installments, beginning in 2011. As such, the Company has paid the former associate a total of $1.2 million through December 31, 2016, 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. |
Interest Rate Derivatives
The Company’s interest rate derivatives consisted of the following at December 31, 2016 and 2015 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Fair Value Asset (Liability) |
|
|||||
|
|
|
Strike / Capped |
|
Effective |
Maturity |
|
Notional |
|
December 31, |
|
|||||||
|
Hedged Debt |
Type |
Rate |
Index |
Date |
Date |
|
Amount |
|
2016 |
|
2015 |
|
|||||
|
Hilton San Diego Bayfront (1) |
Cap |
4.250 |
% |
1-Month LIBOR |
April 15, 2015 |
May 1, 2017 |
|
$ |
111,301 |
|
$ |
— |
|
$ |
1 |
|
|
|
$85.0 million term loan (2) |
Swap |
3.391 |
% |
1-Month LIBOR |
October 29, 2015 |
September 2, 2022 |
|
$ |
85,000 |
|
$ |
1,336 |
|
$ |
759 |
|
|
|
$100.0 million term loan (3) |
Swap |
3.653 |
% |
1-Month LIBOR |
January 29, 2016 |
January 31, 2023 |
|
$ |
100,000 |
|
$ |
413 |
|
$ |
(437) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,749 |
|
$ |
323 |
|
|
|
(1) |
The fair value of the Hilton San Diego Bayfront cap agreement is included in other assets, net on the accompanying consolidated balance sheets as of both December 31, 2016 and 2015. |
|
(2) |
The fair value of the $85.0 million term loan swap agreement is included in other assets, net on the accompanying consolidated balance sheets as of both December 31, 2016 and 2015. The 1-month LIBOR rate was swapped to a fixed rate of 1.591%. |
F-22
|
(3) |
The fair value of the $100.0 million term loan swap agreement is included in other assets, net and other liabilities on the accompanying consolidated balance sheets as of December 31, 2016 and 2015, respectively. The 1-month LIBOR rate was swapped to a fixed rate of 1.853%. |
Changes in the fair values of the Company’s interest rate derivatives resulted in decreases to interest expense for the years ended December 31, 2016, 2015 and 2014 as follows (in thousands):
|
|
|
2016 |
|
2015 |
|
2014 |
|
|||
|
Gain on derivatives, net |
|
$ |
(1,426) |
|
$ |
(309) |
|
$ |
(529) |
|
Fair Value of Debt
As of December 31, 2016 and 2015, 76.2% and 79.5%, respectively, of the Company’s outstanding debt had fixed interest rates, including the effects of interest rate swap agreements. The Company’s principal value of its consolidated debt totaled $0.9 billion and $1.1 billion as of December 31, 2016 and 2015, respectively. Using Level 3 measurements, the Company estimates that the fair market value of its debt totaled $0.9 billion and $1.1 billion as of December 31, 2016 and 2015, respectively.
6. Other Assets
Other assets, net consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
||||
|
|
|
2016 |
|
2015 |
|
||
|
Property and equipment, net |
|
$ |
779 |
|
$ |
1,341 |
|
|
Land held for development |
|
|
— |
|
|
188 |
|
|
Goodwill |
|
|
990 |
|
|
990 |
|
|
Deferred expense on straight-lined third-party tenant leases |
|
|
2,876 |
|
|
3,336 |
|
|
Interest rate derivatives |
|
|
1,749 |
|
|
760 |
|
|
Other receivables |
|
|
1,673 |
|
|
2,201 |
|
|
Other |
|
|
1,322 |
|
|
1,570 |
|
|
Total other assets, net |
|
$ |
9,389 |
|
$ |
10,386 |
|
As of December 31, 2016 and 2015, the property and equipment, net noted above consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
2016 |
|
2015 |
|
||
|
Cost basis |
|
$ |
10,807 |
|
$ |
10,785 |
|
|
Accumulated depreciation |
|
|
(10,028) |
|
|
(9,444) |
|
|
Property and equipment, net |
|
$ |
779 |
|
$ |
1,341 |
|
In December 2016, the Company sold its land held for development for gross proceeds of $0.4 million, and recognized a net gain on the sale of $0.2 million.
F-23
7. Notes Payable
Notes payable consisted of the following at December 31 (in thousands):
|
|
|
2016 |
|
2015 |
|
||
|
Notes payable requiring payments of interest and principal, with fixed rates ranging from 4.12% to 5.95%; maturing at dates ranging from April 2017 through January 2025. The notes are collateralized by first deeds of trust on five hotel properties at December 31, 2016, and eight hotel properties at December 31, 2015. |
|
$ |
528,604 |
|
$ |
791,073 |
|
|
Note payable requiring payments of interest and principal, bearing a blended rate of one-month LIBOR plus 225 basis points; maturing in August 2019. The note is collateralized by a first deed of trust on one hotel property. |
|
|
222,340 |
|
|
225,407 |
|
|
Unsecured term loan requiring payments of interest only, with a blended interest rate based on a pricing grid with a range of 180 to 255 basis points over LIBOR, depending on the Company's leverage ratios. LIBOR has been swapped to a fixed rate of 1.591%, resulting in an effective interest rate of 3.391% based on the Company's current leverage. Matures in September 2022. |
|
|
85,000 |
|
|
85,000 |
|
|
Unsecured term loan requiring payments of interest only, with a blended interest rate based on a pricing grid with a range of 180 to 255 basis points over LIBOR, depending on the Company's leverage ratios. LIBOR has been swapped to a fixed rate of 1.853%, resulting in an effective interest rate of 3.653% based on the Company's current leverage. Matures in January 2023. |
|
|
100,000 |
|
|
— |
|
|
Total notes payable |
|
$ |
935,944 |
|
$ |
1,101,480 |
|
|
|
|
|
|
|
|
|
|
|
Current portion of notes payable |
|
$ |
186,034 |
|
$ |
86,840 |
|
|
Less: current portion of deferred financing fees |
|
|
(1,105) |
|
|
(1,064) |
|
|
Carrying value of current portion of notes payable |
|
$ |
184,929 |
|
$ |
85,776 |
|
|
|
|
|
|
|
|
|
|
|
Notes payable, less current portion |
|
$ |
749,910 |
|
$ |
1,014,640 |
|
|
Less: long-term portion of deferred financing fees |
|
|
(3,536) |
|
|
(3,821) |
|
|
Carrying value of notes payable, less current portion |
|
$ |
746,374 |
|
$ |
1,010,819 |
|
Aggregate future principal maturities and amortization of notes payable at December 31, 2016, are as follows (in thousands):
|
|
|
|
|
|
|
2017 |
|
$ |
186,034 |
|
|
2018 |
|
|
11,006 |
|
|
2019 |
|
|
223,880 |
|
|
2020 |
|
|
84,137 |
|
|
2021 |
|
|
111,247 |
|
|
Thereafter |
|
|
319,640 |
|
|
Total |
|
$ |
935,944 |
|
Notes Payable Transactions - 2016
In January 2016, the Company drew the available funds of $100.0 million under an unsecured term loan agreement, and used the proceeds in February 2016, combined with cash on hand, to repay the $114.2 million loan secured by the Boston Park Plaza. The Boston Park Plaza loan was scheduled to mature in February 2018, and was available to be repaid without penalty in February 2016. The $100.0 million unsecured term loan matures in January 2023, and bears interest based on a pricing grid with a range of 180 to 255 basis points over LIBOR, depending on the Company’s leverage ratios. The Company entered into a forward swap agreement in December 2015 that fixed the LIBOR rate at 1.853% for the duration of the $100.0 million term loan (see Note 5). Based on the Company’s current leverage and the swap in place, the loan bears interest at an effective rate of 3.653%.
In May 2016, the Company repaid $72.6 million of debt secured by the Renaissance Orlando at SeaWorld®, using proceeds received from its issuance of Series F Cumulative Redeemable Preferred Stock (“Series F preferred stock”) in May 2016 (see Note 10). The Renaissance Orlando at SeaWorld® loan was scheduled to mature in July 2016, and was available to be repaid without penalty in May 2016.
In December 2016, the Company repaid $66.1 million of debt secured by the Embassy Suites Chicago, using cash on hand. The Embassy Suites Chicago loan was scheduled to mature in March 2017, and was available to be repaid without penalty at the end of December 2016.
F-24
Notes Payable Transactions – 2015
In April 2015, the Company entered into a $400.0 million senior unsecured credit facility, which replaced its prior $150.0 million senior unsecured credit facility. The credit facility’s interest rate is based on a pricing grid with a range of 155 to 230 basis points over LIBOR, depending on the Company’s leverage ratios, and represents a decline in pricing from the prior credit facility of approximately 30 to 60 basis points. The initial term of the credit facility is four years, expiring in April 2019, with an option to extend for an additional one year subject to the satisfaction of certain customary conditions. The credit facility also includes an accordion option, which allows the Company to request additional lender commitments for up to a total capacity of $800.0 million. As of December 31, 2016, the Company has no outstanding amounts due under its credit facility.
In May 2015, the Company repaid $99.1 million of debt secured by four of its hotels, the Marriott Houston, the Marriott Park City, the Marriott Philadelphia and the Marriott Tysons Corner.
In October 2015, the Company drew down $85.0 million in funds available from a term loan supplement agreement under its credit facility and used the proceeds, combined with cash on hand, to repay the $85.9 million loan secured by the Renaissance Harborplace, which loan was scheduled to mature in January 2016. The $85.0 million unsecured term loan matures in September 2022, and bears interest based on a pricing grid with a range of 180 to 255 basis points over LIBOR, depending on the Company’s leverage ratios. Additionally, the Company entered into a swap agreement effective October 29, 2015, fixing the LIBOR rate at 1.591% for the duration of the $85.0 million term loan (see Note 5). Based on the Company’s current leverage, the loan reflects a fixed rate of 3.391%.
In December 2015, the Company repaid the $30.7 million loan secured by the Hilton North Hilton, which loan was scheduled to mature in March 2016. The Company funded the repayment of the loan using cash on hand.
Additionally, in December 2015, the Company repaid the remaining $175.0 million balance of the loan secured by the Doubletree Guest Suites Times Square concurrent with the sale of the hotel (see Note 4).
Deferred Financing Fees and Losses on Extinguishment of Debt
Deferred financing fees and losses on extinguishment of debt for the years ended December 31, 2016, 2015 and 2014 were as follows (in thousands):
|
|
|
2016 (1) |
|
2015 (2) |
|
2014 (3) |
|
|||
|
Payments of deferred financing costs |
|
$ |
1,759 |
|
$ |
5,861 |
|
$ |
2,346 |
|
|
Accelerated amortization of deferred financing fees |
|
$ |
— |
|
$ |
455 |
|
$ |
— |
|
|
Loss on extinguishment of debt |
|
$ |
284 |
|
$ |
2,964 |
|
$ |
4,638 |
|
|
(1) |
During the year ended December 31, 2016, the Company paid a total of $1.8 million in deferred financing fees related to its new $100.0 million unsecured term loan, its credit facility and its senior unsecured notes (see Note 14). In addition, during 2016, the Company incurred a loss on extinguishment of debt totaling $0.3 million related to its 2016 debt repayments. |
|
(2) |
During the year ended December 31, 2015, the Company paid a total of $5.9 million in deferred financing fees related to its new credit facility and two new term loan agreements, as well as its new loans entered into in December 2014 secured by the Embassy Suites La Jolla and the JW Marriott New Orleans. In addition, during 2015, the Company wrote off $0.5 million in deferred financing fees related to its prior credit facility, and incurred a total of $3.0 million in losses on extinguishment of debt related to its 2015 debt repayments. |
|
(3) |
During the year ended December 31, 2014, the Company paid additional deferred financing fees of $2.3 million related to its amendment of the mortgage secured by the Hilton San Diego Bayfront, as well as the refinancing of the mortgages secured by the JW Marriott New Orleans and the Embassy Suites La Jolla. In addition, the Company incurred a total of $4.6 million in losses on the extinguishment of debt related to its amendment of the Hilton San Diego Bayfront loan, along its 2014 debt repayments. |
F-25
Interest Expense
Total interest incurred and expensed on the notes payable for the years ended December 31, 2016, 2015 and 2014 was as follows (in thousands):
|
|
|
2016 |
|
2015 |
|
2014 |
|
|||
|
Interest expense on debt and capital lease obligations |
|
$ |
49,509 |
|
$ |
63,677 |
|
$ |
70,067 |
|
|
Gain on derivatives, net |
|
|
(1,426) |
|
|
(309) |
|
|
(529) |
|
|
Amortization of deferred financing fees |
|
|
2,200 |
|
|
3,148 |
|
|
2,777 |
|
|
Total interest expense |
|
$ |
50,283 |
|
$ |
66,516 |
|
$ |
72,315 |
|
8. Other Current Liabilities and Other Liabilities
Other Current Liabilities
Other current liabilities consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|||
|
|
|
December 31, |
|
|||||||
|
|
|
2016 |
|
2015 |
|
|||||
|
Property, sales and use taxes payable |
|
$ |
16,965 |
|
$ |
17,988 |
|
|||
|
Income tax payable |
|
|
211 |
|
|
470 |
|
|||
|
Accrued interest |
|
|
1,996 |
|
|
3,012 |
|
|||
|
Advance deposits |
|
|
14,505 |
|
|
12,727 |
|
|||
|
Management fees payable |
|
|
1,645 |
|
|
3,001 |
|
|||
|
Other |
|
|
4,547 |
|
|
4,976 |
|
|||
|
Total other current liabilities |
|
$ |
39,869 |
|
$ |
42,174 |
|
|||
Other Liabilities
Other liabilities consisted of the following (in thousands):
|
|
|
December 31, |
|
||||
|
|
|
2016 |
|
2015 |
|
||
|
Deferred gain on sale of asset |
|
$ |
7,000 |
|
$ |
7,000 |
|
|
Interest rate swap derivatives |
|
|
— |
|
|
437 |
|
|
Accrued income tax |
|
|
— |
|
|
1,596 |
|
|
Deferred revenue |
|
|
6,045 |
|
|
5,881 |
|
|
Deferred rent |
|
|
19,807 |
|
|
17,191 |
|
|
Other |
|
|
3,798 |
|
|
4,184 |
|
|
Total other liabilities |
|
$ |
36,650 |
|
$ |
36,289 |
|
As part of the Company’s ongoing evaluations of its uncertain tax positions, in 2016, the Company reversed a $1.5 million income tax accrual that it previously recorded during 2013, plus $0.1 million in accrued interest, related to the 2012 tax year. The reversal was due to the expiration of the statute of limitations for the 2012 tax year.
9. Income Taxes
The Company has elected to be taxed as a REIT under the under the Internal Revenue Code of 1986, as amended. 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.
F-26
During 2016, the Company reversed a $1.5 million income tax accrual that it had previously recorded during 2013, plus $0.1 million in accrued interest, through the 2016 tax year. The reversal was due to the expiration of the statute of limitations for the 2012 tax year. This income tax benefit was partially offset as the Company recognized combined federal and state income tax expense of $1.0 million based on 2016 projected taxable income net of operating loss carryforwards for its taxable entities.
During 2015, the Company recognized combined federal and state income tax expense of $0.7 million related to its sale of BuyEfficient, and $0.7 million based on 2015 projected taxable income net of operating loss carryforwards for its taxable entities. In addition, upon the sale of the Preferred Equity Investment and settlement of the working capital loan associated with the Rochester Portfolio (see Note 4), the Company recorded $0.1 million in income tax expense, which is included in discontinued operations, net of tax in the Company’s consolidated statements of operations.
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.
The Company recognizes penalties and interest related to unrecognized tax benefits in income tax expense. During 2016, 2015 and 2014, the Company recognized $42,000, $55,000 and $50,000 in interest expense related to its tax provisions, respectively.
The income tax (benefit) provision for the Company is included in the consolidated financial statements as follows (in thousands):
|
|
|
2016 |
|
2015 |
|
2014 |
|
|||
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
(1,379) |
|
$ |
760 |
|
$ |
255 |
|
|
State |
|
|
763 |
|
|
779 |
|
|
(76) |
|
|
Total current income tax (benefit) provision |
|
$ |
(616) |
|
$ |
1,539 |
|
$ |
179 |
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
(3,797) |
|
$ |
(4,856) |
|
$ |
(2,341) |
|
|
State |
|
|
(1,638) |
|
|
(1,254) |
|
|
(598) |
|
|
Change in valuation allowance |
|
|
5,435 |
|
|
6,110 |
|
|
2,939 |
|
|
Total deferred income tax provision |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
The tax effects of temporary differences giving rise to the deferred tax assets are as follows (in thousands):
|
December 31, |
|||||||
|
2016 |
2015 |
||||||
|
NOL carryover |
$ |
10,270 |
$ |
14,977 | |||
|
Other reserves |
1,945 | 2,005 | |||||
|
State taxes and other |
2,351 | 3,157 | |||||
|
Depreciation |
702 | 564 | |||||
|
Deferred tax asset before valuation allowance |
15,268 | 20,703 | |||||
|
Valuation allowance |
(15,268) | (20,703) | |||||
|
Deferred tax asset net of valuation allowance |
$ |
— |
$ |
— |
|||
The Company has provided a valuation allowance against its net deferred tax asset at December 31, 2016 and 2015. 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, 2016 and 2015, the net operating loss carryforwards for federal income tax purposes totaled approximately $27.1 million and $38.1 million, respectively. These losses, which begin to expire in 2031, are available to offset future income through 2032.
F-27
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, 2016, 2015 and 2014, distributions paid per share were characterized as follows (unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
|
|
2016 |
|
2015 |
|
2014 |
|
||||||||||||||||||||||
|
|
|
Amount |
|
% |
|
Amount |
|
% |
|
Amount |
|
% |
|
||||||||||||||||
|
Common Stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Ordinary income |
|
$ |
0.609 |
|
89.62 |
% |
$ |
0.661 |
|
46.86 |
% |
$ |
0.510 |
|
100 |
% |
|||||||||||||
|
Capital gain |
|
|
0.071 |
|
10.38 |
|
|
0.749 |
|
53.14 |
|
|
— |
|
— |
|
|||||||||||||
|
Return of capital |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|||||||||||||
|
Total |
|
$ |
0.680 |
|
100 |
% |
$ |
1.410 |
|
100 |
% |
$ |
0.510 |
|
100 |
% |
|||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Preferred Stock — Series D |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Ordinary income |
|
$ |
0.473 |
|
89.62 |
% |
$ |
0.937 |
|
46.86 |
% |
$ |
2.000 |
|
100 |
% |
|||||||||||||
|
Capital gain |
|
|
0.055 |
|
10.38 |
|
|
1.063 |
|
53.14 |
|
|
— |
|
— |
|
|||||||||||||
|
Return of capital |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|||||||||||||
|
Total |
|
$ |
0.528 |
|
100 |
% |
$ |
2.000 |
|
100 |
% |
$ |
2.000 |
|
100 |
% |
|||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Preferred Stock — Series E |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Ordinary income |
|
$ |
1.259 |
|
89.62 |
% |
$ |
— |
|
— |
% |
$ |
— |
|
— |
% |
|||||||||||||
|
Capital gain |
|
|
0.146 |
|
10.38 |
|
|
— |
|
— |
|
|
— |
|
— |
|
|||||||||||||
|
Return of capital |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|||||||||||||
|
Total |
|
$ |
1.405 |
|
100 |
% |
$ |
— |
|
— |
% |
$ |
— |
|
— |
% |
|||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Preferred Stock — Series F |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Ordinary income |
|
$ |
0.903 |
|
89.62 |
% |
$ |
— |
|
— |
% |
$ |
— |
|
— |
% |
|||||||||||||
|
Capital gain |
|
|
0.105 |
|
10.38 |
|
|
— |
|
— |
|
|
— |
|
— |
|
|||||||||||||
|
Return of capital |
|
|
— |
|
— |
|
|
— |
|
— |
|
|
— |
|
— |
|
|||||||||||||
|
Total |
|
$ |
1.008 |
|
100 |
% |
$ |
— |
|
— |
% |
$ |
— |
|
— |
% |
|||||||||||||
10. Stockholders’ Equity
Series D Cumulative Redeemable Preferred Stock
In April 2016, the Company redeemed all 4,600,000 shares of its Series D preferred stock at a redemption price of $25.00 per share, plus accrued and unpaid dividends up to, but not including, the redemption date. In accordance with the FASB’s Emerging Issues Task Force Topic D-42, an additional redemption charge of $4.1 million was recognized related to the original issuance costs of the Series D preferred stock, which were previously included in additional paid in capital. After the redemption date, the Company has no outstanding shares of Series D preferred stock, and all rights of the holders of such shares were terminated. Because the redemption of the Series D preferred stock was a redemption in full, trading of the Series D preferred stock on the New York Stock Exchange ceased on the April 6, 2016 redemption date.
Series E Cumulative Redeemable Preferred Stock
In March 2016, the Company issued 4,600,000 shares of its Series E preferred stock with a liquidation preference of $25.00 per share for gross proceeds of $115.0 million. In conjunction with the offering, the Company incurred $4.0 million in preferred offering costs. On or after March 11, 2021, the Series E 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.
Series F Cumulative Redeemable Preferred Stock
In May 2016, the Company issued 3,000,000 shares of its Series F preferred stock with a liquidation preference of $25.00 per share for gross proceeds of $75.0 million. In conjunction with the offering, the Company incurred $2.6 million in preferred offering costs. On or after May 17, 2021, the Series F 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-28
Common Stock
In February 2014, the Company entered into separate “At the Market” Agreements (the “ATM Agreements”) with Wells Fargo Securities, LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated (the “Managers”). Under the terms of the ATM 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 2016, the Company received $54.2 million in net proceeds from the issuance of 3,564,047 shares of its common stock in connection with the ATM Agreements. The Company did not issue any shares of its common stock in connection with the ATM Agreements during 2015. 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 ATM Agreements. As of December 31, 2016, the Company has $73.3 million available for sale under the ATM 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 Wailea Beach Resort 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 Wailea Beach Resort in connection with the Company’s acquisition of the hotel (see Note 3).
Dividends
The Company declared dividends per share on its Series D preferred stock, Series E preferred stock, Series F preferred stock and common stock during 2016, 2015 and 2014 as follows:
|
|
|
2016 |
|
2015 |
|
2014 |
|
|||
|
Series D preferred stock |
|
$ |
0.527778 |
|
$ |
2.00 |
|
$ |
2.00 |
|
|
Series E preferred stock |
|
|
1.404450 |
|
|
— |
|
|
— |
|
|
Series F preferred stock |
|
|
1.007850 |
|
|
— |
|
|
— |
|
|
Common stock (1) |
|
|
0.680000 |
|
|
1.41 |
|
|
0.51 |
|
|
|
|
$ |
3.620078 |
|
$ |
3.41 |
|
$ |
2.51 |
|
|
(1) |
Common stock dividends include a $1.26 dividend and a $0.36 dividend declared during the fourth quarters of 2015 and 2014, respectively, both of which are comprised of a combination of cash and shares of the Company’s common stock, pursuant to elections by individual stockholders. |
11. 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 5,445,554 shares remain available for future issuance as of December 31, 2016.
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 are measured at fair value on the date of grant and amortized over the relevant requisite service period or derived service period.
As discussed in Note 2, the Company chose to early adopt ASU No. 2016-09 effective January 1, 2016. Upon adoption of ASU No. 2016-09, the Company elected to account for forfeitures as they occur. The Company’s compensation expense and forfeitures related to restricted shares for the years ended December 31, 2016, 2015 and 2014 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
||
|
|
|
2016 |
|
2015 |
|
2014 |
|
|||||
|
Amortization expense, including forfeitures |
|
$ |
7,157 |
|
$ |
9,695 |
|
$ |
9,063 |
|
||
In January 2015, the Company recognized a total of $2.5 million in stock compensation and amortization expense related to the departure of its former Chief Executive Officer.
F-29
In addition, the Company capitalizes compensation costs related to all restricted shares granted to certain of those employees who work on the design and construction of its hotels. During both 2016 and 2015, these capitalized costs totaled $0.6 million. During 2014, these capitalized costs totaled $0.5 million.
The following is a summary of non-vested stock grant activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016 |
|
2015 |
|
2014 |
|
|||||||||
|
|
|
|
|
Weighted |
|
|
|
Weighted |
|
|
|
Weighted |
|
|||
|
|
|
|
|
Average |
|
|
|
Average |
|
|
|
Average |
|
|||
|
|
|
Shares |
|
Price |
|
Shares |
|
Price |
|
Shares |
|
Price |
|
|||
|
Outstanding at beginning of year |
|
986,345 |
|
$ |
14.33 |
|
1,883,296 |
|
$ |
11.24 |
|
2,009,412 |
|
$ |
10.23 |
|
|
Granted |
|
816,880 |
|
$ |
12.33 |
|
499,787 |
|
$ |
17.33 |
|
691,182 |
|
$ |
13.48 |
|
|
Vested |
|
(605,641) |
|
$ |
13.39 |
|
(1,225,443) |
|
$ |
10.75 |
|
(799,845) |
|
$ |
10.61 |
|
|
Forfeited |
|
(101,676) |
|
$ |
14.32 |
|
(171,295) |
|
$ |
14.76 |
|
(17,453) |
|
$ |
11.90 |
|
|
Outstanding at end of year |
|
1,095,908 |
|
$ |
13.36 |
|
986,345 |
|
$ |
14.33 |
|
1,883,296 |
|
$ |
11.24 |
|
At December 31, 2016, 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 a former Company associate. The Options fully vested in April 2009, and will expire in April 2018. The exercise price of the Options is $17.71 per share.
12. Commitments and Contingencies
Management Agreements
Management agreements with the Company’s third-party hotel managers require the Company to pay between 2.0% and 3.5% of total revenue of the managed hotels to the third-party managers each month as a basic management fee. 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 basic management fees, net of key money incentives received from third-party hotel managers, along with incentive management fees incurred by the Company during the years ended December 31, 2016, 2015 and 2014 were included in the Company’s consolidated statements of operations as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016 |
|
2015 |
|
2014 |
|
||||
|
Basic management fees |
|
$ |
33,109 |
|
$ |
34,426 |
|
$ |
31,485 |
|
|
|
Incentive management fees |
|
|
6,071 |
|
|
5,020 |
|
|
4,034 |
|
|
|
Total basic and incentive management fees |
|
$ |
39,180 |
|
$ |
39,446 |
|
$ |
35,519 |
|
|
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, 2016, 2015 and 2014 were included in the Company’s consolidated statements of operations as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016 |
|
2015 |
|
2014 |
|
|||
|
Franchise assessments (1) |
|
$ |
26,399 |
|
$ |
28,193 |
|
$ |
26,689 |
|
|
Franchise royalties |
|
|
10,248 |
|
|
11,903 |
|
|
11,582 |
|
|
Total franchise costs |
|
$ |
36,647 |
|
$ |
40,096 |
|
$ |
38,271 |
|
|
(1) |
Includes advertising, reservation and frequent guest club assessments. |
F-30
Renovation and Construction Commitments
At December 31, 2016, the Company had various contracts outstanding with third parties in connection with the renovation and repositioning of certain of its hotel properties. The remaining commitments under these contracts at December 31, 2016 totaled $38.0 million.
Capital Leases
The Hyatt Centric 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 capital lease asset was included in investment in hotel properties, net on the Company’s consolidated balance sheets as follows (in thousands):
|
|
|
December 31, |
|
||||
|
|
|
2016 |
|
2015 |
|
||
|
Gross capital lease asset - buildings and improvements |
|
$ |
58,799 |
|
$ |
58,799 |
|
|
Accumulated depreciation |
|
|
(6,738) |
|
|
(5,268) |
|
|
Net capital lease asset - buildings and improvements |
|
$ |
52,061 |
|
$ |
53,531 |
|
Future minimum lease payments under for the Company’s capital lease together with the present value of the net minimum lease payments as of December 31, 2016 are as follows (in thousands):
|
|
|
|
|
|
|
2017 |
|
$ |
1,403 |
|
|
2018 |
|
|
1,403 |
|
|
2019 |
|
|
1,403 |
|
|
2020 |
|
|
1,403 |
|
|
2021 |
|
|
1,403 |
|
|
Thereafter |
|
|
106,607 |
|
|
Total minimum lease payments (1) |
|
|
113,622 |
|
|
Less: Amount representing interest (2) |
|
|
(98,047) |
|
|
Present value of net minimum lease payments (3) |
|
$ |
15,575 |
|
|
(1) |
Minimum lease payments do not include percentage rent, which may be paid under the Hyatt Centric 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 $0.1 million in percentage rent during both 2016 and 2015, and zero in percentage rent during 2014. |
|
(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, 2016 as a current obligation of $1,000, 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. |
F-31
Ground, Building and Air Leases
During 2016, 2015 and 2014, certain of the Company’s hotels were obligated to unaffiliated third parties under the terms of ground, building and air leases as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2016 |
|
2015 |
|
2014 |
|
|
Number of hotels with ground, building and/or air leases (1) |
|
6 |
|
8 |
|
9 |
|
|
|
|
|
|
|
|
|
|
|
Number of ground leases (1) |
|
6 |
|
7 |
|
8 |
|
|
Number of building leases (2) |
|
1 |
|
1 |
|
1 |
|
|
Number of air leases (1) |
|
1 |
|
2 |
|
3 |
|
|
Total number of ground, building and air leases |
|
8 |
|
10 |
|
12 |
|
|
(1) |
Both 2015 and 2014 include a ground lease related to the Sheraton Cerritos, which the Company sold in May 2016, as well as an air rights lease at the Renaissance Harborplace, which air rights the Company purchased in June 2016. 2014 includes ground and air leases related to the Doubletree Guest Suites Times Square, which the Company sold in December 2015. |
|
(2) |
The building lease is considered by the Company to be a capital lease, as noted above. |
At December 31, 2016, the ground, building and air lease agreements mature in dates ranging from 2044 through 2097, excluding renewal options. Total rent expense incurred pursuant to ground, building and air lease agreements for the years ended December 31, 2016, 2015 and 2014 was included in property tax, ground lease and insurance in the Company’s consolidated statements of operations as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016 |
|
2015 |
|
2014 |
|
|||
|
Minimum rent, including straight-line adjustments |
|
$ |
9,140 |
|
$ |
14,484 |
|
$ |
14,999 |
|
|
Percentage rent (1) |
|
|
9,394 |
|
|
3,256 |
|
|
2,718 |
|
|
Total |
|
$ |
18,534 |
|
$ |
17,740 |
|
$ |
17,717 |
|
|
(1) |
Several of the Company’s hotels pay percentage rent, which is calculated on operating revenues above certain thresholds. |
At December 31, 2016, 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, which is included in corporate overhead expense, totaled $0.2 million, $0.3 million and $0.4 million for the years ended December 31, 2016, 2015 and 2014, respectively.
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, 2016 are as follows (in thousands):
|
|
|
|
|
|
|
2017 |
|
$ |
10,184 |
|
|
2018 |
|
|
10,143 |
|
|
2019 |
|
|
10,012 |
|
|
2020 |
|
|
10,029 |
|
|
2021 |
|
|
10,030 |
|
|
Thereafter |
|
|
309,647 |
|
|
Total |
|
$ |
360,045 |
|
Employment Agreements
As of December 31, 2016, the Company had employment agreements with certain executive employees, which expire in either March 2017 or March 2018. The terms of the agreements stipulate payments of base salaries and bonuses. The Company’s approximate minimum future obligations under employment agreements through their expiration dates totaled $1.3 million as of December 31, 2016.
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”). Qualified 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 completion of six calendar months of employment. Three percent of eligible employee annual base earnings
F-32
are contributed by the Company as a Safe Harbor elective contribution. Safe Harbor contributions made by the Company totaled $0.2 million for both of the years ended December 31, 2016 and 2015, and $0.3 million for the year ended December 31, 2014, and were included in corporate overhead expense for the Company’s corporate employees and other property-level expenses for the Company’s former BuyEfficient employees.
The Company is also responsible for funding various retirement plans at certain hotels operated by its management companies. Other property-level expenses on the Company’s consolidated statements of operations includes matching contributions into these various retirement plans of $1.6 million for the year ended December 31, 2016, and $1.5 million for both of the years ended December 31, 2015 and 2014.
Collective Bargaining Agreements
The Company is subject to exposure to collective bargaining agreements at certain hotels operated by its management companies. At December 31, 2016, approximately 23.4% of workers employed by the Company’s third-party managers were covered by such collective bargaining agreements.
Concentration of Risk
The concentration of the Company’s hotels in California, 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, 2016, 16 of the Company’s 27 hotels were concentrated in California, Illinois, Massachusetts and the greater Washington DC area as follows:
|
|
|
|
|
|
|
|
|
Greater |
|
|
|
|
|
|
|
|
|
|
Washington DC |
|
|
|
|
California |
|
Illinois |
|
Massachusetts |
|
Area |
|
|
Number of hotels |
|
7 |
|
3 |
|
3 |
|
3 |
|
|
Percentage of total rooms |
|
29 |
% |
9 |
% |
15 |
% |
14 |
% |
|
Percentage of total revenue for the year ended December 31, 2016 |
|
34 |
% |
7 |
% |
15 |
% |
13 |
% |
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, 2016, the Company had $0.5 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, 2016.
The Company is subject to various claims, lawsuits and legal proceedings, including routine litigation arising in the ordinary course of business, regarding the operation of its hotels and Company matters. While it is not possible to ascertain the ultimate outcome of such matters, the Company believes that the aggregate amount of such liabilities, if any, in excess of amounts covered by insurance will not have a material adverse impact on its financial condition or results of operations. The outcome of claims, lawsuits and legal proceedings brought against the Company, however, is subject to significant uncertainties.
F-33
13. Quarterly Operating Results (Unaudited)
The Company’s consolidated quarterly results for the years ended December 31, 2016 and 2015 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
First |
|
Second |
|
Third |
|
Fourth |
|
||||||||
|
|
|
Quarter |
|
Quarter |
|
Quarter |
|
Quarter |
|
||||||||
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
2016 |
|
$ |
274,292 |
|
$ |
322,160 |
|
$ |
303,304 |
|
$ |
289,584 |
|
||||
|
2015 |
|
$ |
284,385 |
|
$ |
339,267 |
|
$ |
324,595 |
|
$ |
300,933 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Operating income |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
2016 |
|
$ |
21,079 |
|
$ |
63,422 |
|
$ |
48,846 |
|
$ |
37,068 |
|
||||
|
2015 |
|
$ |
17,668 |
|
$ |
69,353 |
|
$ |
52,274 |
|
$ |
41,141 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
2016 |
|
$ |
1,216 |
|
$ |
65,736 |
|
$ |
39,427 |
|
$ |
34,298 |
|
||||
|
2015 |
|
$ |
1,203 |
|
$ |
53,657 |
|
$ |
63,084 |
|
$ |
237,575 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
Income (loss) attributable to common stockholders per share — basic and diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
2016 |
|
$ |
(0.02) |
|
$ |
0.26 |
|
$ |
0.16 |
|
$ |
0.14 |
|
||||
|
2015 |
|
$ |
(0.02) |
|
$ |
0.23 |
|
$ |
0.28 |
|
$ |
1.12 |
|
||||
Income (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.
14. Subsequent Events
On January 10, 2017, the Company received proceeds of $240.0 million in private placement senior unsecured notes. The private placement consisted of $120.0 million of notes bearing interest at a fixed rate of 4.69%, maturing in January 2026 (the “Series A Senior Notes”), and $120.0 million of notes bearing interest at a fixed rate of 4.79%, maturing in January 2028 (the “Series B Senior Notes”).
On January 11, 2017, the Company used proceeds received from its private placement of senior unsecured notes to repay the loan secured by the Marriott Boston Long Wharf, which had a balance of $176.0 million and a fixed rate of 5.58%. The Marriott Boston Long Wharf loan was scheduled to mature in April 2017, and was available to be repaid without penalty in January 2017.
On February 10, 2017, the Company sold the 444-room Fairmont Newport Beach, California for a gross sales price of $125.0 million. The hotel was classified as held for sale as of December 31, 2016, but did not qualify as a discontinued operation as the sale did not represent a strategic shift that had a major impact on the Company’s business plan or its primary markets.
F-34
SUNSTONE HOTEL INVESTORS, INC.
SCHEDULE III—REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2016
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Cost Capitalized |
|
Gross Amount at |
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||
|
|
|
|
|
|
Initial costs |
|
Subsequent to Acquisition |
|
December 31, 2016 (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 |
|
$ |
— |
(2) |
$ |
58,527 |
|
$ |
170,589 |
|
$ |
— |
|
$ |
96,236 |
|
$ |
58,527 |
|
$ |
266,825 |
|
$ |
325,352 |
|
$ |
29,482 |
|
2013 |
|
5-35 |
|
||||||||||||||||
|
Courtyard by Marriott Los Angeles |
|
|
— |
(2) |
|
— |
|
|
8,446 |
|
|
— |
|
|
13,537 |
|
|
— |
|
|
21,983 |
|
|
21,983 |
|
|
10,770 |
|
1999 |
|
5-35 |
|
||||||||||||||||
|
Embassy Suites Chicago |
|
|
— |
|
|
79 |
|
|
46,886 |
|
|
6,348 |
|
|
21,671 |
|
|
6,427 |
|
|
68,557 |
|
|
74,984 |
|
|
29,076 |
|
2002 |
|
5-35 |
|
||||||||||||||||
|
Embassy Suites La Jolla |
|
|
62,886 |
|
|
27,900 |
|
|
70,450 |
|
|
— |
|
|
12,885 |
|
|
27,900 |
|
|
83,335 |
|
|
111,235 |
|
|
28,767 |
|
2006 |
|
5-35 |
|
||||||||||||||||
|
Hilton Garden Inn Chicago Downtown/Magnificent Mile |
|
|
— |
(2) |
|
14,040 |
|
|
66,350 |
|
|
— |
|
|
8,632 |
|
|
14,040 |
|
|
74,982 |
|
|
89,022 |
|
|
7,143 |
|
2012 |
|
5-50 |
|
||||||||||||||||
|
Hilton New Orleans St. Charles |
|
|
— |
(2) |
|
3,698 |
|
|
53,578 |
|
|
— |
|
|
7,261 |
|
|
3,698 |
|
|
60,839 |
|
|
64,537 |
|
|
4,857 |
|
2013 |
|
5-35 |
|
||||||||||||||||
|
Hilton North Houston |
|
|
— |
|
|
6,184 |
|
|
35,628 |
|
|
— |
|
|
24,402 |
|
|
6,184 |
|
|
60,030 |
|
|
66,214 |
|
|
24,456 |
|
2002 |
|
5-35 |
|
||||||||||||||||
|
Hilton San Diego Bayfront |
|
|
222,340 |
|
|
— |
|
|
424,992 |
|
|
— |
|
|
9,874 |
|
|
— |
|
|
434,866 |
|
|
434,866 |
|
|
46,037 |
|
2011 |
|
5-57 |
|
||||||||||||||||
|
Hilton Times Square |
|
|
83,311 |
|
|
— |
|
|
221,488 |
|
|
— |
|
|
30,469 |
|
|
— |
|
|
251,957 |
|
|
251,957 |
|
|
89,118 |
|
2006 |
|
5-35 |
|
||||||||||||||||
|
Hyatt Centric Chicago Magnificent Mile |
|
|
— |
(2) |
|
— |
|
|
91,964 |
|
|
— |
|
|
17,122 |
|
|
— |
|
|
109,086 |
|
|
109,086 |
|
|
17,518 |
|
2012 |
|
5-40 |
|
||||||||||||||||
|
Hyatt Regency Newport Beach |
|
|
— |
(2) |
|
— |
|
|
30,549 |
|
|
— |
|
|
27,630 |
|
|
— |
|
|
58,179 |
|
|
58,179 |
|
|
22,125 |
|
2002 |
|
5-35 |
|
||||||||||||||||
|
Hyatt Regency San Francisco |
|
|
— |
(2) |
|
116,140 |
|
|
131,430 |
|
|
— |
|
|
36,387 |
|
|
116,140 |
|
|
167,817 |
|
|
283,957 |
|
|
23,122 |
|
2013 |
|
5-35 |
|
||||||||||||||||
|
JW Marriott New Orleans |
|
|
86,963 |
|
|
— |
|
|
73,420 |
|
|
— |
|
|
12,144 |
|
|
— |
|
|
85,564 |
|
|
85,564 |
|
|
13,795 |
|
2011 |
|
5-35 |
|
||||||||||||||||
|
Marriott Boston Long Wharf |
|
|
176,000 |
|
|
51,598 |
|
|
170,238 |
|
|
— |
|
|
38,302 |
|
|
51,598 |
|
|
208,540 |
|
|
260,138 |
|
|
68,146 |
|
2007 |
|
5-35 |
|
||||||||||||||||
|
Marriott Houston |
|
|
— |
|
|
4,167 |
|
|
19,155 |
|
|
— |
|
|
15,518 |
|
|
4,167 |
|
|
34,673 |
|
|
38,840 |
|
|
13,885 |
|
2002 |
|
5-35 |
|
||||||||||||||||
|
Marriott Park City |
|
|
— |
|
|
2,260 |
|
|
17,778 |
|
|
— |
|
|
18,217 |
|
|
2,260 |
|
|
35,995 |
|
|
38,255 |
|
|
14,614 |
|
1999 |
|
5-35 |
|
||||||||||||||||
|
Marriott Philadelphia |
|
|
— |
|
|
3,297 |
|
|
29,710 |
|
|
— |
|
|
14,946 |
|
|
3,297 |
|
|
44,656 |
|
|
47,953 |
|
|
17,676 |
|
2002 |
|
5-35 |
|
||||||||||||||||
|
Marriott Portland |
|
|
— |
(2) |
|
5,341 |
|
|
20,705 |
|
|
— |
|
|
7,249 |
|
|
5,341 |
|
|
27,954 |
|
|
33,295 |
|
|
13,488 |
|
2000 |
|
5-35 |
|
||||||||||||||||
|
Marriott Quincy |
|
|
— |
(2) |
|
14,375 |
|
|
97,875 |
|
|
— |
|
|
7,507 |
|
|
14,375 |
|
|
105,382 |
|
|
119,757 |
|
|
34,290 |
|
2007 |
|
5-35 |
|
||||||||||||||||
|
Marriott Tysons Corner |
|
|
— |
|
|
3,897 |
|
|
43,528 |
|
|
(250) |
|
|
16,659 |
|
|
3,647 |
|
|
60,187 |
|
|
63,834 |
|
|
26,516 |
|
2002 |
|
5-35 |
|
||||||||||||||||
|
Wailea Beach Resort |
|
|
— |
(2) |
|
119,707 |
|
|
194,137 |
|
|
— |
|
|
59,394 |
|
|
119,707 |
|
|
253,531 |
|
|
373,238 |
|
|
14,308 |
|
2014 |
|
5-40 |
|
||||||||||||||||
|
Renaissance Harborplace |
|
|
— |
|
|
25,085 |
|
|
102,707 |
|
|
— |
|
|
25,365 |
|
|
25,085 |
|
|
128,072 |
|
|
153,157 |
|
|
47,124 |
|
2005 |
|
5-35 |
|
||||||||||||||||
|
Renaissance Los Angeles Airport |
|
|
— |
(2) |
|
7,800 |
|
|
52,506 |
|
|
— |
|
|
7,823 |
|
|
7,800 |
|
|
60,329 |
|
|
68,129 |
|
|
19,823 |
|
2007 |
|
5-35 |
|
||||||||||||||||
|
Renaissance Long Beach |
|
|
— |
(2) |
|
10,437 |
|
|
37,300 |
|
|
— |
|
|
20,058 |
|
|
10,437 |
|
|
57,358 |
|
|
67,795 |
|
|
19,794 |
|
2005 |
|
5-35 |
|
||||||||||||||||
|
Renaissance Orlando at SeaWorld ® |
|
|
— |
|
|
— |
|
|
119,733 |
|
|
30,716 |
|
|
40,077 |
|
|
30,716 |
|
|
159,810 |
|
|
190,526 |
|
|
57,792 |
|
2005 |
|
5-35 |
|
||||||||||||||||
|
Renaissance Washington DC |
|
|
119,444 |
|
|
14,563 |
|
|
132,800 |
|
|
— |
|
|
44,884 |
|
|
14,563 |
|
|
177,684 |
|
|
192,247 |
|
|
63,937 |
|
2005 |
|
5-35 |
|
||||||||||||||||
|
Renaissance Westchester (3) |
|
|
— |
(2) |
|
5,751 |
|
|
17,069 |
|
|
— |
|
|
20,546 |
|
|
5,751 |
|
|
37,615 |
|
|
43,366 |
|
|
8,748 |
|
2010 |
|
5-35 |
|
||||||||||||||||
|
|
|
$ |
750,944 |
|
$ |
494,846 |
|
$ |
2,481,011 |
|
$ |
36,814 |
|
$ |
654,795 |
|
$ |
531,660 |
|
$ |
3,135,806 |
|
$ |
3,667,466 |
|
$ |
766,407 |
|
|
|
|
|
||||||||||||||||
|
(1) |
The aggregate cost of properties for federal income tax purposes is approximately $4.1 billion (unaudited) at December 31, 2016. |
|
(2) |
Hotel is pledged as collateral by the Company’s credit facility. As of December 31, 2016, 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-35
|
|
|
Hotel Properties |
|
|||||||
|
|
|
2016 |
|
2015 |
|
2014 |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Reconciliation of land and buildings and improvements: |
|
|
|
|
|
|
|
|
|
|
|
Balance at the beginning of the year |
|
$ |
3,652,222 |
|
$ |
3,807,607 |
|
$ |
3,416,762 |
|
|
Additions during year: |
|
|
|
|
|
|
|
|
|
|
|
Acquisitions |
|
|
— |
|
|
— |
|
|
324,844 |
|
|
Improvements |
|
|
159,786 |
|
|
86,615 |
|
|
66,001 |
|
|
Changes in reporting presentation |
|
|
(112,023) |
|
|
— |
|
|
— |
|
|
Dispositions |
|
|
(32,519) |
|
|
(242,000) |
|
|
— |
|
|
Balance at the end of the year |
|
$ |
3,667,466 |
|
$ |
3,652,222 |
|
$ |
3,807,607 |
|
|
(2) Reconciliation of accumulated depreciation: |
|
|
|
|
|
|
|
|
|
|
|
Balance at the beginning of the year |
|
$ |
707,737 |
|
$ |
625,020 |
|
$ |
524,014 |
|
|
Depreciation |
|
|
107,409 |
|
|
108,153 |
|
|
101,006 |
|
|
Changes in reporting presentation |
|
|
(37,506) |
|
|
— |
|
|
— |
|
|
Retirement |
|
|
(11,233) |
|
|
(25,436) |
|
|
— |
|
|
Balance at the end of the year |
|
$ |
766,407 |
|
$ |
707,737 |
|
$ |
625,020 |
|
F-36
Exhibit 10.20
EXECUTION VERSION
SUNSTONE HOTEL PARTNERSHIP, LLC
SUNSTONE HOTEL INVESTORS, INC.
$240,000,000
4.69% Series A Guaranteed Senior Notes due January 10, 2026
4.79% Series B Guaranteed Senior Notes due January 10, 2028
NOTE AND GUARANTEE AGREEMENT
Dated as of December 20, 2016
|
Section |
|
Page |
|
|
|
|
|
SECTION 1. AUTHORIZATION OF NOTES |
1 | |
|
|
|
|
|
SECTION 2. SALE AND PURCHASE OF NOTES; GUARANTIES |
1 | |
|
|
|
|
|
Section 2.1. |
Sale and Purchase of Notes |
1 |
|
Section 2.2. |
Guaranties |
1 |
|
|
|
|
|
SECTION 3. EXECUTION; CLOSING |
2 | |
|
|
|
|
|
SECTION 4. CONDITIONS TO CLOSING |
2 | |
|
|
|
|
|
Section 4.1. |
Representations and Warranties |
2 |
|
Section 4.2. |
Performance; No Default |
2 |
|
Section 4.3. |
Compliance Certificates |
3 |
|
Section 4.4. |
Opinions of Counsel |
3 |
|
Section 4.5. |
Purchase Permitted By Applicable Law, Etc |
3 |
|
Section 4.6. |
Sale of Other Notes |
4 |
|
Section 4.7. |
Payment of Special Counsel Fees |
4 |
|
Section 4.8. |
Private Placement Numbers |
4 |
|
Section 4.9. |
Changes in Corporate Structure; Change in Control |
4 |
|
Section 4.10. |
Funding Instructions |
4 |
|
Section 4.11. |
Subsidiary Guaranty Agreement |
4 |
|
Section 4.12. |
Bank Credit Agreement |
4 |
|
Section 4.13. |
Proceedings and Documents |
4 |
|
|
|
|
|
SECTION 5. REPRESENTATIONS AND WARRANTIES OF THE CONSTITUENT COMPANIES |
5 | |
|
|
|
|
|
Section 5.1. |
Organization; Power and Authority |
5 |
|
Section 5.2. |
Authorization, Etc |
5 |
|
Section 5.3. |
Disclosure |
6 |
|
Section 5.4. |
Organization and Ownership of Shares of Subsidiaries; Affiliates |
6 |
|
Section 5.5. |
Financial Statements; Material Liabilities |
7 |
|
Section 5.6. |
Compliance with Laws, Other Instruments, Etc |
7 |
|
Section 5.7. |
Governmental Authorizations, Etc |
8 |
|
Section 5.8. |
Litigation; Observance of Agreements, Statutes and Orders |
8 |
|
Section 5.9. |
Taxes; REIT Status |
8 |
|
Section 5.10. |
Title to Property; Leases |
9 |
|
Section 5.11. |
Licenses, Permits, Etc |
9 |
|
Section 5.12. |
Compliance with Employee Benefit Plans |
9 |
|
Section 5.13. |
Private Offering by the Issuer |
10 |
|
Section 5.14. |
Use of Proceeds; Margin Regulations |
11 |
|
Section 5.15. |
Existing Indebtedness; Future Liens |
11 |
|
Section 5.16. |
Foreign Assets Control Regulations, Etc |
12 |
|
Section 5.17. |
Status under Certain Statutes |
12 |
|
Section 5.18. |
Environmental Matters |
12 |
-i-
|
Section 5.19. |
Notes Rank Pari Passu |
13 |
|
Section 5.20. |
Solvency |
13 |
|
Section 5.21. |
Unencumbered Properties |
14 |
|
|
|
|
|
SECTION 6. REPRESENTATIONS OF THE PURCHASERS |
14 | |
|
|
|
|
|
Section 6.1. |
Purchase for Investment |
14 |
|
Section 6.2. |
Accredited Investor |
14 |
|
Section 6.3. |
Source of Funds |
14 |
|
|
|
|
|
SECTION 7. INFORMATION AS TO CONSTITUENT COMPANIES |
16 | |
|
|
|
|
|
Section 7.1. |
Financial and Business Information |
16 |
|
Section 7.2. |
Officer’s Certificate |
19 |
|
Section 7.3. |
Visitation |
19 |
|
Section 7.4. |
Electronic Delivery |
20 |
|
|
|
|
|
SECTION 8. PAYMENT AND PREPAYMENT OF THE NOTES |
21 | |
|
|
|
|
|
Section 8.1. |
Maturity |
21 |
|
Section 8.2. |
Optional Prepayments with Make-Whole Amount |
21 |
|
Section 8.3. |
Allocation of Partial Prepayments |
21 |
|
Section 8.4. |
Maturity; Surrender, Etc |
22 |
|
Section 8.5. |
Purchase of Notes |
22 |
|
Section 8.6. |
Make-Whole Amount |
22 |
|
Section 8.7. |
Offer to Prepay Notes in the Event of a Change in Control |
24 |
|
Section 8.8. |
Optional Prepayment at Par |
25 |
|
Section 8.9. |
Payments Due on Non-Business Days |
25 |
|
|
|
|
|
SECTION 9. AFFIRMATIVE COVENANTS |
25 | |
|
|
|
|
|
Section 9.1. |
Compliance with Laws and Material Contracts |
25 |
|
Section 9.2. |
Insurance |
26 |
|
Section 9.3. |
Maintenance of Properties |
26 |
|
Section 9.4. |
Payment of Taxes and Claims |
26 |
|
Section 9.5. |
Corporate Existence, Etc |
27 |
|
Section 9.6. |
Books and Records |
27 |
|
Section 9.7. |
REIT Status |
27 |
|
Section 9.8. |
Exchange Listing |
27 |
|
Section 9.9. |
Subsidiary Guarantors |
27 |
|
Section 9.10. |
Most Favored Lender Provision |
28 |
|
|
|
|
|
SECTION 10. NEGATIVE COVENANTS |
29 | |
|
|
|
|
|
Section 10.1. |
Transactions with Affiliates |
29 |
|
Section 10.2. |
Merger, Consolidation, Sales of Assets and Other Arrangements |
30 |
|
Section 10.3. |
Line of Business |
30 |
|
Section 10.4. |
Economic Sanctions, Etc |
31 |
|
Section 10.5. |
Permitted Liens; Negative Pledge |
31 |
|
Section 10.6. |
Restrictions on Intercompany Transfers |
32 |
|
Section 10.7. |
Parent Guarantor Ownership and Management of the Issuer |
32 |
-ii-
|
Section 10.8. |
Financial Covenants |
32 |
|
|
|
|
|
SECTION 11. EVENTS OF DEFAULT |
33 | |
|
|
|
|
|
SECTION 12. REMEDIES ON DEFAULT, ETC |
36 | |
|
|
|
|
|
Section 12.1. |
Acceleration |
36 |
|
Section 12.2. |
Other Remedies |
37 |
|
Section 12.3. |
Rescission |
37 |
|
Section 12.4. |
No Waivers or Election of Remedies, Expenses, Etc |
37 |
|
|
|
|
|
SECTION 13. GUARANTEE |
37 | |
|
|
|
|
|
Section 13.1. |
The Guarantee |
37 |
|
Section 13.2. |
Waiver of Defenses |
38 |
|
Section 13.3. |
Guaranty of Payment |
39 |
|
Section 13.4. |
Guaranty Unconditional |
39 |
|
Section 13.5. |
Reinstatement |
39 |
|
Section 13.6. |
Payment on Demand |
39 |
|
Section 13.7. |
Stay of Acceleration |
40 |
|
Section 13.8. |
No Subrogation |
40 |
|
Section 13.9. |
Marshalling |
40 |
|
Section 13.10. |
Transfer of Notes |
40 |
|
Section 13.11. |
Consideration |
40 |
|
|
|
|
|
SECTION 14. REGISTRATION; EXCHANGE; SUBSTITUTION OF NOTES |
40 | |
|
|
|
|
|
Section 14.1. |
Registration of Notes |
40 |
|
Section 14.2. |
Transfer and Exchange of Notes |
41 |
|
Section 14.3. |
Replacement of Notes |
41 |
|
|
|
|
|
SECTION 15. PAYMENTS ON NOTES |
42 | |
|
|
|
|
|
Section 15.1. |
Place of Payment |
42 |
|
Section 15.2. |
Payment by Wire Transfer |
42 |
|
Section 15.3. |
FATCA Information |
42 |
|
|
|
|
|
SECTION 16. EXPENSES, ETC |
43 | |
|
|
|
|
|
Section 16.1. |
Transaction Expenses |
43 |
|
Section 16.2. |
Certain Taxes |
43 |
|
Section 16.3. |
Survival |
44 |
|
|
|
|
|
SECTION 17. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE AGREEMENT |
44 | |
|
|
|
|
|
SECTION 18. AMENDMENT AND WAIVER |
44 | |
|
|
|
|
|
Section 18.1. |
Requirements |
44 |
|
Section 18.2. |
Solicitation of Holders of Notes |
45 |
|
Section 18.3. |
Binding Effect, Etc |
45 |
|
Section 18.4. |
Notes Held by the Constituent Companies, Etc |
46 |
|
|
|
|
|
SECTION 19. NOTICES |
46 | |
|
|
|
|
|
SECTION 20. REPRODUCTION OF DOCUMENTS |
46 | |
|
|
|
|
-iii-
|
SECTION 21. CONFIDENTIAL INFORMATION |
47 | |
|
|
|
|
|
SECTION 22. SUBSTITUTION OF PURCHASER |
48 | |
|
|
|
|
|
SECTION 23. MISCELLANEOUS |
48 | |
|
|
|
|
|
Section 23.1. |
Successors and Assigns |
48 |
|
Section 23.2. |
Accounting Terms |
48 |
|
Section 23.3. |
Severability |
49 |
|
Section 23.4. |
Construction, Etc |
49 |
|
Section 23.5. |
Counterparts |
49 |
|
Section 23.6. |
Governing Law |
49 |
|
Section 23.7. |
Jurisdiction and Process; Waiver of Jury Trial |
50 |
-iv-
|
SCHEDULE A |
— |
Defined Terms |
|
SCHEDULE 1(a) |
— |
Form of 4.69% Series A Guaranteed Senior Note due January 10, 2026 |
|
SCHEDULE 1(b) |
— |
Form of 4.79% Series B Guaranteed Senior Note due January 10, 2028 |
|
SCHEDULE 4.4(a)(1) |
— |
Form of Opinion of Special Counsel for the Consistent Companies and the Subsidiary Guarantors |
|
SCHEDULE 4.4(a)(2) |
— |
Form of Opinion of Maryland Counsel for the Parent Guarantor |
|
SCHEDULE 4.4(b) |
— |
Form of Opinion of Special Counsel for the Purchasers |
|
SCHEDULE 5.3 |
— |
Disclosure Materials |
|
SCHEDULE 5.4 |
— |
Subsidiaries of the Parent Guarantor and Ownership of Subsidiary Stock |
|
SCHEDULE 5.5 |
— |
Financial Statements |
|
SCHEDULE 5.10 |
— |
Real Estate Assets |
|
SCHEDULE 5.15 |
— |
Existing Indebtedness |
|
SCHEDULE 10.5 |
— |
Certain Permitted Liens |
|
PURCHASER SCHEDULE |
— |
Information Relating to Purchasers |
|
EXHIBIT SGA |
— |
Form of Subsidiary Guaranty Agreement |
SUNSTONE HOTEL PARTNERSHIP, LLC
SUNSTONE HOTEL INVESTORS, INC.
120 Vantis, Suite 300
Aliso Viejo, CA 92656
4.69% Series A Guaranteed Senior Notes due January 10, 2026
4.79% Series B Guaranteed Senior Notes due January 10, 2028
Dated as of December 20, 2016
TO EACH OF THE PURCHASERS LISTED IN
THE PURCHASER SCHEDULE HERETO:
Ladies and Gentlemen:
SUNSTONE HOTEL PARTNERSHIP, LLC, a Delaware limited liability company (the “Issuer”), and SUNSTONE HOTEL INVESTORS, INC., a Maryland corporation (the “Parent Guarantor,” and together with the Issuer, the “Constituent Companies” and individually, a “Constituent Company”), jointly and severally, agree with each of the Purchasers as follows:
SECTION 1. AUTHORIZATION OF NOTES.
The Issuer will authorize the issue and sale of $240,000,000 aggregate principal of its Guaranteed Senior Notes, of which $120,000,000 aggregate principal amount shall be its 4.69% Series A Guaranteed Senior Notes due January 10, 2026 (the “Series A Notes”) and $120,000,000 aggregate principal amount shall be its 4.79% Series B Guaranteed Senior Notes due January 10, 2028 (the “Series B Notes”; the Series A Notes and the Series B Notes are hereinafter referred to collectively as the “Notes”). The Series A Notes and the Series B Notes shall be substantially in the forms set out in Schedule 1(a) and Schedule 1(b), respectively. Certain capitalized and other terms used in this Agreement are defined in Schedule A and, for purposes of this Agreement, the rules of construction set forth in Section 23.4 shall govern.
SECTION 2. SALE AND PURCHASE OF NOTES; GUARANTIES.
Section 2.1. Sale and Purchase of Notes. Subject to the terms and conditions of this Agreement, the Issuer will issue and sell to each Purchaser and each Purchaser will purchase from the Issuer, at the Closing provided for in Section 3, Notes in the principal amount and of the series specified opposite such Purchaser’s name in the Purchaser Schedule at the purchase price of 100% of the principal amount thereof. The Purchasers’ obligations hereunder are several and not joint obligations and no Purchaser shall have any liability to any Person for the performance or non-performance of any obligation by any other Purchaser hereunder.
Section 2.2. Guaranties. The obligations of the Issuer hereunder and under the Notes are unconditionally and irrevocably guaranteed (a) by the Parent Guarantor pursuant to Section 13 and (b) by each Subsidiary Guarantor pursuant to that certain Subsidiary Guaranty Agreement to be dated as of the date of the Closing (the “Subsidiary Guaranty Agreement”) substantially in the form of Exhibit SGA.
SECTION 3. EXECUTION; CLOSING.
The execution and delivery of this Agreement shall occur on December 20, 2016 (the “Execution Date”). The sale and purchase of the Notes to be purchased by each Purchaser shall occur at the offices of Schiff Hardin LLP, 666 Fifth Avenue, 17th Floor, New York, New York 10103, at 11:00 a.m., New York, New York time, at a closing (the “Closing”) on January 10, 2017. At the Closing, the Issuer will deliver to each Purchaser the Notes of each series to be purchased by such Purchaser in the form of a single Note of such series (or such greater number of Notes of such series in denominations of at least $100,000 as such Purchaser may request) dated the date of the Closing and registered in such Purchaser’s name (or in the name of its nominee), against delivery by such Purchaser to the Issuer or its order in the amount of the purchase price therefor by wire transfer to the account of the Issuer set forth in the funding instructions delivered by the Issuer pursuant to Section 4.10. If at the Closing the Issuer shall fail to tender such Notes to any Purchaser as provided above in this Section 3, or any of the conditions specified in Section 4 shall not have been fulfilled to such Purchaser’s satisfaction, such Purchaser shall, at its election, be relieved of all further obligations under this Agreement, without thereby waiving any rights such Purchaser may have by reason of such failure by the Issuer to tender such Notes or any of the conditions specified in Section 4 not having been fulfilled to such Purchaser’s satisfaction.
SECTION 4. CONDITIONS TO CLOSING.
Each Purchaser’s obligation to purchase and pay for the Notes to be sold to such Purchaser at the Closing is subject to the fulfillment to such Purchaser’s satisfaction, prior to or at the Closing, of the following conditions:
Section 4.1. Representations and Warranties.
(a) Representations of each Constituent Company. The representations and warranties of each Constituent Company in this Agreement shall be correct when made and at the Closing.
(b) Representations and Warranties of each Subsidiary Guarantor. The representations and warranties of each Subsidiary Guarantor in the Subsidiary Guaranty Agreement shall be correct when made and at the Closing.
Section 4.2. Performance; No Default. Each Constituent Company and each Subsidiary Guarantor shall have performed and complied with all agreements and conditions contained in this Agreement and the Subsidiary Guaranty Agreement required to be performed or complied with by it prior to or at the Closing. Before and after giving effect to the issue and sale of the Notes (and the application of the proceeds thereof as contemplated by Section 5.14), no Default or Event of Default shall have occurred and be continuing. Neither Constituent Company or any Subsidiary shall have entered into any transaction since the date of the Memorandum that would have been prohibited by Section 10 had such Section applied since such date.
-2-
Section 4.3. Compliance Certificates.
(a) Officer’s Certificate of each Constituent Company. Each Constituent Company shall have delivered to such Purchaser an Officer’s Certificate, dated the date of the Closing, certifying that the conditions specified in Sections 4.1, 4.2 and 4.9 have been fulfilled.
(b) Secretary’s Certificate of each Constituent Company. Each Constituent Company shall have delivered to such Purchaser a certificate of its Secretary or Assistant Secretary, dated the date of the Closing, certifying as to (1) the resolutions attached thereto and other corporate or limited liability company proceedings relating to the authorization, execution and delivery of the Notes (in the case of the Issuer) and this Agreement (in the case of each Constituent Company) and (2) such Constituent Company’s organizational documents as then in effect.
(c) Officer’s Certificate of each Subsidiary Guarantor. Each Subsidiary Guarantor shall have delivered to such Purchaser an Officer’s Certificate, dated the date of the Closing, certifying as to such Subsidiary Guarantor that the conditions specified in Sections 4.1(b), 4.2 and 4.9 have been fulfilled.
(d) Secretary’s Certificate of each Subsidiary Guarantor. Each Subsidiary Guarantor shall have delivered to such Purchaser a certificate of its Secretary or Assistant Secretary, dated the date of the Closing, certifying as to (1) the resolutions attached thereto and other corporate, limited liability company, partnership or trust proceedings relating to the authorization, execution and delivery of the Subsidiary Guaranty Agreement and (2) such Subsidiary Guarantor’s organizational documents as then in effect.
Section 4.4. Opinions of Counsel. Such Purchaser shall have received opinions in form and substance satisfactory to such Purchaser, dated the date of the Closing (a) from (1) Latham & Watkins LLP, special counsel for the Constituent Companies and the Subsidiary Guarantors, and (2) Venable LLP, Maryland counsel to the Parent Guarantor, covering the matters set forth in Schedules 4.4(a)(1) and 4.4(a)(2) (and the Constituent Companies hereby instruct their counsel to deliver such opinions to the Purchasers) and (b) from Schiff Hardin LLP, the Purchasers’ special counsel in connection with such transactions, substantially in the form set forth in Schedule 4.4(b) and covering such other matters incident to such transactions as such Purchaser may reasonably request.
Section 4.5. Purchase Permitted By Applicable Law, Etc. On the date of the Closing, such Purchaser’s purchase of Notes shall (a) be permitted by the laws and regulations of each jurisdiction to which such Purchaser is subject, without recourse to provisions (such as section 1405(a)(8) of the New York Insurance Law) permitting limited investments by insurance companies without restriction as to the character of the particular investment, (b) not violate any applicable law or regulation (including Regulation T, U or X of the Board of Governors of the Federal Reserve System) and (c) not subject such Purchaser to any tax, penalty or liability under or pursuant to any applicable law or regulation, which law or regulation was not in effect on the Execution Date. If requested by such Purchaser, such Purchaser shall have received an Officer’s Certificate from the Issuer certifying as to such matters of fact as such Purchaser may reasonably specify to enable such Purchaser to determine whether such purchase is so permitted.
-3-
Section 4.6. Sale of Other Notes. Contemporaneously with the Closing, the Issuer shall sell to each other Purchaser and each other Purchaser shall purchase the Notes to be purchased by it at the Closing as specified in the Purchaser Schedule.
Section 4.7. Payment of Special Counsel Fees. Without limiting Section 16.1, the Issuer shall have paid on or before the Execution Date and the date of the Closing the fees, charges and disbursements of the Purchasers’ special counsel referred to in Section 4.4(b) to the extent reflected in a statement of such counsel rendered to the Issuer at least one Business Day prior to such date.
Section 4.8. Private Placement Numbers. A Private Placement Number issued by Standard & Poor’s CUSIP Service Bureau (in cooperation with the SVO) shall have been obtained for each series of the Notes.
Section 4.9. Changes in Corporate Structure; Change in Control. Neither Constituent Company or any Subsidiary Guarantor shall have changed its jurisdiction of incorporation or organization, as applicable, or been a party to any merger or consolidation or succeeded to all or any substantial part of the liabilities of any other entity, at any time following the date of the most recent financial statements referred to in Schedule 5.5. No Change in Control shall have occurred.
Section 4.10. Funding Instructions. At least three Business Days prior to the date of the Closing, each Purchaser shall have received written instructions signed by a Responsible Officer of the Issuer on letterhead of the Issuer directing the manner of the payment of the purchase price for the Notes and setting forth (a) the name and address of the transferee bank, (b) such transferee bank’s ABA number and (c) the account name and number into which the purchase price for the Notes is to be deposited.
Section 4.11. Subsidiary Guaranty Agreement. Such Purchaser shall have received a copy of the Subsidiary Guaranty Agreement which shall have been duly authorized, executed and delivered by each Person then required to be a Subsidiary Guarantor.
Section 4.12. Bank Credit Agreement. Such Purchaser shall have received a copy of the Bank Credit Agreement as in effect on the date of the Closing, which copy shall be certified as true, correct and complete and evidences the amendment of the definition of “Capitalized Lease Obligations” therein to include a new sentence at the end thereof corresponding to the last sentence in the definition of Capitalized Lease Obligations in this Agreement, and which certificate shall identify each Additional Covenant then in effect therein.
Section 4.13. Proceedings and Documents. All corporate and other proceedings in connection with the transactions contemplated by this Agreement and all documents and instruments incident to such transactions shall be satisfactory to such Purchaser and its special counsel, and such Purchaser and its special counsel shall have received all such counterpart originals or certified or other copies of such documents as such Purchaser or such special counsel may reasonably request.
-4-
SECTION 5. REPRESENTATIONS AND WARRANTIES OF THE CONSTITUENT COMPANIES.
Each Constituent Company represents and warrants to each Purchaser that:
Section 5.1. Organization; Power and Authority.
(a) The Issuer is a limited liability company duly organized, validly existing and in good standing under the laws of its jurisdiction of organization, and is duly qualified as a foreign limited liability company and is in good standing in each jurisdiction in which such qualification is required by law, other than those jurisdictions as to which the failure to be so qualified or in good standing could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. The Issuer has the limited liability company power and authority to own or hold under lease the properties it purports to own or hold under lease, to transact the business it transacts and proposes to transact, to execute and deliver this Agreement and the Notes and to perform the provisions hereof and thereof.
(b) The Parent Guarantor is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation, and is duly qualified as a foreign corporation and is in good standing in each jurisdiction in which such qualification is required by law, other than those jurisdictions as to which the failure to be so qualified or in good standing could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. The Parent Guarantor has the corporate power and authority to own or hold under lease the properties it purports to own or hold under lease, to transact the business it transacts and proposes to transact, to execute and deliver this Agreement and to perform the provisions hereof.
(c) Each Subsidiary Guarantor is a corporation or other legal entity duly organized, validly existing and, where applicable, in good standing under the laws of its jurisdiction of organization, and is duly qualified as a foreign corporation or other legal entity and, where applicable, is in good standing in each jurisdiction in which such qualification is required by law, other than those jurisdictions as to which the failure to be so qualified or in good standing could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. Each Subsidiary Guarantor has the corporate or other power and authority to own or hold under lease the properties it purports to own or hold under lease and to transact the business it transacts and proposes to transact and to execute and deliver the Subsidiary Guaranty Agreement and to perform the provisions thereof.
Section 5.2. Authorization, Etc.
(a) This Agreement and the Notes have been duly authorized by all necessary limited liability company action on the part of the Issuer, and this Agreement constitutes, and upon execution and delivery thereof each Note will constitute, a legal, valid and binding obligation of the Issuer enforceable against the Issuer in accordance with its terms, except as such enforceability may be limited by (1) applicable bankruptcy,
-5-
insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors’ rights generally and (2) general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law).
(b) This Agreement has been duly authorized by all necessary corporate action on the part of the Parent Guarantor, and this Agreement constitutes a legal, valid and binding obligation of the Parent Guarantor enforceable against the Parent Guarantor in accordance with its terms, except as such enforceability may be limited by (1) applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors’ rights generally and (2) general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law).
(c) The Subsidiary Guaranty Agreement has been duly authorized by all necessary corporate or other action on the part of each Subsidiary Guarantor, and the Subsidiary Guaranty Agreement constitutes a legal, valid and binding obligation of each Subsidiary Guarantor enforceable against each Subsidiary Guarantor in accordance with its terms, except as such enforceability may be limited by (1) applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors’ rights generally and (2) general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law).
Section 5.3. Disclosure. The Constituent Companies, through their agents, Merrill Lynch, Pierce, Fenner & Smith Incorporated, JPMorgan Securities, LLC and US Bancorp Investments, Inc., have delivered to each Purchaser a copy of a Private Placement Memorandum, dated September 2016 (the “Memorandum”), relating to the transactions contemplated hereby. The Memorandum fairly describes, in all material respects, the general nature of the business and principal properties of the Parent Guarantor and its Subsidiaries. This Agreement, the Memorandum, the financial statements listed in Schedule 5.5 and the documents, certificates or other writings delivered to the Purchasers by or on behalf of the Constituent Companies prior to October 18, 2016 in connection with the transactions contemplated hereby and identified in Schedule 5.3 (this Agreement, the Memorandum and such documents, certificates or other writings and such financial statements delivered to each Purchaser being referred to, collectively, as the “Disclosure Documents”), taken as a whole, do not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading in light of the circumstances under which they were made. Except as disclosed in the Disclosure Documents, since December 31, 2015, there has been no change in the financial condition, operations, business, properties or prospects of the Parent Guarantor or any Subsidiary except changes that could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. There is no fact known to either Constituent Company that could reasonably be expected to have a Material Adverse Effect that has not been set forth herein or in the Disclosure Documents.
Section 5.4. Organization and Ownership of Shares of Subsidiaries; Affiliates.
(a) Schedule 5.4 contains (except as noted therein) complete and correct lists of (1) the Parent Guarantor’s Subsidiaries, showing, as to each Subsidiary, the name
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thereof, the jurisdiction of its organization, the percentage of shares of each class of its capital stock or similar Equity Interests outstanding owned by the Parent Guarantor and each other Subsidiary and whether such Subsidiary is a Subsidiary Guarantor, a Significant Subsidiary and/or an Excluded Subsidiary, (2) the Parent Guarantor’s Affiliates, other than Subsidiaries and identifying each Unconsolidated Affiliate, and (3) each Constituent Company’s directors and senior officers.
(b) All of the outstanding shares of capital stock or similar Equity Interests of each Subsidiary shown in Schedule 5.4 as being owned by the Parent Guarantor and its Subsidiaries have been validly issued, are fully paid and non-assessable and are owned by the Parent Guarantor or another Subsidiary free and clear of any Lien that is prohibited by this Agreement.
(c) Each Subsidiary (other than a Subsidiary Guarantor) is a corporation or other legal entity duly organized, validly existing and, where applicable, in good standing under the laws of its jurisdiction of organization, and is duly qualified as a foreign corporation or other legal entity and, where applicable, is in good standing in each jurisdiction in which such qualification is required by law, other than those jurisdictions as to which the failure to be so qualified or in good standing could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. Each such Subsidiary has the corporate or other power and authority to own or hold under lease the properties it purports to own or hold under lease and to transact the business it transacts and proposes to transact.
(d) No Subsidiary is subject to any legal, regulatory, contractual or other restriction (other than the agreements listed on Schedule 5.4 and customary limitations imposed by corporate law or similar statutes) restricting the ability of such Subsidiary to pay dividends out of profits or make any other similar distributions of profits to the Parent Guarantor or any of its Subsidiaries that owns outstanding shares of capital stock or similar Equity Interests of such Subsidiary.
Section 5.5. Financial Statements; Material Liabilities. The Constituent Companies have delivered to each Purchaser copies of the consolidated financial statements of the Parent Guarantor and its Subsidiaries listed on Schedule 5.5. All of such financial statements (including in each case the related schedules and notes) fairly present in all material respects the consolidated financial position of the Parent Guarantor and its Subsidiaries as of the respective dates specified in such Schedule and the consolidated results of their operations and cash flows for the respective periods so specified and have been prepared in accordance with GAAP consistently applied throughout the periods involved except as set forth in the notes thereto (subject, in the case of any interim financial statements, to normal year-end adjustments). The Parent Guarantor and its Subsidiaries do not have any Material liabilities that are not disclosed in the Disclosure Documents.
Section 5.6. Compliance with Laws, Other Instruments, Etc. The execution, delivery and performance by (a) the Issuer of this Agreement and the Notes, (b) the Parent Guarantor of this Agreement and (c) each Subsidiary Guarantor of the Subsidiary Guaranty Agreement will not (1) contravene, result in any breach of, or constitute a default under, or result
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in the creation of any Lien in respect of any property of the Parent Guarantor or any Subsidiary under, any indenture, mortgage, deed of trust, loan, purchase or credit agreement, lease, corporate charter, regulations or by-laws, shareholders agreement or any other agreement or instrument to which the Parent Guarantor or any Subsidiary is bound or by which the Parent Guarantor or any Subsidiary or any of their respective properties may be bound or affected, (2) conflict with or result in a breach of any of the terms, conditions or provisions of any order, judgment, decree or ruling of any court, arbitrator or Governmental Authority applicable to the Parent Guarantor or any Subsidiary or (3) violate any provision of any statute or other rule or regulation of any Governmental Authority applicable to the Parent Guarantor or any Subsidiary.
Section 5.7. Governmental Authorizations, Etc. No consent, approval or authorization of, or registration, filing or declaration with, any Governmental Authority is required in connection with the execution, delivery or performance by (a) the Issuer of this Agreement or the Notes (b) the Parent Guarantor of this Agreement or (c) any Subsidiary Guarantor of the Subsidiary Guaranty Agreement.
Section 5.8. Litigation; Observance of Agreements, Statutes and Orders.
(a) There are no actions, suits, investigations or proceedings pending or, to the best knowledge of either Constituent Company, threatened against or affecting the Parent Guarantor or any Subsidiary or any property of the Parent Guarantor or any Subsidiary in any court or before any arbitrator of any kind or before or by any Governmental Authority that could, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.
(b) Neither the Parent Guarantor nor any Subsidiary is (1) in default under any agreement or instrument to which it is a party or by which it is bound, (2) in violation of any order, judgment, decree or ruling of any court, any arbitrator of any kind or any Governmental Authority or (3) in violation of any applicable law, ordinance, rule or regulation of any Governmental Authority (including Environmental Laws, the USA PATRIOT Act or any of the other laws and regulations that are referred to in Section 5.16), which default or violation could, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.
Section 5.9. Taxes; REIT Status.
(a) The Parent Guarantor and its Subsidiaries have filed all tax returns that are required to have been filed in any jurisdiction, and have paid all taxes shown to be due and payable on such returns and all other taxes and assessments levied upon them or their properties, assets, income or franchises, to the extent such taxes and assessments have become due and payable and before they have become delinquent, except for any taxes and assessments (1) the amount of which, individually or in the aggregate, is not Material or (2) the amount, applicability or validity of which is currently being contested in good faith by appropriate proceedings and with respect to which the Parent Guarantor or a Subsidiary, as the case may be, has established adequate reserves in accordance with GAAP. Neither Constituent Company knows of any basis for any other tax or assessment that could, individually or in the aggregate, reasonably be expected to have a
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Material Adverse Effect. The charges, accruals and reserves on the books of the Parent Guarantor and its Subsidiaries in respect of U.S. federal, state or other taxes for all fiscal periods are adequate. The U.S. federal income tax liabilities of the Parent Guarantor and its Subsidiaries have been finally determined (whether by reason of completed audits or the statute of limitations having run) for all fiscal years up to and including the fiscal year ended December 31, 2012.
(b) The Parent Guarantor has operated, and intends to continue to operate in a manner so as to permit it to qualify as a REIT. The Parent Guarantor has elected treatment as a REIT. Each Subsidiary of the Parent Guarantor is either (1) a “qualified REIT subsidiary” within the meaning of Section 856(i) of the Code, (2) a REIT, (3) a Taxable REIT Subsidiary within the meaning of Section 856(l) of the Code, (4) a partnership under Treasury Regulation Section 301.7701-3 or (5) an entity disregarded as a separate entity from its owner under Treasury Regulation Section 301.7701-3.
Section 5.10. Title to Property; Leases. Schedule 5.10 contains, as of the Execution Date, a complete and correct listing of all real estate assets of the Parent Guarantor and its Subsidiaries, setting forth, for each such Property, the current occupancy status of such Property and whether such Property is (a) a Development Property and, if such Property is a Development Property, the status of completion of such Property, (b) a New Property or a Seasoned Property and/or (c) an Unencumbered Property. The Parent Guarantor and its Subsidiaries have good, marketable and legal title to, or a valid leasehold interest in, their respective assets.
Section 5.11. Licenses, Permits, Etc.
(a) The Parent Guarantor and its Subsidiaries own or possess all licenses, permits, franchises, authorizations, patents, copyrights, proprietary software, service marks, trademarks and trade names, or rights thereto, that are necessary to the conduct of its businesses, without known conflict with the rights of others.
(b) To the best knowledge of each Constituent Company, no product or service of the Parent Guarantor or any of its Subsidiaries infringes in any material respect any license, permit, franchise, authorization, patent, copyright, proprietary software, service mark, trademark, trade name or other right owned by any other Person.
(c) To the best knowledge of each Constituent Company, there is no Material violation by any Person of any right of the Parent Guarantor or any of its Subsidiaries with respect to any license, permit, franchise, authorization, patent, copyright, proprietary software, service mark, trademark, trade name or other right owned or used by the Parent Guarantor or any of its Subsidiaries.
Section 5.12. Compliance with Employee Benefit Plans.
(a) The Parent Guarantor and each ERISA Affiliate have operated and administered each Plan in compliance with all applicable laws except for such instances of noncompliance as have not resulted in and could not, individually or in the aggregate, reasonably be expected to result in a Material Adverse Effect. Neither the Parent Guarantor nor any ERISA Affiliate has incurred any liability pursuant to Title I or IV of
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ERISA or the penalty or excise tax provisions of the Code relating to employee benefit plans (as defined in section 3 of ERISA), and no event, transaction or condition has occurred or exists that could, individually or in the aggregate, reasonably be expected to result in the incurrence of any such liability by the Parent Guarantor or any ERISA Affiliate, or in the imposition of any Lien on any of the rights, properties or assets of the Parent Guarantor or any ERISA Affiliate, in either case pursuant to Title I or IV of ERISA or to section 430(k) of the Code or to any such penalty or excise tax provisions under the Code or federal law or section 4068 of ERISA or by the granting of a security interest in connection with the amendment of a Plan, other than such liabilities or Liens as would not be individually or in the aggregate Material.
(b) The present value of the aggregate benefit liabilities under each of the Plans (other than Multiemployer Plans), determined as of the end of such Plan’s most recently ended plan year on the basis of the actuarial assumptions specified for funding purposes in such Plan’s most recent actuarial valuation report, did not exceed the aggregate current value of the assets of such Plan allocable to such benefit liabilities. The term “benefit liabilities” has the meaning specified in section 4001 of ERISA and the terms “current value” and “present value” have the meaning specified in section 3 of ERISA.
(c) The Parent Guarantor and its ERISA Affiliates have not incurred withdrawal liabilities (and are not subject to contingent withdrawal liabilities) under section 4201 or 4204 of ERISA in respect of Multiemployer Plans that individually or in the aggregate are Material.
(d) The expected postretirement benefit obligation (determined as of the last day of the Parent Guarantor’s most recently ended fiscal year in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 715-60, without regard to liabilities attributable to continuation coverage mandated by section 4980B of the Code) of the Parent Guarantor and its Subsidiaries is not Material.
(e) The execution and delivery of this Agreement and the issuance and sale of the Notes hereunder will not involve any transaction that is subject to the prohibitions of section 406 of ERISA or in connection with which a tax could be imposed pursuant to section 4975(c)(1)(A)-(D) of the Code. The representation by each Constituent Company to each Purchaser in the first sentence of this Section 5.12(e) is made in reliance upon and subject to the accuracy of such Purchaser’s representation in Section 6.2 as to the sources of the funds to be used to pay the purchase price of the Notes to be purchased by such Purchaser.
(f) The Parent Guarantor and its Subsidiaries do not have any Non-U.S. Plans.
Section 5.13. Private Offering by the Issuer. Neither Constituent Company or anyone acting on their behalf has offered the Notes, the Subsidiary Guaranty Agreement or any similar Securities for sale to, or solicited any offer to buy the Notes, the Subsidiary Guaranty Agreement or any similar Securities from, or otherwise approached or negotiated in respect thereof with, any
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Person other than the Purchasers and not more than 70 other Institutional Investors, each of which has been offered the Notes at a private sale for investment. Neither Constituent Company or anyone acting on their behalf has taken, or will take, any action that would subject the issuance or sale of the Notes or the execution and delivery of the Subsidiary Guaranty Agreement to the registration requirements of section 5 of the Securities Act or to the registration requirements of any Securities or blue sky laws of any applicable jurisdiction.
Section 5.14. Use of Proceeds; Margin Regulations. The Issuer will apply the proceeds of the sale of the Notes hereunder as set forth in the Memorandum. No part of the proceeds from the sale of the Notes hereunder will be used, directly or indirectly, for the purpose of buying or carrying any margin stock within the meaning of Regulation U of the Board of Governors of the Federal Reserve System (12 CFR 221), or for the purpose of buying or carrying or trading in any Securities under such circumstances as to involve the Issuer in a violation of Regulation X of said Board (12 CFR 224) or to involve any broker or dealer in a violation of Regulation T of said Board (12 CFR 220). Margin stock does not constitute more than 5% of the value of the consolidated assets of the Issuer and its Subsidiaries and the Issuer does not have any present intention that margin stock will constitute more than 5% of the value of such assets. As used in this Section, the terms “margin stock” and “purpose of buying or carrying” shall have the meanings assigned to them in said Regulation U.
Section 5.15. Existing Indebtedness; Future Liens.
(a) Except as described therein, Schedule 5.15 sets forth a complete and correct list of all outstanding Indebtedness of the Parent Guarantor and its Subsidiaries as of September 30, 2016 (including descriptions of the obligors and obligees, principal amounts outstanding, any collateral therefor and any Guaranty thereof), since which date there has been no Material change in the amounts, interest rates, sinking funds, installment payments or maturities of the Indebtedness of the Parent Guarantor or its Subsidiaries. Neither the Parent Guarantor nor any Subsidiary is in default and no waiver of default is currently in effect, in the payment of any principal or interest on any Indebtedness of the Parent Guarantor or such Subsidiary and no event or condition exists with respect to any Indebtedness of the Parent Guarantor or any Subsidiary that would permit (or that with notice or the lapse of time, or both, would permit) one or more Persons to cause such Indebtedness to become due and payable before its stated maturity or before its regularly scheduled dates of payment.
(b) Except as disclosed in Schedule 5.15, neither the Parent Guarantor nor any Subsidiary has agreed or consented to cause or permit any of its property, whether now owned or hereafter acquired, to be subject to a Lien not permitted by this Agreement.
(c) Neither the Parent Guarantor nor any Subsidiary is a party to, or otherwise subject to any provision contained in, any instrument evidencing Indebtedness of the Parent Guarantor or such Subsidiary, any agreement relating thereto or any other agreement (including its charter or any other organizational document) which limits the amount of, or otherwise imposes restrictions on the incurring of, Indebtedness of either Constituent Company or any Subsidiary Guarantor, except as disclosed in Schedule 5.15.
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Section 5.16. Foreign Assets Control Regulations, Etc.
(a) Neither the Parent Guarantor nor any Controlled Entity (1) is a Blocked Person, (2) has been notified that its name appears or may in the future appear on a State Sanctions List or (3) is a target of sanctions that have been imposed by the United Nations or the European Union.
(b) Neither the Parent Guarantor nor any Controlled Entity (1) has violated, been found in violation of, or been charged or convicted under, any applicable U.S. Economic Sanctions Laws, Anti-Money Laundering Laws or Anti-Corruption Laws or (2) to either Constituent Company’s knowledge, is under investigation by any Governmental Authority for possible violation of any U.S. Economic Sanctions Laws, Anti-Money Laundering Laws or Anti-Corruption Laws.
(c) No part of the proceeds from the sale of the Notes hereunder:
(1) constitutes or will constitute funds obtained on behalf of any Blocked Person or will otherwise be used by the Parent Guarantor or any Controlled Entity, directly or indirectly, (i) in connection with any investment in, or any transactions or dealings with, any Blocked Person, (ii) for any purpose that would cause any Purchaser to be in violation of any U.S. Economic Sanctions Laws or (iii) otherwise in violation of any U.S. Economic Sanctions Laws;
(2) will be used, directly or indirectly, in violation of, or cause any Purchaser to be in violation of, any applicable Anti-Money Laundering Laws; or
(3) will be used, directly or indirectly, for the purpose of making any improper payments, including bribes, to any Governmental Official or commercial counterparty in order to obtain, retain or direct business or obtain any improper advantage, in each case which would be in violation of, or cause any Purchaser to be in violation of, any applicable Anti-Corruption Laws.
(d) The Parent Guarantor has established procedures and controls which it reasonably believes are adequate (and otherwise comply with applicable law) to ensure that the Parent Guarantor and each Controlled Entity is and will continue to be in compliance with all applicable U.S. Economic Sanctions Laws, Anti-Money Laundering Laws and Anti-Corruption Laws.
Section 5.17. Status under Certain Statutes. Neither the Parent Guarantor nor any Subsidiary is subject to regulation under the Investment Company Act of 1940, the Public Utility Holding Company Act of 2005, the ICC Termination Act of 1995, or the Federal Power Act.
Section 5.18. Environmental Matters.
(a) Neither the Parent Guarantor nor any Subsidiary has knowledge of any claim or has received any notice of any claim and no proceeding has been instituted asserting any claim against the Parent Guarantor or any of its Subsidiaries or any of their respective real properties or other assets now or formerly owned, leased or operated by
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any of them, alleging any damage to the environment or violation of any Environmental Laws, except, in each case, such as could not reasonably be expected to result in a Material Adverse Effect.
(b) Neither the Parent Guarantor nor any Subsidiary has knowledge of any facts which would give rise to any claim, public or private, of violation of Environmental Laws or damage to the environment emanating from, occurring on or in any way related to real properties now or formerly owned, leased or operated by any of them or to other assets or their use, except, in each case, such as could not, individually or in the aggregate, reasonably be expected to result in a Material Adverse Effect.
(c) Neither the Parent Guarantor nor any Subsidiary has stored any Hazardous Materials on real properties now or formerly owned, leased or operated by any of them in a manner which is contrary to any Environmental Law that could, individually or in the aggregate, reasonably be expected to result in a Material Adverse Effect.
(d) Neither the Parent Guarantor nor any Subsidiary has disposed of any Hazardous Materials in a manner which is contrary to any Environmental Law that could, individually or in the aggregate, reasonably be expected to result in a Material Adverse Effect.
(e) All buildings on all real properties now owned, leased or operated by the Parent Guarantor or any Subsidiary are in compliance with applicable Environmental Laws, except where failure to comply could not, individually or in the aggregate, reasonably be expected to result in a Material Adverse Effect.
Section 5.19. Notes Rank Pari Passu.
(a) The obligations of the Issuer under this Agreement and the Notes rank at least pari passu in right of payment with all other unsecured and unsubordinated senior Indebtedness (actual or contingent) of the Issuer, including all unsecured and unsubordinated senior Indebtedness of the Issuer described in Schedule 5.15(a).
(b) The obligations of the Parent Guarantor under this Agreement rank at least pari passu in right of payment with all other unsecured and unsubordinated senior Indebtedness (actual or contingent) of the Parent Guarantor, including all unsecured and unsubordinated senior Indebtedness of the Parent Guarantor described in Schedule 5.15(a).
(c) The obligations of each Subsidiary Guarantor under the Subsidiary Guaranty Agreement rank at least pari passu in right of payment with all other unsecured and unsubordinated senior Indebtedness (actual or contingent) of such Subsidiary Guarantor, including all unsecured and unsubordinated senior Indebtedness of such Subsidiary Guarantor described on Schedule 5.15(a).
Section 5.20. Solvency. Each Constituent Company and each Subsidiary Guarantor is Solvent.
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Section 5.21. Unencumbered Properties. Each Property included in the calculation of Unencumbered Asset Value satisfies all of the requirements contained in the definition of Unencumbered Property.
SECTION 6. REPRESENTATIONS OF THE PURCHASERS.
Section 6.1. Purchase for Investment. Each Purchaser severally represents that it is purchasing the Notes for its own account or for one or more separate accounts maintained by such Purchaser or for the account of one or more pension or trust funds and not with a view to the distribution thereof, provided that the disposition of such Purchaser’s or their property shall at all times be within such Purchaser’s or their control. Each Purchaser understands that the Notes have not been registered under the Securities Act and may be resold only if registered pursuant to the provisions of the Securities Act or if an exemption from registration is available, except under circumstances where neither such registration nor such an exemption is required by law, and that the Issuer is not required to register the Notes.
Section 6.2. Accredited Investor. Each Purchaser severally represents that it is an “accredited investor” (as defined in Rule 501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act) acting for its own account (and not for the account of others) or as a fiduciary or agent for others (which others are also “accredited investors”). Each Purchaser further severally represents that such Purchaser has had the opportunity to ask questions of the Issuer and received answers concerning the terms and conditions of the sale of the Notes.
Section 6.3. Source of Funds. Each Purchaser severally represents that at least one of the following statements is an accurate representation as to each source of funds (a “Source”) to be used by such Purchaser to pay the purchase price of the Notes to be purchased by such Purchaser hereunder:
(a) the Source is an “insurance company general account” (as the term is defined in the United States Department of Labor’s Prohibited Transaction Exemption (“PTE”) 95-60) in respect of which the reserves and liabilities (as defined by the annual statement for life insurance companies approved by the NAIC (the “NAIC Annual Statement”)) for the general account contract(s) held by or on behalf of any employee benefit plan together with the amount of the reserves and liabilities for the general account contract(s) held by or on behalf of any other employee benefit plans maintained by the same employer (or affiliate thereof as defined in PTE 95-60) or by the same employee organization in the general account do not exceed 10% of the total reserves and liabilities of the general account (exclusive of separate account liabilities) plus surplus as set forth in the NAIC Annual Statement filed with such Purchaser’s state of domicile; or
(b) the Source is a separate account that is maintained solely in connection with such Purchaser’s fixed contractual obligations under which the amounts payable, or credited, to any employee benefit plan (or its related trust) that has any interest in such separate account (or to any participant or beneficiary of such plan (including any annuitant)) are not affected in any manner by the investment performance of the separate account; or
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(c) the Source is either (1) an insurance company pooled separate account, within the meaning of PTE 90-1 or (2) a bank collective investment fund, within the meaning of the PTE 91-38 and, except as disclosed by such Purchaser to the Issuer in writing pursuant to this clause (c), no employee benefit plan or group of plans maintained by the same employer or employee organization beneficially owns more than 10% of all assets allocated to such pooled separate account or collective investment fund; or
(d) the Source constitutes assets of an “investment fund” (within the meaning of Part VI of PTE 84-14 (the “QPAM Exemption”)) managed by a “qualified professional asset manager” or “QPAM” (within the meaning of Part VI of the QPAM Exemption), no employee benefit plan’s assets that are managed by the QPAM in such investment fund, when combined with the assets of all other employee benefit plans established or maintained by the same employer or by an affiliate (within the meaning of Part VI(c)(1) of the QPAM Exemption) of such employer or by the same employee organization and managed by such QPAM, represent more than 20% of the total client assets managed by such QPAM, the conditions of Part I(c) and (g) of the QPAM Exemption are satisfied, neither the QPAM nor a Person controlling or controlled by the QPAM maintains an ownership interest in the Issuer that would cause the QPAM and the Issuer to be “related” within the meaning of Part VI(h) of the QPAM Exemption and (1) the identity of such QPAM and (2) the names of any employee benefit plans whose assets in the investment fund, when combined with the assets of all other employee benefit plans established or maintained by the same employer or by an affiliate (within the meaning of Part VI(c)(1) of the QPAM Exemption) of such employer or by the same employee organization, represent 10% or more of the assets of such investment fund, have been disclosed to the Issuer in writing pursuant to this clause (d); or
(e) the Source constitutes assets of a “plan(s)” (within the meaning of Part IV(h) of PTE 96-23 (the “INHAM Exemption”)) managed by an “in-house asset manager” or “INHAM” (within the meaning of Part IV(a) of the INHAM Exemption), the conditions of Part I(a), (g) and (h) of the INHAM Exemption are satisfied, neither the INHAM nor a Person controlling or controlled by the INHAM (applying the definition of “control” in Part IV(d)(3) of the INHAM Exemption) owns a 10% or more interest in the Issuer and (1) the identity of such INHAM and (2) the name(s) of the employee benefit plan(s) whose assets constitute the Source have been disclosed to the Issuer in writing pursuant to this clause (e); or
(f) the Source is a governmental plan; or
(g) the Source is one or more employee benefit plans, or a separate account or trust fund comprised of one or more employee benefit plans, each of which has been identified to the Issuer in writing pursuant to this clause (g); or
(h) the Source does not include assets of any employee benefit plan, other than a plan exempt from the coverage of ERISA.
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As used in this Section 6.2, the terms “employee benefit plan,” “governmental plan,” and “separate account” shall have the respective meanings assigned to such terms in section 3 of ERISA.
SECTION 7. INFORMATION AS TO CONSTITUENT COMPANIES.
Section 7.1. Financial and Business Information. The Constituent Companies shall deliver to each Purchaser and each holder of a Note that is an Institutional Investor:
(a) Quarterly Statements — within 60 days (or such shorter period as is the earlier of (x) 15 days greater than the period applicable to the filing of the Parent Guarantor’s Quarterly Report on Form 10-Q (the “Form 10-Q”) with the SEC regardless of whether the Parent Guarantor is subject to the filing requirements thereof and (y) the date by which such financial statements are required to be delivered under any Material Credit Facility or the date on which such corresponding financial statements are delivered under any Material Credit Facility if such delivery occurs earlier than such required delivery date) after the end of each quarterly fiscal period in each fiscal year of the Parent Guarantor (other than the last quarterly fiscal period of each such fiscal year), duplicate copies of,
(1) a consolidated balance sheet of the Parent Guarantor and its Subsidiaries as at the end of such quarter, and
(2) consolidated statements of income, changes in shareholders’ equity and cash flows of the Parent Guarantor and its Subsidiaries, for such quarter and (in the case of the second and third quarters) for the portion of the fiscal year ending with such quarter,
setting forth in each case in comparative form the figures for the corresponding periods in the previous fiscal year, all in reasonable detail, prepared in accordance with GAAP applicable to quarterly financial statements generally, and certified by a Senior Financial Officer of the Parent Guarantor as fairly presenting, in all material respects, the financial position of the companies being reported on and their results of operations and cash flows, subject to changes resulting from year-end adjustments;
(b) Annual Statements — within 105 days (or such shorter period as is the earlier of (x) 15 days greater than the period applicable to the filing of the Parent Guarantor’s Annual Report on Form 10-K (the “Form 10-K”) with the SEC regardless of whether the Parent Guarantor is subject to the filing requirements thereof and (y) the date by which such financial statements are required to be delivered under any Material Credit Facility or the date on which such corresponding financial statements are delivered under any Material Credit Facility if such delivery occurs earlier than such required delivery date) after the end of each fiscal year of the Parent Guarantor, duplicate copies of,
(1) a consolidated balance sheet of the Parent Guarantor and its Subsidiaries as at the end of such year, and
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(2) consolidated statements of income, changes in shareholders’ equity and cash flows of the Parent Guarantor and its Subsidiaries for such year,
setting forth in each case in comparative form the figures for the previous fiscal year, all in reasonable detail, prepared in accordance with GAAP, and accompanied by an opinion thereon (without a “going concern” or similar qualification or exception and without any qualification or exception as to the scope of the audit on which such opinion is based) of independent public accountants of recognized national standing, which opinion shall state that such financial statements present fairly, in all material respects, the financial position of the companies being reported upon and their results of operations and cash flows and have been prepared in conformity with GAAP, and that the examination of such accountants in connection with such financial statements has been made in accordance with generally accepted auditing standards, and that such audit provides a reasonable basis for such opinion in the circumstances;
(c) SEC and Other Reports — promptly upon their becoming available, one copy of (1) each financial statement, report, notice, proxy statement or similar document sent by the Parent Guarantor or any Subsidiary (i) to its creditors under any Material Credit Facility (excluding information sent to such creditors in the ordinary course of administration of a credit facility, such as information relating to pricing and borrowing availability) or (ii) to its public Securities holders generally, and (2) each regular or periodic report, each registration statement (without exhibits except as expressly requested by such Purchaser or holder), and each prospectus and all amendments thereto filed by the Parent Guarantor or any Subsidiary with the SEC and of all press releases and other statements made available generally by the Parent Guarantor or any Subsidiary to the public concerning developments that are Material;
(d) Notice of Default or Event of Default — promptly, and in any event within five days after a Responsible Officer of either Constituent Company becoming aware of the existence of any Default or Event of Default or that any Person has given any notice or taken any action with respect to a claimed default hereunder or that any Person has given any notice or taken any action with respect to a claimed default of the type referred to in Section 11(f), a written notice specifying the nature and period of existence thereof and what action the Constituent Companies are taking or propose to take with respect thereto;
(e) Employee Benefits Matters — promptly, and in any event within five days after a Responsible Officer of either Constituent Company becoming aware of any of the following, a written notice setting forth the nature thereof and the action, if any, that the Parent Guarantor or an ERISA Affiliate proposes to take with respect thereto:
(1) with respect to any Plan, any reportable event, as defined in section 4043(c) of ERISA and the regulations thereunder, for which notice thereof has not been waived pursuant to such regulations as in effect on the Execution Date;
(2) the taking by the PBGC of steps to institute, or the threatening by the PBGC of the institution of, proceedings under section 4042 of ERISA for the
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termination of, or the appointment of a trustee to administer, any Plan, or the receipt by the Parent Guarantor or any ERISA Affiliate of a notice from a Multiemployer Plan that such action has been taken by the PBGC with respect to such Multiemployer Plan;
(3) any event, transaction or condition that could result in the incurrence of any liability by the Parent Guarantor or any ERISA Affiliate pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the Code relating to employee benefit plans, or in the imposition of any Lien on any of the rights, properties or assets of the Parent Guarantor or any ERISA Affiliate pursuant to Title I or IV of ERISA or such penalty or excise tax provisions, if such liability or Lien, taken together with any other such liabilities or Liens then existing, could reasonably be expected to have a Material Adverse Effect; or
(4) receipt of notice of the imposition of a Material financial penalty (which for this purpose shall mean any tax, penalty or other liability, whether by way of indemnity or otherwise) with respect to one or more Non-U.S. Plans;
(f) Notices from Governmental Authority — promptly, and in any event within 30 days of receipt thereof, copies of any notice to the Parent Guarantor or any Subsidiary from any Governmental Authority relating to any order, ruling, statute or other law or regulation that could reasonably be expected to have a Material Adverse Effect;
(g) Resignation or Replacement of Independent Auditors — within 10 days following the date on which the Parent Guarantor’s independent auditors resign or the Parent Guarantor elects to change independent auditors, as the case may be, notification thereof, together with such further information as the Required Holders may reasonably request;
(h) Operating Summaries for Unencumbered Properties — Within 45 days after the end of each fiscal quarter of the Parent Guarantor, an operating summary with respect to each Unencumbered Property, including a quarterly and year-to-date statement of Net Operating Income;
(i) Smith Travel Research STAR Reports — with reasonable promptness upon the request of such Purchaser or holder, the most current Smith Travel Research STAR Report available, which will compare the individual Unencumbered Properties to the primary competitive set;
(j) Calculation of Ownership Share — with reasonable promptness upon the request of such Purchaser or holder, evidence of the Parent Guarantor’s calculation of the Ownership Share with respect to a Subsidiary or an Unconsolidated Affiliate, such evidence to be reasonably satisfactory to such Purchaser or holder; and
(k) Requested Information — with reasonable promptness, such other data and information relating to the business, operations, affairs, financial condition, assets or properties of the Parent Guarantor or any of its Subsidiaries or relating to the ability of
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either Constituent Company or any Subsidiary Guarantor to perform its obligations hereunder, under the Notes or under the Subsidiary Guaranty Agreement as from time to time may be reasonably requested by any such Purchaser or holder of a Note.
Section 7.2. Officer’s Certificate. Each set of financial statements delivered to a Purchaser or a holder of a Note pursuant to Section 7.1(a) or Section 7.1(b) shall be accompanied by a certificate of a Senior Financial Officer of the Parent Guarantor:
(a) Covenant Compliance — setting forth the information from such financial statements that is required in order to establish whether the Parent Guarantor was in compliance with the requirements of Section 10.8 and each Additional Covenant during the quarterly or annual period covered by the financial statements then being furnished (including with respect to each such provision that involves mathematical calculations, the information from such financial statements that is required to perform such calculations) and detailed calculations of the maximum or minimum amount, ratio or percentage, as the case may be, permissible under the terms of such Section or Additional Covenant, and the calculation of the amount, ratio or percentage then in existence. In the event that the Parent Guarantor or any Subsidiary has made an election to measure any financial liability using fair value (which election is being disregarded for purposes of determining compliance with this Agreement pursuant to Section 23.2) as to the period covered by any such financial statement, such Senior Financial Officer’s certificate as to such period shall include a reconciliation from GAAP with respect to such election;
(b) Event of Default — certifying that such Senior Financial Officer has reviewed the relevant terms hereof and has made, or caused to be made, under his or her supervision, a review of the transactions and conditions of the Parent Guarantor and its Subsidiaries from the beginning of the quarterly or annual period covered by the statements then being furnished to the date of the certificate and that such review shall not have disclosed the existence during such period of any condition or event that constitutes a Default or an Event of Default or, if any such condition or event existed or exists (including any such event or condition resulting from the failure of the Parent Guarantor or any Subsidiary to comply with any Environmental Law), specifying the nature and period of existence thereof and what action the Constituent Companies shall have taken or proposes to take with respect thereto; and
(c) Subsidiary Guarantors – setting forth a list of (1) all Persons that have become (or no longer are) a Significant Subsidiary or an Excluded Subsidiary since the certificate most recently delivered pursuant to this Section 7.2 and (2) all Subsidiaries that are Subsidiary Guarantors, in each case, as of the date of such certificate of such Senior Financial Officer.
Section 7.3. Visitation. Each Constituent Company shall permit the representatives of each Purchaser and each holder of a Note that is an Institutional Investor:
(a) No Default — if no Default or Event of Default then exists, at the expense of such Purchaser or holder and upon reasonable prior notice to such Constituent Company, to visit the principal executive office of such Constituent Company, to discuss
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the affairs, finances and accounts of such Constituent Company and its Subsidiaries with such Constituent Company’s officers, and (with the consent of such Constituent Company, which consent will not be unreasonably withheld, and in the presence of the such Constituent Company) its independent public accountants, and (with the consent of such Constituent Company, which consent will not be unreasonably withheld) to visit the other offices and properties of such Constituent Company and each Subsidiary, all at such reasonable times and as often as may be reasonably requested in writing; and
(b) Default — if a Default or Event of Default then exists, at the expense of the Constituent Companies to visit and inspect any of the offices or properties of such Constituent Company or any of its Subsidiaries, to examine all their respective books of account, records, reports and other papers, to make abstracts therefrom, and to discuss their respective affairs, finances and accounts with their respective officers and independent public accountants (and by this provision each Constituent Company authorizes said accountants to discuss the affairs, finances and accounts of such Constituent Company and its Subsidiaries), all at such times and as often as may be requested.
Section 7.4. Electronic Delivery. Financial statements, opinions of independent certified public accountants, other information and Officer’s Certificates that are required to be delivered by a Constituent Company pursuant to Sections 7.1(a), (b), (c), (g) or (h) and Section 7.2 shall be deemed to have been delivered if such Constituent Company satisfies any of the following requirements with respect thereto:
(a) such financial statements satisfying the requirements of Section 7.1(a) or (b) and related Officer’s Certificate satisfying the requirements of Section 7.2 and any other information required under Section 7.1(c), (g) or (h) are delivered to each Purchaser and each holder of a Note by e-mail at the e-mail address set forth in such Purchaser’s or holder’s Purchaser Schedule or as communicated from time to time in a separate writing delivered to the Constituent Companies;
(b) the Parent Guarantor shall have timely filed such Form 10–Q or Form 10–K, satisfying the requirements of Section 7.1(a) or Section 7.1(b), as the case may be, with the SEC on EDGAR and shall have made such form and the related Officer’s Certificate satisfying the requirements of Section 7.2 available on its website on the internet, which is located at www.sunstonehotels.com as of the Execution Date, or on any future website that may take the place of www.sunstonehotels.com and which has been identified as such to each Purchaser and each holder of Notes;
(c) such financial statements satisfying the requirements of Section 7.1(a) or Section 7.1(b) and related Officer’s Certificate satisfying the requirements of Section 7.2 and any other information required under Section 7.1(c), (g) or (h) are timely posted by or on behalf of such Constituent Company on IntraLinks or on any other similar website to which each Purchaser and each holder of Notes has free access; or
(d) the Parent Guarantor shall have timely filed any of the items referred to in Section 7.1(c), (g) or (h) with the SEC on EDGAR (including by means of filing a
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Current Report on Form 8-K) and shall have made such items available on its website on the internet or on IntraLinks or on any other similar website to which each Purchaser and each holder of Notes has free access;
provided however, that in no case shall access to such financial statements, other information and Officer’s Certificates be conditioned upon any waiver or other agreement or consent (other than confidentiality provisions consistent with Section 21 of this Agreement); provided further, that in the case of each delivery pursuant to clause (b), (c) or (d), such Constituent Company shall have given each Purchaser and each holder of a Note (i) email notice of any filing with the SEC on EDGAR, if such Person shall have registered to receive such notice on the Parent Guarantor’s website or shall have provided to the Parent Guarantor its email address on its Purchaser Schedule or any update thereto pursuant to Section 19, or (ii) in the case of any other filing or posting, prior written notice thereof, provided further, that upon request of any Purchaser or any holder to receive paper copies of such forms, financial statements, other information and Officer’s Certificates or to receive them by e-mail, such Constituent Company will promptly e-mail them or deliver such paper copies, as the case may be, to such Purchaser or holder.
SECTION 8. PAYMENT AND PREPAYMENT OF THE NOTES.
Section 8.1. Maturity. As provided therein, the entire unpaid principal balance of each Note shall be due and payable on the Maturity Date thereof.
Section 8.2. Optional Prepayments with Make-Whole Amount. The Issuer may, at its option, upon notice as provided below, prepay at any time all, or from time to time any part of, the Notes, in an amount not less than 5% of the aggregate principal amount of the Notes then outstanding in the case of a partial prepayment, at 100% of the principal amount so prepaid, and the Make-Whole Amount determined for the prepayment date with respect to such principal amount. The Issuer will give each holder of Notes written notice of each optional prepayment under this Section 8.2 not less than 10 days and not more than 60 days prior to the date fixed for such prepayment unless the Issuer and the Required Holders agree to another time period pursuant to Section 18. Each such notice shall specify such date (which shall be a Business Day), the aggregate principal amount of the Notes to be prepaid on such date, the principal amount of each Note held by such holder to be prepaid (determined in accordance with Section 8.3), and the interest to be paid on the prepayment date with respect to such principal amount being prepaid, and shall be accompanied by a certificate of a Senior Financial Officer of the Issuer as to the estimated Make-Whole Amount due in connection with such prepayment (calculated as if the date of such notice were the date of the prepayment), setting forth the details of such computation. Two Business Days prior to such prepayment, the Issuer shall deliver to each holder of Notes a certificate of a Senior Financial Officer of the Issuer specifying the calculation of such Make-Whole Amount as of the specified prepayment date.
Section 8.3. Allocation of Partial Prepayments. In the case of each partial prepayment of the Notes pursuant to Section 8.2, the principal amount of the Notes to be prepaid shall be allocated among all of the Notes at the time outstanding in proportion, as nearly as practicable, to the respective unpaid principal amounts thereof not theretofore called for prepayment.
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Section 8.4. Maturity; Surrender, Etc. In the case of each prepayment of Notes pursuant to this Section 8, the principal amount of each Note to be prepaid shall mature and become due and payable on the date fixed for such prepayment, together with interest on such principal amount accrued to such date and the applicable Make-Whole Amount, if any. From and after such date, unless the Issuer shall fail to pay such principal amount when so due and payable, together with the interest and Make-Whole Amount, if any, as aforesaid, interest on such principal amount shall cease to accrue. Any Note paid or prepaid in full shall be surrendered to the Issuer and cancelled and shall not be reissued, and no Note shall be issued in lieu of any prepaid principal amount of any Note.
Section 8.5. Purchase of Notes. The Issuer will not, and will not permit any Affiliate to, purchase, redeem, prepay or otherwise acquire, directly or indirectly, any of the outstanding Notes except (a) upon the payment or prepayment of the Notes in accordance with the terms of this Agreement and the Notes or (b) pursuant to an offer to purchase made by the Issuer or an Affiliate pro rata to the holders of all Notes at the time outstanding upon the same terms and conditions (except to the extent necessary to reflect differences in interest rates and maturities of the Notes of the different series). Any such offer shall provide each holder with sufficient information to enable it to make an informed decision with respect to such offer, and shall remain open for at least 10 Business Days. If the holders of more than 50% of the principal amount of the Notes then outstanding accept such offer, the Issuer shall promptly notify the remaining holders of such fact and the expiration date for the acceptance by holders of Notes of such offer shall be extended by the number of days necessary to give each such remaining holder at least 10 Business Days from its receipt of such notice to accept such offer. The Issuer will promptly cancel all Notes acquired by it or any Affiliate pursuant to any payment, prepayment or purchase of Notes pursuant to this Agreement and no Notes may be issued in substitution or exchange for any such Notes.
Section 8.6. Make-Whole Amount.
The term “Make-Whole Amount” means, with respect to any Note, an amount equal to the excess, if any, of the Discounted Value of the Remaining Scheduled Payments with respect to the Called Principal of such Note over the amount of such Called Principal, provided that the Make-Whole Amount may in no event be less than zero. For the purposes of determining the Make-Whole Amount, the following terms have the following meanings:
“Called Principal” means, with respect to any Note, the principal of such Note that is to be prepaid pursuant to Section 8.2 or has become or is declared to be immediately due and payable pursuant to Section 12.1, as the context requires.
“Discounted Value” means, with respect to the Called Principal of any Note, the amount obtained by discounting all Remaining Scheduled Payments with respect to such Called Principal from their respective scheduled due dates to the Settlement Date with respect to such Called Principal, in accordance with accepted financial practice and at a discount factor (applied on the same periodic basis as that on which interest on the Notes is payable) equal to the Reinvestment Yield with respect to such Called Principal.
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“Reinvestment Yield” means, with respect to the Called Principal of any Note, the sum of (a) 0.50% (50 basis points) plus (b) the yield to maturity implied by the “Ask Yield(s)” reported as of 10:00 a.m. (New York City time) on the second Business Day preceding the Settlement Date with respect to such Called Principal, on the display designated as “Page PX1” (or such other display as may replace Page PX1) on Bloomberg Financial Markets for the most recently issued actively traded on-the-run U.S. Treasury securities (“Reported”) having a maturity equal to the Remaining Average Life of such Called Principal as of such Settlement Date. If there are no such U.S. Treasury securities Reported having a maturity equal to such Remaining Average Life, then such implied yield to maturity will be determined by (1) converting U.S. Treasury bill quotations to bond equivalent yields in accordance with accepted financial practice and (2) interpolating linearly between the “Ask Yields” Reported for the applicable most recently issued actively traded on-the-run U.S. Treasury securities with the maturities (i) closest to and greater than such Remaining Average Life and (ii) closest to and less than such Remaining Average Life. The Reinvestment Yield shall be rounded to the number of decimal places as appears in the interest rate of the applicable Note.
If such yields are not Reported or the yields Reported as of such time are not ascertainable (including by way of interpolation), then “Reinvestment Yield” means, with respect to the Called Principal of any Note, the sum of (x) 0.50% (50 basis points) plus (y) the yield to maturity implied by the U.S. Treasury constant maturity yields reported, for the latest day for which such yields have been so reported as of the second Business Day preceding the Settlement Date with respect to such Called Principal, in Federal Reserve Statistical Release H.15 (or any comparable successor publication) for the U.S. Treasury constant maturity having a term equal to the Remaining Average Life of such Called Principal as of such Settlement Date. If there is no such U.S. Treasury constant maturity having a term equal to such Remaining Average Life, such implied yield to maturity will be determined by interpolating linearly between (A) the U.S. Treasury constant maturity so reported with the term closest to and greater than such Remaining Average Life and (B) the U.S. Treasury constant maturity so reported with the term closest to and less than such Remaining Average Life. The Reinvestment Yield shall be rounded to the number of decimal places as appears in the interest rate of the applicable Note.
“Remaining Average Life” means, with respect to any Called Principal, the number of years obtained by dividing (a) such Called Principal into (b) the sum of the products obtained by multiplying (1) the principal component of each Remaining Scheduled Payment with respect to such Called Principal by (2) the number of years, computed on the basis of a 360-day year comprised of twelve 30-day months and calculated to two decimal places, that will elapse between the Settlement Date with respect to such Called Principal and the scheduled due date of such Remaining Scheduled Payment.
“Remaining Scheduled Payments” means, with respect to the Called Principal of any Note, all payments of such Called Principal and interest thereon that would be due after the Settlement Date with respect to such Called Principal if no payment of such Called Principal were made prior to its scheduled due date, provided that if such Settlement Date is not a date on which interest payments are due to be made under the Notes, then the amount of the next succeeding scheduled interest payment will be reduced by the amount of interest accrued to such Settlement Date and required to be paid on such Settlement Date pursuant to Section 8.2 or Section 12.1.
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“Settlement Date” means, with respect to the Called Principal of any Note, the date on which such Called Principal is to be prepaid pursuant to Section 8.2 or has become or is declared to be immediately due and payable pursuant to Section 12.1, as the context requires.
Section 8.7. Offer to Prepay Notes in the Event of a Change in Control.
(a) Notice of Change in Control. The Constituent Companies will, within five Business Days after any Responsible Officer of either thereof has knowledge of the occurrence of any Change in Control, give written notice of such Change in Control to each holder of Notes and such notice shall contain and constitute an offer by the Issuer to prepay Notes as described in Section 8.7(b) and shall be accompanied by the certificate described in Section 8.7(e).
(b) Offer to Prepay Notes. The offer to prepay Notes contemplated by Sections 8.7(a) shall be an offer to prepay, in accordance with and subject to this Section 8.7, all, but not less than all, Notes held by each holder on a date specified in such offer (the “Change in Control Proposed Prepayment Date”), which date shall be a Business Day not less than 20 days and not more than 60 days after the date of such offer (or if the Change in Control Proposed Prepayment Date shall not be specified in such offer, the Change in Control Proposed Prepayment Date shall be the Business Day nearest to the 20th day after the date of such offer).
(c) Acceptance; Rejection. A holder of Notes may accept or reject the offer to prepay made pursuant to this Section 8.7 by causing a notice of such acceptance or rejection to be delivered to the Issuer at least five Business Days prior to the Change in Control Proposed Prepayment Date. A failure by a holder of Notes to so respond to an offer to prepay made pursuant to this Section 8.7 shall be deemed to constitute a rejection of such offer by such holder.
(d) Prepayment. Prepayment of the Notes to be prepaid pursuant to this Section 8.7 shall be at 100% of the principal amount of such Notes, together with accrued and unpaid interest on such Notes accrued to the date of prepayment but without any Make-Whole Amount. The prepayment shall be made on the Change in Control Proposed Prepayment Date.
(e) Officer’s Certificate. Each offer to prepay the Notes pursuant to this Section 8.7 shall be accompanied by a certificate, executed by a Senior Financial Officer of the Issuer and dated the date of such offer, specifying (1) the Change in Control Proposed Prepayment Date, (2) that such offer is made pursuant to this Section 8.7 and that failure by a holder to respond to such offer by the deadline established in Section 8.7(c) shall result in such offer to such holder being deemed rejected, (3) the principal amount of each Note offered to be prepaid, (4) the interest that would be due on each Note offered to be prepaid, accrued to the Change in Control Proposed Prepayment Date, (5) that the conditions of this Section 8.7 have been fulfilled and (6) in reasonable detail, the nature and date of the Change in Control.
(f) Change in Control Defined. “Change in Control” means:
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(1) Any “person” or “group” (as such terms are used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), is or becomes the “beneficial owner” (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that a Person will be deemed to have “beneficial ownership” of all securities that such Person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of more than 35% of the total voting power of the then outstanding voting stock of the Parent Guarantor; or
(2) A “change in control,” “change in management” or similar event in respect of the Parent Guarantor under the Bank Credit Agreement.
Section 8.8. Optional Prepayment at Par. So long as no Default or Event of Default then exists, the Issuer may, at its option, upon notice as provided below, prepay any series of Notes at any time during the 60-day period immediately preceding the Maturity Date of such series of Notes at 100% of the principal amount of all Notes of such series then outstanding, together with interest accrued thereon to the date of prepayment. The Issuer will give each holder of Notes of the relevant series (with a copy to each holder of Notes of the other series) written notice of each optional prepayment pursuant to this Section 8.8 not less than 10 days and not more than 30 days prior to the date fixed for such prepayment; provided that any prepayment of Notes under this Section 8.8 shall not occur prior to the 60th day preceding the Maturity Date of such series of Notes. Each such notice shall specifically refer to this Section 8.8 and shall specify the prepayment date (which shall be a Business Day), the aggregate principal amount of the Notes of the relevant series to be prepaid on such date, the principal amount of each Note held by such holder to be prepaid, and the accrued interest to be paid on the prepayment date with respect to such principal amount being prepaid.
Section 8.9. Payments Due on Non-Business Days. Anything in this Agreement or the Notes to the contrary notwithstanding, (a) except as set forth in clause (b), any payment of interest on any Note that is due on a date that is not a Business Day shall be made on the next succeeding Business Day without including the additional days elapsed in the computation of the interest payable on such next succeeding Business Day; and (b) any payment of principal of or Make-Whole Amount on any Note (including principal due on the Maturity Date of such Note) that is due on a date that is not a Business Day shall be made on the next succeeding Business Day and shall include the additional days elapsed in the computation of interest payable on such next succeeding Business Day.
SECTION 9. AFFIRMATIVE COVENANTS.
From the Execution Date until the Closing and thereafter, so long as any of the Notes are outstanding, the Constituent Companies covenant that:
Section 9.1. Compliance with Laws and Material Contracts.
(a) Without limiting Section 10.4, each Constituent Company will, and will cause each of its Subsidiaries to, comply with all laws, ordinances or governmental rules or regulations to which each of them is subject (including ERISA, Environmental Laws,
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the USA PATRIOT Act and the other laws and regulations that are referred to in Section 5.16) and will obtain and maintain in effect all licenses, certificates, permits, franchises and other governmental authorizations necessary to the ownership of their respective properties or to the conduct of their respective businesses, in each case to the extent necessary to ensure that non-compliance with such laws, ordinances or governmental rules or regulations or failures to obtain or maintain in effect such licenses, certificates, permits, franchises and other governmental authorizations could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.
(b) Each Constituent Company will, and will cause each of its Subsidiaries to, duly and punctually perform and comply with any and all representations, warranties, covenants and agreements expressed as binding upon any such Person under any Material Contract which if not performed or complied with could reasonably be expected to result in any party to a Material Contract taking action to terminate such Material Contract.
Section 9.2. Insurance. Each Constituent Company will, and will cause each of its Subsidiaries to, maintain, with financially sound and reputable insurers, insurance (on a replacement cost basis) with respect to their respective properties and businesses against such casualties and contingencies (including terrorism as applicable), of such types, on such terms and in such amounts (including deductibles, co-insurance and self-insurance, if adequate reserves are maintained with respect thereto) as is customary in the case of entities of established reputations engaged in the same or a similar business and similarly situated.
Section 9.3. Maintenance of Properties. Each Constituent Company will, and will cause each of its Subsidiaries to, maintain and keep, or cause to be maintained and kept, their respective properties in good repair, working order and condition (other than ordinary wear and tear), so that the business carried on in connection therewith may be properly conducted at all times, provided that this Section 9.3 shall not prevent the Parent Guarantor or any Subsidiary from discontinuing the operation and the maintenance of any of its properties if such discontinuance is desirable in the conduct of its business and the Parent Guarantor has concluded that such discontinuance could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.
Section 9.4. Payment of Taxes and Claims. Each Constituent Company will, and will cause each of its Subsidiaries to, file all tax returns required to be filed in any jurisdiction and to pay and discharge all taxes shown to be due and payable on such returns and all other taxes, assessments, governmental charges, or levies imposed on them or any of their properties, assets, income or franchises, to the extent the same have become due and payable and before they have become delinquent and all claims for which sums have become due and payable that have or might become a Lien on properties or assets of the Parent Guarantor or any Subsidiary, provided that neither the Parent Guarantor nor any Subsidiary need pay any such tax, assessment, charge, levy or claim if (a) the amount, applicability or validity thereof is contested by the Parent Guarantor or such Subsidiary on a timely basis in good faith and in appropriate proceedings, and the Parent Guarantor or a Subsidiary has established adequate reserves therefor in accordance with GAAP on the books of the Parent Guarantor or such Subsidiary or (b) the nonpayment of all such taxes, assessments, charges, levies and claims could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.
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Section 9.5. Corporate Existence, Etc. Each Constituent Company will at all times preserve and keep its limited liability company or corporate existence in full force and effect. Subject to Section 10.2, each Constituent Company will at all times preserve and keep in full force and effect the corporate or other legal existence of each of its Subsidiaries (unless, except in the case of the Issuer, merged into a Constituent Company or a Wholly-Owned Subsidiary) and all rights and franchises of each Constituent Company and its Subsidiaries unless, in the good faith judgment of the Parent Guarantor, the termination of or failure to preserve and keep in full force and effect such corporate or other legal existence, right or franchise could not, individually or in the aggregate, have a Material Adverse Effect.
Section 9.6. Books and Records. Each Constituent Company will, and will cause each of its Subsidiaries to, maintain proper books of record and account in conformity with GAAP and all applicable requirements of any Governmental Authority having legal or regulatory jurisdiction over such Constituent Company or such Subsidiary, as the case may be. Each Constituent Company will, and will cause each of its Subsidiaries to, keep books, records and accounts which, in reasonable detail, accurately reflect all transactions and dispositions of assets. Each Constituent Company and its Subsidiaries have devised a system of internal accounting controls sufficient to provide reasonable assurances that their respective books, records, and accounts accurately reflect all transactions and dispositions of assets and each Constituent Company will, and will cause each of its Subsidiaries to, continue to maintain such system.
Section 9.7. REIT Status. The Parent Guarantor shall maintain its status as, and election to be treated as, a REIT under the Code.
Section 9.8. Exchange Listing. The Parent Guarantor shall maintain at least one class of common shares of the Parent Guarantor having trading privileges on the New York Stock Exchange or NYSE Amex Equities or which is subject to price quotations on The NASDAQ Stock Market’s National Market System.
Section 9.9. Subsidiary Guarantors.
(a) The Parent Guarantor will cause each of its Subsidiaries that guarantees or otherwise becomes liable at any time, whether as a borrower or an additional or co-borrower or otherwise, for or in respect of any Indebtedness under any Material Credit Facility to concurrently therewith:
(1) execute a supplement to the Subsidiary Guaranty Agreement in the form of Exhibit A thereto (a “Subsidiary Guaranty Supplement”); and
(2) deliver the following to each holder of a Note:
(i) an executed counterpart of such Subsidiary Guaranty Supplement;
(ii) a certificate signed by an authorized Responsible Officer of such Subsidiary containing representations and warranties on behalf of such Subsidiary to the same effect, mutatis mutandis, as those contained in Sections 5.1(c), 5.2(c), 5.6(c), 5.7(c) and 5.19(c) of this Agreement (but with
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respect to such Subsidiary, such Subsidiary Guaranty Supplement and the Subsidiary Guaranty Agreement, as the case may be);
(iii) all documents as may be reasonably requested by the Required Holders to evidence the due organization, continuing existence and, where applicable, good standing of such Subsidiary and the due authorization by all requisite action on the part of such Subsidiary of the execution and delivery of such Subsidiary Guaranty Supplement and the performance by such Subsidiary of its obligations under the Subsidiary Guaranty Agreement; and
(iv) an opinion of counsel reasonably satisfactory to the Required Holders covering the matters set forth in paragraphs 2, 3, 4 and 5 of Schedule 4.4(a)(1) but relating to such Subsidiary, such Subsidiary Guaranty Supplement and the Subsidiary Guaranty Agreement and which opinion may be subject to assumptions, qualifications and limitations similar to those set forth in said Schedule 4.4(a)(1).
(b) At the request of the Parent Guarantor and by written notice to each holder of Notes, any Subsidiary Guarantor that is a party to the Subsidiary Guaranty Agreement (including any Subsidiary Guarantor that becomes a party thereto by virtue of a Subsidiary Guaranty Supplement) shall be discharged from all of its obligations and liabilities under the Subsidiary Guaranty Agreement and shall be automatically released from its obligations thereunder without the need for the execution or delivery of any other document by the holders, provided that (1) if such Subsidiary Guarantor is a guarantor or is otherwise liable for or in respect of any Material Credit Facility, then such Subsidiary Guarantor has been released and discharged (or will be released and discharged concurrently with the release of such Subsidiary Guarantor under the Subsidiary Guaranty Agreement) under such Material Credit Facility, (2) at the time of, and after giving effect to, such release and discharge, no Default or Event of Default shall have occurred and be continuing, (3) no amount is then due and payable under the Subsidiary Guaranty Agreement, (4) if in connection with such Subsidiary Guarantor being released and discharged under any Material Credit Facility, any fee or other form of consideration is given to any holder of Indebtedness under such Material Credit Facility principally for such release, the holders of the Notes shall receive equivalent consideration substantially concurrently therewith and (5) each holder shall have received a certificate of a Responsible Officer of the Parent Guarantor certifying as to the matters set forth in clauses (1) through (4).
Section 9.10. Most Favored Lender Provision. If at any time the Bank Credit Agreement or any Additional Note Purchase Agreement or any Guaranty in respect of any thereof (a “MFL Agreement”) shall include any Financial Covenant and such provision is not contained in this Agreement (any such provision, together with any related definitions (including, any term defined therein with reference to the application of GAAP, as identified in such MFL Agreement), an “Additional Covenant”), then the Constituent Companies shall promptly, and in any event within 10 Business Days thereof, provide a Most Favored Lender Notice with respect to each such Additional Covenant; provided that a Most Favored Lender
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Notice is not required to be given in the case of the Additional Covenants incorporated herein on the Execution Date. Thereupon, unless waived in writing by the Required Holders within 10 days of the Purchasers and holders receipt of such notice, such Additional Covenant shall be deemed incorporated by reference into this Agreement, mutatis mutandis, as if set forth fully herein, effective (a) in the case of any Additional Covenant effective on the Execution Date, as of the Execution Date, and (b) in the case of any Additional Covenant effective after the Execution Date, as of the date when such Additional Covenant became effective under the relevant MFL Agreement. Any Additional Covenant incorporated into this Agreement pursuant to this provision, (1) shall be deemed automatically waived herein to reflect any waiver of such Additional Covenant under the relevant MFL Agreement, (2) shall be deemed automatically amended herein to reflect any subsequent amendments agreed and implemented in relation to such Additional Covenant under the relevant MFL Agreement and (3) shall be deemed deleted from this Agreement at such time as such Additional Covenant is deleted or otherwise removed from or is no longer in effect under or pursuant to the relevant MFL Agreement or if the relevant MFL Agreement has been terminated; provided in each case that any consideration paid or provided to any holder of Indebtedness under the relevant MFL Agreement in connection with an event contemplated by clause (1), (2) or (3) above (other than in connection with the extension of the term of the relevant MFL Agreement, refinancing or replacing the relevant MFL Agreement or repayment in full of the relevant MFL Agreement in connection with its termination) is paid to each holder of Notes at the same time and on equivalent terms (and for the avoidance of doubt such amounts shall be proportional to the aggregate principal amount of Notes outstanding as compared to the aggregate amount of the Indebtedness outstanding under the relevant MFL Agreement); and provided further that no Additional Covenant shall be so deemed automatically waived, amended or deleted during any time that a Default or Event of Default has occurred and is continuing. In determining whether a breach of any Financial Covenant incorporated by reference into this Agreement pursuant to this Section 9.10 shall constitute an Event of Default, the period of grace, if any, applicable to such Additional Covenant in the relevant MFL Agreement shall apply.
Although it will not be a Default or an Event of Default if the Constituent Companies fail to comply with any provision of Section 9 on or after the Execution Date and prior to the Closing, if such a failure occurs, then any of the Purchasers may elect not to purchase the Notes on the date of Closing that is specified in Section 3.
SECTION 10. NEGATIVE COVENANTS.
From the Execution Date until the Closing and thereafter, so long as any of the Notes are outstanding, the Constituent Companies covenant that:
Section 10.1. Transactions with Affiliates. The Constituent Companies will not, and will not permit any Subsidiary to, enter into directly or indirectly any transaction or group of related transactions (including the purchase, lease, sale or exchange of properties of any kind or the rendering of any service) with any Affiliate, except pursuant to the reasonable requirements of such Constituent Company’s or such Subsidiary’s business and upon fair and reasonable terms no less favorable to such Constituent Company or such Subsidiary than would be obtainable in a comparable arm’s-length transaction with a Person not an Affiliate.
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Section 10.2. Merger, Consolidation, Sales of Assets and Other Arrangements. The Constituent Companies will not, and will not permit any Subsidiary to, (x) enter into any transaction of merger or consolidation, (y) liquidate, wind-up or dissolve itself (or suffer any liquidation or dissolution) or (z) convey, sell, lease, sublease, transfer or otherwise dispose of, in one transaction or a series of transactions, all or any substantial part of its business or assets, or the capital stock of or other Equity Interests in any of its Subsidiaries, whether now owned or hereafter acquired; provided, however, that:
(a) any of the actions described in the immediately preceding clauses (x) through (z) may be taken with respect to any Subsidiary (other than the Issuer) so long as (1) immediately prior to the taking of such action, and immediately thereafter and after giving effect thereto, no Default or Event of Default is or would be in existence and (2) if such action includes the sale of all Equity Interests in a Subsidiary that is a Subsidiary Guarantor owned directly or indirectly by the Parent Guarantor, such Subsidiary can and will be released from the Guaranty in accordance with Section 9.9(b);
(b) the Parent Guarantor and its Subsidiaries may lease and sublease their respective assets, as lessor or sublessor (as the case may be), in the ordinary course of their business;
(c) a Person may merge with the Parent Guarantor, the Issuer or a Subsidiary Guarantor so long as (1) the survivor of such merger is the Parent Guarantor, the Issuer or such Subsidiary Guarantor or, solely in the case of a Subsidiary Guarantor, becomes a Subsidiary Guarantor at the time of such merger, and (2) immediately prior to such merger, and immediately thereafter and after giving effect thereto, no Default or Event of Default is or would be in existence, including a Default or Event of Default resulting from a breach of Section 10.8 or any Additional Covenant; and
(d) the Parent Guarantor and its Subsidiaries may sell, transfer or dispose of assets among themselves.
Further, (i) no Constituent Company or any Subsidiary Guarantor may enter into any sale-leaseback transactions or other transaction by which such Person shall remain liable as lessee (or the economic equivalent thereof) of any real or personal property that it has sold or leased to another Person and (ii) no Subsidiary that is not the Issuer or a Subsidiary Guarantor may enter into any sale-leaseback transactions or other transaction by which such Person shall remain liable as lessee (or the economic equivalent thereof) of any real or personal property that it has sold or leased to another unless no Default or Event of Default then exists or would result therefrom.
Section 10.3. Line of Business. The Constituent Companies will not, and will not permit any Subsidiary to, engage in any business if, as a result, the general nature of the business in which the Parent Guarantor and its Subsidiaries, taken as a whole, would then be engaged would be substantially changed from the general nature of the business in which the Parent Guarantor and its Subsidiaries, taken as a whole, are engaged on the Execution Date as described in the Memorandum.
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Section 10.4. Economic Sanctions, Etc. The Constituent Companies will not, and will not permit any Controlled Entity to (a) become (including by virtue of being owned or controlled by a Blocked Person), own or control a Blocked Person or (b) directly or indirectly have any investment in or engage in any dealing or transaction (including any investment, dealing or transaction involving the proceeds of the Notes) with any Person if such investment, dealing or transaction (1) would cause any Purchaser or holder or any affiliate of such Purchaser or holder to be in violation of, or subject to sanctions under, any law or regulation applicable to such Purchaser or holder, or (2) is prohibited by or subject to sanctions under any U.S. Economic Sanctions Laws.
Section 10.5. Permitted Liens; Negative Pledge.
(a) The Constituent Companies will not, and will not permit any Subsidiary to, create, assume, or incur any Lien (other than Permitted Liens) upon any of its properties, assets, income or profits of any character whether now owned or hereafter acquired if immediately prior to the creation, assumption or incurring of such Lien, or immediately thereafter, a Default or Event of Default is or would be in existence, including a Default or Event of Default resulting from a violation of any of the covenants contained in Section 10.8. In addition, the Constituent Companies will not, and will not permit any Subsidiary to, secure any Indebtedness outstanding under or pursuant to a Material Credit Facility unless and until the Notes (and the Subsidiary Guaranty Agreement and any other Guaranty delivered in connection therewith) shall concurrently be secured equally and ratably with such Indebtedness pursuant to documentation reasonably acceptable to the Required Holders in substance and in form, including, an intercreditor agreement and opinions of counsel to the Constituent Companies and/or any such Subsidiary, as the case may be, from counsel that is reasonably acceptable to the Required Holders.
(b) The Constituent Companies will not, and will not permit any Subsidiary (other than an Excluded Subsidiary) to, enter into, assume or otherwise be bound by any Negative Pledge except for (1) a Negative Pledge contained in any agreement that evidences unsecured Indebtedness which contains restrictions on encumbering assets that are substantially similar to or less restrictive than those restrictions contained in this Agreement; (2) a Negative Pledge contained in any agreement relating to assets to be sold where the restrictions on encumbering assets relate only to such assets pending such sale; (3) a Negative Pledge contained in a joint venture agreement applicable solely to the assets or Equity Interests of such joint venture; and (4) a Negative Pledge contained in any agreement (i) evidencing Secured Indebtedness of such Person, but only to the extent that no Default or Event of Default is in existence at the time such Secured Indebtedness is created, incurred or assumed, nor would result from the creation, incurrence or assumption of such Secured Indebtedness (including a Default or Event of Default resulting from a violation of any of the covenants contained in Section 10.8), (ii) the Lien securing such Secured Indebtedness is permitted to exist pursuant to this Agreement, and (iii) which prohibits the creation of any other Lien on only the property securing such Secured Indebtedness.
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Section 10.6. Restrictions on Intercompany Transfers. The Constituent Companies will not, and will not permit any Subsidiary (other than an Excluded Subsidiary) to, create or otherwise cause or suffer to exist or become effective any consensual encumbrance or restriction of any kind on the ability of any Subsidiary to: (a) pay dividends or make any other distribution on any of such Subsidiary’s capital stock or other Equity Interests owned by the Parent Guarantor or any other Subsidiary; (b) pay any Indebtedness owed to the Parent Guarantor or any other Subsidiary; (c) make loans or advances to the Parent Guarantor or any other Subsidiary; or (d) transfer any of its property or assets to the Parent Guarantor or any other Subsidiary, in each case, other than: (1) with respect to clauses (a) through (d), those encumbrances or restrictions (i) contained in this Agreement or (ii) contained in any other agreement that evidences unsecured Indebtedness containing encumbrances or restrictions on the actions described above that are substantially similar to or less restrictive than those contained in this Agreement, or (2) with respect to clause (d), (i) restrictions contained in any agreement relating to the sale of a Subsidiary (other than the Issuer) or the assets of a Subsidiary pending sale, or relating to Secured Indebtedness secured by a Lien on assets that the Parent Guarantor or any Subsidiary may create, incur, assume, or permit or suffer to exist under this Agreement; provided that in any such case, the restrictions apply only to the Subsidiary or the assets that are the subject of such sale or Lien, as the case may be or (ii) customary provisions restricting assignment of any agreement entered into by the Parent Guarantor or any Subsidiary in the ordinary course of business.
Section 10.7. Parent Guarantor Ownership and Management of the Issuer. The Constituent Companies will not permit the Parent Guarantor or a Wholly-Owned Subsidiary of the Parent Guarantor to (a) cease to be the sole managing member of the Issuer, (b) cease to have the sole and exclusive power to exercise all management and control over the Issuer or (c) cease to own and control, directly or indirectly, at least 80% of the outstanding Equity Interests of the Issuer.
Section 10.8. Financial Covenants.
(a) Maximum Leverage Ratio. The Parent Guarantor will not permit the Leverage Ratio to exceed 6.50 to 1.00 at any time; provided, however, that the Parent Guarantor shall have the option, exercisable one time, to elect that the Leverage Ratio may exceed 6.50 to 1.00 for a period (such period, the “Surge Period”) of one or two consecutive fiscal quarters commencing with the fiscal quarter during which the Issuer delivers the notice referred to below so long as (1) the Issuer has delivered a written notice to each holder of the Notes that the Parent Guarantor is exercising its option under this subsection (a) and (2) the Leverage Ratio does not exceed 7.00 to 1.00 at any time during the Surge Period.
(b) Minimum Fixed Charge Coverage Ratio. The Parent Guarantor will not permit the ratio of (1) Adjusted EBITDA for the period of four consecutive fiscal quarters most recently ended to (2) Fixed Charges for such period to be less than 1.50 to 1.00 as of the last day of such period.
(c) Maximum Unencumbered Leverage Ratio. The Parent Guarantor will not permit the ratio of (1) Unsecured Indebtedness of the Parent Guarantor and its
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Subsidiaries determined on a consolidated basis to (2) Unencumbered Asset Value to exceed 0.60 to 1.00 at any time.
(d) Maximum Secured Indebtedness Ratio. The Parent Guarantor will not permit the ratio of (1) Secured Indebtedness of the Parent Guarantor and its Subsidiaries determined on a consolidated basis to (2) Total Asset Value to exceed 0.45 to 1.00 at any time
(e) Minimum Unencumbered Implied Debt Service Coverage Ratio. The Parent Guarantor will not permit the ratio of (1) Adjusted NOI from Unencumbered Properties to (2) Implied Debt Service for all Unsecured Indebtedness of the Parent Guarantor and its Subsidiaries to be less than 1.20 to 1.00 at any time.
(f) Minimum Unencumbered Property Requirements. The Parent Guarantor will not permit the number of Unencumbered Properties to be less than seven Properties or the Unencumbered Asset Value to be less than $500,000,000.
Although it will not be a Default or an Event of Default if the Constituent Companies fail to comply with any provision of Section 10 before or after giving effect to the issuance of the Notes on a pro forma basis, if such a failure occurs, then any of the Purchasers may elect not to purchase the Notes on the date of Closing that is specified in Section 3.
SECTION 11. EVENTS OF DEFAULT.
An “Event of Default” shall exist if any of the following conditions or events shall occur and be continuing:
(a) the Issuer defaults in the payment of any principal or Make-Whole Amount, on any Note when the same becomes due and payable, whether at maturity or at a date fixed for prepayment or by declaration or otherwise; or
(b) the Issuer defaults in the payment of any interest on any Note for more than three Business Days after the same becomes due and payable; or
(c) either Constituent Company defaults in the performance of or compliance with any term contained in Section 7.1(d) or Section 10 or any Additional Covenant; or
(d) either Constituent Company or any Subsidiary Guarantor defaults in the performance of or compliance with any term contained herein (other than those referred to in Sections 11(a), (b) and (c)) or in the Subsidiary Guaranty Agreement and such default is not remedied within 30 days after the earlier of (1) a Responsible Officer of either Constituent Company obtaining actual knowledge of such default and (2) either Constituent Company receiving written notice of such default from any holder of a Note (any such written notice to be identified as a “notice of default” and to refer specifically to this Section 11(d)); or
(e) (1) any representation or warranty made in writing by or on behalf of either Constituent Company or by any officer of either Constituent Company in this
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Agreement or any writing furnished in connection with the transactions contemplated hereby proves to have been false or incorrect in any material respect on the date as of which made, or (2) any representation or warranty made in writing by or on behalf of any Subsidiary Guarantor or by any officer of such Subsidiary Guarantor in the Subsidiary Guaranty Agreement or any writing furnished in connection with the Subsidiary Guaranty Agreement proves to have been false or incorrect in any material respect on the date as of which made; or
(f) (1) either Constituent Company or any Subsidiary is in default (as principal or as guarantor or other surety) in the payment of any principal of or premium or make-whole amount or interest on any Indebtedness that is outstanding in an aggregate principal amount of at least $25,000,000 (or, in the case of Nonrecourse Indebtedness, $175,000,000) (or its equivalent in the relevant currency of payment) beyond any period of grace provided with respect thereto, or (2) either Constituent Company or any Subsidiary is in default in the performance of or compliance with any term of any evidence of any Indebtedness in an aggregate outstanding principal amount of at least $25,000,000 (or, in the case of Nonrecourse Indebtedness, $175,000,000) (or its equivalent in the relevant currency of payment) or of any mortgage, indenture or other agreement relating thereto or any other condition exists, and as a consequence of such default or condition such Indebtedness has become, or has (i) been declared due and payable before its stated maturity or before its regularly scheduled dates of payment or (ii) one or more Persons are entitled to declare such Indebtedness to be due and payable before its stated maturity or before its regularly scheduled dates of payment, provided that in the case of clause (ii), upon the receipt by each holder of Notes of evidence that such default has been waived in writing by the requisite Person(s) holding such Indebtedness, so long as the Required Holders shall not have then exercised any of their rights or remedies with respect to such default, such event shall automatically cease to constitute an Event of Default hereunder or (3) as a consequence of the occurrence or continuation of any event or condition (other than the passage of time or the right of the holder of Indebtedness to convert such Indebtedness into equity interests), (i) either Constituent Company or any Subsidiary has become obligated to purchase or repay Indebtedness before its regular maturity or before its regularly scheduled dates of payment in an aggregate outstanding principal amount of at least $25,000,000 (or, in the case of Nonrecourse Indebtedness, $175,000,000) (or its equivalent in the relevant currency of payment), or (ii) one or more Persons have the right to require either Constituent Company or any Subsidiary so to purchase or repay such Indebtedness, provided that, upon the receipt by each holder of Notes of evidence that such right has been waived in writing by the requisite Person(s) holding such Indebtedness, so long as the Required Holders shall not have then exercised any of their rights or remedies with respect to such right, such event shall automatically cease to constitute an Event of Default hereunder; or
(g) either Constituent Company, any Subsidiary Guarantor or any Significant Subsidiary (1) is generally not paying, or admits in writing its inability to pay, its debts as they become due, (2) files, or consents by answer or otherwise to the filing against it of, a petition for relief or reorganization or arrangement or any other petition in bankruptcy, for liquidation or to take advantage of any bankruptcy, insolvency, reorganization,
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moratorium or other similar law of any jurisdiction, (3) makes an assignment for the benefit of its creditors, (4) consents to the appointment of a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, (5) is adjudicated as insolvent or to be liquidated, or (6) takes corporate action for the purpose of any of the foregoing; or
(h) a court or other Governmental Authority of competent jurisdiction enters an order appointing, without consent by either Constituent Company, any Subsidiary Guarantor or any Significant Subsidiary, a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, or constituting an order for relief or approving a petition for relief or reorganization or any other petition in bankruptcy or for liquidation or to take advantage of any bankruptcy or insolvency law of any jurisdiction, or ordering the dissolution, winding-up or liquidation of either Constituent Company, any Subsidiary Guarantor or any Significant Subsidiary, or any such petition shall be filed against either Constituent Company, any Subsidiary Guarantor or any Significant Subsidiary and such petition shall not be dismissed within 60 days; or
(i) any event occurs with respect either Constituent Company, any Subsidiary Guarantor or any Significant Subsidiary which under the laws of any jurisdiction is analogous to any of the events described in Section 11(g) or Section 11(h), provided that the applicable grace period, if any, which shall apply shall be the one applicable to the relevant proceeding which most closely corresponds to the proceeding described in Section 11(g) or Section 11(h); or
(j) one or more final judgments or orders for the payment of money aggregating in excess of $25,000,000 (or its equivalent in the relevant currency of payment), including any such final order enforcing a binding arbitration decision, are rendered against one or more of the Constituent Companies and their Subsidiaries and which judgments are not, within 60 days after entry thereof, bonded, discharged or stayed pending appeal, or are not discharged within 60 days after the expiration of such stay; or
(k) if (1) any Plan shall fail to satisfy the minimum funding standards of ERISA or the Code for any plan year or part thereof or a waiver of such standards or extension of any amortization period is sought or granted under section 412 of the Code, (2) a notice of intent to terminate any Plan shall have been or is reasonably expected to be filed with the PBGC or the PBGC shall have instituted proceedings under ERISA section 4042 to terminate or appoint a trustee to administer any Plan or the PBGC shall have notified the Parent Guarantor or any ERISA Affiliate that a Plan may become a subject of any such proceedings, (3) there is any “amount of unfunded benefit liabilities” (within the meaning of section 4001(a)(18) of ERISA) under one or more Plans, determined in accordance with Title IV of ERISA, (4) the aggregate present value of accrued benefit liabilities under all funded Non-U.S. Plans exceeds the aggregate current value of the assets of such Non-U.S. Plans allocable to such liabilities, (5) the Parent Guarantor or any ERISA Affiliate shall have incurred or is reasonably expected to incur any liability pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the Code relating to employee benefit plans, (6) the Parent Guarantor or any ERISA Affiliate
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withdraws from any Multiemployer Plan, (7) the Parent Guarantor or any Subsidiary establishes or amends any employee welfare benefit plan that provides post-employment welfare benefits in a manner that would increase the liability of the Parent Guarantor or any Subsidiary thereunder, (8) the Parent Guarantor or any Subsidiary fails to administer or maintain a Non-U.S. Plan in compliance with the requirements of any and all applicable laws, statutes, rules, regulations or court orders or any Non-U.S. Plan is involuntarily terminated or wound up, or (9) the Parent Guarantor or any Subsidiary becomes subject to the imposition of a financial penalty (which for this purpose shall mean any tax, penalty or other liability, whether by way of indemnity or otherwise) with respect to one or more Non-U.S. Plans; and any such event or events described in clauses (1) through (9) above, either individually or together with any other such event or events, could reasonably be expected to have a Material Adverse Effect. As used in this Section 11(k), the terms “employee benefit plan” and “employee welfare benefit plan” shall have the respective meanings assigned to such terms in section 3 of ERISA; or
(l) the Subsidiary Guaranty Agreement shall cease to be in full force and effect with respect to any Subsidiary Guarantor, any Subsidiary Guarantor or any Person acting on behalf of such Subsidiary Guarantor shall contest in any manner the validity, binding nature or enforceability of the Subsidiary Guaranty Agreement with respect to such Subsidiary Guarantor, or the obligations of any Subsidiary Guarantor under the Subsidiary Guaranty Agreement are not or cease to be legal, valid, binding and enforceable in accordance with the terms of the Subsidiary Guaranty Agreement.
SECTION 12. REMEDIES ON DEFAULT, ETC.
Section 12.1. Acceleration.
(a) If an Event of Default with respect to either Constituent Company described in Section 11(g), (h) or (i) (other than an Event of Default described in clause (1) of Section 11(g) or described in clause (6) of Section 11(g) by virtue of the fact that such clause encompasses clause (1) of Section 11(g)) has occurred, all the Notes then outstanding shall automatically become immediately due and payable.
(b) If any other Event of Default has occurred and is continuing, the Required Holders may at any time at their option, by notice or notices to the Issuer, declare all the Notes then outstanding to be immediately due and payable.
(c) If any Event of Default described in Section 11(a) or (b) has occurred and is continuing, any holder or holders of Notes at the time outstanding affected by such Event of Default may at any time, at its or their option, by notice or notices to the Issuer, declare all the Notes held by it or them to be immediately due and payable.
Upon any Notes becoming due and payable under this Section 12.1, whether automatically or by declaration, such Notes will forthwith mature and the entire unpaid principal amount of such Notes, plus (1) all accrued and unpaid interest thereon (including interest accrued thereon at the applicable Default Rate) and (2) the Make-Whole Amount determined in respect of such principal amount, shall all be immediately due and payable, in each and every case
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without presentment, demand, protest or further notice, all of which are hereby waived. The Issuer acknowledges, and the parties hereto agree, that each holder of a Note has the right to maintain its investment in the Notes free from repayment by the Issuer (except as herein specifically provided for) and that the provision for payment of a Make-Whole Amount by the Issuer in the event that the Notes are prepaid or are accelerated as a result of an Event of Default, is intended to provide compensation for the deprivation of such right under such circumstances.
Section 12.2. Other Remedies. If any Default or Event of Default has occurred and is continuing, and irrespective of whether any Notes have become or have been declared immediately due and payable under Section 12.1, the holder of any Note at the time outstanding may proceed to protect and enforce the rights of such holder by an action at law, suit in equity or other appropriate proceeding, whether for the specific performance of any agreement contained herein or in any Note or the Subsidiary Guaranty Agreement, or for an injunction against a violation of any of the terms hereof or thereof, or in aid of the exercise of any power granted hereby or thereby or by law or otherwise.
Section 12.3. Rescission. At any time after any Notes have been declared due and payable pursuant to Section 12.1(b) or (c), the Required Holders, by written notice to the Issuer, may rescind and annul any such declaration and its consequences if (a) the Issuer has paid all overdue interest on the Notes, all principal of and Make-Whole Amount, if any, on any Notes that are due and payable and are unpaid other than by reason of such declaration, and all interest on such overdue principal and Make-Whole Amount, if any, and (to the extent permitted by applicable law) any overdue interest in respect of the Notes, at the applicable Default Rate, (b) neither the Issuer nor any other Person shall have paid any amounts which have become due solely by reason of such declaration, (c) all Events of Default and Defaults, other than non-payment of amounts that have become due solely by reason of such declaration, have been cured or have been waived pursuant to Section 18, and (d) no judgment or decree has been entered for the payment of any monies due pursuant hereto or to the Notes. No rescission and annulment under this Section 12.3 will extend to or affect any subsequent Event of Default or Default or impair any right consequent thereon.
Section 12.4. No Waivers or Election of Remedies, Expenses, Etc. No course of dealing and no delay on the part of any holder of any Note in exercising any right, power or remedy shall operate as a waiver thereof or otherwise prejudice such holder’s rights, powers or remedies. No right, power or remedy conferred by this Agreement, the Subsidiary Guaranty Agreement or any Note upon any holder thereof shall be exclusive of any other right, power or remedy referred to herein or therein or now or hereafter available at law, in equity, by statute or otherwise. Without limiting the obligations of the Constituent Companies under Section 16, the Issuer will pay to the holder of each Note on demand such further amount as shall be sufficient to cover all costs and expenses of such holder incurred in any enforcement or collection under this Section 12, including reasonable attorneys’ fees, expenses and disbursements.
SECTION 13. GUARANTEE.
Section 13.1. The Guarantee. The Parent Guarantor hereby absolutely, unconditionally and irrevocably guarantees, as primary obligor and not as surety, to each holder of a Note (a) the full and punctual payment when due, whether at maturity, by acceleration, by redemption or
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otherwise, of the principal of, Make-Whole Amount, if any, and interest (including any interest accruing after the commencement of any proceeding in bankruptcy and any additional interest that would accrue but for the commencement of such proceeding) on the Notes and all other obligations of the Issuer under this Agreement and (b) the full and prompt performance and observance by the Issuer of each and all of the obligations, covenants and agreements required to be performed or observed by the Issuer under the terms of this Agreement and the Notes (all the foregoing being hereinafter collectively called the “Obligations”). The Parent Guarantor further agrees (to the extent permitted by applicable law) that the Obligations may be extended or renewed, in whole or in part, without notice or further assent from it, and that it shall remain bound under this Section 13 notwithstanding any extension or renewal of any Obligation.
Section 13.2. Waiver of Defenses. The Parent Guarantor waives presentation to, demand of payment from and protest to the Issuer of any of the Obligations and also waives notice of protest for nonpayment. The Parent Guarantor waives notice of any default under this Agreement, the Notes or the other Obligations. The obligation of the Parent Guarantor hereunder shall not be affected by (a) the failure of any holder of a Note to assert any claim or demand or to enforce any right or remedy against the Issuer or any other Person (including any Subsidiary Guarantor) under this Agreement, the Notes, the Subsidiary Guaranty Agreement or any other agreement or otherwise; (b) any extension or renewal of any thereof; (c) any rescission, waiver, amendment or modification of any of the terms or provisions of this Agreement, the Notes, the Subsidiary Guaranty Agreement or any other agreement; (d) the acceptance of any security or Guarantee (including the Subsidiary Guaranty Agreement) by any holder of a Note for the Obligations or any of them; (e) the release of any security or Guarantee (including the Subsidiary Guaranty Agreement) held by any holder of a Note for the Obligations or any of them; (f) the release of the Issuer, any Subsidiary Guarantor or any other Person from its liability with respect to the Obligations; (g) any act or failure to act with regard to the Obligations; (h) the voluntary or involuntary liquidation, dissolution, sale or other disposition of all or substantially all the assets, marshalling of assets and liabilities, receivership, insolvency, bankruptcy, assignment for the benefit of creditors, reorganization or arrangement under bankruptcy or similar laws, composition with creditors or readjustment of, or other similar procedure affecting the Issuer, any Subsidiary Guarantor or any other Person or any of the assets of any of them, or any allegation or contest of the validity of this Agreement, the Notes, the Subsidiary Guaranty Agreement or any other agreement or the disaffirmance of this Agreement or the Notes or the Subsidiary Guaranty Agreement or any other agreement in any such proceeding; (i) the invalidity or unenforceability of this Agreement, the Notes, the Subsidiary Guaranty Agreement or any other agreement; (j) the impossibility or illegality of performance on the part of the Issuer, any Subsidiary Guarantor or any other Person of its obligations under the Notes, this Agreement, the Subsidiary Guaranty Agreement or any other instrument or agreement; (k) in respect of the Issuer, any Subsidiary Guarantor or any other Person, any change of circumstances, whether or not foreseen or foreseeable, whether or not imputable to the Issuer, any Subsidiary Guarantor or any other Person, or other impossibility of performance through fire, explosion, accident, labor disturbance, floods, droughts, embargoes, wars (whether or not declared), acts of terrorists, civil commotions, acts of God or the public enemy, delays or failures of suppliers or carriers, inability to obtain materials, action of any Governmental Authority, change of law or any other causes affecting performance, or other force majeure, whether or not beyond the control of the Issuer, any Subsidiary Guarantor or any other Person and whether or not of the kind above specified; or (l) any change in the ownership of the Issuer.
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It being understood that the specific enumeration of the above-mentioned acts, failures or omissions shall not be deemed to exclude any other acts, failures or omissions, though not specifically mentioned above, it being the purpose and intent of this Section 13.2 that the obligations of the Parent Guarantor shall be absolute, unconditional and irrevocable to the extent herein specified and shall not be discharged, impaired or varied except by the payment of the Obligations and then only to the extent of such payment.
Section 13.3. Guaranty of Payment. The Parent Guarantor further agrees that the Guarantee herein constitutes a guaranty of payment when due (and not a guaranty of collection) and waives any right to require that any resort be had by any holder of a Note to any other Person or to any security held for payment of the Obligations.
Section 13.4. Guaranty Unconditional. The obligations of the Parent Guarantor hereunder shall not be subject to any reduction, limitation, impairment or termination for any reason (other than payment of the Obligations in full), including any claim of waiver, release, surrender, alteration or compromise, and shall not be subject to any defense of setoff, counterclaim, recoupment or termination whatsoever or by reason of the invalidity, illegality or unenforceability of the Obligations or otherwise. Without limiting the generality of the foregoing, the obligations of the Parent Guarantor herein shall not be discharged or impaired or otherwise affected by the failure of any holder of a Note to assert any claim or demand or to enforce any remedy under this Agreement, the Notes, the Subsidiary Guaranty Agreement or any other agreement, by any waiver or modification of any thereof, by any default, failure or delay, willful or otherwise, in the performance of the Obligations, or by any other act or thing or omission or delay to do any other act or thing which may or might in any manner or to any extent vary the risk of the Parent Guarantor or would otherwise operate as a discharge of the Parent Guarantor as a matter of law or equity.
Section 13.5. Reinstatement. The Parent Guarantor further agrees that the Guarantee herein shall continue to be effective or be reinstated, as the case may be, if at any time payment, or any part thereof, of any of the Obligations is rescinded or must otherwise be restored by any holder of a Note upon the bankruptcy or reorganization of the Issuer or otherwise.
Section 13.6. Payment on Demand. In furtherance of the foregoing and not in limitation of any other right which any holder of a Note has at law or in equity against the Parent Guarantor by virtue hereof, upon the failure of the Issuer to pay any of the Obligations when and as the same shall become due, whether at maturity, by acceleration, by redemption or otherwise, the Parent Guarantor hereby promises to and shall, upon receipt of written demand by any holder of a Note, forthwith pay, or cause to be paid, in cash, to the holders an amount equal to the sum of (a) the unpaid amount of such Obligations then due and owing and (b) accrued and unpaid interest on such Obligations then due and owing (but only to the extent not prohibited by applicable law).
The Parent Guarantor acknowledges and agrees that repeated and successive demands may be made and recoveries may be had hereunder as and when, from time to time, the Issuer shall default under the terms of a Note or this Agreement and that notwithstanding recovery hereunder for or in respect of any given Default or Event of Default, the Guarantee contained in this Section
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13 shall remain in full force and effect and shall apply to each and every subsequent Default or Event of Default.
Section 13.7. Stay of Acceleration. The Parent Guarantor further agrees that, as between itself, on the one hand, and the holders of the Notes, on the other hand, (a) the maturity of the Obligations guaranteed hereby may be accelerated as provided in this Agreement for the purposes of the Guarantee herein, notwithstanding any stay, injunction or other prohibition preventing such acceleration in respect of the Obligations guaranteed hereby and (b) in the event of any such declaration of acceleration of such Obligations, such Obligations (whether or not due and payable) shall forthwith become due and payable by the Parent Guarantor for the purposes of this Guarantee.
Section 13.8. No Subrogation. Notwithstanding any payment or payments made by the Parent Guarantor hereunder, the Parent Guarantor shall not be entitled to be subrogated to any of the rights of any holder of a Note against the Issuer or any collateral security or Guarantee or right of offset held by any holder for the payment of the Obligations, nor shall the Parent Guarantor seek or be entitled to seek any contribution or reimbursement from the Issuer or any Subsidiary Guarantor in respect of payments made by the Parent Guarantor hereunder, until all amounts owing to the holders of the Notes by the Issuer on account of the Obligations are paid in full. If any amount shall be paid to the Parent Guarantor on account of such subrogation rights at any time when all of the Obligations shall not have been paid in full, such amount shall be held by the Parent Guarantor in trust for the holders of the Notes, segregated from other funds of the Parent Guarantor, and shall, forthwith upon receipt by the Parent Guarantor, be turned over to the holders of the Notes in the exact form received by the Parent Guarantor (duly indorsed by the Parent Guarantor to the holders of the Notes, if required), to be applied against the Obligations.
Section 13.9. Marshalling. No holder of a Note shall be under any obligation: (a) to marshal any assets in favor of the Parent Guarantor or in payment of any or all of the liabilities of the Issuer under or in respect of the Notes and this Agreement or the obligations of the Parent Guarantor hereunder or (b) to pursue any other remedy that the Parent Guarantor may or may not be able to pursue itself and that may lighten the Parent Guarantor’s burden, any right to which the Parent Guarantor hereby expressly waives.
Section 13.10. Transfer of Notes. All rights of any holder of a Note under this Section 13 shall be considered to be transferred or assigned at any time or from time to time upon the transfer of any Note held by such holder whether with or without the consent of or notice to the Parent Guarantor under this Section 13 or to the Issuer.
Section 13.11. Consideration. The Parent Guarantor has received, or shall receive, direct or indirect benefits from the making of this Guarantee.
SECTION 14. REGISTRATION; EXCHANGE; SUBSTITUTION OF NOTES.
Section 14.1. Registration of Notes. The Issuer shall keep at its principal executive office a register for the registration and registration of transfers of Notes. The name and address of each holder of one or more Notes, each transfer thereof and the name and address of each transferee of one or more Notes shall be registered in such register. If any holder of one or more
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Notes is a nominee, then (a) the name and address of the beneficial owner of such Note or Notes shall also be registered in such register as an owner and holder thereof and (b) at any such beneficial owner’s option, either such beneficial owner or its nominee may execute any amendment, waiver or consent pursuant to this Agreement. Prior to due presentment for registration of transfer, the Person in whose name any Note shall be registered shall be deemed and treated as the owner and holder thereof for all purposes hereof, and the Issuer shall not be affected by any notice or knowledge to the contrary. The Issuer shall give to any holder of a Note that is an Institutional Investor promptly upon request therefor, a complete and correct copy of the names and addresses of all registered holders of Notes.
Section 14.2. Transfer and Exchange of Notes. Upon surrender of any Note to the Issuer at the address and to the attention of the designated officer (all as specified in Section 19(c)), for registration of transfer or exchange (and in the case of a surrender for registration of transfer accompanied by a written instrument of transfer duly executed by the registered holder of such Note or such holder’s attorney duly authorized in writing and accompanied by the relevant name, address and other information for notices of each transferee of such Note or part thereof), within 10 Business Days thereafter, the Issuer shall execute and deliver, at the Issuer’s expense (except as provided below), one or more new Notes of the same series (as requested by the holder thereof) in exchange therefor, in an aggregate principal amount equal to the unpaid principal amount of the surrendered Note. Each such new Note shall be payable to such Person as such holder may request and shall be substantially in the form of Schedule 1(a) or Schedule 1(b), as applicable. Each such new Note shall be dated and bear interest from the date to which interest shall have been paid on the surrendered Note or dated the date of the surrendered Note if no interest shall have been paid thereon. The Issuer may require payment of a sum sufficient to cover any stamp tax or governmental charge imposed in respect of any such transfer of Notes. Notes shall not be transferred (a) to any Competitor, provided that the limitation contained in this clause (a) shall not apply during any period when an Event of Default has occurred and is continuing, and (b) in denominations of less than $100,000, provided that if necessary to enable the registration of transfer by a holder of its entire holding of Notes of a series, one Note of such series may be in a denomination of less than $100,000. Any transferee, by its acceptance of a Note registered in its name (or the name of its nominee), shall be deemed to have made the representation set forth in Section 6.3.
Section 14.3. Replacement of Notes. Upon receipt by the Issuer at the address and to the attention of the designated officer (all as specified in Section 19(3)) of evidence reasonably satisfactory to it of the ownership of and the loss, theft, destruction or mutilation of any Note (which evidence shall be, in the case of an Institutional Investor, notice from such Institutional Investor of such ownership and such loss, theft, destruction or mutilation), and
(a) in the case of loss, theft or destruction, of indemnity reasonably satisfactory to it (provided that if the holder of such Note is, or is a nominee for, an original Purchaser or another holder of a Note with a minimum net worth of at least $100,000,000 or a Qualified Institutional Buyer, such Person’s own unsecured agreement of indemnity shall be deemed to be satisfactory), or
(b) in the case of mutilation, upon surrender and cancellation thereof,
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within 10 Business Days thereafter, the Issuer at its own expense shall execute and deliver, in lieu thereof, a new Note of the same series, dated and bearing interest from the date to which interest shall have been paid on such lost, stolen, destroyed or mutilated Note or dated the date of such lost, stolen, destroyed or mutilated Note if no interest shall have been paid thereon.
SECTION 15. PAYMENTS ON NOTES.
Section 15.1. Place of Payment. Subject to Section 15.2, payments of principal, Make-Whole Amount, if any, and interest becoming due and payable on the Notes shall be made in New York, New York at the principal office of Bank of America, N.A. in such jurisdiction. The Issuer may at any time, by notice to each holder of a Note, change the place of payment of the Notes so long as such place of payment shall be either the principal office of the Issuer in such jurisdiction or the principal office of a bank or trust company in such jurisdiction.
Section 15.2. Payment by Wire Transfer. So long as any Purchaser or its nominee shall be the holder of any Note, and notwithstanding anything contained in Section 15.1 or in such Note to the contrary, the Issuer will pay all sums becoming due on such Note for principal, Make-Whole Amount, if any, interest and all other amounts becoming due hereunder by the method and at the address specified for such purpose below such Purchaser’s name in the Purchaser Schedule, or by such other method or at such other address as such Purchaser shall have from time to time specified to the Issuer in writing for such purpose, without the presentation or surrender of such Note or the making of any notation thereon, except that upon written request of the Issuer made concurrently with or reasonably promptly after payment or prepayment in full of any Note, such Purchaser shall surrender such Note for cancellation, reasonably promptly after any such request, to the Issuer at its principal executive office or at the place of payment most recently designated by the Issuer pursuant to Section 15.1. Prior to any sale or other disposition of any Note held by a Purchaser or its nominee, such Purchaser will, at its election, either endorse thereon the amount of principal paid thereon and the last date to which interest has been paid thereon or surrender such Note to the Issuer in exchange for a new Note or Notes pursuant to Section 14.2. The Issuer will afford the benefits of this Section 15.2 to any Institutional Investor that is the direct or indirect transferee of any Note purchased by a Purchaser under this Agreement and that has made the same agreement relating to such Note as the Purchasers have made in this Section 15.2.
Section 15.3. FATCA Information. By acceptance of any Note, the holder of such Note agrees that such holder will with reasonable promptness duly complete and deliver to the Issuer, or to such other Person as may be reasonably requested by the Issuer, from time to time (a) in the case of any such holder that is a United States Person, such holder’s United States tax identification number or other forms reasonably requested by the Issuer necessary to establish such holder’s status as a United States Person under FATCA and as may otherwise be necessary for the Issuer to comply with its obligations under FATCA and (b) in the case of any such holder that is not a United States Person, such documentation prescribed by applicable law (including as prescribed by section 1471(b)(3)(C)(i) of the Code) and such additional documentation as may be necessary for the Issuer to comply with its obligations under FATCA and to determine that such holder has complied with such holder’s obligations under FATCA or to determine the amount, if any, to deduct and withhold from any such payment made to such holder. Nothing in this Section 15.3 shall require any holder to provide information that is confidential or
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proprietary to such holder unless the Issuer is required to obtain such information under FATCA and, in such event, the Issuer shall treat any such information it receives as confidential.
SECTION 16. EXPENSES, ETC.
Section 16.1. Transaction Expenses. Whether or not the transactions contemplated hereby are consummated, the Constituent Companies will pay all costs and expenses (including reasonable attorneys’ fees of a special counsel and, if reasonably required by the Required Holders, local or other counsel) incurred by the Purchasers and each other holder of a Note in connection with such transactions and in connection with any amendments, waivers or consents under or in respect of this Agreement, the Subsidiary Guaranty Agreement or the Notes (whether or not such amendment, waiver or consent becomes effective), including: (a) the costs and expenses incurred in enforcing or defending (or determining whether or how to enforce or defend) any rights under this Agreement, the Subsidiary Guaranty Agreement or the Notes or in responding to any subpoena or other legal process or informal investigative demand issued in connection with this Agreement, the Subsidiary Guaranty Agreement or the Notes, or by reason of being a holder of any Note, (b) the costs and the expenses, including financial advisors’ fees, incurred in connection with the insolvency or bankruptcy of either Constituent Company or any Subsidiary or in connection with any work-out or restructuring of the transactions contemplated hereby and by the Notes and the Subsidiary Guaranty Agreement and (c) the costs and expenses incurred in connection with the initial filing of this Agreement and all related documents and financial information with the SVO provided, that such costs and expenses under this clause (c) shall not exceed $6,500. If required by the NAIC, the Issuer shall obtain and maintain at its own cost and expense a Legal Entity Identifier (LEI).
The Constituent Companies will pay, and will save each Purchaser and each other holder of a Note harmless from, (1) all claims in respect of any fees, costs or expenses, if any, of brokers and finders (other than those, if any, retained by a Purchaser or other holder in connection with its purchase of the Notes), (2) any and all wire transfer fees that any bank or other financial institution deducts from any payment under such Note to such holder or otherwise charges to a holder of a Note with respect to a payment under such Note and (3) any judgment, liability, claim, order, decree, fine, penalty, cost, fee, expense (including reasonable attorneys’ fees and expenses) or obligation resulting from the consummation of the transactions contemplated hereby, including the use of the proceeds of the Notes by the Issuer, provided that the Constituent Companies shall have no obligation under this clause (3) to any Purchaser or holder to the extent resulting from the bad faith, gross negligence or willful misconduct of such Purchaser or holder as determined by a court of competent jurisdiction by final and nonappealable judgment.
Section 16.2. Certain Taxes. The Constituent Companies agree to pay all stamp, documentary or similar taxes or fees which may be payable in respect of the execution and delivery or the enforcement of this Agreement or the Subsidiary Guaranty Agreement or the execution and delivery (but not the transfer) or the enforcement of any of the Notes in the United States or any other jurisdiction where either Constituent Company or any Subsidiary Guarantor has assets or of any amendment of, or waiver or consent under or with respect to, this Agreement or the Subsidiary Guaranty Agreement or of any of the Notes, and to pay any value added tax due and payable in respect of reimbursement of costs and expenses by the Constituent
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Companies pursuant to this Section 16, and will save each holder of a Note to the extent permitted by applicable law harmless against any loss or liability resulting from nonpayment or delay in payment of any such tax or fee required to be paid by the Constituent Companies hereunder.
Section 16.3. Survival. The obligations of the Constituent Companies under this Section 16 will survive the payment or transfer of any Note, the enforcement, amendment or waiver of any provision of this Agreement, the Subsidiary Guaranty Agreement or the Notes, and the termination of this Agreement.
SECTION 17. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE AGREEMENT.
All representations and warranties contained herein shall survive the execution and delivery of this Agreement and the Notes, the purchase or transfer by any Purchaser of any Note or portion thereof or interest therein and the payment of any Note, and may be relied upon by any subsequent holder of a Note, regardless of any investigation made at any time by or on behalf of such Purchaser or any other holder of a Note. All statements contained in any certificate or other instrument delivered by or on behalf of either Constituent Company pursuant to this Agreement shall be deemed representations and warranties of such Constituent Company under this Agreement. Subject to the preceding sentence, this Agreement, the Notes and the Subsidiary Guaranty Agreement embody the entire agreement and understanding between each Purchaser and the Constituent Companies and supersede all prior agreements and understandings relating to the subject matter hereof.
SECTION 18. AMENDMENT AND WAIVER.
Section 18.1. Requirements. This Agreement and the Notes may be amended, and the observance of any term hereof or of the Notes may be waived (either retroactively or prospectively), only with the written consent of the Constituent Companies and the Required Holders, except that:
(a) no amendment or waiver of any of Sections 1, 2, 3, 4, 5, 6 or 22 hereof, or any defined term (as it is used therein), will be effective as to any Purchaser unless consented to by such Purchaser in writing; and
(b) no amendment or waiver may, without the written consent of each Purchaser and the holder of each Note at the time outstanding, (1) subject to Section 12 relating to acceleration or rescission, change the amount or time of any prepayment or payment of principal of, or reduce the rate or change the time of payment or method of computation of (i) interest on the Notes or (ii) the Make-Whole Amount, (2) change the percentage of the principal amount of the Notes the holders of which are required to consent to any amendment or waiver or the principal amount of the Notes that the Purchasers are to purchase pursuant to Section 2 upon the satisfaction of the conditions to Closing that appear in Section 4 or (3) amend any of Sections 8 (except as set forth in the second sentence of Section 8.2), 11(a), 11(b), 12, 13, 18 or 21.
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Section 18.2. Solicitation of Holders of Notes.
(a) Solicitation. The Constituent Companies will provide each Purchaser and each holder of a Note with sufficient information, sufficiently far in advance of the date a decision is required, to enable such Purchaser or holder to make an informed and considered decision with respect to any proposed amendment, waiver or consent in respect of any of the provisions hereof or of the Notes or the Subsidiary Guaranty Agreement. The Constituent Companies will deliver executed or true and correct copies of each amendment, waiver or consent effected pursuant to this Section 18 or the Subsidiary Guaranty Agreement to each Purchaser and each holder of a Note promptly following the date on which it is executed and delivered by, or receives the consent or approval of, the requisite Purchasers or holders of Notes.
(b) Payment. The Constituent Companies will not directly or indirectly pay or cause to be paid any remuneration, whether by way of supplemental or additional interest, fee or otherwise, or grant any security or provide other credit support, to any Purchaser or any holder of a Note as consideration for or as an inducement to the entering into by such Purchaser or holder of any waiver or amendment of any of the terms and provisions hereof or of the Subsidiary Guaranty Agreement or any Note unless such remuneration is concurrently paid, or security is concurrently granted or other credit support concurrently provided, on the same terms, ratably to each holder of a Note even if such Purchaser or holder did not consent to such waiver or amendment.
(c) Consent in Contemplation of Transfer. Any consent given pursuant to this Section 18 or the Subsidiary Guaranty Agreement by a holder of a Note that has transferred or has agreed to transfer its Note to (1) a Constituent Company, (2) any Subsidiary or any other Affiliate or (3) any other Person in connection with, or in anticipation of, such other Person acquiring, making a tender offer for or merging with either Constituent Company and/or any of its Affiliates in each case in connection with such consent, shall be void and of no force or effect except solely as to such holder, and any amendments effected or waivers granted or to be effected or granted that would not have been or would not be so effected or granted but for such consent (and the consents of all other holders of Notes that were acquired under the same or similar conditions) shall be void and of no force or effect except solely as to such holder.
Section 18.3. Binding Effect, Etc. Any amendment or waiver consented to as provided in this Section 18 or the Subsidiary Guaranty Agreement applies equally to all Purchasers and holders of Notes and is binding upon them and upon each future holder of any Note and upon the Constituent Companies without regard to whether such Note has been marked to indicate such amendment or waiver. No such amendment or waiver will extend to or affect any obligation, covenant, agreement, Default or Event of Default not expressly amended or waived or impair any right consequent thereon. No course of dealing between either Constituent Company and any Purchaser or any holder of a Note and no delay in exercising any rights hereunder or under any Note or the Subsidiary Guaranty Agreement shall operate as a waiver of any rights of any Purchaser or any holder of such Note.
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Section 18.4. Notes Held by the Constituent Companies, Etc. Solely for the purpose of determining whether the holders of the requisite percentage of the aggregate principal amount of Notes then outstanding approved or consented to any amendment, waiver or consent to be given under this Agreement, the Subsidiary Guaranty Agreement or the Notes, or have directed the taking of any action provided herein or in the Subsidiary Guaranty Agreement or the Notes to be taken upon the direction of the holders of a specified percentage of the aggregate principal amount of Notes then outstanding, Notes directly or indirectly owned by a Constituent Company or any of its Affiliates shall be deemed not to be outstanding.
SECTION 19. NOTICES.
Except to the extent otherwise provided in Section 7.4, all notices and communications provided for hereunder shall be in writing and sent (a) by telecopy if the sender on the same day sends a confirming copy of such notice by an internationally recognized overnight delivery service (charges prepaid), (b) by registered or certified mail with return receipt requested (postage prepaid), or (c) by an internationally recognized overnight delivery service (charges prepaid). Any such notice must be sent:
(1) if to any Purchaser or its nominee, to such Purchaser or nominee at the address specified for such communications in the Purchaser Schedule, or at such other address as such Purchaser or nominee shall have specified to the Constituent Companies in writing,
(2) if to any other holder of any Note, to such holder at such address as such other holder shall have specified to the Constituent Companies in writing, or
(3) if to either Constituent Company, to such Constituent Company at its address set forth at the beginning hereof to the attention of Bryan Giglia, or at such other address as such Constituent Company shall have specified to the Purchaser and holders of the Notes in writing.
Notices under this Section 19 will be deemed given only when actually received.
SECTION 20. REPRODUCTION OF DOCUMENTS.
This Agreement and all documents relating hereto, including (a) consents, waivers and modifications that may hereafter be executed, (b) documents received by any Purchaser on the Execution Date or at the Closing (except the Notes themselves), and (c) financial statements, certificates and other information previously or hereafter furnished to any Purchaser, may be reproduced by such Purchaser by any photographic, photostatic, electronic, digital, or other similar process and such Purchaser may destroy any original document so reproduced. Each Constituent Company agrees and stipulates that, to the extent permitted by applicable law, any such reproduction shall be admissible in evidence as the original itself in any judicial or administrative proceeding (whether or not the original is in existence and whether or not such reproduction was made by such Purchaser in the regular course of business) and any enlargement, facsimile or further reproduction of such reproduction shall likewise be admissible in evidence. This Section 20 shall not prohibit either Constituent Company or any other Purchaser or holder of Notes from contesting any such reproduction to the same extent that it
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could contest the original, or from introducing evidence to demonstrate the inaccuracy of any such reproduction.
SECTION 21. CONFIDENTIAL INFORMATION.
For the purposes of this Section 21, “Confidential Information” means information delivered to any Purchaser by or on behalf of a Constituent Company or any Subsidiary in connection with the transactions contemplated by or otherwise pursuant to this Agreement that is proprietary in nature and that was clearly marked or labeled or otherwise adequately identified when received by such Purchaser as being confidential information of such Constituent Company or such Subsidiary, provided that such term does not include information that (a) was publicly known or otherwise known to such Purchaser prior to the time of such disclosure, (b) subsequently becomes publicly known through no act or omission by such Purchaser or any Person acting on such Purchaser’s behalf, (c) otherwise becomes known to such Purchaser other than through disclosure by a Constituent Company or any Subsidiary or (d) constitutes financial statements delivered to such Purchaser under Section 7.1 that are otherwise publicly available. Each Purchaser will maintain the confidentiality of such Confidential Information in accordance with procedures adopted by such Purchaser in good faith to protect confidential information of third parties delivered to such Purchaser, provided that such Purchaser may deliver or disclose Confidential Information to (1) its directors, officers, employees, agents, attorneys, trustees and affiliates (to the extent such disclosure reasonably relates to the administration of the investment represented by its Notes), (2) its auditors, financial advisors and other professional advisors who agree to hold confidential the Confidential Information substantially in accordance with this Section 21, (3) any other holder of any Note, (4) any Institutional Investor to which it sells or offers to sell such Note or any part thereof or any participation therein (if such Person has agreed in writing prior to its receipt of such Confidential Information to be bound by this Section 21), (5) any Person from which it offers to purchase any Security of a Constituent Company (if such Person has agreed in writing prior to its receipt of such Confidential Information to be bound by this Section 21), (6) any federal or state regulatory authority having jurisdiction over such Purchaser, (7) the NAIC or the SVO or, in each case, any similar organization, or any nationally recognized rating agency that requires access to information about such Purchaser’s investment portfolio, or (8) any other Person to which such delivery or disclosure may be necessary or appropriate (i) to effect compliance with any law, rule, regulation or order applicable to such Purchaser, (ii) in response to any subpoena or other legal process, (iii) in connection with any litigation to which such Purchaser is a party or (iv) if an Event of Default has occurred and is continuing, to the extent such Purchaser may reasonably determine such delivery and disclosure to be necessary or appropriate in the enforcement or for the protection of the rights and remedies under such Purchaser’s Notes, this Agreement or the Subsidiary Guaranty Agreement. Each holder of a Note, by its acceptance of a Note, will be deemed to have agreed to be bound by and to be entitled to the benefits of this Section 21 as though it were a party to this Agreement. On reasonable request by a Constituent Company in connection with the delivery to any holder of a Note of information required to be delivered to such holder under this Agreement or requested by such holder (other than a holder that is a party to this Agreement or its nominee), such holder will enter into an agreement with the Constituent Companies embodying this Section 21.
In the event that as a condition to receiving access to information relating to a Constituent Company or its Subsidiaries in connection with the transactions contemplated by or otherwise
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pursuant to this Agreement, any Purchaser or holder of a Note is required to agree to a confidentiality undertaking (whether through IntraLinks, another secure website, a secure virtual workspace or otherwise) which is different from this Section 21, this Section 21 shall not be amended thereby and, as between such Purchaser or such holder and such Constituent Company, this Section 21 shall supersede any such other confidentiality undertaking.
SECTION 22. SUBSTITUTION OF PURCHASER.
Each Purchaser shall have the right to substitute any one of its Affiliates or another Purchaser or any one of such other Purchaser’s Affiliates (a “Substitute Purchaser”) as the purchaser of the Notes that it has agreed to purchase hereunder, by written notice to the Constituent Companies, which notice shall be signed by both such Purchaser and such Substitute Purchaser, shall contain such Substitute Purchaser’s agreement to be bound by this Agreement and shall contain a confirmation by such Substitute Purchaser of the accuracy with respect to it of the representations set forth in Section 6. Upon receipt of such notice, any reference to such Purchaser in this Agreement (other than in this Section 22), shall be deemed to refer to such Substitute Purchaser in lieu of such original Purchaser. In the event that such Substitute Purchaser is so substituted as a Purchaser hereunder and such Substitute Purchaser thereafter transfers to such original Purchaser all of the Notes then held by such Substitute Purchaser, upon receipt by the Constituent Companies of notice of such transfer, any reference to such Substitute Purchaser as a “Purchaser” in this Agreement (other than in this Section 22), shall no longer be deemed to refer to such Substitute Purchaser, but shall refer to such original Purchaser, and such original Purchaser shall again have all the rights of an original holder of the Notes under this Agreement.
SECTION 23. MISCELLANEOUS.
Section 23.1. Successors and Assigns. All covenants and other agreements contained in this Agreement by or on behalf of any of the parties hereto bind and inure to the benefit of their respective successors and assigns (including any subsequent holder of a Note) whether so expressed or not, except that, subject to Section 10.2, neither Constituent Company may assign or otherwise transfer any of its rights or obligations hereunder or under the Notes without the prior written consent of each holder. Nothing in this Agreement, expressed or implied, shall be construed to confer upon any Person (other than the parties hereto and their respective successors and assigns permitted hereby) any legal or equitable right, remedy or claim under or by reason of this Agreement.
Section 23.2. Accounting Terms. All accounting terms used herein which are not expressly defined in this Agreement have the meanings respectively given to them in accordance with GAAP. Except as otherwise specifically provided herein, (a) all computations made pursuant to this Agreement shall be made in accordance with GAAP, and (b) all financial statements shall be prepared in accordance with GAAP. For purposes of determining compliance with this Agreement (including Section 9, Section 10 and the definition of “Indebtedness”), any election by the Parent Guarantor to measure any financial liability using fair value (as permitted by Financial Accounting Standards Board Accounting Standards Codification Topic No. 825-10-25 – Fair Value Option, International Accounting Standard 39 –
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Financial Instruments: Recognition and Measurement or any similar accounting standard) shall be disregarded and such determination shall be made as if such election had not been made.
Section 23.3. Severability. Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall (to the full extent permitted by law) not invalidate or render unenforceable such provision in any other jurisdiction.
Section 23.4. Construction, Etc. Each covenant contained herein shall be construed (absent express provision to the contrary) as being independent of each other covenant contained herein, so that compliance with any one covenant shall not (absent such an express contrary provision) be deemed to excuse compliance with any other covenant. Where any provision herein refers to action to be taken by any Person, or which such Person is prohibited from taking, such provision shall be applicable whether such action is taken directly or indirectly by such Person.
Defined terms herein shall apply equally to the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words “include,” “includes” and “including” shall be deemed to be followed by the phrase “without limitation.” The word “will” shall be construed to have the same meaning and effect as the word “shall.” Unless the context requires otherwise (a) any definition of or reference to any agreement, instrument or other document herein shall be construed as referring to such agreement, instrument or other document as from time to time amended, supplemented or otherwise modified (subject to any restrictions on such amendments, supplements or modifications set forth herein) and, for purposes of the Notes, shall also include any such notes issued in substitution therefor pursuant to Section 14, (b) subject to Section 23.1, any reference herein to any Person shall be construed to include such Person’s successors and assigns, (c) the words “herein,” “hereof” and “hereunder,” and words of similar import, shall be construed to refer to this Agreement in its entirety and not to any particular provision hereof, (d) all references herein to Sections, Schedules and Exhibits shall be construed to refer to Sections of, and Schedules and Exhibits to, this Agreement, and (e) any reference to any law or regulation herein shall, unless otherwise specified, refer to such law or regulation as amended, modified or supplemented from time to time.
Section 23.5. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original but all of which together shall constitute one instrument. Each counterpart may consist of a number of copies hereof, each signed by less than all, but together signed by all, of the parties hereto.
Section 23.6. Governing Law. This Agreement shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the law of the State of New York excluding choice-of-law principles of the law of such State that would permit the application of the laws of a jurisdiction other than such State.
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Section 23.7. Jurisdiction and Process; Waiver of Jury Trial.
(a) Each Constituent Company irrevocably submits to the non-exclusive jurisdiction of any New York State or federal court sitting in the Borough of Manhattan, The City of New York, over any suit, action or proceeding arising out of or relating to this Agreement or the Notes. To the fullest extent permitted by applicable law, each Constituent Company irrevocably waives and agrees not to assert, by way of motion, as a defense or otherwise, any claim that it is not subject to the jurisdiction of any such court, any objection that it may now or hereafter have to the laying of the venue of any such suit, action or proceeding brought in any such court and any claim that any such suit, action or proceeding brought in any such court has been brought in an inconvenient forum.
(b) Each Constituent Company agrees, to the fullest extent permitted by applicable law, that a final judgment in any suit, action or proceeding of the nature referred to in Section 23.7(a) brought in any such court shall be conclusive and binding upon it subject to rights of appeal, as the case may be, and may be enforced in the courts of the United States or the State of New York (or any other courts to the jurisdiction of which it or any of its assets is or may be subject) by a suit upon such judgment.
(c) Each Constituent Company consents to process being served by or on behalf of any holder of Notes in any suit, action or proceeding of the nature referred to in Section 23.7(a) by mailing a copy thereof by registered, certified, priority or express mail (or any substantially similar form of mail), postage prepaid, return receipt or delivery confirmation requested, to it at its address specified in Section 19 or at such other address of which such holder shall then have been notified pursuant to said Section. Each Constituent Company agrees that such service upon receipt (1) shall be deemed in every respect effective service of process upon it in any such suit, action or proceeding and (2) shall, to the fullest extent permitted by applicable law, be taken and held to be valid personal service upon and personal delivery to it. Notices hereunder shall be conclusively presumed received as evidenced by a delivery receipt furnished by the United States Postal Service or any reputable commercial delivery service.
(d) Nothing in this Section 23.7 shall affect the right of any holder of a Note to serve process in any manner permitted by law, or limit any right that the holders of any of the Notes may have to bring proceedings against a Constituent Company in the courts of any appropriate jurisdiction or to enforce in any lawful manner a judgment obtained in one jurisdiction in any other jurisdiction.
(e) The parties hereto hereby waive trial by jury in any action brought on or with respect to this Agreement, the Notes or any other document executed in connection herewith or therewith.
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If you are in agreement with the foregoing, please sign the form of agreement on a counterpart of this Agreement and return it to the Constituent Companies, whereupon this Agreement shall become a binding agreement between you and the Constituent Companies.
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SUNSTONE HOTEL PARTNERSHIP, LLC |
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Its Chief Financial Officer |
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SUNSTONE HOTEL INVESTORS, INC. |
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/s/ Bryan A. Giglia |
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Its Chief Financial Officer |
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This Agreement is hereby
accepted and agreed to as
of the date hereof.
[ADD PURCHASER SIGNATURE BLOCKS]
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DEFINED TERMS
As used herein, the following terms have the respective meanings set forth below or set forth in the Section hereof following such term:
“Additional Covenant” is defined in Section 9.10.
“Additional Note Purchase Agreement” means any note purchase agreement or similar agreement entered into by the Issuer and/or the Parent Guarantor after the Execution Date in connection with a private placement debt financing.
“Adjusted EBITDA” means, for any given period, (a) EBITDA of the Parent Guarantor and its Subsidiaries determined on a consolidated basis for such period, minus (b) FF&E Reserves for such period.
“Adjusted NOI” means, for any Property and for any period (or if no applicable period is stated, the period of 12 consecutive fiscal months then ended), Net Operating Income for such Property for such period minus an imputed franchise fee in the amount of 4.00% of the gross revenues for such Property for such period; provided, however, for purposes of this definition, no imputed franchise fee shall be deducted from Net Operating Income with respect to any Property that is not subject to a Franchise Agreement.
“Affiliate” means, at any time, and with respect to any Person, any other Person that at such time directly or indirectly through one or more intermediaries Controls, or is Controlled by, or is under common Control with, such first Person. Unless the context otherwise clearly requires, any reference to an “Affiliate” is a reference to an Affiliate of the Parent Guarantor.
“Agreement” means this Note and Guarantee Agreement, including all Schedules and Exhibits attached to this Agreement.
“Anti-Corruption Laws” means any law or regulation in a U.S. or any non-U.S. jurisdiction regarding bribery or any other corrupt activity, including the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act 2010.
“Anti-Money Laundering Laws” means any law or regulation in a U.S. or any non-U.S. jurisdiction regarding money laundering, drug trafficking, terrorist-related activities or other money laundering predicate crimes, including the Currency and Foreign Transactions Reporting Act of 1970 (otherwise known as the Bank Secrecy Act) and the USA PATRIOT Act.
“Bank Credit Agreement” means that certain Credit Agreement dated as of April 2, 2015 by and among the Constituent Companies, the financial institutions party thereto and Wells Fargo Bank, National Association, as administrative agent, Bank of America, N.A. and JPMorgan Chase Bank, N.A., as syndication agents, and Citibank, N.A., PNC Bank, National Association, and U.S. Bank National Association, as documentation agents, including any renewals, extensions, amendments, supplements, restatements, replacements or refinancings thereof; provided that if no Bank Credit Agreement then exists, the largest Material Credit Facility then in effect shall be deemed to be the Bank Credit Agreement.
SCHEDULE A
(to Note and Guarantee Agreement)
“Blocked Person” means (a) a Person whose name appears on the list of Specially Designated Nationals and Blocked Persons published by OFAC, (b) a Person, entity, organization, country or regime that is blocked or a target of sanctions that have been imposed under U.S. Economic Sanctions Laws or (c) a Person that is an agent, department or instrumentality of, or is otherwise beneficially owned by, controlled by or acting on behalf of, directly or indirectly, any Person, entity, organization, country or regime described in clause (a) or (b).
“Boston Park Plaza Hotel” means the Boston Park Plaza Hotel located in Boston, Massachusetts.
“Business Day” means (a) for the purposes of Section 8.6 only, any day other than a Saturday, a Sunday or a day on which commercial banks in New York City are required or authorized to be closed, and (b) for the purposes of any other provision of this Agreement, any day other than a Saturday, a Sunday or a day on which commercial banks in Los Angeles, California or New York, New York are required or authorized to be closed.
“Capitalization Rate” means (a) 7.25% for (1) upscale select-service, upper-upscale or above full-service Properties developed with hotels and located within the central business districts of Boston, Massachusetts; Chicago, Illinois; Manhattan, New York City; Washington, D.C.; and San Francisco, California and (2) the Wailea Beach Marriott or (b) 8.00% for all other Properties, provided that, if the Bank Credit Agreement provides for a “capitalization rate” for the Property or types of Properties described in clause (a) or clause (b) that is higher or lower than the rate set forth in such clause, then the applicable rate for such Property or types of Properties shall be such higher or lower rate, provided, however, that in no event may the capitalization rate used for the Property or types of Properties described in clause (a) or clause (b) be less than 6.25% and 7.00%, respectively.
“Capitalized Lease Obligations” means obligations under a lease (or other arrangement conveying the right to use property) to pay rent or other amounts that are required to be capitalized for financial reporting purposes in accordance with GAAP. The amount of a Capitalized Lease Obligation is the capitalized amount of such obligation as would be required to be reflected on a balance sheet of the applicable Person prepared in accordance with GAAP as of the applicable date. The obligations of Sunstone St. Clair, LLC, a Delaware limited liability company and Subsidiary of the Issuer, under the Hyatt Chicago Capital Lease shall not constitute Capitalized Lease Obligations. Notwithstanding the reclassification of ground or building leases as capitalized leases or lease liabilities under FASB ASC 842, obligations of the Company or any Subsidiary under a ground or building lease shall not constitute Capitalized Lease Obligations so long as the lease payments under such ground or building lease are deducted from EBITDA.
“Change in Control” is defined in Section 8.7(f).
“Change in Control Proposed Prepayment Date” defined in Section 8.7(b).
“Closing” is defined in Section 3.
“Code” means the Internal Revenue Code of 1986 and the rules and regulations promulgated thereunder from time to time.
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“Competitor” means any Person that is a real estate investment trust, real property fund or a listed property trust; provided, however, that the term “Competitor” shall exclude any Person that is an Institutional Investor and that, but for this proviso, would fall within the definition of “Competitor” solely through the holding of passive investments in a Competitor.
“Confidential Information” is defined in Section 21.
“Constituent Companies” and “Constituent Company” are defined in the first paragraph of this Agreement.
“Control” means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise; and the terms “Controlled” and “Controlling” shall have meanings correlative to the foregoing.
“Controlled Entity” means (a) any of the Subsidiaries of the Parent Guarantor and any of their or the Parent Guarantor’s respective Controlled Affiliates and (b) if the Parent Guarantor has a parent company, such parent company and its Controlled Affiliates.
“Credit Rating” means the rating assigned by S&P or Moody’s to the senior unsecured long term Indebtedness of a Person.
“Default” means an event or condition the occurrence or existence of which would, with the lapse of time or the giving of notice or both, become an Event of Default.
“Default Rate” means, with respect to any Note, that rate of interest per annum that is the greater of (a) 2.00% above the rate of interest stated in clause (a) of the first paragraph of such Note or (b) 2.00% over the rate of interest publicly announced by Bank of America, N.A. in New York, New York as its “base” or “prime” rate.
“Derivatives Contract” means a “swap agreement” as defined in Section 101 of the United States Bankruptcy Code of 1978.
“Derivatives Termination Value” means, in respect of any one or more Derivatives Contracts, after taking into account the effect of any legally enforceable netting agreement or provision relating to such Derivatives Contracts, (a) for any date on or after the date such Derivatives Contracts have been terminated or closed out, the termination amount or value(s) determined in accordance therewith, and (b) for any date prior to the date referenced in clause (a), the amount(s) determined as the mark-to-market value(s) for such Derivatives Contracts, as determined based upon one or more mid-market or other readily available quotations or estimates provided by any recognized dealer in Derivatives Contracts.
“Development Property” means, as of any date of determination, any Property on which the existing building or other improvements are undergoing renovation and redevelopment that will either (a) disrupt the occupancy of at least 10% of the rentable rooms of such Property or (b) temporarily reduce the Net Operating Income of such Property by more than 10% as compared to the immediately preceding comparable prior period. A Property that satisfies the foregoing requirements shall constitute a Development Property unless the Issuer in its discretion notifies
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each holder of Notes in writing that such Property shall not constitute a Development Property. Notwithstanding the foregoing in the case of the Boston Park Plaza Hotel or the Wailea Beach Marriott, during planned renovations of such Property, such Property shall not be treated as a Development Property if the Issuer has provided written notice to each holder of Notes (a) that such renovations have commenced, (b) that the Issuer elects to have such Property not treated as a Development Property and (c) of the date on which such election is to become effective. Upon the effective date of such an election, the Operating Property Value of such Property shall be deemed to be equal to the purchase price paid by the Issuer (or any applicable Subsidiary) for such Property less any amounts paid to the Issuer (or such Subsidiary) as a purchase price adjustment, held in escrow, retained as a contingency reserve, or in connection with other similar arrangements. Such election shall cease to be effective upon the earlier of (1) the date six months following the date all improvements related to the renovation of such Property have been substantially completed and (2) June 30, 2017. Once such election shall cease to be effective, such Property shall be valued as a Seasoned Property. A Property shall cease to be a Development Property once all improvements related to the renovation or redevelopment of such Property has been substantially completed.
“Disclosure Documents” is defined in Section 5.3.
“EBITDA” means, with respect to a Person for any period (without duplication): (a) net income (loss) of such Person for such period determined on a consolidated basis exclusive of the following (but only to the extent included in determination of such net income (loss)): (1) depreciation and amortization expense; (2) Interest Expense; (3) income tax expense; (4) extraordinary or non-recurring gains, losses, revenues and expenses; and (5) other non-cash charges including impairment charges (other than non-cash charges that constitute an accrual of a reserve for future cash payments) plus (b) such Person’s Ownership Share of EBITDA of its Unconsolidated Affiliates. EBITDA shall be adjusted to remove any impact from (i) non-cash amortization of stock grants to members of the Parent Guarantor’s management, (ii) straight line rent leveling adjustments required under GAAP and (iii) amortization of intangibles pursuant to Financial Accounting Standards Board Accounting Standards Codification Topic 805. For purposes of determining compliance with the Leverage Ratio, (A) EBITDA attributable to Properties disposed of by the Issuer or any Subsidiary during the period of four consecutive fiscal quarters most recently ended for which financial statements are required to have been delivered pursuant to Section 7.1(a) or Section 7.2(b), or disposed of after such period but on or before the applicable date of determination, shall be excluded and (B) EBITDA attributable to any Property acquired by the Issuer or any Subsidiary during the period of four consecutive fiscal quarters most recently ended for which financial statements are required to have been delivered pursuant to Section 7.1(a) or Section 7.1(b), or acquired after such period but on or before the applicable date of determination, shall be utilized regardless of the date such Property was acquired by the Issuer or such Subsidiary.
“EDGAR” means the SEC’s Electronic Data Gathering, Analysis and Retrieval System or any successor SEC electronic filing system for such purposes.
“Eligible Property” means a Property which satisfies all of the following requirements: (a) such Property is fully developed as (1) an upscale, upper-upscale or luxury (as defined by Smith Travel Research) full-service hotel with not less than 150 keys or (2) a select-service (as
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defined by Smith Travel Research) hotel located in a top 25 market (or major resort market); (b) such Property is located in a top 50 MSA or a destination resort; (c) such Property is free of all structural defects, architectural deficiencies, title defects, environmental conditions or other adverse matters except for defects, deficiencies, conditions or other matters which, individually or collectively, are not material to the profitable operation of such Property; (d) such Property is owned in fee simple, or leased under a Ground Lease, entirely by the Issuer or a Subsidiary that is a Subsidiary Guarantor; (e) such Property is located in one of the 48 contiguous states of the United States or in Hawaii or the District of Columbia; (f) all material occupancy and operating permits and customary licenses required under applicable law for such Property are in effect and such Property is covered by insurance in amounts and upon terms that satisfy the criteria set forth in Section 9.2; (g) neither such Property, nor if such Property is owned by a Subsidiary, any of the Issuer’s direct or indirect ownership interest in such Subsidiary, is subject to (1) any Lien other than Permitted Liens (but not Permitted Liens described in clause (g) of the definition of that term) or (2) any Negative Pledge other than a Negative Pledge described in Section 10.5(b)(1) or (2); (h) regardless of whether such Property is owned by the Issuer or a Subsidiary, the Issuer has the right directly, or indirectly through a Subsidiary, to take the following actions without the need to obtain the consent of any Person: (1) to create Liens on such Property as security for Indebtedness of the Issuer or such Subsidiary, as applicable, and (2) to sell, transfer or otherwise dispose of such Property; (i) such Property is currently open for business to the public and (j) such Property is (1) branded by a nationally recognized hotel company (such as Marriott, Hilton, Hyatt, Fairmont, Intercontinental or Starwood) or an Affiliate of such a company or (2) operated as an independent hotel in a central business district or in Hawaii or another location not objected to by the Required Holders acting reasonably.
“Environmental Laws” means any and all federal, state, local, and foreign statutes, laws, regulations, ordinances, rules, judgments, orders, decrees, permits, concessions, grants, franchises, licenses, agreements or governmental restrictions relating to pollution and the protection of the environment or the release of any materials into the environment, including those related to Hazardous Materials.
“Equity Interest” means, with respect to any Person, any share of capital stock of (or other ownership or profit interests in) such Person, any warrant, option or other right for the purchase or other acquisition from such Person of any share of capital stock of (or other ownership or profit interests in) such Person, whether or not certificated, any security convertible into or exchangeable for any share of capital stock of (or other ownership or profit interests in) such Person or warrant, right or option for the purchase or other acquisition from such Person of such shares (or such other interests), and any other ownership or profit interest in such Person (including partnership, member or trust interests therein), whether voting or nonvoting, and whether or not such share, warrant, option, right or other interest is authorized or otherwise existing on any date of determination.
“ERISA” means the Employee Retirement Income Security Act of 1974 and the rules and regulations promulgated thereunder from time to time in effect.
“ERISA Affiliate” means any trade or business (whether or not incorporated) that is treated as a single employer together with the Parent Guarantor under section 414 of the Code.
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“Event of Default” is defined in Section 11.
“Exchange Act” is defined in Section 8.7(h)(1).
“Excluded Subsidiary” means any Subsidiary as to which both of the following apply (a) such Subsidiary holds title to, or beneficially owns, assets which are or are intended to become collateral for any Secured Indebtedness of such Subsidiary, or is a direct or indirect beneficial owner of a Subsidiary holding title to or beneficially owning such assets (but having no material assets other than such beneficial ownership interests); and (b) which (1) is, or is expected to be, prohibited from Guarantying the Indebtedness of any other Person pursuant to any document, instrument or agreement evidencing such Secured Indebtedness or (2) is prohibited from Guarantying the Indebtedness of any other Person pursuant a provision of such Subsidiary’s organizational documents which provision was included in such Subsidiary’s organizational documents as a condition to the extension of such Secured Indebtedness.
“Execution Date” is defined in Section 3.
“FATCA” means (a) sections 1471 through 1474 of the Code, as of the Execution Date (or any amended or successor version that is substantively comparable and not materially more onerous to comply with), together with any current or future regulations or official interpretations thereof, (b) any treaty, law or regulation of any other jurisdiction, or relating to an intergovernmental agreement between the United States and any other jurisdiction, which (in either case) facilitates the implementation of the foregoing clause (a), and (c) any agreements entered into pursuant to section 1471(b)(1) of the Code.
“FF&E Reserves” means, for any period and with respect to a Property, an amount equal to the greater of (a) 4.00% of total gross revenues for such Property for such period and (b) the aggregate amount of reserves in respect to furniture, fixtures and equipment required under any Property Management Agreement or Franchise Agreement applicable to such Property for such period. If the term FF&E Reserves is used without reference to a specific Property, then the amount shall be determined on an aggregate basis with respect to all Properties of the Parent Guarantor and its Subsidiaries and the applicable Ownership Share of all Properties of all Unconsolidated Affiliates of the Parent Guarantor.
“Financial Covenant” means any covenant (whether set forth as a covenant, undertaking, event of default, restriction, prepayment event or other such provision) that requires the Parent Guarantor and/or any Subsidiary to:
(a) maintain a specified level of net worth, shareholders’ equity, total assets, unencumbered assets, unencumbered properties, cash flow, net income, occupancy rate or lease term;
(b) maintain any relationship of any component of its capital structure to any other component thereof (including the relationship of indebtedness, subsidiary indebtedness, senior indebtedness, secured indebtedness, unsecured indebtedness, or subordinated indebtedness to total capitalization, total assets, unencumbered assets or to net worth);
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(c) maintain any measure of its ability to service its indebtedness (including exceeding any specified ratio of revenues, cash flow, operating income or net income to indebtedness, interest expense, rental expense, capital expenditures and/or scheduled payments of indebtedness);
(d) restricts the amount of distributions; or
(e) restrict the amount or type of its investments;
but in all cases excluding any such covenant that amounts to a negative pledge or a sale of assets limitation.
“Fixed Charges” means, for any period, the sum of the following (without duplication): (a) Interest Expense of the Parent Guarantor and its Subsidiaries determined on a consolidated basis for such period, (b) all regularly scheduled principal payments made with respect to Indebtedness of the Parent Guarantor and its Subsidiaries during such period, other than any balloon, bullet or similar principal payment due upon the stated maturity of such Indebtedness, (c) all Preferred Dividends paid during such period on Preferred Equity Interests not owned by the Parent Guarantor or any of its Subsidiaries and (d) payments in respect of Capitalized Lease Obligations. The Parent Guarantor’s Ownership Share of the Fixed Charges of Unconsolidated Affiliates of the Parent Guarantor shall be included in determinations of Fixed Charges.
“Form 10-K” is defined in Section 7.1(b).
“Form 10-Q” is defined in Section 7.1(a).
“Franchise Agreement” means an agreement permitting the use of the applicable hotel brand name, hotel system trademarks, trade names and any related rights in connection with the ownership or operation of a Property.
“GAAP” means (a) generally accepted accounting principles as in effect from time to time in the United States and (b) for purposes of Section 9.6, with respect to any Subsidiary, generally accepted accounting principles (including International Financial Reporting Standards, as applicable) as in effect from time to time in the jurisdiction of organization of such Subsidiary.
“Governmental Authority” means
(a) the government of
(1) the United States or any state or other political subdivision thereof, or
(2) any other jurisdiction in which the Parent Guarantor or any Subsidiary conducts all or any part of its business, or which asserts jurisdiction over any properties of the Parent Guarantor or any Subsidiary, or
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(b) any entity exercising executive, legislative, judicial, regulatory or administrative functions of, or pertaining to, any such government.
“Governmental Official” means any governmental official or employee, employee of any government-owned or government-controlled entity, political party, any official of a political party, candidate for political office, official of any public international organization or anyone else acting in an official capacity.
“Ground Lease” means a ground lease containing terms and conditions customarily required by mortgagees making a loan secured by the interest of the holder of the leasehold estate demised pursuant to a ground lease, including the following: (a) a remaining term (inclusive of any unexercised extension or renewal options that are exercisable without condition (other than a condition that no default exists under such ground lease at the time of exercise of such extension or renewal option)) of 50 years or more from the Execution Date or, in the event that such remaining term is less than 50 years, such ground lease either (1) contains an unconditional end-of-term purchase option in favor of the lessee for consideration that is de minimus or (2) provides that the lessee’s leasehold interest therein automatically becomes a fee-owned interest at the end of the term; (b) the right of the lessee to mortgage and encumber its interest in the leased property, and to amend the terms of any such mortgage or encumbrance, in each case, without the consent of the lessor or, if consent is required, such consent has been obtained or is required to be given upon the satisfaction of customary conditions; (c) the obligation of the lessor to give the holder of any mortgage Lien on such leased property written notice of any defaults on the part of the lessee and agreement of such lessor that such lease will not be terminated until such holder has had a reasonable opportunity to cure or complete foreclosures, and fails to do so; (d) acceptable transferability of the lessee’s interest under such lease, including ability to sublease; (e) acceptable limitations on the use of the leased property; and (f) clearly determinable rental payment terms which in no event contain profit participation rights. So long as the ground lease for the Hyatt Regency Newport Beach located in Newport Beach, California satisfies the requirements of the preceding clauses (b) through (f), such ground lease shall be deemed to be a Ground Lease.
“Guaranty,” “Guaranteed,” “Guarantying” or to “Guarantee” as applied to any obligation means and includes: (a) a guaranty (other than by endorsement of negotiable instruments for collection or deposit in the ordinary course of business), directly or indirectly, in any manner, of any part or all of such obligation, or (b) an agreement, direct or indirect, contingent or otherwise, and whether or not constituting a guaranty, the practical effect of which is to assure the payment or performance (or payment of damages in the event of nonperformance) of any part or all of such obligation whether by: (1) the purchase of securities or obligations, (2) the purchase, sale or lease (as lessee or lessor) of property or the purchase or sale of services primarily for the purpose of enabling the obligor with respect to such obligation to make any payment or performance (or payment of damages in the event of nonperformance) of or on account of any part or all of such obligation, or to assure the owner of such obligation against loss, (3) the supplying of funds to or in any other manner investing in the obligor with respect to such obligation, (4) repayment of amounts drawn down by beneficiaries of letters of credit, or (5) the supplying of funds to or investing in a Person on account of all or any part of such Person’s obligation under a Guaranty of any obligation or indemnifying or holding harmless, in any way, such Person against any part or all of such obligation. Obligations in
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respect of customary performance guaranties and Guaranties constituting Nonrecourse Indebtedness shall not be deemed to give rise to Indebtedness or otherwise constitute a Guaranty except as otherwise provided in the definition of “Nonrecourse Indebtedness.”
“Hazardous Materials” means any and all pollutants, toxic or hazardous wastes or other substances that might pose a hazard to health and safety, the removal of which may be required or the generation, manufacture, refining, production, processing, treatment, storage, handling, transportation, transfer, use, disposal, release, discharge, spillage, seepage or filtration of which is or shall be restricted, prohibited or penalized by any applicable law, including asbestos, urea formaldehyde foam insulation, polychlorinated biphenyls, petroleum, petroleum products, lead based paint, radon gas or similar restricted, prohibited or penalized substances.
“holder” means, with respect to any Note, the Person in whose name such Note is registered in the register maintained by the Issuer pursuant to Section 14.1, provided, however, that if such Person is a nominee, then for the purposes of Sections 7, 8.7, 12, 18.2 and 19 and any related definitions in this Schedule A, “holder” shall mean the beneficial owner of such Note whose name and address appears in such register.
“Hyatt Chicago Capital Lease” means that certain Lease dated December 15, 1997 between Chicago Title Land Trust Company, as trustee, as successor trustee to LaSalle Bank National Association, as successor trustee to American National Bank and Trust Company of Chicago, and Sunstone St. Clair, LLC, a Delaware limited liability company, as assignee of Patriot Mortgage Borrower, L.L.C., as assignee of Oxford Wyn 633 Investment Company, L.L.C.
“Implied Debt Service” means (a) a given principal balance of Unsecured Indebtedness multiplied by (b) the greatest of (1) 10% per annum, (2) the highest per annum interest rate then applicable to any of the outstanding principal balance of any form of loan then outstanding under the Bank Credit Agreement and (3) a mortgage debt constant for a loan calculated using a per annum interest rate equal to the yield on a 10-year United States Treasury Note at such time plus 3.50% and amortizing in full in a 25-year period.
“Indebtedness” means, with respect to a Person, at the time of computation thereof, all of the following (without duplication): (a) all obligations of such Person in respect of money borrowed or for the deferred purchase price of property or services (other than trade debt incurred in the ordinary course of business which is not more than 180 days past due); (b) all obligations of such Person, whether or not for money borrowed (1) represented by notes payable, or drafts accepted, in each case representing extensions of credit, (2) evidenced by bonds, debentures, notes or similar instruments, or (3) constituting purchase money indebtedness, conditional sales contracts, title retention debt instruments or other similar instruments, upon which interest charges are customarily paid or that are issued or assumed as full or partial payment for property or for services rendered; (c) Capitalized Lease Obligations of such Person; (d) all reimbursement obligations (contingent or otherwise) of such Person under or in respect of any letters of credit or acceptances (whether or not the same have been presented for payment); (e) all Off-Balance Sheet Obligations of such Person; (f) all obligations of such Person to purchase, redeem, retire, defease or otherwise make any payment in respect of any Mandatorily Redeemable Stock issued by such Person or any other Person, valued at the greater of its
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voluntary or involuntary liquidation preference plus accrued and unpaid dividends; (g) all obligations of such Person in respect of any (1) purchase obligation, repurchase obligation or takeout commitment, in each case evidenced by a binding agreement and to the extent such obligation is to acquire Equity Interests of another Person, assets of another Person that constitute the business or a division or operating unit of such Person, real estate, bonds, debentures, notes or similar instruments or (2) forward equity commitment evidenced by a binding agreement (provided, however that this clause (g) shall exclude (i) any such obligation to the extent the obligation can be satisfied by the issuance of Equity Interests (other than Mandatorily Redeemable Stock) and (ii) in the case of the Parent Guarantor, obligations incurred in the ordinary course of the business of the Issuer and its Subsidiaries to acquire developed Properties within 6 months of the incurrence of such obligations); (h) net obligations under any Derivatives Contract not entered into as a hedge against interest rate risk in respect of existing Indebtedness, in an amount equal to the Derivatives Termination Value thereof at such time (but in no event less than zero); (i) all Indebtedness of other Persons which such Person has Guaranteed or is otherwise recourse to such Person (except for Guaranties constituting Nonrecourse Indebtedness); and (j) all Indebtedness of another Person secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien on property or assets owned by such Person, even though such Person has not assumed or become liable for the payment of such Indebtedness or other payment obligation. Indebtedness of any Person shall include Indebtedness of any partnership or joint venture in which such Person is a general partner or joint venturer to the extent of such Person’s Ownership Share of the ownership of such partnership or joint venture (except if such Indebtedness, or portion thereof, is recourse (other than in respect of exceptions referred to in the definition of Nonrecourse Indebtedness) to such Person, in which case the greater of such Person’s Ownership Share of such Indebtedness or the amount of such recourse portion of the Indebtedness, shall be included as Indebtedness of such Person). The Notes shall constitute Indebtedness of the Issuer.
“INHAM Exemption” is defined in Section 6.3(e).
“Interest Expense” means, with respect to a Person and for any period, and without duplication (a) all paid, accrued or capitalized interest expense (including capitalized interest expense) other than (1) capitalized interest funded from a construction loan interest reserve account held by another lender and not included in the calculation of cash for balance sheet reporting purposes and (2) interest expense attributable to Capitalized Lease Obligations of such Person, and in any event shall include all letter of credit fees and all interest expense with respect to any Indebtedness in respect of which such Person is wholly or partially liable whether pursuant to any repayment, interest carry, performance guarantee or otherwise, plus (b) to the extent not already included in the foregoing clause (a), such Person’s Ownership Share of all paid, accrued or capitalized interest expense for such period of Unconsolidated Affiliates of such Person. The term “Interest Expense” shall exclude all costs and expenses, including any prepayment penalties, of defeasing, or otherwise paying or prepaying, any Indebtedness encumbering any Property or amortization of deferred financing fees or the write-off of any deferred financing fees following the acquisition, disposition or refinancing thereof.
“Institutional Investor” means (a) any Purchaser of a Note, (b) any holder of a Note holding (together with one or more of its affiliates) more than $2,000,000 of the aggregate principal amount of the Notes then outstanding, (c) any bank, trust company, savings and loan
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association or other financial institution, any pension plan, any investment company, any insurance company, any broker or dealer, or any other similar financial institution or entity, regardless of legal form, and (d) any Related Fund of any holder of any Note.
“Investment” means, with respect to any Person, any acquisition or investment (whether or not of a controlling interest) by such Person, by means of any of the following: (a) the purchase or other acquisition of any Equity Interest in another Person, (b) a loan, advance or extension of credit to, capital contribution to, Guaranty of Indebtedness of, or purchase or other acquisition of any Indebtedness of, another Person, including any partnership or joint venture interest in such other Person, or (c) the purchase or other acquisition (in one transaction or a series of transactions) of assets of another Person that constitute the business or a division or operating unit of another Person. Any commitment to make an Investment in any other Person, as well as any option of another Person to require an Investment in such Person, shall constitute an Investment. Except as expressly provided otherwise, for purposes of determining compliance with any covenant contained this Agreement, the amount of any Investment shall be the amount actually invested, without adjustment for subsequent increases or decreases in the value of such Investment.
“Issuer” is defined in the first paragraph of this Agreement.
“Lien” as applied to the property of any Person means: (a) any security interest, encumbrance, mortgage, deed to secure debt, deed of trust, assignment of leases and rents, pledge, lien, hypothecation, assignment, charge or lease constituting a Capitalized Lease Obligation, conditional sale or other title retention agreement, or other security title or encumbrance of any kind in respect of any property of such Person, or upon the income, rents or profits therefrom; (b) any arrangement, express or implied, under which any property of such Person is transferred, sequestered or otherwise identified for the purpose of subjecting the same to the payment of Indebtedness or performance of any other obligation in priority to the payment of the general, unsecured creditors of such Person; (c) the filing of any financing statement under the UCC or its equivalent in any jurisdiction, other than any precautionary filing not otherwise constituting or giving rise to a Lien, including a financing statement filed (1) in respect of a lease not constituting a Capitalized Lease Obligation pursuant to Section 9-505 (or a successor provision) of the UCC or its equivalent as in effect in an applicable jurisdiction or (2) in connection with a sale or other disposition of accounts or other assets not prohibited by this Agreement in a transaction not otherwise constituting or giving rise to a Lien; and (d) any agreement by such Person to grant, give or otherwise convey any of the foregoing.
“Leverage Ratio” means, as of a given date, the ratio of (a)(1) Total Indebtedness as of such date minus (2) the lesser of (i) the amount, if any, by which Unrestricted Cash exceeds $25,000,000 on such date and (ii) the lowest maximum amount, if any, of Unrestricted Cash then permitted to be subtracted from “total indebtedness” for purposes of determining the leverage ratio covenant under any Material Credit Facility to (b) EBITDA of the Parent Guarantor and its Subsidiaries for the period of four consecutive fiscal quarters most recently ended for which financial statements are required to have been delivered pursuant to Section 7.1(a) or Section 7.1(b).
“Make-Whole Amount” is defined in Section 8.6.
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“Mandatorily Redeemable Stock” means, with respect to any Person, any Equity Interest of such Person which by the terms of such Equity Interest (or by the terms of any security into which it is convertible or for which it is exchangeable or exercisable), upon the happening of any event or otherwise, (a) matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise (other than an Equity Interest to the extent redeemable in exchange for common stock or other equivalent common Equity Interests at the option of the issuer of such Equity Interest), (b) is convertible into or exchangeable or exercisable for Indebtedness or Mandatorily Redeemable Stock, or (c) is redeemable at the option of the holder thereof, in whole or in part (other than an Equity Interest which is redeemable solely in exchange for common stock or other equivalent common Equity Interests), in the case of each of clauses (a) through (c), on or prior to the Maturity Date of the Series B Notes.
“Marketable Securities” means: (a) common or preferred Equity Interests of Persons located in, and formed under the laws of, any State of the United States or the District of Columbia, which Equity Interests are subject to price quotations (quoted at least daily) on The NASDAQ Stock Market’s National Market System or have trading privileges on the New York Stock Exchange, the American Stock Exchange or another recognized national United States Securities exchange and (b) Securities evidencing Indebtedness issued by Persons located in, and formed under the laws of, any State of the United States or the District of Columbia, which Persons have a Credit Rating of “BBB-” or “Baa3” or better.
“Material” means material in relation to the business, operations, affairs, financial condition, assets, properties, or prospects of the Parent Guarantor and its Subsidiaries taken as a whole.
“Material Adverse Effect” means a material adverse effect on (a) the business, operations, affairs, financial condition, assets or properties of the Parent Guarantor and its Subsidiaries taken as a whole, (b) the ability of either Constituent Company to perform its obligations under this Agreement and/or the Notes, (c) the ability of any Subsidiary Guarantor to perform its obligations under the Subsidiary Guaranty Agreement, or (d) the validity or enforceability of this Agreement, the Notes or the Subsidiary Guaranty Agreement.
“Material Contract” means any contract or other arrangement (other than this Agreement, the Notes or the Subsidiary Guaranty Agreement), whether written or oral, to which either Constituent Company or any Subsidiary is a party as to which the breach, nonperformance, cancellation or failure to renew by any party thereto could reasonably be expected to have a Material Adverse Effect.
“Material Credit Facility” means, as to the Constituent Companies and their Subsidiaries,
(a) the Bank Credit Agreement;
(b) that certain Term Loan Agreement dated as of December 17, 2015 by and among the Constituent Companies, the financial institutions party thereto, PNC Bank, National Association, as administrative agent, PNC Bank, National Association and U.S. Bank National Association, as joint lead arrangers and joint bookrunners, and U.S. Bank
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National Association, as syndication agent, including any renewals, extensions, amendments, supplements, restatements, replacements or refinancings thereof; and
(c) any other agreement(s) creating or evidencing indebtedness for borrowed money (excluding any Nonrecourse Indebtedness) entered into on or after the Execution Date by either Constituent Company or any Subsidiary, or in respect of which either Constituent Company or any Subsidiary is an obligor or otherwise provides a guarantee or other credit support (other than a guaranty of customary recourse exceptions) (“Credit Facility”), in a principal amount outstanding or available for borrowing equal to or greater than $100,000,000 (or the equivalent of such amount in the relevant currency of payment, determined as of the date of the closing of such facility based on the exchange rate of such other currency); and if no Credit Facility or Credit Facilities equal or exceed such amounts, then the largest Credit Facility shall be deemed to be a Material Credit Facility.
“Maturity Date” with respect to any Note is defined in the first paragraph of such Note.
“Memorandum” is defined in Section 5.3.
“MFL Agreement” is defined in Section 9.10.
“Moody’s” means Moody’s Investors Service, Inc.
“Mortgage” means a mortgage, deed of trust, deed to secure debt or similar security instrument made by a Person owning an interest in real property granting a Lien on such interest in real property as security for the payment of Indebtedness of such Person or another Person.
“Mortgage Receivable” means a promissory note secured by a Mortgage of which the Parent Guarantor or a Subsidiary is the holder and retains the rights of collection of all payments thereunder.
“Most Favored Lender Notice” means, in respect of any Additional Covenant, a written notice from the Constituent Companies giving notice of such Additional Covenant, including therein a verbatim statement of such Additional Covenant, together with any definitions incorporated therein.
“MSA” means a Metropolitan Statistical Area as listed in Budget Bulletin No. 09-01 issued by the Executive Office of the President of the United States of America, Office of Management and Budget.
“Multiemployer Plan” means any Plan that is a “multiemployer plan” (as such term is defined in section 4001(a)(3) of ERISA).
“NAIC” means the National Association of Insurance Commissioners.
“Negative Pledge” means, with respect to a given asset, any provision of a document, instrument or agreement (other than this Agreement) which prohibits or purports to prohibit the creation or assumption of any Lien on such asset as security for Indebtedness of the Person
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owning such asset or any other Person; provided, however, that an agreement that conditions a Person’s ability to encumber its assets upon the maintenance of one or more specified ratios that limit such Person’s ability to encumber its assets but that do not generally prohibit the encumbrance of its assets, or the encumbrance of specific assets, shall not constitute a Negative Pledge.
“Net Operating Income” or “NOI” means, for any Property and for a given period, the sum of the following (without duplication and determined on a consistent basis with prior periods): (a) gross revenues received in the ordinary course from such Property minus (b) all expenses paid (excluding interest but including an appropriate accrual for property taxes and insurance) related to the ownership, operation or maintenance of such Property, including property taxes, assessments and the like, insurance, utilities, payroll costs, maintenance, repair and landscaping expenses, marketing expenses, and general and administrative expenses (including an appropriate allocation for legal, accounting, advertising, marketing and other expenses incurred in connection with such Property, but specifically excluding general overhead expenses of the Issuer or any Subsidiary and any property management fees) minus (c) the FF&E Reserves for such Property as of the end of such period minus (d) an imputed management fee in the amount of 3.00% of the gross revenues for such Property for such period. For purposes of determining Adjusted NOI, Operating Property Value, Total Asset Value and Unencumbered Asset Value, (1) NOI from Properties disposed of by the Issuer or any Subsidiary during the period of four consecutive fiscal quarters most recently ended for which financial statements are required to have been delivered pursuant to Section 7.1(a) or Section 7.1(b) shall be excluded and (2) NOI for the period of four consecutive fiscal quarters most recently ended for which financial statements are required to have been delivered pursuant to Section 7.1(a) or Section 7.1(b) for any Property acquired by the Issuer or any Subsidiary during such period shall be utilized regardless of the date such Property was acquired by the Issuer or such Subsidiary.
“New Property” means each Property on which a hotel is located acquired by the Parent Guarantor, any Subsidiary or any Unconsolidated Affiliate from the date of acquisition until the Seasoned Date in respect thereof; provided, however, that, upon the Seasoned Date for any New Property, such New Property shall be converted to a Seasoned Property and shall cease to be a New Property.
“Nonrecourse Indebtedness” means, with respect to a Person, (a) Indebtedness for borrowed money in respect of which recourse for payment (except for customary exceptions for fraud, misapplication of funds, environmental indemnities, voluntary bankruptcy, collusive involuntary bankruptcy and other similar exceptions to nonrecourse liability) is contractually limited to specific assets of such Person encumbered by a Lien securing such Indebtedness or (b) if such Person is a Single Asset Entity, any Indebtedness for borrowed money of such Person.
“Non-U.S. Plan” means any plan, fund or other similar program that (a) is established or maintained outside the United States by the Parent Guarantor or any Subsidiary primarily for the benefit of employees of the Parent Guarantor or one or more Subsidiaries residing outside the United States, which plan, fund or other similar program provides, or results in, retirement income, a deferral of income in contemplation of retirement or payments to be made upon termination of employment, and (b) is not subject to ERISA or the Code.
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“Notes” is defined in Section 1.
“Obligations” is defined in Section 13.1.
“OFAC” means the Office of Foreign Assets Control of the United States Department of the Treasury.
“OFAC Sanctions Program” means any economic or trade sanction that OFAC is responsible for administering and enforcing. A list of OFAC Sanctions Programs may be found at http://www.treasury.gov/resource-center/sanctions/Programs/Pages/Programs.aspx.
“Off-Balance Sheet Obligations” means, in the case of the Parent Guarantor or any of its Subsidiaries, liabilities and obligations of the Parent Guarantor, any such Subsidiary or any other Person in respect of “off-balance sheet arrangements” (as defined in Item 303(a)(4)(ii) of Regulation S-K promulgated under the Securities Act) which the Parent Guarantor would be required to disclose in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of the Parent Guarantor’s report on Form 10-Q or Form 10-K (or their equivalents) which the Parent Guarantor is required to file with the SEC.
“Officer’s Certificate” means, with respect to any Person, a certificate of a Senior Financial Officer or of any other officer of such Person whose responsibilities extend to the subject matter of such certificate.
“Operating Property Value” means, at any date of determination, (a) for each New Property (until the Seasoned Date), or Development Property (that is not a Seasoned Property), the purchase price of the Property less any amounts paid to the Issuer (or such Subsidiary) as a purchase price adjustment, held in escrow, retained as a contingency reserve, or in connection with other similar arrangements; or (b) for each Seasoned Property, (1) the Adjusted NOI of such Property for the period of four consecutive fiscal quarters most recently ended for which financial statements are required to have been delivered pursuant to Section 7.1(a) or Section 7.1(b) divided by (2) the applicable Capitalization Rate. Notwithstanding the forgoing, the Operating Property Value of the Wailea Beach Marriott and the Boston Park Plaza Hotel may be determined in accordance with the applicable provisions of the definition of “Development Property.”
“Ownership Share” means, with respect to any Subsidiary of a Person (other than a Wholly-Owned Subsidiary) or any Unconsolidated Affiliate of a Person, the greater of (a) such Person’s relative nominal direct and indirect ownership interest (expressed as a percentage) in such Subsidiary or Unconsolidated Affiliate or (b) such Person’s relative direct and indirect economic interest (calculated as a percentage) in such Subsidiary or Unconsolidated Affiliate determined in accordance with the applicable provisions of the declaration of trust, articles or certificate of incorporation, articles of organization, partnership agreement, joint venture agreement or other applicable organizational document of such Subsidiary or Unconsolidated Affiliate.
“Parent Guarantor” is defined in the first paragraph of the Agreement.
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“PBGC” means the Pension Benefit Guaranty Corporation referred to and defined in ERISA.
“Permitted Liens” means, with respect to any asset or property of a Person, (a) Liens securing taxes, assessments and other charges or levies imposed by any Governmental Authority (excluding any Lien imposed pursuant to any of the provisions of ERISA or pursuant to any Environmental Laws) which, in each case, are not at the time required to be paid or discharged under Section 9.4, (b) the claims of materialmen, mechanics, carriers, warehousemen or landlords for labor, materials, supplies or rentals incurred in the ordinary course of business, which, in each case, are not at the time required to be paid or discharged under Section 9.4; (c) Liens consisting of deposits or pledges made, in the ordinary course of business, in connection with, or to secure payment of, obligations under workers’ compensation, unemployment insurance or similar applicable laws; (d) Liens consisting of encumbrances in the nature of zoning restrictions, easements, and rights or restrictions of record on the use of real property, which do not materially detract from the value of such property or impair the intended use thereof in the business of such Person; (e) the rights of tenants under leases or subleases not interfering with the ordinary conduct of business of such Person; and (f) Liens in favor of the holders of the Notes and (g) Liens in existence on the Execution Date and set forth on Schedule 10.5.
“Person” means an individual, partnership, corporation, limited liability company, association, trust, unincorporated organization, business entity or Governmental Authority.
“Plan” means an “employee benefit plan” (as defined in section 3(3) of ERISA) subject to Title I of ERISA that is or, within the preceding five years, has been established or maintained, or to which contributions are or, within the preceding five years, have been made or required to be made, by the Parent Guarantor or any ERISA Affiliate or with respect to which the Parent Guarantor or any ERISA Affiliate may have any liability.
“Preferred Dividends” means, for any period and without duplication, all Restricted Payments paid during such period on Preferred Equity Interests issued by the Parent Guarantor or a Subsidiary. Preferred Dividends shall not include dividends or distributions (a) paid or payable solely in Equity Interests (other than Mandatorily Redeemable Stock) payable to holders of such class of Equity Interests, (b) paid or payable to the Parent Guarantor or a Subsidiary, or (c) constituting or resulting in the redemption of Preferred Equity Interests, other than scheduled redemptions not constituting balloon, bullet or similar redemptions in full.
“Preferred Equity Interests” means, with respect to any Person, Equity Interests in such Person which are entitled to preference or priority over any other Equity Interest in such Person in respect of the payment of dividends or distribution of assets upon liquidation or both.
“Property” means any parcel (or group of related parcels) of real property owned or leased (in whole or in part) or operated by the Parent Guarantor, any Subsidiary or any Unconsolidated Affiliate of the Parent Guarantor.
“property” or “properties” means, unless otherwise specifically limited, real or personal property of any kind, tangible or intangible, choate or inchoate.
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“Property Management Agreement” means, collectively, all agreements entered into by a Constituent Company or a Subsidiary Guarantor pursuant to which such Person engages a Person to advise it with respect to the management of an Unencumbered Property or to provide management services with respect to the same.
“PTE” is defined in Section 6.3(a).
“Purchaser” or “Purchasers” means each of the purchasers that has executed and delivered this Agreement to the Constituent Companies and such Purchaser’s successors and assigns (so long as any such assignment complies with Section 14.2), provided, however, that any Purchaser of a Note that ceases to be the registered holder or a beneficial owner (through a nominee) of such Note as the result of a transfer thereof pursuant to Section 14.2 shall cease to be included within the meaning of “Purchaser” of such Note for the purposes of this Agreement upon such transfer.
“Purchaser Schedule” means the Purchaser Schedule to this Agreement listing the Purchasers of the Notes and including their notice and payment information.
“QPAM Exemption” is defined in Section 6.3(d).
“Qualified Institutional Buyer” means any Person who is a “qualified institutional buyer” within the meaning of such term as set forth in Rule 144A(a)(1) under the Securities Act.
“REIT” means a Person qualifying for treatment as a “real estate investment trust” under the Code.
“Related Fund” means, with respect to any holder of any Note, any fund or entity that (a) invests in Securities or bank loans, and (b) is advised or managed by such holder, the same investment advisor as such holder or by an affiliate of such holder or such investment advisor.
“Required Holders” means at any time (a) prior to the Closing, the Purchasers and (b) on or after the Closing, the holders of more than 50% in principal amount of the Notes at the time outstanding (exclusive of Notes then owned by either Constituent Company or any of its Affiliates).
“Responsible Officer” means, with respect to any Person, any Senior Financial Officer and any other officer of such Person with responsibility for the administration of the relevant portion of this Agreement.
“Restricted Payment” means (a) any dividend or other distribution, direct or indirect, on account of any Equity Interest of the Parent Guarantor or any Subsidiary now or hereafter outstanding, except a dividend payable solely in Equity Interests; (b) any redemption, conversion, exchange, retirement, sinking fund or similar payment, purchase or other acquisition for value, direct or indirect, of any Equity Interest of the Parent Guarantor or any Subsidiary now or hereafter outstanding; and (c) any payment made to retire, or to obtain the surrender of, any outstanding warrants, options or other rights to acquire any Equity Interests of the Parent Guarantor or any Subsidiary now or hereafter outstanding.
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“Seasoned Date” means the first day on which an acquired Property on which a hotel is located has been owned for four full fiscal quarters following the date of acquisition by the Parent, a Subsidiary or an Unconsolidated Affiliate of the Parent Guarantor.
“Seasoned Property” means Property on which a hotel is located that is not a New Property.
“SEC” means the Securities and Exchange Commission of the United States of America.
“Secured Indebtedness” means, with respect to a Person as of a given date, the aggregate principal amount of all Indebtedness of such Person outstanding on such date that is secured in any manner by any Lien on any property and, in the case of the Parent Guarantor, shall include the Parent Guarantor’s Ownership Share of the Secured Indebtedness of its Unconsolidated Affiliates.
“Securities Act” means the Securities Act of 1933 and the rules and regulations promulgated thereunder from time to time in effect.
“Securities” or “Security” shall have the meaning specified in section 2(1) of the Securities Act.
“Senior Financial Officer” means, with respect to any Person, the chief financial officer, principal accounting officer, treasurer or comptroller of such Person.
“Series A Notes” is defined in Section 1.
“Series B Notes” is defined in Section 1.
“Significant Subsidiary” means any Subsidiary to which more than $10,000,000 of Total Asset Value is attributable.
“Single Asset Entity” means a Person (other than an individual) that (a) only owns a single Property; (b) is engaged only in the business of owning, developing and/or leasing such Property; and (c) receives substantially all of its gross revenues from such Property. In addition, if the assets of a Person consist solely of (1) Equity Interests in one or more Single Asset Entities that directly or indirectly own such single Property and (2) cash and other assets of nominal value incidental to such Person’s ownership of the other Single Asset Entity, such Person shall also be deemed to be a Single Asset Entity for purposes of this Agreement.
“Smith Travel Research” means Smith Travel Research or, if Smith Travel Research shall no longer exist, any other Person that provides competitive benchmarking, information services and research to the hotel industry and is acceptable to the Required Holders.
“Source” is defined in Section 6.3.
“Solvent” means, when used with respect to any Person (or group of Persons), that (a) the fair value and the fair salable value of its (or their) assets (excluding any Indebtedness due from any Affiliate of such Person (or group of Persons)) are each in excess of the fair valuation
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of its (or their) total liabilities (including all contingent liabilities computed at the amount which, in light of all facts and circumstances existing at such time, represents the amount that could reasonably be expected to become an actual and matured liability); (b) such Person is (or group of Persons are) able to pay its (or their) debts or other obligations in the ordinary course as they mature; and (c) such Person (or group of Persons) has capital not unreasonably small to carry on its (or their) business and all business in which it proposes (or they propose) to be engaged
“State Sanctions List” means a list that is adopted by any state Governmental Authority within the United States pertaining to Persons that engage in investment or other commercial activities in Iran or any other country that is a target of economic sanctions imposed under U.S. Economic Sanctions Laws.
“Subsidiary” means, as to any Person, any other Person in which such first Person or one or more of its Subsidiaries or such first Person and one or more of its Subsidiaries owns sufficient equity or voting interests to enable it or them (as a group) ordinarily, in the absence of contingencies, to elect a majority of the directors (or Persons performing similar functions) of such second Person, and any partnership or joint venture if more than a 50% interest in the profits or capital thereof is owned by such first Person or one or more of its Subsidiaries or such first Person and one or more of its Subsidiaries (unless such partnership or joint venture can and does ordinarily take major business actions without the prior approval of such Person or one or more of its Subsidiaries). Unless the context otherwise clearly requires, any reference to a “Subsidiary” is a reference to a Subsidiary of the Parent Guarantor.
“Subsidiary Guarantor” means each Subsidiary that has executed and delivered the Subsidiary Guaranty Agreement or a Subsidiary Guaranty Supplement and has not been released from the Subsidiary Guaranty Agreement pursuant to Section 9.9(b).
“Subsidiary Guaranty Agreement” is defined in Section 2.2(b).
“Subsidiary Guaranty Supplement” is defined in Section 9.9(a)(1).
“Substitute Purchaser” is defined in Section 22.
“S&P” means Standard & Poor’s Ratings Services, a Standard & Poor’s Financial Services LLC.
“Surge Period” is defined in Section 10.8(a).
“SVO” means the Securities Valuation Office of the NAIC.
“Total Asset Value” means the sum of all of the following of the Parent Guarantor and its Subsidiaries on a consolidated basis determined in accordance with GAAP applied on a consistent basis: (a) Unrestricted Cash and Marketable Securities, plus (b) the Operating Property Value of all Properties of the Parent Guarantor and its Subsidiaries on which a hotel is located, plus (c) the book value of Unimproved Land, Mortgage Receivables and other promissory notes, plus (d) the Parent’s Guarantor Ownership Share of the preceding items for its Unconsolidated Affiliates (excluding assets of the type described in the immediately preceding clause (a)), plus (e) in the case of any property subject to a purchase obligation, repurchase
A-19
obligation or takeout commitment which at such time (1) could not be specifically enforced by the seller of such property, the aggregate amount of due diligence deposits, earnest money payments and other similar payments made under the applicable contract which, at such time, would be subject to forfeiture upon termination of the contract or (2) could be specifically enforced by the seller of such property, the contractual purchase price of such property, but, in either case, only to the extent the amount of the applicable purchase obligation, repurchase obligation or takeout commitment is included in the Indebtedness of the Issuer and its Subsidiaries on a consolidated basis. Notwithstanding the foregoing, for purposes of determining Total Asset Value, the amount, if any, by which the value of Marketable Securities included under the immediately preceding clause (a) would account for more than 15% of Total Asset Value shall be excluded. The percentage of Total Asset Value attributable to a given Subsidiary shall be equal to the ratio expressed as a percentage of (x) an amount equal to Total Asset Value calculated solely with respect to assets owned directly by such Subsidiary to (y) Total Asset Value.
“Total Indebtedness” means without duplication: (a) all Indebtedness of the Parent Guarantor and its Subsidiaries determined on a consolidated basis plus (b) the Parent Guarantor’s Ownership Share of the Indebtedness of all Unconsolidated Affiliates of the Parent Guarantor.
“UCC” means the Uniform Commercial Code as in effect in any applicable jurisdiction.
“Unconsolidated Affiliate” means, with respect to any Person, any other Person in whom such Person holds an Investment, which Investment is accounted for in the financial statements of such Person on an equity basis of accounting and whose financial results would not be consolidated under GAAP with the financial results of such Person on the consolidated financial statements of such Person.
“Unencumbered Asset Value” means at any time the sum of (a) the aggregate Operating Property Values of the Unencumbered Properties at such time and (b) the lesser of (1) the amount, if any, by which Unrestricted Cash exceeds $25,000,000 and (2) the lowest amount, if any, of Unrestricted Cash then permitted to be added to “operating property values” for purposes of determining the “unencumbered asset value” under any Material Credit Facility. For purposes of this definition, the Adjusted NOI for any Unencumbered Property shall be reduced by an amount equal to (i) the amount by which the Adjusted NOI of such Unencumbered Property would exceed 30% of the aggregate Adjusted NOI of all Unencumbered Properties and (ii) the amount by which the Adjusted NOI of Unencumbered Properties located in the same MSA as such Property would exceed 40% of the aggregate Adjusted NOI of all Unencumbered Properties. In addition (A) to the extent that Unencumbered Asset Value attributable to Properties leased under Ground Leases would exceed 25% of Unencumbered Asset Value, such excess shall be excluded and (B) if the Wailea Beach Marriott or the Boston Park Plaza Hotel is an Unencumbered Property and the Issuer has elected that such Property not be treated as a Development Property in accordance with the applicable provisions of the definition of such term, then to the extent that the Unencumbered Asset Value attributable to such Property would exceed 25% of Unencumbered Asset Value, such excess shall be excluded.
“Unencumbered Property” means an Eligible Property that is included in the calculation of Unencumbered Asset Value. A Property shall cease to be an Unencumbered
A-20
Property if at any time such Property shall (a) cease to be an Eligible Property (unless such Property has been approved or been deemed to have been approved as an Unencumbered Property by the Required Holders) or (b) for any reason be excluded as an “unencumbered property” under any Material Credit Facility.
“Unimproved Land” means land on which no development (other than improvements that are not material and are temporary in nature) has occurred. Unimproved Land shall not include any undeveloped parcels of a Property that has been developed unless and until the Issuer provides written notice to the holders of Notes that the Issuer intends to develop such parcel.
“United States” or “U.S.” means the United States of America.
“United States Person” has the meaning set forth in Section 7701(a)(30) of the Code.
“Unrestricted Cash” means cash and cash equivalents held by the Issuer and its Subsidiaries other than tenant deposits and other cash and cash equivalents that are subject to a Lien or a Negative Pledge or the disposition of which is restricted in any way.
“Unsecured Indebtedness” means with respect to a Person as of any given date, the aggregate principal amount of all Indebtedness of such Person outstanding at such date that is not Secured Indebtedness and, in the case of the Parent Guarantor, shall include the Parent Guarantor’s Ownership Share of Unsecured Indebtedness of its Unconsolidated Affiliate.
“USA PATRIOT Act” means United States Public Law 107-56, Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT ACT) Act of 2001 and the rules and regulations promulgated thereunder from time to time in effect.
“U.S. Economic Sanctions Laws” means those laws, executive orders, enabling legislation or regulations administered and enforced by the United States pursuant to which economic sanctions have been imposed on any Person, entity, organization, country or regime, including the Trading with the Enemy Act, the International Emergency Economic Powers Act, the Iran Sanctions Act, the Sudan Accountability and Divestment Act and any other OFAC Sanctions Program.
“Wailea Beach Marriott” means the Wailea Beach Marriott Resort & Spa located in Maui, Hawaii.
“Wholly-Owned Subsidiary” means, at any time, any Subsidiary all of the Equity Interests (except directors’ qualifying shares) and voting interests of which are owned by any one or more of the Parent Guarantor and the Parent Guarantor’s other Wholly-Owned Subsidiaries at such time.
A-21
FORM OF SERIES A NOTE
SUNSTONE HOTEL PARTNERSHIP, LLC
4.69% Series A Guaranteed Senior Notes due January 10, 2026
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FOR VALUE RECEIVED, the undersigned, SUNSTONE HOTEL PARTNERSHIP, LLC (herein called the “Issuer”), a limited liability company organized and existing under the laws of the State of Delaware, hereby promises to pay to ____________, or registered assigns, the principal sum of _____________________ DOLLARS (or so much thereof as shall not have been prepaid) on January 10, 2026 (the “Maturity Date”), with interest (computed on the basis of a 360-day year of twelve 30-day months) (a) on the unpaid balance hereof at the rate of 4.69% per annum from the date hereof, payable semiannually, on the tenth day of January and July in each year, commencing with the January 10 or July 10 next succeeding the date hereof, and on the Maturity Date, until the principal hereof shall have become due and payable, and (b) to the extent permitted by law, (1) on any overdue payment of interest and (2) during the continuance of an Event of Default, on such unpaid balance and on any overdue payment of any Make-Whole Amount, at a rate per annum from time to time equal to the greater of (i) 6.69% or (ii) 2.00% over the rate of interest publicly announced by the principal office of Bank of America, N.A from time to time in New York, New York as its “base” or “prime” rate, payable semiannually as aforesaid (or, at the option of the registered holder hereof, on demand).
Payments of principal of, interest on and any Make-Whole Amount with respect to this Note are to be made in lawful money of the United States of America at Bank of America, N.A. in New York, New York or at such other place as the Issuer shall have designated by written notice to the holder of this Note as provided in the Note and Guarantee Agreement referred to below.
This Note is one of a series of Senior Notes (herein called the “Notes”) issued pursuant to the Note and Guarantee Agreement dated as of December 20, 2016 (as from time to time amended, the “Note and Guarantee Agreement”) between the Issuer, Sunstone Hotel Investors, Inc., a corporation organized and existing under the laws of the State of Maryland, and the respective Purchasers named therein and is entitled to the benefits thereof. Each holder of this Note will be deemed, by its acceptance hereof, to have (i) agreed to the confidentiality provisions set forth in Section 21 of the Note and Guarantee Agreement and (ii) made the representation set forth in Section 6.3 of the Note and Guarantee Agreement. Unless otherwise indicated, capitalized terms used in this Note shall have the respective meanings ascribed to such terms in the Note and Guarantee Agreement.
This Note is a registered Note and, as provided in the Note and Guarantee Agreement, upon surrender of this Note for registration of transfer accompanied by a written instrument of
SCHEDULE 1(a)
(to Note and Guarantee Agreement)
transfer duly executed, by the registered holder hereof or such holder’s attorney duly authorized in writing, a new Note for a like principal amount will be issued to, and registered in the name of, the transferee. Prior to due presentment for registration of transfer, the Issuer may treat the Person in whose name this Note is registered as the owner hereof for the purpose of receiving payment and for all other purposes, and the Issuer will not be affected by any notice to the contrary.
This Note is subject to optional prepayment, in whole or from time to time in part, at the times and on the terms specified in the Note and Guarantee Agreement, but not otherwise.
If an Event of Default occurs and is continuing, the principal of this Note may be declared or otherwise become due and payable in the manner, at the price (including any applicable Make-Whole Amount) and with the effect provided in the Note and Guarantee Agreement.
This Note shall be construed and enforced in accordance with, and the rights of the Issuer and the holder of this Note shall be governed by, the law of the State of New York excluding choice-of-law principles of the law of such State that would permit the application of the laws of a jurisdiction other than such State.
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S-1(a)-2
FORM OF SERIES B NOTE
SUNSTONE HOTEL PARTNERSHIP, LLC
4.79% Series B Guaranteed Senior Notes due January 10, 2028
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No. BR- _____ |
_____ __, 20 |
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$_______ |
PPN 86801F A@5 |
FOR VALUE RECEIVED, the undersigned, SUNSTONE HOTEL PARTNERSHIP, LLC (herein called the “Issuer”), a limited liability company organized and existing under the laws of the State of Delaware, hereby promises to pay to ____________, or registered assigns, the principal sum of _____________________ DOLLARS (or so much thereof as shall not have been prepaid) on January 10, 2028 (the “Maturity Date”), with interest (computed on the basis of a 360-day year of twelve 30-day months) (a) on the unpaid balance hereof at the rate of 4.79% per annum from the date hereof, payable semiannually, on the tenth day of January and July in each year, commencing with the January 10 or July 10 next succeeding the date hereof, and on the Maturity Date, until the principal hereof shall have become due and payable, and (b) to the extent permitted by law, (1) on any overdue payment of interest and (2) during the continuance of an Event of Default, on such unpaid balance and on any overdue payment of any Make-Whole Amount, at a rate per annum from time to time equal to the greater of (i) 6.79% or (ii) 2.00% over the rate of interest publicly announced by the principal office of Bank of America, N.A. in New York, New York from time to time in New York, New York as its “base” or “prime” rate, payable semiannually as aforesaid (or, at the option of the registered holder hereof, on demand).
Payments of principal of, interest on and any Make-Whole Amount with respect to this Note are to be made in lawful money of the United States of America at Bank of America, N.A. in New York, New York or at such other place as the Issuer shall have designated by written notice to the holder of this Note as provided in the Note and Guarantee Agreement referred to below.
This Note is one of a series of Senior Notes (herein called the “Notes”) issued pursuant to the Note and Guarantee Agreement dated as of December 20, 2016 (as from time to time amended, the “Note and Guarantee Agreement”) between the Issuer, Sunstone Hotel Investors, Inc., a corporation organized and existing under the laws of the State of Maryland, and the respective Purchasers named therein and is entitled to the benefits thereof. Each holder of this Note will be deemed, by its acceptance hereof, to have (i) agreed to the confidentiality provisions set forth in Section 21 of the Note and Guarantee Agreement and (ii) made the representation set forth in Section 6.3 of the Note and Guarantee Agreement. Unless otherwise indicated, capitalized terms used in this Note shall have the respective meanings ascribed to such terms in the Note and Guarantee Agreement.
SCHEDULE 1(b)
(to Note and Guarantee Agreement)
This Note is a registered Note and, as provided in the Note and Guarantee Agreement, upon surrender of this Note for registration of transfer accompanied by a written instrument of transfer duly executed, by the registered holder hereof or such holder’s attorney duly authorized in writing, a new Note for a like principal amount will be issued to, and registered in the name of, the transferee. Prior to due presentment for registration of transfer, the Issuer may treat the Person in whose name this Note is registered as the owner hereof for the purpose of receiving payment and for all other purposes, and the Issuer will not be affected by any notice to the contrary.
This Note is subject to optional prepayment, in whole or from time to time in part, at the times and on the terms specified in the Note and Guarantee Agreement, but not otherwise.
If an Event of Default occurs and is continuing, the principal of this Note may be declared or otherwise become due and payable in the manner, at the price (including any applicable Make-Whole Amount) and with the effect provided in the Note and Guarantee Agreement.
This Note shall be construed and enforced in accordance with, and the rights of the Issuer and the holder of this Note shall be governed by, the law of the State of New York excluding choice-of-law principles of the law of such State that would permit the application of the laws of a jurisdiction other than such State.
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S-1(b)-2
FORM OF OPINION OF SPECIAL COUNSEL
FOR THE CONSTITUENT COMPANIES AND THE SUBSIDIARY GUARANTORS
[LETTERHEAD OF LATHAM AND WATKINS LLP]
January 10, 2017
The Purchasers listed on Schedule A hereto
Re: Sunstone Hotel Investors, Inc. / Note and Guarantee Agreement dated December 20, 2016
Ladies and Gentlemen:
We have acted as special counsel to Sunstone Hotel Partnership, LLC, a Delaware limited liability company (the “Issuer”), Sunstone Hotel Investors, Inc., a Maryland corporation (the “Parent”), and each of the subsidiaries of the Issuer listed on Schedule B hereto (collectively, the “Initial Subsidiary Guarantors” and, together with the Issuer and the Parent, the “Note Parties”) in connection with (i) that certain Note and Guarantee Agreement, including the Parent Guaranty contained therein (the “Note Agreement”), dated as of December 20, 2016, by and among the Issuer, the Parent and the purchasers party thereto (the “Purchasers”), pursuant to which the Issuer is issuing on the date hereof $120,000,000 aggregate principal amount of its 4.69% Series A Guaranteed Senior Notes due January 10, 2026 (the “Series A Notes”) and $120,000,000 aggregate principal amount of its 4.79% Series B Guaranteed Senior Notes due January 10, 2028 (the “Series B Notes”; the Series A Notes and the Series B Notes are hereinafter referred to collectively as the “Notes”) and (ii) the other Note Documents (as defined below). This letter is being delivered to you pursuant to Section 4.4(a)(1) of the Note Agreement.
As such counsel, we have examined such matters of fact and questions of law as we have considered appropriate for purposes of this letter, except where a specific fact confirmation procedure is stated to have been performed (in which case we have with your consent performed the stated procedure). We have examined, among other things, the following:
(a) the Note Agreement;
(b) the Subsidiary Guaranty Agreement, dated as of the date hereof (the “Subsidiary Guaranty”), executed and delivered by the Initial Subsidiary Guarantors in favor of the Purchasers and each other holder of Notes;
(c) specimen copies of the Notes listed on Schedule C hereto;
(d) the third Amended and Restated Limited Liability Company Agreement of the Issuer, dated as of April 6, 2011 (the “Operating LLC Agreement”);
(e) the certificate of formation of the Issuer and any amendments thereto;
SCHEDULE 4.4(a)(1)
(to Note and Guarantee Agreement)
(f) the limited liability company agreement of each Initial Subsidiary Guarantor, as amended or restated to the date hereof (collectively, the “Initial Subsidiary Guarantor Operating Agreements”);
(g) the certificate of formation of each Initial Subsidiary Guarantor and any amendments thereto;
(h) each agreement described on Schedule 5.15 of the Note Agreement (the “Specified Agreements”); and
(h) the written consent of (a) the Board of Directors of the Parent; (b) the Parent, as managing member of the Issuer; and (c) the Issuer, as sole member of each Initial Subsidiary Guarantor that is a limited liability company.
The documents described in subsections (a) through (c) above are referred to herein collectively as the “Note Documents.”
We call your attention to the fact that with your consent, we have assumed that each of the Operating LLC Agreement and the Initial Subsidiary Guarantor Operating Agreements is (i) a valid and binding agreement of the parties thereto, enforceable in accordance with the plain meaning of its terms; (ii) in full force and effect; and (iii) the entire agreement of the parties pertaining to the subject matter thereof. We have further assumed, with your consent, the Parent has duly taken such internal actions as may be necessary to enable it to act in its corporate capacity as managing member of the Issuer.
Except as otherwise stated herein, as to factual matters, we have, with your consent, relied upon the foregoing and upon oral or written statements and representations of officers and other representatives of the Note Parties and others, including the representations and warranties of the Note Parties in the Note Documents. We have not independently verified such factual matters.
Except as otherwise stated herein, we are opining as to the effect on the subject transaction only of the federal laws of the United States, the internal laws of the State of New York, in numbered paragraphs 1, 2, 3, 4 and 5 of this letter, the Delaware Limited Liability Company Act (the “DLLCA”), and we express no opinion with respect to the applicability thereto, or the effect thereon, of the laws of any other jurisdiction or, in the case of Delaware, any other laws, or as to any matters of municipal law or the laws of any local agencies within any state. Except as otherwise stated herein, our opinions are based upon our consideration of only those statutes, rules and regulations that, in our experience, are normally applicable to private placements of debt securities. Various matters concerning the laws of Maryland are addressed in the opinion of Venable LLP, which has been separately provided to you. We express no opinion with respect to those matters, and to the extent elements of those opinions are necessary to the conclusions expressed herein, we have, with your consent, assumed such matters. We express no opinion as to any state or federal laws or regulations applicable to the subject transaction because of the legal or regulatory status of any parties to the Note Documents or the legal or regulatory status of any of their affiliates.
Subject to the foregoing and the other matters set forth herein, as of the date hereof:
S-4.4(a)(1)-2
1. The Issuer is a limited liability company under the DLLCA with limited liability company power and authority to enter into the Note Agreement and the Notes and to perform its obligations thereunder. With your consent, based solely on certificates from public officials, we confirm that the Issuer is validly existing and in good standing under the laws of the State of Delaware.
2. Each Initial Subsidiary Guarantor is a limited liability company under the DLLCA, with the limited liability company power and authority to enter into the Subsidiary Guaranty Agreement and to perform its obligations thereunder. With your consent, based solely on certificates from public officials, we confirm that each Initial Subsidiary Guarantor is validly existing and in good standing under the laws of the State of Delaware.
3. The execution, delivery and performance of the Note Documents to which each of the Issuer and the Initial Subsidiary Guarantors is a party have been duly authorized by all necessary limited liability company action of the Issuer and the Initial Subsidiary Guarantors, as the case may be, and each of the Note Documents to which each of the Issuer and the Initial Subsidiary Guarantors is a party has been duly executed and delivered by each of the Issuer and the Initial Subsidiary Guarantors, as the case may be.
4. Each of the Note Documents is the legally valid and binding agreement of each Note Party that is a party thereto, enforceable against each such Note Party in accordance with its terms.
5. (a) The execution and delivery by each Note Party of the Note Documents to which it is a party does not on the date hereof and (b) the issuance and sale of the Notes by the Issuer, and the issuance of any guarantee thereof by the Initial Subsidiary Guarantors pursuant to the Note Documents do not, and the performance of the obligations under the Note Documents will not, on the date hereof:
(i) violate the Operating LLC Agreement or Certificate of Formation of the Issuer or the Subsidiary Guarantor Operating Agreements or Certificates of Formation of the Initial Subsidiary Guarantors, as applicable;
(ii) result in the breach of or a default under any of the Specified Agreements;
(iii) violate any federal or New York statute, rule or regulation applicable to the Note Parties (including, without limitation, Regulation T, U or X of the Board of Governors of the Federal Reserve System, assuming the Issuer complies with the provisions of the Note Documents relating to the use of proceeds) or the DLLCA; or
(iv) require any consents, approvals or authorizations to be obtained by the Note Parties from, or any registrations, declarations or filings to be made by the Note Parties with, any governmental authority under any federal or New York statute, rule or regulation applicable to the Note Parties or the DLLCA, as applicable, that have not been obtained or made.
S-4.4(a)(1)-3
6. None of the Parent, the Issuer or any Initial Subsidiary Guarantor is required to be registered as an “investment company” within the meaning of the Investment Company Act of 1940, as amended.
7. No registration of the Notes or any guarantee thereof pursuant to the Note Documents under the Securities Act of 1933, as amended, and no qualification of an indenture under the Trust Indenture Act of 1939, as amended, is required for the purchase of the Notes by the Purchasers. We express no opinion, however, as to when or under what circumstances any Notes initially purchased by you may be reoffered or resold.
Our opinions are subject to: (i) the effect of bankruptcy, insolvency, reorganization, preference, fraudulent transfer, moratorium or other similar laws relating to or affecting the rights and remedies of creditors; (ii) the effect of general principles of equity, whether considered in a proceeding in equity or at law (including the possible unavailability of specific performance or injunctive relief), concepts of materiality, reasonableness, good faith and fair dealing, and the discretion of the court before which a proceeding is brought; (iii) the invalidity under certain circumstances under law or court decisions of provisions providing for the indemnification or exculpation of or contribution to a party with respect to a liability where such indemnification or exculpation or contribution is contrary to public policy; and (iv) we express no opinion with respect to (a) any provision for liquidated damages, default interest, late charges, monetary penalties, make-whole premiums or other economic remedies to the extent such provisions are deemed to constitute a penalty, (b) consents to, or restrictions upon, governing law (except for the validity under the laws of the State of New York, but subject to mandatory choice of law rules and constitutional limitations, of provisions in the Note Documents which expressly choose New York as the governing law for the Note Documents), jurisdiction, venue, service of process, arbitration, remedies or judicial relief, (c) any provision requiring the payment of attorneys’ fees, where such payment is contrary to law or public policy, (d) provisions purporting to make a guarantor primarily liable rather than as a surety, (e) provisions purporting to waive modifications of any guaranteed obligation to the extent such modification constitutes a novation and (f) the severability, if invalid, of provisions to the foregoing effect. We express no opinion with respect to (i) advance waivers of claims, defenses, rights granted by law, or notice, opportunity for hearing, evidentiary requirements, statutes of limitation, trial by jury or at law, or other procedural rights; (ii) waivers of broadly or vaguely stated rights and restrictions upon non-written modifications and waivers; (iii) covenants not to compete; (iv) provisions for exclusivity, election or cumulation of rights or remedies; (v) provisions authorizing or validating conclusive or discretionary determinations; (vi) grants of setoff rights; (vii) proxies, powers and trusts; and (viii) provisions prohibiting, restricting, or requiring consent to assignment or transfer of any right or property. We express no opinion or confirmation as to federal or state securities laws (except as expressly set forth in numbered paragraphs 6 and 7 of this letter as to federal securities laws), tax laws, antitrust or trade regulation laws, insolvency or fraudulent transfer laws, antifraud laws, compliance with fiduciary duty requirements, pension or employee benefit laws, usury laws (other than any statute, rule or regulation of the State of New York), environmental laws, margin regulations (except as set forth in numbered paragraph 5(iii) of this letter), the rules of the Financial Industry Regulatory Authority or stock exchange rules (without limiting other laws excluded by customary practice).
S-4.4(a)(1)-4
With your consent, for purposes of the opinion rendered in numbered paragraph 7 of this letter, we have assumed that the representations and agreements made by each of you and each of the Note Parties contained in the Note Documents are accurate and have been and will be complied with.
With your consent, we have assumed (i) that the Note Documents have been duly authorized, executed and delivered by the parties thereto other than the Issuer and the Initial Subsidiary Guarantors; (ii) that the Note Documents constitute legally valid and binding obligations of the parties thereto other than the Note Parties, enforceable against each of them in accordance with their respective terms; and (iii) that the status of the Note Documents as legally valid and binding obligations of the parties is not affected by any (a) breaches of, or defaults under, agreements or instruments, (b) violations of statutes, rules, regulations or court or governmental orders or (c) failures to obtain required consents, approvals or authorizations from, or make required registrations, declarations or filings with, governmental authorities, provided that we make no such assumption to the extent we have specifically opined as to such matters with respect to the Note Parties herein.
With your consent, we have also assumed (a) that the Parent is duly incorporated and validly existing under the laws of the State of Maryland and is in good standing with the State Department of Assessments and Taxation of Maryland, and has the power and authority to execute, deliver and perform its obligations under the Note Documents to which it is a party, and (b) that such Note Documents have been duly authorized by all necessary corporate action of the Parent, and duly executed and delivered by the Parent.
This letter is furnished only to you in your capacity as purchasers under the Note Agreement and is solely for the benefit of the Purchasers in connection with the transactions referenced in the first paragraph. This letter may not be relied upon by you for any other purpose, or furnished to, assigned to, quoted to, or relied upon by any other person, firm or other entity for any purpose (including any person, firm or other entity that acquires Notes or any interest therein from you) without our prior written consent, which may be granted or withheld in our sole discretion. We hereby consent to reliance hereon by any future transferee of your interest in any Note pursuant to a transfer that is made and consented to in accordance with the express provisions of Section 14.2 of the Note Agreement, on the condition and understanding that (i) this letter speaks only as of the date hereof, (ii) we have no responsibility or obligation to update this letter, to consider its applicability or correctness to other than its addressee(s), or to take into account changes in law, facts or any other developments of which we may later become aware, and (iii) any such reliance by a future transferee must be actual and reasonable under the circumstances existing at the time of transfer, including any changes in law, facts or any other developments known to or reasonably knowable by the transferee at such time. In addition, we also hereby consent to your furnishing a copy of this letter to: (i) governmental regulatory agencies having jurisdiction over any person permitted to rely on this letter (including the National Association of Insurance Commissioners), (ii) to attorneys as needed in connection with any legal action arising out of the transactions contemplated by the Note Documents to which a person permitted to rely on this letter is a party, (iii) to your counsel and auditors and (iv) as required by any order of any court or governmental authority; provided, however, that no such person shall be entitled to rely on this letter.
S-4.4(a)(1)-5
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S-4.4(a)(1)-6
SCHEDULE A
PURCHASERS
AMERICAN REPUBLIC INSURANCE COMPANY
BLUE CROSS AND BLUE SHIELD OF FLORIDA, INC.
CATHOLIC UNITED FINANCIAL
CATHOLIC FINANCIAL LIFE
CINCINNATI LIFE INSURANCE COMPANY
FARM BUREAU LIFE INSURANCE COMPANY OF MICHIGAN
GLEANER LIFE INSURANCE SOCIETY
GREAT WESTERN INSURANCE COMPANY
MINNESOTA LIFE INSURANCE COMPANY
UNITEDHEALTHCARE INSURANCE COMPANY
UNITED INSURANCE COMPANY OF AMERICA
WESTERN FRATERNAL LIFE ASSOCIATION
USAA LIFE INSURANCE COMPANY
USAA CASUALTY INSURANCE COMPANY
UNITED SERVICES AUTOMOBILE ASSOCIATION
AXA EQUITABLE LIFE INSURANCE COMPANY
AB US DIVERSIFIED CREDIT BM FUND
THRIVENT FINANCIAL FOR LUTHERANS
TRANSAMERICA FINANCIAL LIFE INSURANCE COMPANY
TRANSAMERICA LIFE INSURANCE COMPANY
TRANSAMERICA LIFE (BERMUDA) LTD
PACIFIC LIFE INSURANCE COMPANY
BANKERS LIFE AND CASUALTY COMPANY
S-4.4(a)(1)-7
WASHINGTON NATIONAL INSURANCE COMPANY
LIFE INSURANCE COMPANY OF THE SOUTHWEST
NATIONAL LIFE INSURANCE COMPANY
AMERICO FINANCIAL LIFE & ANNUITY INSURANCE COMPANY
TRAVELERS CASUALTY AND SURETY COMPANY
THE STANDARD FIRE INSURANCE COMPANY
AMERICAN FAMILY LIFE INSURANCE COMPANY
PRIMERICA LIFE INSURANCE COMPANY
AMERICAN HEALTH AND LIFE INSURANCE COMPANY
SENIOR HEALTH INSURANCE COMPANY OF PENNSYLVANIA
S-4.4(a)(1)-8
SCHEDULE B
INITIAL SUBSIDIARY GUARANTORS
SUNSTONE CENTURY, LLC
SUNSTONE JAMBOREE, LLC
SUNSTONE LA AIRPORT, LLC
SUNSTONE MACARTHUR, LLC
SUNSTONE QUINCY, LLC
SUNSTONE RED OAK, LLC
WB SUNSTONE-PORTLAND, LLC
SUNSTONE EAST GRAND, LLC
SUNSTONE ST. CHARLES, LLC
SUNSTONE EC5, LLC
SUNSTONE HAWAII 3-0, LLC
SUNSTONE HOLDCO 5, LLC
SUNSTONE HOLDCO 6, LLC
SUNSTONE HOLDCO 8, LLC
SUNSTONE SAINT CLAIR, LLC
SUNSTONE HOLDCO 4, LLC
SUNSTONE OCEAN, LLC
BOSTON 1927 OWNER, LLC
S-4.4(a)(1)-9
SCHEDULE C
NOTES
S-4.4(a)(1)-10
FORM OF OPINION OF MARYLAND COUNSEL
FOR THE PARENT GUARANTOR
[LETTERHEAD OF VENABLE LLP]
January 10, 2017
The Purchasers party to the
Agreement referred to below
Re: Sunstone Hotel Investors, Inc.
Ladies and Gentlemen:
We have served as Maryland counsel for Sunstone Hotel Investors, Inc., a Maryland corporation (the “Company”), in connection with certain matters of Maryland law arising out of the sale and issuance by Sunstone Hotel Partnership LLC, a Delaware limited liability company (the “Issuer”), of the following series of its notes (collectively, the “Senior Notes”): (a) $120,000,000 aggregate principal amount of the 4.69% Series A Guaranteed Senior Notes, due January 10, 2026 and (b) $120,000,000 aggregate principal amount of the 4.79% Series B Guaranteed Senior Notes, due January 10, 2028, pursuant to the Note and Guarantee Agreement, dated as of December 20, 2016 (the “Agreement”), by and among the Issuer, the Company and the purchasers of the Senior Notes listed in the Purchaser Schedule thereto (the “Purchasers”). This opinion is being delivered to you at the request of the Company in connection with Section 4.4(a)(2) of the Agreement. This firm did not participate in the negotiation or drafting of the Agreement.
In connection with our representation of the Company, and as a basis for the opinion hereinafter set forth, we have examined originals, or copies certified or otherwise identified to our satisfaction, of the following documents (hereinafter collectively referred to as the “Documents”):
1. The charter of the Company (the “Charter”), certified by the State Department of Assessments and Taxation of Maryland (the “SDAT”);
2. The Amended and Restated Bylaws of the Company, as amended (the “Bylaws”), certified as of the date hereof by an officer of the Company;
3. A certificate, as of January __, 2017, of the SDAT as to the good standing of the Company;
4. Resolutions adopted by the Board of Directors of the Company (the “Board”), or a duly authorized committee of the Board, relating to the authorization of the execution, delivery and performance by the Company and the Issuer of the Agreement, certified as of the date hereof by an officer of the Company;
5. The Agreement;
SCHEDULE 4.4(a)(2)
(to Note and Guarantee Agreement)
6. A certificate executed by an officer of the Company, dated as of the date hereof; and
7. Such other documents and matters as we have deemed necessary or appropriate to express the opinion set forth below, subject to the assumptions, limitations and qualifications stated herein.
In expressing the opinion set forth below, we have assumed the following:
1. Each individual executing any of the Documents, whether on behalf of such individual or another person, is legally competent to do so.
2. Each individual executing any of the Documents on behalf of a party (other than the Company) is duly authorized to do so.
3. Each of the parties (other than the Company) executing any of the Documents has duly and validly executed and delivered each of the Documents to which such party is a signatory, and such party’s obligations set forth therein are legal, valid and binding and are enforceable in accordance with all stated terms.
4. All Documents submitted to us as originals are authentic. All Documents submitted to us as certified or photostatic copies conform to the original documents. All signatures on all Documents are genuine. All public records reviewed or relied upon by us or on our behalf are true and complete. All representations, warranties, statements and information as to factual maters (other than those facts constituting conclusions of law on matters on which we opine herein) contained in the Documents are true and complete. There has been no oral or written modification of or amendment to any of the Documents, and there has been no waiver of any provision of any of the Documents, by action or omission of the parties or otherwise.
Based upon the foregoing, and subject to the assumptions, limitations and qualifications stated herein, it is our opinion that:
1. The Company is a corporation duly incorporated and validly existing under and by virtue of the laws of the State of Maryland and is in good standing with the SDAT.
2. The Company has the corporate power to execute and deliver the Agreement and to perform its obligations thereunder.
3. The execution and delivery of the Agreement, and the performance by the Company and the Issuer of each of its obligations thereunder, have been duly authorized by all necessary corporate action of the Company, in its own capacity and in its capacity as managing member of the Issuer. The Agreement has been duly executed and delivered by the Company.
4. The execution and delivery by the Company, in its own capacity and in its capacity as managing member of the Issuer, of the Agreement and the performance by the Company of its obligations thereunder, did not and will not conflict with or constitute a breach of
S-4.4(a)(2)-2
(a) the Charter or the Bylaws, or (b) any Maryland law, rule or regulation or any order of any Maryland governmental authority (other than any law, rule, regulation or order in connection with the securities laws of the State of Maryland, as to which no opinion is hereby expressed).
5. No consent, approval, authorization, or order of or filing with any Maryland governmental authority was required to be made or obtained by the Company in connection with the execution and delivery by the Company, in its own capacity and in its capacity as managing member of the Issuer, of the Agreement or will be required for the performance of its obligations under the Agreement, except such consents, approvals, authorizations, orders and filings as may have been made, waived or obtained, if any (except that no opinion is expressed herein with respect to the applicability or effect of the securities laws of the State of Maryland).
The foregoing opinion is limited to Maryland law and we do not express any opinion herein concerning any other law. We express no opinion as to the applicability or effect of federal or state securities laws, including the securities laws of the State of Maryland, or as to federal or state laws regarding fraudulent transfers or the laws, codes or regulations of any municipality or other local jurisdiction. We express no opinion with respect to the actions which might be required under the organizational documents of the Issuer for the Issuer to authorize, execute, deliver or perform the Agreement or issue the Senior Notes. We note that the Agreement provides that it shall be governed by the laws of a state other than the State of Maryland. To the extent that any matter as to which our opinion is expressed herein would be governed by the laws of any jurisdiction other than the State of Maryland, we do not express any opinion on such matter. Our opinion expressed in paragraph 4(b) above is based upon our consideration of only those Maryland laws, rules or regulations and orders of Maryland governmental authorities, if any, which, in our experience, are normally applicable to transactions of the type referred to in such paragraph. Our opinion expressed in paragraph 5 above is based upon our consideration of only those consents, approvals, authorizations and orders of and filings with Maryland governmental authorities, if any, which, in our experience, are normally applicable to transactions of the type referred to in such paragraph. We call your attention to the fact that, in connection with the delivery of this opinion, we have not ordered or reviewed judgment, lien or any other searches of public or private records of the Company or its properties. The opinion expressed herein is subject to the effect of any judicial decision which may permit the introduction of parol evidence to modify the terms or the interpretation of agreements.
The opinion expressed herein is limited to the matters specifically set forth herein and no other opinion shall be inferred beyond the matters expressly stated. We assume no obligation to supplement this opinion if any applicable law changes after the date hereof or if we become aware of any fact that might change the opinion expressed herein after the date hereof.
S-4.4(a)(2)-3
This opinion is being furnished to you solely for your benefit. Accordingly, subject to the following sentences, this opinion may not be relied upon by, quoted in any manner to, or delivered to any other person or entity (other than Latham & Watkins LLP, counsel to the Company and the Issuer, in connection with the opinion to be issued by it of even date herewith relating to the sale and issuance of the Senior Notes) without, in each instance, our prior written consent. This opinion may also be relied upon by your permitted successors and assigns (collectively, the “Future Recipients”), and such Future Recipients may rely on this opinion as if it were addressed to them and had been delivered to them on the date hereof; provided, however, that any such reliance by a Future Recipient must be actual and reasonable under the circumstances existing at the time, including any changes in law or facts or any other developments known to or reasonably knowable by such Future Recipient at such time. This opinion may be delivered (but may not be relied upon by any recipient pursuant to this sentence) (i) to potential successors and assigns, (ii) in connection with any judicial or arbitration process, (iii) to your counsel and to your independent auditors, and (iv) to any governmental or regulatory authority having jurisdiction over you, including, without limitation, the National Association of Insurance Commissioners, in each case, without our prior written consent.
|
|
Very truly yours, |
S-4.4(a)(2)-4
FORM OF OPINION OF SPECIAL COUNSEL
FOR THE PURCHASERS
The closing opinion of Schiff Hardin LLP, special counsel to the Purchasers, called for by Section 4.4(b) of the Agreement, shall be dated the date of the Closing and addressed to the Purchasers, shall be satisfactory in form and substance to the Purchasers and shall be to the effect that:
1. The Issuer is a limited liability company in good standing under the laws of the State of Delaware.
2. The Parent Guarantor is a corporation in good standing under the laws of the State of Maryland.
3. The Agreement and the Notes being delivered on the date hereof constitute the legal, valid and binding contracts of the Issuer enforceable against the Issuer in accordance with their respective terms.
4. The Agreement constitutes the legal, valid and binding contract of the Parent Guarantor enforceable against the Parent Guarantor in accordance with its terms.
5. The issuance, sale and delivery of the Notes being delivered on the date hereof under the circumstances contemplated by this Agreement do not, under existing law, require the registration of such Notes under the Securities Act or the qualification of an indenture under the Trust Indenture Act of 1939.
The opinion of Schiff Hardin LLP shall also state that the opinions of Latham & Watkins LLP and Venable LLP are satisfactory in scope and form to Schiff Hardin LLP and that, in its opinion, the Purchasers are justified in relying thereon.
The opinion of Schiff Hardin LLP is limited to the laws of the State of New York and the federal laws of the United States.
With respect to matters of fact upon which such opinion is based, Schiff Hardin LLP may rely on appropriate certificates of public officials and officers of the Constituent Companies and upon representations of the Constituent Companies and the Purchasers delivered in connection with the issuance and sale of the Notes.
SCHEDULE 4.4(b)
(to Note and Guarantee Agreement)
DISCLOSURE MATERIALS
None.
SCHEDULE 5.3
(to Note and Guarantee Agreement)
SUBSIDIARIES OF THE PARENT GUARANTOR AND
OWNERSHIP OF SUBSIDIARY STOCK
(1) Subsidiaries:
|
Entity |
Jurisdiction of |
Ownership |
Subsidiary |
|
Boston 1927 Lessee, Inc. |
Delaware |
100% Sunstone Hotel TRS Lessee, Inc. |
Subsidiary |
|
Boston 1927 Owner, LLC |
Delaware |
100% Sunstone Hotel Partnership, LLC |
Subsidiary Guarantor |
|
EP Holdings, LLC |
Delaware |
100% Sunstone East Pratt, LP |
Significant Subsidiary |
|
One Park Boulevard, LLC |
Delaware |
75% Sunstone Park, LLC; 25% HHC One Park Boulevard, LLC |
Excluded Subsidiary |
|
Sun CHP I, Inc. |
Delaware |
100% Sunstone Hotel Investors, Inc. |
Significant Subsidiary |
|
Sun SHP II, LLC |
Delaware |
90.9092% Sunstone Hotel Investors, Inc.; 9.0908% Sun CHP I, Inc. |
Significant Subsidiary |
|
Sunstone 42nd Street Lessee, Inc. |
Delaware |
100% Sunstone Hotel TRS Lessee, Inc. |
Subsidiary |
|
Sunstone 42nd Street, LLC |
Delaware |
100% Sunstone Holdco 5, LLC |
Excluded Subsidiary |
|
Sunstone Broadway, LLC |
Delaware |
100% Sunstone Hotel Partnership, LLC |
Subsidiary |
|
Sunstone Canal Lessee, Inc. |
Delaware |
100% Sunstone Hotel TRS Lessee, Inc. |
Subsidiary |
|
Sunstone Canal, LLC |
Delaware |
100% Sunstone Holdco 9, LLC |
Excluded Subsidiary |
|
Sunstone Center Court, LLC |
Delaware |
100% Sunstone Holdco 8, LLC |
Subsidiary |
|
Sunstone Center Court Lessee, Inc. |
Delaware |
100% Sunstone Hotel TRS Lessee, Inc. |
Subsidiary |
|
Sunstone Century, LLC |
Delaware |
100% Sunstone Holdco 8, LLC |
Subsidiary Guarantor |
|
Sunstone Century Lessee, Inc. |
Delaware |
100% Sunstone Hotel TRS Lessee, Inc. |
Subsidiary |
|
Sunstone Cowboy, LP |
Delaware |
99.5% Sunstone Holdco 3, LLC, 0.5% Sunstone Cowboy GP, LLC |
Significant Subsidiary |
|
Sunstone Cowboy GP, LLC |
Delaware |
100% Sunstone Holdco 3, LLC |
Significant Subsidiary |
|
Sunstone Cowboy Lessee, LP |
Delaware |
99.5% Sunstone Hotel TRS Lessee, Inc.; 0.5% Sunstone Cowboy Lessee GP, LLC |
Subsidiary |
|
Sunstone Cowboy Lessee GP, LLC |
Delaware |
100% Sunstone Hotel TRS Lessee, Inc. |
Significant Subsidiary |
|
Sunstone East Grand, LLC |
Delaware |
100% Sunstone Holdco 6, LLC |
Subsidiary Guarantor |
|
Sunstone East Grand Lessee, Inc. |
Delaware |
100% Sunstone Hotel TRS Lessee, Inc. |
Subsidiary |
SCHEDULE 5.4
(to Note and Guarantee Agreement)
|
Entity |
Jurisdiction of |
Ownership |
Subsidiary |
|
Sunstone East Pratt, LP |
Delaware |
99% Sunstone Holdco 4, LLC; 1% Sunstone East Pratt GP, LLC |
Significant Subsidiary |
|
Sunstone East Pratt GP, LLC |
Delaware |
100% Sunstone Holdco 4, LLC |
Significant Subsidiary |
|
Sunstone East Pratt Lessee, Inc. |
Delaware |
100% Sunstone Hotel TRS Lessee, Inc. |
Subsidiary |
|
Sunstone EC5, LLC |
Delaware |
100% Sunstone Hotel Partnership, LLC |
Subsidiary Guarantor |
|
Sunstone EC5 Lessee, Inc. |
Delaware |
100% Sunstone Hotel TRS Lessee, Inc. |
Subsidiary |
|
Sunstone Hawaii 3-0, LLC |
Delaware |
100% Sunstone Hotel Partnership, LLC |
Subsidiary Guarantor |
|
Sunstone Hawaii 3-0 Lessee, Inc. |
Delaware |
100% Sunstone Hotel TRS Lessee, Inc. |
Subsidiary |
|
Sunstone Holdco 3, LLC |
Delaware |
100% Sunstone Hotel Partnership, LLC |
Significant Subsidiary |
|
Sunstone Holdco 4, LLC |
Delaware |
100% Sunstone Hotel Partnership, LLC |
Subsidiary Guarantor |
|
Sunstone Holdco 5, LLC |
Delaware |
100% Sunstone Hotel Partnership, LLC |
Subsidiary Guarantor |
|
Sunstone Holdco 6, LLC |
Delaware |
100% Sunstone Hotel Partnership, LLC |
Subsidiary Guarantor |
|
Sunstone Holdco 8, LLC |
Delaware |
100% Sunstone Hotel Partnership, LLC |
Subsidiary Guarantor |
|
Sunstone Holdco 9, LLC |
Delaware |
100% Sunstone Hotel Partnership, LLC |
Significant Subsidiary |
|
Sunstone Holdco 10, LLC |
Delaware |
100% Sunstone Hotel Partnership, LLC |
Significant Subsidiary |
|
Sunstone Hotel Acquisitions, LLC |
Delaware |
100% Sunstone Hotel Partnership, LLC |
Significant Subsidiary |
|
Sunstone Hotel Partnership, LLC |
Delaware |
98.9% Sunstone Hotel Investors, Inc., 1.1% Sun SHP II, LLC |
Issuer |
|
Sunstone Hotel TRS Lessee, Inc. |
Delaware |
100% Sunstone Hotel Partnership, LLC |
Significant Subsidiary |
|
Sunstone Jamboree, LLC |
Delaware |
100% Sunstone Holdco 8, LLC |
Subsidiary Guarantor |
|
Sunstone Jamboree Lessee, Inc. |
Delaware |
100% Sunstone Hotel TRS Lessee, Inc. |
Subsidiary |
|
Sunstone K9, LLC |
Delaware |
100% Sunstone Holdco 5, LLC |
Excluded Subsidiary |
|
Sunstone K9 Lessee, Inc. |
Delaware |
100% Sunstone Hotel TRS Lessee, Inc. |
Subsidiary |
|
Sunstone LA Airport, LLC |
Delaware |
100% Sunstone Holdco 8, LLC |
Subsidiary Guarantor |
|
Sunstone LA Airport Lessee, Inc. |
Delaware |
100% Sunstone Hotel TRS Lessee, Inc. |
Subsidiary |
|
Sunstone Leesburg, LLC |
Delaware |
100% Sunstone Holdco 3, LLC |
Significant Subsidiary |
|
Sunstone Leesburg Lessee, Inc. |
Delaware |
100% Sunstone Hotel TRS Lessee, Inc. |
Subsidiary |
|
Sunstone Longhorn, LP |
Delaware |
99.5% Sunstone Pledgeco, LLC; 0.5% Sunstone Longhorn GP, LLC |
Significant Subsidiary |
S-5.4-2
|
Entity |
Jurisdiction of |
Ownership |
Subsidiary |
|
Sunstone Longhorn GP, LLC |
Delaware |
100% Sunstone Pledgeco, LLC |
Significant Subsidiary |
|
Sunstone Longhorn Holdco, LLC |
Delaware |
100% Sunstone Hotel TRS Lessee, Inc. |
Significant Subsidiary |
|
Sunstone Longhorn Lessee, LP |
Delaware |
99.5% Sunstone Longhorn Holdco, LLC; 0.5% Sunstone Longhorn Lessee GP, LLC |
Subsidiary |
|
Sunstone Longhorn Lessee GP, LLC |
Delaware |
100% Sunstone Hotel TRS Lessee, Inc. |
Significant Subsidiary |
|
Sunstone MacArthur, LLC |
Delaware |
100% Sunstone Holdco 8, LLC |
Subsidiary Guarantor |
|
Sunstone MacArthur Lessee, Inc. |
Delaware |
100% Sunstone Hotel TRS Lessee, Inc. |
Subsidiary |
|
Sunstone North State Lessee, Inc. |
Delaware |
100% Sunstone Hotel TRS Lessee, Inc. |
Subsidiary |
|
Sunstone North State, LLC |
Delaware |
100% Sunstone Pledgeco, LLC |
Excluded Subsidiary |
|
Sunstone Ocean, LLC |
Delaware |
100% Sunstone Holdco 4, LLC |
Subsidiary Guarantor |
|
Sunstone Ocean Lessee, Inc. |
Delaware |
100% Sunstone Hotel TRS Lessee, Inc. |
Subsidiary |
|
Sunstone Outparcel, LLC |
Delaware |
100% Sunstone Hotel Partnership, LLC |
Subsidiary |
|
Sunstone Park, LLC |
Delaware |
100% Sunstone Hotel Partnership, LLC |
Significant Subsidiary |
|
Sunstone Park Lessee, LLC |
Delaware |
75% Sunstone Hotel TRS Lessee, Inc.; 25% HLT JV Acquisition, LLC |
Subsidiary |
|
Sunstone Philly, LP |
Delaware |
99.5% Sunstone Holdco 3, LLC; 0.5% Sunstone Philly GP, LLC |
Significant Subsidiary |
|
Sunstone Philly GP, LLC |
Delaware |
100% Sunstone Holdco 3, LLC |
Significant Subsidiary |
|
Sunstone Philly Lessee, Inc. |
Delaware |
100% Sunstone Hotel TRS Lessee, Inc. |
Subsidiary |
|
Sunstone Pledgeco, LLC |
Delaware |
100% Sunstone Hotel Partnership, LLC |
Significant Subsidiary |
|
Sunstone Quincy, LLC |
Delaware |
100% Sunstone Holdco 8, LLC |
Subsidiary Guarantor |
|
Sunstone Quincy Lessee, Inc. |
Delaware |
100% Sunstone Hotel TRS Lessee, Inc. |
Subsidiary |
|
Sunstone Red Oak, LLC |
Delaware |
100% Sunstone Holdco 8, LLC |
Subsidiary Guarantor |
|
Sunstone Red Oak Lessee, Inc. |
Delaware |
100% Sunstone Hotel TRS Lessee, Inc. |
Subsidiary |
|
Sunstone Saint Clair, LLC |
Delaware |
100% Sunstone Holdco 6, LLC |
Subsidiary Guarantor |
|
Sunstone Saint Clair Lessee, Inc. |
Delaware |
100% Sunstone Hotel TRS Lessee, Inc. |
Subsidiary |
|
Sunstone Sea Harbor Holdco, LLC |
Delaware |
100% Sunstone Holdco 4, LLC |
Significant Subsidiary |
S-5.4-3
|
Entity |
Jurisdiction of |
Ownership |
Subsidiary |
|
Sunstone Sea Harbor Lessee, Inc. |
Delaware |
100% Sunstone Hotel TRS Lessee, Inc. |
Subsidiary |
|
Sunstone Sea Harbor, LLC |
Delaware |
100% SWW No. 1, LLC |
Excluded Subsidiary |
|
Sunstone Sidewinder, LLC |
Delaware |
100% Sunstone Holdco 3, LLC |
Significant Subsidiary |
|
Sunstone Sidewinder Lessee, Inc. |
Delaware |
100% Sunstone Hotel TRS Lessee, Inc. |
Subsidiary |
|
Sunstone St. Charles, LLC |
Delaware |
100% Sunstone Holdco 10, LLC |
Subsidiary Guarantor |
|
Sunstone St. Charles Lessee, Inc. |
Delaware |
100% Sunstone Hotel TRS Lessee, Inc. |
Subsidiary |
|
Sunstone Top Gun Lessee, Inc. |
Delaware |
100% Sunstone Hotel TRS Lessee, Inc. |
Subsidiary |
|
Sunstone Top Gun, LLC |
Delaware |
100% Sunstone Holdco 5, LLC |
Excluded Subsidiary |
|
Sunstone Von Karman, LLC |
Delaware |
100% Sunstone Hotel Partnership, LLC |
Significant Subsidiary |
|
Sunstone Westwood, LLC |
Delaware |
100% Sunstone Holdco 8, LLC |
Significant Subsidiary |
|
Sunstone Wharf Lessee, Inc. |
Delaware |
100% Sunstone Hotel TRS Lessee, Inc. |
Subsidiary |
|
Sunstone Wharf, LLC |
Delaware |
100% Sunstone Holdco 6, LLC |
Excluded Subsidiary |
|
SWW No. 1, LLC |
Delaware |
85% Sunstone Sea Harbor Holdco, LLC; 15% HSH of Orlando, Inc. |
Excluded Subsidiary |
|
WB Sunstone-Portland, LLC |
Delaware |
100% Sunstone Holdco 8, LLC |
Subsidiary Guarantor |
|
WB Sunstone-Portland, Inc. |
Delaware |
100% Sunstone Hotel TRS Lessee, Inc. |
Subsidiary |
|
WHP Bevflow, LLC |
Texas |
100% Sunstone Longhorn Lessee, LP |
Subsidiary |
|
WHP Texas Beverage 1, Inc. |
Texas |
100% Sunstone Hotel TRS Lessee, Inc. |
Subsidiary |
|
WHP Texas Beverage 2, Inc. |
Texas |
100% WHP Bevflow, LLC |
Subsidiary |
(2) Affiliates:
None other than as listed above.
(3) Issuer’s Directors and Senior Officers:
Sunstone Hotel Investors, Inc., managing member
John Arabia, President & Chief Executive Officer
Bryan Giglia, Chief Financial Officer
Robert C. Springer, Senior Vice President & Treasurer
S-5.4-4
(4) Parent Guarantor’s Directors and Senior Officers:
John V. Arabia, President & Chief Executive Officer and Director
Marc A. Hoffman, Executive Vice President & Chief Operating Officer
Bryan Giglia, Executive Vice President & Chief Financial Officer
Robert C. Springer, Executive Vice President & Chief Investment Officer
Douglas M. Pasquale, Chairman of the Board of Directors
Andrew Batinovich, Director
Keith P. Russell, Director
Z. Jamie Behar, Director
W. Blake Baird, Director
Thomas A. Lewis, Jr., Director
Murray J. McCabe, Director
Keith M. Locker, Director
S-5.4-5
FINANCIAL STATEMENTS
Financial statements included in the Parent Guarantor’s Form 10-K for the year ended December 31, 2015, filed with the SEC on February 23, 2016
Financial statements included in the Parent Guarantor’s Form 10-K for the year ended December 31, 2014, filed with the SEC on February 19, 2015
Financial statements included in the Parent Guarantor’s Form 10-K for the year ended December 31, 2013, filed with the SEC on February 25, 2014
Financial statements included in the Parent Guarantor’s Form 10-K for the year ended December 31, 2012, filed with the SEC on February 25, 2013
Financial statements included in the Parent Guarantor’s Form 10-K for the year ended December 31, 2011, filed with the SEC on February 28, 2012
Financial statements included in the Parent Guarantor’s Form 10-Q for the quarter ended June 30, 2016, filed with the SEC on August 8, 2016
Supplemental Financial Information of the Parent Guarantor for the quarter ended June 30, 2016
Consolidated Monthly STR Report for the Parent Guarantor for the month of June 2016
Consolidated Monthly STR Report for the Parent Guarantor for the month of December 2015
SCHEDULE 5.5
(to Note and Guarantee Agreement)
REAL ESTATE ASSETS
|
PROPERTY |
ADDRESS |
FEE AND/OR |
OCCUPANCY |
Property |
Encumbered |
|
Hilton Garden Inn Chicago |
10 E. Grand Ave., Chicago, IL 60611 |
Sunstone East Grand, LLC |
79.9% |
Seasoned |
No |
|
Courtyard LAX |
6161 W Century Blvd., Los Angeles, CA 90045 |
Sunstone Century, LLC |
97.4% |
Seasoned |
No |
|
Hilton New Orleans |
333 St. Charles Ave., New Orleans, LA 70130 |
Sunstone St. Charles, LLC |
84.1% |
Seasoned |
No |
|
Hyatt Chicago |
633 N St. Clair St, Chicago, IL 60611 |
Sunstone Saint Clair, LLC |
79.7% |
Seasoned |
No |
|
Marriott Portland |
520 SW Broadway, Portland, Oregon 97205 |
WB Sunstone-Portland, LLC |
89.1% |
Seasoned |
No |
|
Marriott Boston Quincy |
1000 Marriott Dr., Quincy, MA 02169 |
Sunstone Quincy, LLC |
80.3% |
Seasoned |
No |
|
Hyatt Newport Beach |
1107 Jamboree Rd., Newport Beach, CA 92660 |
Sunstone Jamboree, LLC |
83.9% |
Seasoned |
No |
|
Renaissance Long Beach |
111 E. Ocean Blvd., Long Beach, CA 90802 |
Sunstone Ocean, LLC |
80.5% |
Seasoned |
No |
|
Fairmont Newport Beach |
4500 MacArthur Blvd., Newport Beach, CA 92660 |
Sunstone MacArthur, LLC |
79.6% |
Seasoned |
No |
|
Renaissance LAX |
9620 Airport Blvd, Los Angeles, CA 90045 |
Sunstone LA Airport, LLC |
90.4% |
Seasoned |
No |
1 Occupancy percentages as shown reflect the average occupancy rates for each property for the nine months ended September 30, 2016.
SCHEDULE 5.10
(to Note and Guarantee Agreement)
|
PROPERTY |
ADDRESS |
FEE AND/OR |
OCCUPANCY |
Property |
Encumbered |
|
Renaissance Westchester |
80 W Red Oak Ln., West Harrison, NY 10604 |
Sunstone Red Oak, LLC |
77.7% |
Seasoned |
No |
|
Hyatt Regency SF |
5 Embarcadero Center, San Francisco, CA 94111 |
Sunstone EC5, LLC |
91.1% |
Seasoned |
No |
|
Marriott Maui (Wailea) |
3700 Wailea Alanui Drive, Maui, HI 96753 |
Sunstone Hawaii 3-0, LLC |
73.8% |
Development |
No |
|
Marriott Tysons Corner |
8028 Leesburg Pike, Tysons Corner, VA 22182 |
Sunstone Leesburg, LLC |
81.9% |
Seasoned |
No |
|
Marriott Philadelphia |
111 Crawford Avenue, West Conshohocken, PA 19428 |
Sunstone Philly, LP |
73.0% |
Seasoned |
No |
|
Marriott Park City |
1895 Sidewinder Dr., Park City, UT 84060 |
Sunstone Sidewinder, LLC |
69.8% |
Seasoned |
No |
|
Marriott Houston |
255 N. Sam Houston Pkwy. East, Houston, TX 77060 |
Sunstone Cowboy, LP |
84.6% |
Seasoned |
No |
|
Renaissance Harborplace |
202 E. Pratt Street, Baltimore, MD 21202 |
Sunstone East Pratt, LLC |
77.4% |
Seasoned |
No |
|
Boston Park Plaza |
50 Park Plaza, Boston, MA 02116 |
Boston 1927 Owner, LLC |
78.1% |
Seasoned |
No |
|
Marriott Boston Long Wharf |
296 State Street, Boston, MA 02109 |
Sunstone Wharf, LLC |
87.1% |
Seasoned |
Yes |
|
Embassy Suites Chicago |
600 North State Street, Chicago, IL 60654 |
Sunstone North State, LLC |
87.7% |
Seasoned |
Yes |
|
Hilton North Houston |
12400 Greenspoint, Houston, TX 77060 |
Sunstone Longhorn, LP |
79.7% |
Seasoned |
No |
|
Embassy Suites La Jolla |
4550 La Jolla Village Drive, San Diego, CA 92122 |
Sunstone Top Gun, LLC |
86.2% |
Seasoned |
Yes |
S-5.10-2
|
PROPERTY |
ADDRESS |
FEE AND/OR |
OCCUPANCY |
Property |
Encumbered |
|
JW Marriott New Orleans |
614 Canal Street, New Orleans, LA 70130 |
Sunstone Canal, LLC |
83.3% |
Seasoned |
Yes |
|
Renaissance Orlando at SeaWorld |
6677 Sea Harbor Drive, Orlando, FL 32821 |
Sunstone Sea Harbor, LLC |
81.6% |
Seasoned |
No |
|
Hilton San Diego Bayfront |
One Park Blvd., San Diego, CA 92101 |
One Park Boulevard, LLC |
89.3% |
Seasoned |
Yes |
|
Hilton Times Square |
234 West 42nd St., New York, NY 10036 |
Sunstone 42nd Street, LLC |
99.2% |
Seasoned |
Yes |
|
Renaissance Washington D.C. |
999 9th Street NW, Washington, DC 20001 |
Sunstone K9, LLC |
82.5% |
Seasoned |
Yes |
S-5.10-3
EXISTING INDEBTEDNESS OF THE PARENT GUARANTOR AND ITS SUBSIDIARIES
|
Mortgage Loans Payable |
Borrower |
Lender |
Outstanding2 |
|
Mortgage loan (fixed) secured by Embassy Suites Chicago |
Sunstone North State, LLC |
Bear Sterns Commercial Mortgage |
$66,507,000 |
|
Mortgage loan (fixed) secured by Marriott Boston Long Wharf |
Sunstone Wharf, LLC |
Wells Fargo Bank |
$176,000,000 |
|
Mortgage loan (fixed) secured by Hilton Times Square |
Sunstone 42nd Street, LLC |
Bank of America |
$83,734,000 |
|
Mortgage loan (fixed) secured by Renaissance Washington D.C. |
Sunstone K9, LLC |
TIAA-CREF |
$120,076,000 |
|
Mortgage loan (fixed) secured by JW Marriott New Orleans |
Sunstone Canal, LLC |
Wells Fargo Bank |
$87,360,000 |
|
Mortgage loan (fixed) secured by Embassy Suites La Jolla |
Sunstone Top Gun, LLC |
Deutsche Bank |
$63,173,000 |
|
Mortgage loan (variable) secured by Hilton San Diego Bayfront |
One Park Boulevard, LLC |
MUFG Union Bank, Compass Bank, CIBC Inc. |
$223,124,000 |
|
Term Loans Payable3 |
|
|
Outstanding |
|
Unsecured term loan (fixed) #1 |
Sunstone Hotel Partnership, LLC |
Wells Fargo Bank, PNC Bank, U.S. Bank, BB&T |
$85,000,000 |
|
Unsecured term loan (fixed) #2 |
Sunstone Hotel Partnership, LLC |
PNC Bank, U.S. Bank, BB&T |
$100,000,000 |
|
Bank Credit Agreement |
Sunstone Hotel Partnership, LLC |
Wells Fargo Securities, LLC, Merrill Lynch, Pierce, Fenner & Smith, Incorporated and J.P. Morgan Securities LLC |
$0 |
2 Loan balances as of September 30, 2016.
3 Loan swapped to fixed interest rate.
SCHEDULE 5.15
(to Note and Guarantee Agreement)
CERTAIN PERMITTED LIENS
None.
SCHEDULE 10.5
(to Note and Guarantee Agreement)
INFORMATION RELATING TO PURCHASER
|
|
NAME AND ADDRESS OF PURCHASER |
PRINCIPAL AMOUNT OF |
|
|
|
|
|
|
[NAME OF PURCHASER] |
$ |
|
|
|
|
|
(1) |
All payments by wire transfer of immediately available
with sufficient information to identify the source and application of such funds. |
|
|
|
|
|
|
|
|
|
|
(2) |
All notices of payments and written confirmations of |
|
|
|
|
|
|
(3) |
E-mail address for Electronic Delivery: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4) |
All other communications: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5) |
U.S. Tax Identification Number: |
|
PURCHASER SCHEDULE
(to Note and Guarantee Agreement)
FORM OF SUBSIDIARY GUARANTY AGREEMENT
(See Attached)
EXHIBIT SGA
(to Note and Guarantee Agreement)
Exhibit 12
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, |
|
|||||
|
|
|
2016 |
|
2015 |
|
2014 |
|
2013 |
|
2012 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Earnings: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Income from continuing operations |
|
$ |
140,677 |
|
$ |
339,624 |
|
$ |
83,090 |
|
$ |
21,591 |
|
$ |
1,147 |
|
|
Continuing operations: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Equity in net earnings of unconsolidated joint ventures |
|
— |
|
— |
|
— |
|
— |
|
— |
|
|||||
|
Interest expense and amortization of deferred financing fees |
|
50,283 |
|
66,516 |
|
72,315 |
|
72,239 |
|
76,821 |
|
|||||
|
Interest portion of rental expense |
|
4,321 |
|
5,589 |
|
5,984 |
|
6,475 |
|
6,602 |
|
|||||
|
Discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Interest expense and amortization of deferred financing fees |
|
— |
|
— |
|
— |
|
99 |
|
6,490 |
|
|||||
|
Total earnings |
|
$ |
195,281 |
|
$ |
411,729 |
|
$ |
161,389 |
|
$ |
100,404 |
|
$ |
91,060 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Combined Fixed Charges and Preferred Stock Dividends: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Continuing operations: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Interest expense and amortization of deferred financing fees |
|
$ |
50,283 |
|
$ |
66,516 |
|
$ |
72,315 |
|
$ |
72,239 |
|
$ |
76,821 |
|
|
Interest portion of rental expense |
|
4,321 |
|
5,589 |
|
5,984 |
|
6,475 |
|
6,602 |
|
|||||
|
Preferred dividends |
|
15,964 |
|
9,200 |
|
9,200 |
|
19,013 |
|
29,748 |
|
|||||
|
Discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Interest expense and amortization of deferred financing fees |
|
— |
|
— |
|
— |
|
99 |
|
6,490 |
|
|||||
|
Total combined fixed charges and preferred stock dividends |
|
$ |
70,568 |
|
$ |
81,305 |
|
$ |
87,499 |
|
$ |
97,826 |
|
$ |
119,661 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Ratio of earnings to combined fixed charges and preferred stock dividends |
|
2.77 |
|
5.06 |
|
1.84 |
|
1.03 |
|
— |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Deficiency of earnings to combined fixed charges and preferred stock dividends |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
(28,601) |
|
Exhibit 21.1
SUBSIDIARIES OF
SUNSTONE HOTEL INVESTORS, INC.
Boston 1927 Lessee, Inc.
Boston 1927 Owner, LLC
EP Holdings, LLC
One Park Boulevard, LLC
Sun CHP I, Inc.
Sun SHP II, LLC
Sunstone 42nd Street Lessee, Inc.
Sunstone 42nd Street, 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 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 Orlando Lender, 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
WB Sunstone-Portland, Inc.
WB Sunstone-Portland, LLC
WHP Bevflow, LLC
WHP Texas Beverage 1, Inc.
WHP Texas Beverage 2, Inc.
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the following Registration Statements:
|
(1) |
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. |
|
(2) |
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 |
|
(3) |
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., |
|
(4) |
Registration Statement (Form S-8 No. 333-122088) 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 23, 2017, 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, 2016.
|
|
/s/ Ernst & Young LLP |
|
|
|
|
|
|
|
Irvine, California |
|
|
February 23, 2017 |
|
Exhibit 31.1
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 23, 2017 |
/s/ John V. Arabia |
|
|
John V. Arabia |
|
|
Chief Executive Officer |
Exhibit 31.2
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 23, 2017 |
/s/ Bryan A. Giglia |
|
|
Bryan A. Giglia |
|
|
Chief Financial Officer |
Exhibit 32.1
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, 2016, 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 23, 2017 |
/s/ John V. Arabia |
|
|
John V. Arabia |
|
|
Chief Executive Officer |
|
|
|
|
Date: February 23, 2017 |
/s/ Bryan A. Giglia |
|
|
Bryan A. Giglia |
|
|
Chief Financial Officer |
Document and Entity Information - USD ($) $ in Billions |
12 Months Ended | ||
|---|---|---|---|
Dec. 31, 2016 |
Feb. 10, 2017 |
Jun. 30, 2016 |
|
| Document and Entity Information | |||
| Entity Registrant Name | Sunstone Hotel Investors, Inc. | ||
| Entity Central Index Key | 0001295810 | ||
| Document Type | 10-K | ||
| Document Period End Date | Dec. 31, 2016 | ||
| Amendment Flag | false | ||
| Current Fiscal Year End Date | --12-31 | ||
| Entity Well-known Seasoned Issuer | Yes | ||
| Entity Voluntary Filers | No | ||
| Entity Current Reporting Status | Yes | ||
| Entity Filer Category | Large Accelerated Filer | ||
| Entity Public Float | $ 2.6 | ||
| Entity Common Stock, Shares Outstanding | 220,073,140 | ||
| Document Fiscal Year Focus | 2016 | ||
| Document Fiscal Period Focus | FY |
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME - USD ($) $ in Thousands |
12 Months Ended | ||
|---|---|---|---|
Dec. 31, 2016 |
Dec. 31, 2015 |
Dec. 31, 2014 |
|
| CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME | |||
| Comprehensive income | $ 140,677 | $ 355,519 | $ 87,939 |
| Income from consolidated joint ventures attributable to noncontrolling interests | (6,480) | (8,164) | (6,708) |
| Preferred stock dividends and redemption charge | (15,964) | (9,200) | (9,200) |
| Comprehensive income attributable to common stockholders | $ 118,233 | $ 338,155 | $ 72,031 |
CONSOLIDATED STATEMENT OF EQUITY (Parenthetical) - $ / shares |
12 Months Ended | |
|---|---|---|
Dec. 31, 2016 |
Dec. 31, 2015 |
|
| Issuance of common stock distributions per share (in dollars per share) | $ 1.26 | $ 0.36 |
| Common stock distributions and distributions payable, per share (in dollars per share) | 0.68 | 1.41 |
| Series D Cumulative Redeemable Preferred Stock | ||
| Preferred stock dividends declared (in dollars per share) | 0.527778 | $ 2.00 |
| Series E Cumulative Redeemable Preferred Stock | ||
| Preferred stock dividends declared (in dollars per share) | 1.404450 | |
| Series F Cumulative Redeemable Preferred Stock | ||
| Preferred stock dividends declared (in dollars per share) | $ 1.007850 | |
Organization and Description of Business |
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2016 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Organization and Description of Business | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Organization and Description of Business | 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. 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, in transactions that are intended to generate qualifying income. As of December 31, 2016, the Company had interests in 28 hotels (the “28 hotels”), one of which was considered held for sale, leaving 27 hotels currently held for investment (the “27 hotels”). The Company’s third-party managers included the following:
|
Summary of Significant Accounting Policies |
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| Summary of Significant Accounting Policies | 2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements as of December 31, 2016 and 2015, and for the years ended December 31, 2016, 2015 and 2014, include the accounts of the Company, the Operating Partnership, the TRS Lessee and their subsidiaries. All significant intercompany balances and transactions have been eliminated. If the Company determines that it has an interest in a variable interest entity within the meaning of the Consolidation Topic of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”), the Company will consolidate the entity when it is determined to be the primary beneficiary of the entity. Based on its review, the Company determined that all of its subsidiaries were properly consolidated as of December 31, 2016 and 2015, and for the years ended December 31, 2016, 2015 and 2014.
Noncontrolling interest at both December 31, 2016 and 2015 represents the outside 25.0% equity interest in the Hilton San Diego Bayfront, which the Company includes in its financial statements on a consolidated basis.
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.
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.
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, 2016 and 2015, the Company had amounts in banks that were in excess of federally insured amounts.
Restricted Cash
Restricted cash is comprised of reserve accounts for debt service, interest reserves, seasonality 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 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 and $0.1 million at December 31, 2016 and 2015, respectively.
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 business combination 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. When we acquire a hotel property or other entity as a business combination, we use all available information to make these fair value determinations, and engage independent valuation specialists to assist in the fair value determinations of the long-lived assets acquired and the liabilities assumed. Due to the inherent subjectivity in determining the estimated fair value of long-lived assets, 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. Based on the Company’s review, management believes that there were no impairments on its long-lived assets in 2016, 2015 and 2014, and that the carrying values of its hotel properties and other assets are recoverable at December 31, 2016.
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 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 may be considered 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, the buyer waives any closing contingencies, there are no third party approvals necessary 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 December 31, 2016, the Company’s Fairmont Newport Beach, California, was considered held for sale, and subsequently sold in February 2017 (see Note 14). Based on the criteria noted above, the hotel was not included in discontinued operations. As of December 31, 2015, the Company had no hotels or other assets held for sale.
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 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.
Deferred financing fees related to both the Company’s undrawn credit facility and unfunded senior unsecured notes are included on the Company’s consolidated balance sheets as an asset. Deferred financing fees related to the Company’s undrawn credit facility are amortized ratably over the term of the line of credit arrangement, regardless of whether there are any outstanding borrowings on the line of credit arrangement. Deferred financing fees related to the Company’s unfunded senior unsecured notes will be reclassified to the appropriate current and long-term debt liabilities during the first quarter of 2017 once amounts are funded (see Note 14). Deferred financing fees related to the Company’s outstanding debt are included on the Company’s consolidated balance sheets as a contra-liability (see Note 7) and subsequently amortized ratably over the term of the related debt.
Interest Rate Derivatives
The Company’s objective in holding interest rate derivatives is to manage its exposure to the interest rate risks related to its floating rate debt. To accomplish this objective, the Company uses interest rate caps and swaps, none of which qualifies for effective hedge accounting treatment. 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.
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 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, parking, spa, entertainment and other guest services, along with tenant lease revenues related to hotel space leased by third parties, any cancellation or attrition revenue and any performance guarantees. During 2016, the Company recognized $5.0 million in other operating revenue from a performance guarantee received from Marriott related to the Wailea Beach Resort. In addition, prior to its sale in September 2015, other operating revenue also included revenue generated by BuyEfficient, LLC Inc. (“BuyEfficient”), an electronic purchasing platform that allowed members to procure food, operating supplies, furniture, fixtures and equipment. 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 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.
Noncontrolling Interests
The Company’s financial statements include entities in which the Company has a controlling financial interest. Noncontrolling interest is the portion of equity (net assets) in a subsidiary not attributable, directly or indirectly, to a parent. Such noncontrolling 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 noncontrolling interests. Income or loss is allocated to noncontrolling 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, noncontrolling interests and total equity.
At December 31, 2016, 2015 and 2014, the noncontrolling interests reported in the Company’s financial statements included Hilton Worldwide’s 25.0% ownership in the Hilton San Diego Bayfront. Additionally, prior to the Company’s sale of its interests in the Doubletree Guest Suites Times Square in December 2015, the noncontrolling interests reported in the Company’s financial statements also included preferred investors that owned a $0.1 million preferred equity interest in a subsidiary captive REIT that owned the Doubletree Guest Suites Times Square.
Dividends
Under current federal income tax laws related to REITs, the Company is required to distribute at least 90% of its net taxable income to its stockholders. Currently, the Company pays quarterly cash dividends to its common stockholders, as well as to the preferred stockholders of its 6.95% Series E Cumulative Redeemable Preferred Stock (“Series E preferred stock”) and its 6.45% Series F Cumulative Preferred Stock (“Series F preferred stock”) as declared by the Company’s board of directors. Prior to its redemption date in April 2016, the Company also paid quarterly cash dividends to the preferred stockholders of its 8.0% Series D Cumulative Redeemable Preferred Stock (“Series D preferred stock”) as declared by the Company’s 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, the net income per share for each class of stock (common stock and convertible preferred stock) is 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. Unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are considered participating securities and shall be included in the computation of earnings per share pursuant to the two-class method.
In accordance with the Earnings Per Share Topic of the FASB ASC, basic earnings (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 (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):
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, 2016, 2015 and 2014, as their inclusion would have been anti-dilutive.
Segment Reporting
The Company considers each of its hotels to be an operating segment, none of which meets the threshold for a separate reportable segment in accordance with the Segment Reporting Topic of the FASB ASC. Currently, the Company operates in one segment, hotel ownership.
Recent Accounting Pronouncements
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 was originally to be effective during the first quarter of 2017; however, the FASB issued a one-year deferral in July 2015 so that it now becomes effective during the first quarter of 2018. ASU No. 2014-09 will require either a full retrospective approach or a modified retrospective approach, with early adoption permitted as of the original effective date.
In March 2016, the FASB clarified the principal versus agent guidance in ASU No. 2014-09 with it issuance of Accounting Standards Update No. 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)” (“ASU No. 2016-08”). In particular, ASU No. 2016-08 clarifies how an entity should identify the unit of accounting for the principal versus agent evaluation and how it should apply the control principle to certain types of arrangements, such as service transactions by explaining what a principal controls before the specified good or service is transferred to the customer. In addition, ASU No. 2016-08 reframes the indicators to focus on evidence that an entity is acting as a principal rather than as an agent. ASU No. 2016-08 will become effective, along with ASU No. 2014-09, during the first quarter of 2018. Similar to ASU No. 2014-09, ASU No. 2016-08 will require either a full retrospective approach or a modified retrospective approach, with early adoption permitted as of the original effective date.
In May 2016, the FASB amended ASU No. 2014-09’s guidance on transition, collectability, noncash consideration and the presentation of sales and other similar taxes with its issuance of Accounting Standards Update No. 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients” (“ASU No. 2016-12”). The amendments clarify that, for a contract to be considered completed at transition, all (or substantially all) of the revenue must have been recognized under legacy GAAP. This clarification is important because entities that use the modified retrospective transition approach need to apply the standard only to contracts that are not complete as of the date of initial application, and entities that use the full retrospective approach may apply certain practical expedients to completed contracts. In addition, ASU No. 2016-12 clarifies that an entity should consider the probability of collecting substantially all of the consideration to which it will be entitled in exchange for goods and services expected to be transferred to the customer rather than the total amount promised for all the goods or services in the contract. ASU No. 2016-12 also clarifies that an entity may consider its ability to manage its exposure to credit risk as part of the collectability assessment, as well as that the fair value of noncash consideration should be measured at contract inception when determining the transaction price. Finally, ASU No. 2016-12 allows an entity to make an accounting policy election to exclude from the transaction price certain types of taxes collected from a customer if it discloses that policy. ASU No. 2016-12 will become effective, along with ASU No. 2014-09, during the first quarter of 2018. Similar to ASU No. 2014-09, ASU No. 2016-12 will require either a full retrospective approach or a modified retrospective approach, with early adoption permitted as of the original effective date.
The Company is in the process of evaluating the impact that ASU No. 2014-09, along with the related clarifications and amendments in ASU No. 2016-08 and ASU No. 2016-12, will have on its recognition of revenue included in its consolidated financial statements. While the Company is still evaluating the impact that the ASUs will have on accounting for the gain recognized upon the sale of a hotel, there is a possibility that the adoption of ASU No. 2014-09 will affect the timing of any gain recognition in the consolidated financial statements. For example, under current guidance, a gain on the sale of hotel properties with contingencies and some future involvement is deferred until all contingencies have been removed. Under the new guidance, however, the entire gain on sale may be recognized upon the close of escrow. The Company expects to adopt the new ASUs under the modified retrospective approach.
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 No. 2014-12 became effective during the first quarter of 2016, requiring either a prospective or a modified retrospective approach. The Company’s adoption of ASU No. 2014-12 did not have an effect on its consolidated financial statements, and will not have an effect in the future unless the Company issues grants that fall within its scope.
In August 2014, the FASB issued Accounting Standards Update No. 2014-15, “Presentation of Financial Statements – Going Concern (Subtopic 205-40)” (“ASU No. 2014-15”), which requires management to evaluate an entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or available to be issued, when applicable). The evaluation requires management to perform two steps. Management must first evaluate whether there are conditions and events that raise substantial doubt about the entity’s ability to continue as a going concern (step 1). If management concludes that substantial doubt is raised, management also is required to consider whether its plans alleviate that doubt (step 2). Disclosures in the notes to the financial statements are required if management concludes that substantial doubt exists or that its plans alleviate substantial doubt that was raised. ASU No. 2014-15 requires that management perform a going concern evaluation for annual periods beginning in 2016, and for interim periods within annual periods beginning with the first quarter of 2017. The Company’s adoption of ASU No. 2014-15 in 2016 did not have an effect on its financial statements; however, if in the future the Company determines that there is substantial doubt about the Company’s ability to continue as a going concern, the Company will be required to provide the additional disclosures outlined in ASU No. 2014-15 steps 1 and 2 in its consolidated financial statements.
In February 2015, the FASB issued Accounting Standards Update No. 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis” (“ASU No. 2015-02”), which eliminates the option allowing entities with interests in certain investment funds to follow previous consolidation guidance and makes other changes to both the variable interest model and the voting model. While ASU No. 2015-02 is aimed at asset managers, it will affect all reporting entities involved with limited partnerships or similar entities. In some cases consolidation conclusions will change. In other cases, reporting entities will need to provide additional disclosures about entities that currently aren’t considered VIEs but will be considered VIEs under the new guidance when they have a variable interest in those VIEs. Regardless of whether conclusions change or additional disclosure requirements are triggered, reporting entities will need to re-evaluate limited partnerships or similar entities for consolidation and revise their documentation. ASU No. 2015-02 changes (1) the identification of variable interests (fees paid to a decision maker or service provider), (2) the VIE characteristics for a limited partnership or similar entity and (3) the primary beneficiary determination. ASU No. 2015-02 became effective during the first quarter of 2016, requiring a modified retrospective approach. The Company’s adoption of ASU No. 2015-02 did not have a material effect on its consolidated financial statements.
In September 2015, the FASB issued Accounting Standards Update No. 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments” (“ASU No. 2015-16”), which eliminates the requirement for an acquirer in a business combination to account for measurement-period adjustments retrospectively. In a business combination, if the initial accounting is incomplete as of the end of the reporting period in which the acquisition occurs, the acquirer records provisional amounts based on information available at the acquisition date. The acquirer then adjusts these amounts as it obtains more information about facts and circumstances that existed as of the acquisition date. This period is called the measurement period. It ends when the acquirer receives the information it was seeking about facts and circumstances that existed as of the acquisition date or when it determines that it cannot obtain more information. The measurement period cannot exceed one year from the date of the acquisition. Under the previous guidance, an acquirer must recognize adjustments to provisional amounts during the measurement period retrospectively (i.e., as if the accounting for the business combination had been completed at the acquisition date). That is, the acquirer was required to revise comparative information on the income statement and balance sheet for any prior periods affected. Under ASU No. 2015-16, an acquirer will now recognize measurement-period adjustments during the period in which it determines the amount of the adjustment. The acquirer still must disclose the amounts and reasons for adjustments to the provisional amounts. The acquirer also must disclose, by line item, the amount of the adjustment reflected in the current-period income statement that would have been recognized in previous periods if the adjustment to provisional amounts had been recognized as of the acquisition date. Alternatively, an acquirer may present those amounts separately on the face of the income statement. ASU No. 2015-16 became effective during the first quarter of 2016, requiring a prospective approach. The Company’s adoption of ASU No. 2015-16 will have an effect on its consolidated financial statements and related disclosures when and if the Company has a business combination that requires a significant measurement-period adjustment.
In January 2016, the FASB issued Accounting Standards Update No. 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU No. 2016-01”), which makes targeted amendments to guidance on classifying and measuring financial instruments. ASU No. 2016-01 provides disclosure relief for public companies by eliminating the requirement to disclose the method(s) and significant assumptions used to estimate the fair value of financial instruments measured at amortized cost. ASU No. 2016-01 will become effective during the first quarter of 2018, with early adoption permitted. The Company chose to early adopt ASU No. 2016-01 effective January 1, 2016, and eliminated the disclosure in its consolidated financial statements of the methods and significant assumptions the Company use to calculate the fair value of its debt.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, “Leases (Topic 842)” (“ASU No. 2016-02”), which will require lessees to put most leases on their balance sheets but recognize expenses in the income statement in a manner similar to today’s accounting. The guidance also eliminates today’s real estate-specific provisions and changes the guidance on sale-leaseback transactions, initial direct costs and lease executory costs for all entities. For lessors, the standard modifies the classification criteria and the accounting for sales-type and direct financing leases. All entities will classify leases to determine how to recognize lease-related revenue and expense. Classification will continue to affect amounts that lessors record on the balance sheet. ASU No. 2016-02 will become effective during the first quarter of 2019, and will require a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. The Company is currently evaluating the impact that ASU No. 2016-02 will have on its consolidated financial statements, and, other than the inclusion of operating leases on the Company’s balance sheet, such effects have not yet been determined.
In March 2016, the FASB issued Accounting Standards Update No. 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (“ASU No. 2016-09”), which changes certain aspects of accounting for share-based payments to employees. The new guidance will require all income tax effects of awards to be recognized in the income statement when the awards vest or are settled. It also will allow an employer to repurchase more of an employee’s shares for tax withholding purposes without triggering liability accounting and to make a policy election to account for forfeitures as they occur. ASU No. 2016-09 will become effective during the first quarter of 2017, with early adoption permitted, and will require a modified retrospective approach. As noted below, the Company chose to early adopt ASU No. 2016-09 effective January 1, 2016.
Upon adoption of ASU No. 2016-09, the Company elected to account for forfeitures as they occur. In addition, pursuant to employee statutory withholding obligations, the Company may repurchase more of an employee’s shares for tax withholding purposes up to the maximum statutory tax rate in the employee’s applicable jurisdictions.
In accordance with the transition provisions of the new guidance, the Company adjusted items on its consolidated balance sheet, consolidated statement of equity and consolidated statement of cash flows. The following financial statement line items have been adjusted on the Company’s consolidated balance sheet and consolidated statement of equity for the year ended December 31, 2015 in order to reverse the effects of forfeitures recognized in prior years, and on the consolidated statement of cash flows for the years ended December 31, 2015 and 2014 to reclassify the repurchase of employee common stock for employee withholding obligations from an operating activity to a financing activity (in thousands):
In June 2016, the FASB issued Accounting Standards Update No. 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU No. 2016-13”), which will replace today’s “incurred loss” approach with an “expected loss” model for instruments measured at amortized cost. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, entities will be required to use a new forward looking “expected loss” model that generally will result in the earlier recognition of allowances for losses. In addition, entities will have to disclose significantly more information, including information they use to track credit quality by year of origination for most financing receivables. ASU No. 2016-13 is effective during the first quarter of 2020. ASU No. 2016-13 will require a modified retrospective approach, with early adoption permitted during the first quarter of 2019. The Company is currently evaluating the impact that ASU No. 2016-13 will have on its consolidated financial statements.
In September 2016, the FASB issued Accounting Standards Update No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force)” (“ASU No. 2016-15”), which clarifies how entities should classify certain cash receipts and cash payments on the statement of cash flows. ASU No. 2016-15 addresses certain issues where diversity in practice was identified. It amends existing guidance, which is principles based and often requires judgment to determine the appropriate classification of cash flows as operating, investing or financing activities. In addition, ASU No. 2016-15 clarifies how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. ASU No. 2016-15 is effective during the first quarter of 2018, and will generally require a retrospective approach. Early adoption is permitted. The Company does not believe that the adoption of ASU No. 2016-15 will have a material effect on its consolidated financial statements.
In November 2016, the FASB issued Accounting Standards Update No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force)” (“ASU No. 2016-18”), which will require entities to show the changes in total cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. As a result, entities will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. When cash, cash equivalents, restricted cash and restricted cash equivalents are presented in more than one line item on the balance sheet, the new guidance requires a reconciliation of the totals in the statement of cash flows to the related caption in the balance sheet. This reconciliation can be presented either on the face of the statement of cash flows or in the notes to the financial statements. ASU No. 2016-18 is effective in the first quarter of 2018, and will require a retrospective approach. Early adoption in an interim period is permitted, but any adjustments must be reflected as of the beginning of the fiscal year that includes the interim period. The Company is currently evaluating the impact that ASU No. 2016-18 will have on its consolidated financial statements.
In January 2017, the FASB issued Accounting Standards Update No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business” (“ASU No. 2017-01”), which changes the definition of a business to assist entities with evaluating when a set of transferred assets and activities is a business. Under the new guidance, an entity first determines whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. If this threshold is met, the set of transferred assets and activities is not a business. If it is not met, the entity then evaluates whether the set meets the requirement that a business include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs. ASU No. 2017-01 is effective in the first quarter of 2018, and the guidance is to be applied prospectively. Early adoption is permitted. Once adopted, the Company will be required to analyze future hotel acquisitions to determine if the transaction qualifies as the purchase of a business or an asset. Depending on the Company’s conclusion, ASU No. 2017-01 may have an effect on its consolidated financial statements.
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Investment in Hotel Properties |
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| Investment in Hotel Properties | 3. Investment in Hotel Properties
Investment in hotel properties, net consisted of the following (in thousands):
Acquisitions - 2016
In June 2016, the Company purchased the air rights intangible asset associated with its Renaissance Harborplace for $2.4 million, including closing costs. The air rights intangible asset, which has an indefinite useful life, and therefore, is not amortized, is included with intangibles in the Company’s investment in hotel properties on its consolidated balance sheet. This non-amortizable asset will be reviewed annually for impairment and more frequently if events or circumstances indicate that the asset may be impaired. If the 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.
Acquisitions - 2015
The Company did not acquire any hotel properties or other assets during 2015.
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 ATM Agreements (see Note 10), 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 Wailea Beach Resort 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 Wailea Beach Resort 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 Wailea Beach Resort 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 Wailea Beach Resort have been included in the Company’s consolidated statements of operations from the acquisition date of July 17, 2014 through the year ended December 31, 2016.
Unaudited Pro Forma Results
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 land underlying the Fairmont Newport Beach in June 2014, and the Wailea Beach Resort in July 2014 had occurred on January 1, 2014. 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):
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 hotel acquisition.
Intangible Assets
Intangible assets included in the Company’s investment in hotel properties, net consisted of the following (in thousands):
Amortization expense on these intangible assets for the years ended December 31, 2016, 2015 and 2014 consisted of the following (in thousands):
For the next five years, amortization expense for the intangible assets noted above is expected to be as follows (in thousands):
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Disposals and Discontinued Operations |
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| Disposals and Discontinued Operations | 4. Disposals and Discontinued Operations
Disposals
The Company classified the Fairmont Newport Beach as held for sale as of December 31, 2016, and subsequently sold the hotel in February 2017 (see Note 14). The sale does not represent a strategic shift that will have a major impact on the Company’s business plan or its primary markets, and therefore, the sale of the hotel did not qualify as a discontinued operation. The Company has classified the assets and liabilities related to the Fairmont Newport Beach as held for sale as follows (in thousands):
In May 2016, the Company sold the leasehold interest in the 203-room Sheraton Cerritos located in Cerritos, California for net proceeds of $41.2 million. The Company recognized a net gain on the sale of $18.2 million. The sale did not represent a strategic shift that had a major impact on the Company’s business plan or its primary markets, and therefore, the sale of the hotel did not qualify as a discontinued operation.
In September 2015, the Company sold BuyEfficient for net proceeds of $26.4 million. The Company recognized a net gain on the sale of $11.7 million. The sale did not represent a strategic shift that had a major impact on the Company’s business plan or its primary markets, and therefore, the sale of BuyEfficient did not qualify as a discontinued operation. Coterminous with the sale of BuyEfficient, the Company wrote off $8.4 million of goodwill, along with net intangible assets of $6.2 million related to certain trademarks, customer and supplier relationships and intellectual property related to internally developed software, both of which reduced the Company’s gain on the sale of BuyEfficient.
In December 2015, the Company sold its interests in the 468-room Doubletree Guest Suites Times Square located in New York City, New York for net proceeds of $522.7 million. The Company recognized a net gain on the sale of $214.5 million. The sale did not represent a strategic shift that had a major impact on the Company’s business plan or its primary markets, and therefore, the sale of the hotel did not qualify as a discontinued operation. Concurrent with the sale, the Company wrote off $83.9 million of net intangible assets (see Note 3), which reduced the Company’s gain on the sale. In addition, the Company repaid the remaining $175.0 million balance of the mortgage secured by the hotel, and wrote off $1.7 million in related deferred financing fees (see Note 7).
The following table provides summary results of operations for the Sheraton Cerritos, BuyEfficient and the Doubletree Guest Suites Times Square, which are included in continuing operations (in thousands):
Discontinued Operations
The following table sets forth the discontinued operations for the years ended December 31, 2016, 2015 and 2014 for the 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, which the Company sold in 2013, as well as the expense recognized in 2014 for the hotels sold in 2004, 2005, 2010 and 2013 (in thousands):
In January 2013, the Company sold the Rochester Portfolio to an unaffiliated third party. The Company reclassified the Rochester Portfolio’s results of operations for January 2013 to discontinued operations, net of tax on its consolidated statements of operations.
Upon sale of the Rochester Hotels in January 2013, the Company retained a $25.0 million preferred equity investment (the “Preferred Equity Investment”) in the Rochester Hotels, and provided the buyer of the Rochester Portfolio with a $3.7 million working capital loan, resulting in a $28.7 million deferred gain on the sale. The gain was to be deferred until the Preferred Equity Investment was either redeemed or sold and the working capital loan was repaid. Both the Preferred Equity Investment and the working capital loan were carried net of deferred gains, resulting in zero balances on the Company’s balance sheet.
In July 2015, the Company sold the Preferred Equity Investment and settled the working capital loan for an aggregate payment of $16.0 million, plus accrued interest. In accordance with the Real Estate Subtopic of the FASB ASC, the Company recognized a $16.0 million gain on the sale of the Rochester Portfolio, along with related income tax expense of $0.1 million, in discontinued operations, net of tax during the year ended December 31, 2015, as these additional sales proceeds could not be recognized until realized.
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, net of tax for the year ended December 31, 2014. The pension plan liability totals $7.0 million as of both December 31, 2016 and 2015, and is included in other liabilities on the Company’s consolidated balance sheets. The remaining $7.0 million 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.
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 in January 2013 related to potential future costs for certain capital expenditures at one of the hotels in the Rochester Portfolio. During 2014, the Company accrued an additional $1.8 million in accordance with the Contingencies Topic of the FASB ASC, which is included in discontinued operations, net of tax for the year ended December 31, 2014. The contingency was paid in full by the end of the first quarter of 2015.
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. |
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Fair Value Measurements and Interest Rate Derivatives |
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| Fair Value Measurements and Interest Rate Derivatives | 5. Fair Value Measurements and Interest Rate Derivatives
Fair Value Measurements
As of December 31, 2016 and 2015, 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:
As of December 31, 2016 and 2015, the only financial instruments that the Company measures at fair value are its interest rate derivatives, along with a life insurance policy and a related retirement benefit agreement. In accordance with the Fair Value Measurement and Disclosure Topic of the FASB ASC, the Company estimates the fair value of its interest rate derivatives using Level 2 measurements based on quotes obtained from the counterparties, which are based upon the consideration that would be required to terminate the agreements. Both the life insurance policy and the related retirement benefit agreement, which are for a former Company associate, are valued using Level 2 measurements.
The following table presents the Company’s assets measured at fair value on a recurring and non-recurring basis at December 31, 2016 and 2015 (in thousands):
The following table presents the Company’s liabilities measured at fair value on a recurring and non-recurring basis at December 31, 2016 and 2015 (in thousands):
Interest Rate Derivatives
The Company’s interest rate derivatives consisted of the following at December 31, 2016 and 2015 (dollars in thousands):
Changes in the fair values of the Company’s interest rate derivatives resulted in decreases to interest expense for the years ended December 31, 2016, 2015 and 2014 as follows (in thousands):
Fair Value of Debt
As of December 31, 2016 and 2015, 76.2% and 79.5%, respectively, of the Company’s outstanding debt had fixed interest rates, including the effects of interest rate swap agreements. The Company’s principal value of its consolidated debt totaled $0.9 billion and $1.1 billion as of December 31, 2016 and 2015, respectively. Using Level 3 measurements, the Company estimates that the fair market value of its debt totaled $0.9 billion and $1.1 billion as of December 31, 2016 and 2015, respectively. |
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Other Assets |
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| Other Assets | 6. Other Assets
Other assets, net consisted of the following (in thousands):
As of December 31, 2016 and 2015, the property and equipment, net noted above consisted of the following (in thousands):
In December 2016, the Company sold its land held for development for gross proceeds of $0.4 million, and recognized a net gain on the sale of $0.2 million. |
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Notes Payable |
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| Notes Payable | 7. Notes Payable
Notes payable consisted of the following at December 31 (in thousands):
Aggregate future principal maturities and amortization of notes payable at December 31, 2016, are as follows (in thousands):
Notes Payable Transactions - 2016
In January 2016, the Company drew the available funds of $100.0 million under an unsecured term loan agreement, and used the proceeds in February 2016, combined with cash on hand, to repay the $114.2 million loan secured by the Boston Park Plaza. The Boston Park Plaza loan was scheduled to mature in February 2018, and was available to be repaid without penalty in February 2016. The $100.0 million unsecured term loan matures in January 2023, and bears interest based on a pricing grid with a range of 180 to 255 basis points over LIBOR, depending on the Company’s leverage ratios. The Company entered into a forward swap agreement in December 2015 that fixed the LIBOR rate at 1.853% for the duration of the $100.0 million term loan (see Note 5). Based on the Company’s current leverage and the swap in place, the loan bears interest at an effective rate of 3.653%.
In May 2016, the Company repaid $72.6 million of debt secured by the Renaissance Orlando at SeaWorld®, using proceeds received from its issuance of Series F Cumulative Redeemable Preferred Stock (“Series F preferred stock”) in May 2016 (see Note 10). The Renaissance Orlando at SeaWorld® loan was scheduled to mature in July 2016, and was available to be repaid without penalty in May 2016.
In December 2016, the Company repaid $66.1 million of debt secured by the Embassy Suites Chicago, using cash on hand. The Embassy Suites Chicago loan was scheduled to mature in March 2017, and was available to be repaid without penalty at the end of December 2016.
Notes Payable Transactions – 2015
In April 2015, the Company entered into a $400.0 million senior unsecured credit facility, which replaced its prior $150.0 million senior unsecured credit facility. The credit facility’s interest rate is based on a pricing grid with a range of 155 to 230 basis points over LIBOR, depending on the Company’s leverage ratios, and represents a decline in pricing from the prior credit facility of approximately 30 to 60 basis points. The initial term of the credit facility is four years, expiring in April 2019, with an option to extend for an additional one year subject to the satisfaction of certain customary conditions. The credit facility also includes an accordion option, which allows the Company to request additional lender commitments for up to a total capacity of $800.0 million. As of December 31, 2016, the Company has no outstanding amounts due under its credit facility.
In May 2015, the Company repaid $99.1 million of debt secured by four of its hotels, the Marriott Houston, the Marriott Park City, the Marriott Philadelphia and the Marriott Tysons Corner.
In October 2015, the Company drew down $85.0 million in funds available from a term loan supplement agreement under its credit facility and used the proceeds, combined with cash on hand, to repay the $85.9 million loan secured by the Renaissance Harborplace, which loan was scheduled to mature in January 2016. The $85.0 million unsecured term loan matures in September 2022, and bears interest based on a pricing grid with a range of 180 to 255 basis points over LIBOR, depending on the Company’s leverage ratios. Additionally, the Company entered into a swap agreement effective October 29, 2015, fixing the LIBOR rate at 1.591% for the duration of the $85.0 million term loan (see Note 5). Based on the Company’s current leverage, the loan reflects a fixed rate of 3.391%.
In December 2015, the Company repaid the $30.7 million loan secured by the Hilton North Hilton, which loan was scheduled to mature in March 2016. The Company funded the repayment of the loan using cash on hand.
Additionally, in December 2015, the Company repaid the remaining $175.0 million balance of the loan secured by the Doubletree Guest Suites Times Square concurrent with the sale of the hotel (see Note 4).
Deferred Financing Fees and Losses on Extinguishment of Debt
Deferred financing fees and losses on extinguishment of debt for the years ended December 31, 2016, 2015 and 2014 were as follows (in thousands):
Interest Expense
Total interest incurred and expensed on the notes payable for the years ended December 31, 2016, 2015 and 2014 was as follows (in thousands):
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Other Current Liabilities and Other Liabilities |
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| Other Current Liabilities and Other Liabilities | 8. Other Current Liabilities and Other Liabilities
Other Current Liabilities
Other current liabilities consisted of the following (in thousands):
Other Liabilities
Other liabilities consisted of the following (in thousands):
As part of the Company’s ongoing evaluations of its uncertain tax positions, in 2016, the Company reversed a $1.5 million income tax accrual that it previously recorded during 2013, plus $0.1 million in accrued interest, related to the 2012 tax year. The reversal was due to the expiration of the statute of limitations for the 2012 tax year. |
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Income Taxes |
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| Income Taxes | 9. Income Taxes
The Company has elected to be taxed as a REIT under the under the Internal Revenue Code of 1986, as amended. 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 2016, the Company reversed a $1.5 million income tax accrual that it had previously recorded during 2013, plus $0.1 million in accrued interest, through the 2016 tax year. The reversal was due to the expiration of the statute of limitations for the 2012 tax year. This income tax benefit was partially offset as the Company recognized combined federal and state income tax expense of $1.0 million based on 2016 projected taxable income net of operating loss carryforwards for its taxable entities.
During 2015, the Company recognized combined federal and state income tax expense of $0.7 million related to its sale of BuyEfficient, and $0.7 million based on 2015 projected taxable income net of operating loss carryforwards for its taxable entities. In addition, upon the sale of the Preferred Equity Investment and settlement of the working capital loan associated with the Rochester Portfolio (see Note 4), the Company recorded $0.1 million in income tax expense, which is included in discontinued operations, net of tax in the Company’s consolidated statements of operations.
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.
The Company recognizes penalties and interest related to unrecognized tax benefits in income tax expense. During 2016, 2015 and 2014, the Company recognized $42,000, $55,000 and $50,000 in interest expense related to its tax provisions, respectively.
The income tax (benefit) provision for the Company is included in the consolidated financial statements as follows (in thousands):
The tax effects of temporary differences giving rise to the deferred tax assets are as follows (in thousands):
The Company has provided a valuation allowance against its net deferred tax asset at December 31, 2016 and 2015. 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, 2016 and 2015, the net operating loss carryforwards for federal income tax purposes totaled approximately $27.1 million and $38.1 million, respectively. These losses, which begin to expire in 2031, are available to offset future income through 2032.
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, 2016, 2015 and 2014, distributions paid per share were characterized as follows (unaudited):
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Stockholders' Equity |
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| Stockholders' Equity | 10. Stockholders’ Equity
Series D Cumulative Redeemable Preferred Stock
In April 2016, the Company redeemed all 4,600,000 shares of its Series D preferred stock at a redemption price of $25.00 per share, plus accrued and unpaid dividends up to, but not including, the redemption date. In accordance with the FASB’s Emerging Issues Task Force Topic D-42, an additional redemption charge of $4.1 million was recognized related to the original issuance costs of the Series D preferred stock, which were previously included in additional paid in capital. After the redemption date, the Company has no outstanding shares of Series D preferred stock, and all rights of the holders of such shares were terminated. Because the redemption of the Series D preferred stock was a redemption in full, trading of the Series D preferred stock on the New York Stock Exchange ceased on the April 6, 2016 redemption date.
Series E Cumulative Redeemable Preferred Stock
In March 2016, the Company issued 4,600,000 shares of its Series E preferred stock with a liquidation preference of $25.00 per share for gross proceeds of $115.0 million. In conjunction with the offering, the Company incurred $4.0 million in preferred offering costs. On or after March 11, 2021, the Series E 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.
Series F Cumulative Redeemable Preferred Stock
In May 2016, the Company issued 3,000,000 shares of its Series F preferred stock with a liquidation preference of $25.00 per share for gross proceeds of $75.0 million. In conjunction with the offering, the Company incurred $2.6 million in preferred offering costs. On or after May 17, 2021, the Series F 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.
Common Stock
In February 2014, the Company entered into separate “At the Market” Agreements (the “ATM Agreements”) with Wells Fargo Securities, LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated (the “Managers”). Under the terms of the ATM 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 2016, the Company received $54.2 million in net proceeds from the issuance of 3,564,047 shares of its common stock in connection with the ATM Agreements. The Company did not issue any shares of its common stock in connection with the ATM Agreements during 2015. 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 ATM Agreements. As of December 31, 2016, the Company has $73.3 million available for sale under the ATM 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 Wailea Beach Resort 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 Wailea Beach Resort in connection with the Company’s acquisition of the hotel (see Note 3).
Dividends
The Company declared dividends per share on its Series D preferred stock, Series E preferred stock, Series F preferred stock and common stock during 2016, 2015 and 2014 as follows:
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Long-Term Incentive Plan |
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| Long-Term Incentive Plan | 11. 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 5,445,554 shares remain available for future issuance as of December 31, 2016.
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 are measured at fair value on the date of grant and amortized over the relevant requisite service period or derived service period.
As discussed in Note 2, the Company chose to early adopt ASU No. 2016-09 effective January 1, 2016. Upon adoption of ASU No. 2016-09, the Company elected to account for forfeitures as they occur. The Company’s compensation expense and forfeitures related to restricted shares for the years ended December 31, 2016, 2015 and 2014 were as follows (in thousands):
In January 2015, the Company recognized a total of $2.5 million in stock compensation and amortization expense related to the departure of its former Chief Executive Officer.
In addition, the Company capitalizes compensation costs related to all restricted shares granted to certain of those employees who work on the design and construction of its hotels. During both 2016 and 2015, these capitalized costs totaled $0.6 million. During 2014, these capitalized costs totaled $0.5 million.
The following is a summary of non-vested stock grant activity:
At December 31, 2016, 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 a former Company associate. The Options fully vested in April 2009, and will expire in April 2018. The exercise price of the Options is $17.71 per share. |
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Commitments and Contingencies |
12 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Commitments and Contingencies | 12. Commitments and Contingencies
Management Agreements
Management agreements with the Company’s third-party hotel managers require the Company to pay between 2.0% and 3.5% of total revenue of the managed hotels to the third-party managers each month as a basic management fee. 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 basic management fees, net of key money incentives received from third-party hotel managers, along with incentive management fees incurred by the Company during the years ended December 31, 2016, 2015 and 2014 were included in the Company’s consolidated statements of operations as follows (in thousands):
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, 2016, 2015 and 2014 were included in the Company’s consolidated statements of operations as follows (in thousands):
Renovation and Construction Commitments
At December 31, 2016, the Company had various contracts outstanding with third parties in connection with the renovation and repositioning of certain of its hotel properties. The remaining commitments under these contracts at December 31, 2016 totaled $38.0 million.
Capital Leases
The Hyatt Centric 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 capital lease asset was included in investment in hotel properties, net on the Company’s consolidated balance sheets as follows (in thousands):
Future minimum lease payments under for the Company’s capital lease together with the present value of the net minimum lease payments as of December 31, 2016 are as follows (in thousands):
Ground, Building and Air Leases
During 2016, 2015 and 2014, certain of the Company’s hotels were obligated to unaffiliated third parties under the terms of ground, building and air leases as follows:
At December 31, 2016, the ground, building and air lease agreements mature in dates ranging from 2044 through 2097, excluding renewal options. Total rent expense incurred pursuant to ground, building and air lease agreements for the years ended December 31, 2016, 2015 and 2014 was included in property tax, ground lease and insurance in the Company’s consolidated statements of operations as follows (in thousands):
At December 31, 2016, 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, which is included in corporate overhead expense, totaled $0.2 million, $0.3 million and $0.4 million for the years ended December 31, 2016, 2015 and 2014, respectively.
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, 2016 are as follows (in thousands):
Employment Agreements
As of December 31, 2016, the Company had employment agreements with certain executive employees, which expire in either March 2017 or March 2018. The terms of the agreements stipulate payments of base salaries and bonuses. The Company’s approximate minimum future obligations under employment agreements through their expiration dates totaled $1.3 million as of December 31, 2016.
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”). Qualified 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 completion of six calendar months of employment. 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 $0.2 million for both of the years ended December 31, 2016 and 2015, and $0.3 million for the year ended December 31, 2014, and were included in corporate overhead expense for the Company’s corporate employees and other property-level expenses for the Company’s former BuyEfficient employees.
The Company is also responsible for funding various retirement plans at certain hotels operated by its management companies. Other property-level expenses on the Company’s consolidated statements of operations includes matching contributions into these various retirement plans of $1.6 million for the year ended December 31, 2016, and $1.5 million for both of the years ended December 31, 2015 and 2014.
Collective Bargaining Agreements
The Company is subject to exposure to collective bargaining agreements at certain hotels operated by its management companies. At December 31, 2016, approximately 23.4% of workers employed by the Company’s third-party managers were covered by such collective bargaining agreements.
Concentration of Risk
The concentration of the Company’s hotels in California, 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, 2016, 16 of the Company’s 27 hotels were concentrated in California, Illinois, Massachusetts and the greater Washington DC area as follows:
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, 2016, the Company had $0.5 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, 2016.
The Company is subject to various claims, lawsuits and legal proceedings, including routine litigation arising in the ordinary course of business, regarding the operation of its hotels and Company matters. While it is not possible to ascertain the ultimate outcome of such matters, the Company believes that the aggregate amount of such liabilities, if any, in excess of amounts covered by insurance will not have a material adverse impact on its financial condition or results of operations. The outcome of claims, lawsuits and legal proceedings brought against the Company, however, is subject to significant uncertainties. |
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Quarterly Operating Results (Unaudited) |
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| Quarterly Operating Results (Unaudited) | 13. Quarterly Operating Results (Unaudited)
The Company’s consolidated quarterly results for the years ended December 31, 2016 and 2015 are as follows (in thousands):
Income (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. |
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Subsequent Events |
12 Months Ended |
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Dec. 31, 2016 | |
| Subsequent Events | |
| Subsequent Events | 14. Subsequent Events
On January 10, 2017, the Company received proceeds of $240.0 million in private placement senior unsecured notes. The private placement consisted of $120.0 million of notes bearing interest at a fixed rate of 4.69%, maturing in January 2026 (the “Series A Senior Notes”), and $120.0 million of notes bearing interest at a fixed rate of 4.79%, maturing in January 2028 (the “Series B Senior Notes”).
On January 11, 2017, the Company used proceeds received from its private placement of senior unsecured notes to repay the loan secured by the Marriott Boston Long Wharf, which had a balance of $176.0 million and a fixed rate of 5.58%. The Marriott Boston Long Wharf loan was scheduled to mature in April 2017, and was available to be repaid without penalty in January 2017.
On February 10, 2017, the Company sold the 444-room Fairmont Newport Beach, California for a gross sales price of $125.0 million. The hotel was classified as held for sale as of December 31, 2016, but did not qualify as a discontinued operation as the sale did not represent a strategic shift that had a major impact on the Company’s business plan or its primary markets.
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SCHEDULE III-REAL ESTATE AND ACCUMULATED DEPRECIATION |
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| SCHEDULE III-Real Estate and Accumulated Depreciation | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| SCHEDULE III-REAL ESTATE AND ACCUMULATED DEPRECIATION | SUNSTONE HOTEL INVESTORS, INC.
SCHEDULE III—REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 2016 (In thousands)
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Summary of Significant Accounting Policies (Policies) |
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Dec. 31, 2016 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Summary of Significant Accounting Policies | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Basis of Presentation | Basis of Presentation
The accompanying consolidated financial statements as of December 31, 2016 and 2015, and for the years ended December 31, 2016, 2015 and 2014, include the accounts of the Company, the Operating Partnership, the TRS Lessee and their subsidiaries. All significant intercompany balances and transactions have been eliminated. If the Company determines that it has an interest in a variable interest entity within the meaning of the Consolidation Topic of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”), the Company will consolidate the entity when it is determined to be the primary beneficiary of the entity. Based on its review, the Company determined that all of its subsidiaries were properly consolidated as of December 31, 2016 and 2015, and for the years ended December 31, 2016, 2015 and 2014.
Noncontrolling interest at both December 31, 2016 and 2015 represents the outside 25.0% equity interest in the Hilton San Diego Bayfront, which the Company includes in its financial statements on a consolidated basis.
Certain prior year amounts have been reclassified in the consolidated financial statements in order to conform to the current year presentation.
The Company has evaluated subsequent events through the date of issuance of these financial statements. |
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| Use of Estimates | 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. |
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| Cash and Cash Equivalents | 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, 2016 and 2015, the Company had amounts in banks that were in excess of federally insured amounts. |
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| Restricted Cash | Restricted Cash
Restricted cash is comprised of reserve accounts for debt service, interest reserves, seasonality 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. |
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| Accounts Receivable | 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 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 and $0.1 million at December 31, 2016 and 2015, respectively. |
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| Inventories | 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. |
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| Acquisitions of Hotel Properties and Other Entities | Acquisitions of Hotel Properties and Other Entities
Accounting for the acquisition of a hotel property or other entity as a business combination 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. When we acquire a hotel property or other entity as a business combination, we use all available information to make these fair value determinations, and engage independent valuation specialists to assist in the fair value determinations of the long-lived assets acquired and the liabilities assumed. Due to the inherent subjectivity in determining the estimated fair value of long-lived assets, the Company believes that the recording of acquired assets and liabilities is a critical accounting policy. |
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| Investments in Hotel Properties and Other Assets | 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. Based on the Company’s review, management believes that there were no impairments on its long-lived assets in 2016, 2015 and 2014, and that the carrying values of its hotel properties and other assets are recoverable at December 31, 2016.
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 and conditions and, accordingly, the actual timing and amounts realized by the Company may be materially different from their estimated fair values. |
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| Assets Held for Sale | 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 may be considered 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, the buyer waives any closing contingencies, there are no third party approvals necessary 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 December 31, 2016, the Company’s Fairmont Newport Beach, California, was considered held for sale, and subsequently sold in February 2017 (see Note 14). Based on the criteria noted above, the hotel was not included in discontinued operations. As of December 31, 2015, the Company had no hotels or other assets held for sale. |
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| Deferred Financing Fees | 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 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.
Deferred financing fees related to both the Company’s undrawn credit facility and unfunded senior unsecured notes are included on the Company’s consolidated balance sheets as an asset. Deferred financing fees related to the Company’s undrawn credit facility are amortized ratably over the term of the line of credit arrangement, regardless of whether there are any outstanding borrowings on the line of credit arrangement. Deferred financing fees related to the Company’s unfunded senior unsecured notes will be reclassified to the appropriate current and long-term debt liabilities during the first quarter of 2017 once amounts are funded (see Note 14). Deferred financing fees related to the Company’s outstanding debt are included on the Company’s consolidated balance sheets as a contra-liability (see Note 7) and subsequently amortized ratably over the term of the related debt. |
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| Interest Rate Derivatives | Interest Rate Derivatives
The Company’s objective in holding interest rate derivatives is to manage its exposure to the interest rate risks related to its floating rate debt. To accomplish this objective, the Company uses interest rate caps and swaps, none of which qualifies for effective hedge accounting treatment. 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. |
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| Revenue Recognition | 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 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, parking, spa, entertainment and other guest services, along with tenant lease revenues related to hotel space leased by third parties, any cancellation or attrition revenue and any performance guarantees. During 2016, the Company recognized $5.0 million in other operating revenue from a performance guarantee received from Marriott related to the Wailea Beach Resort. In addition, prior to its sale in September 2015, other operating revenue also included revenue generated by BuyEfficient, LLC Inc. (“BuyEfficient”), an electronic purchasing platform that allowed members to procure food, operating supplies, furniture, fixtures and equipment. Revenues from incidental hotel services and BuyEfficient are recognized in the period the related services are provided or the revenue is earned. |
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| Advertising and Promotion Costs | 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.
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| Stock Based Compensation | Stock Based Compensation
Compensation expense related to awards of restricted shares are measured at fair value on the date of grant and amortized over the relevant requisite service period or derived service period.
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| Income Taxes | 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. |
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| Noncontrolling Interests | Noncontrolling Interests
The Company’s financial statements include entities in which the Company has a controlling financial interest. Noncontrolling interest is the portion of equity (net assets) in a subsidiary not attributable, directly or indirectly, to a parent. Such noncontrolling 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 noncontrolling interests. Income or loss is allocated to noncontrolling 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, noncontrolling interests and total equity.
At December 31, 2016, 2015 and 2014, the noncontrolling interests reported in the Company’s financial statements included Hilton Worldwide’s 25.0% ownership in the Hilton San Diego Bayfront. Additionally, prior to the Company’s sale of its interests in the Doubletree Guest Suites Times Square in December 2015, the noncontrolling interests reported in the Company’s financial statements also included preferred investors that owned a $0.1 million preferred equity interest in a subsidiary captive REIT that owned the Doubletree Guest Suites Times Square. |
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| Dividends | Dividends
Under current federal income tax laws related to REITs, the Company is required to distribute at least 90% of its net taxable income to its stockholders. Currently, the Company pays quarterly cash dividends to its common stockholders, as well as to the preferred stockholders of its 6.95% Series E Cumulative Redeemable Preferred Stock (“Series E preferred stock”) and its 6.45% Series F Cumulative Preferred Stock (“Series F preferred stock”) as declared by the Company’s board of directors. Prior to its redemption date in April 2016, the Company also paid quarterly cash dividends to the preferred stockholders of its 8.0% Series D Cumulative Redeemable Preferred Stock (“Series D preferred stock”) as declared by the Company’s board of directors. The Company’s ability to pay dividends is dependent on the receipt of distributions from the Operating Partnership. |
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| Earnings Per Share | 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, the net income per share for each class of stock (common stock and convertible preferred stock) is 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. Unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are considered participating securities and shall be included in the computation of earnings per share pursuant to the two-class method.
In accordance with the Earnings Per Share Topic of the FASB ASC, basic earnings (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 (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):
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, 2016, 2015 and 2014, as their inclusion would have been anti-dilutive. |
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| Segment Reporting | Segment Reporting
The Company considers each of its hotels to be an operating segment, none of which meets the threshold for a separate reportable segment in accordance with the Segment Reporting Topic of the FASB ASC. Currently, the Company operates in one segment, hotel ownership. |
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| Recent Accounting Pronouncements | Recent Accounting Pronouncements
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 was originally to be effective during the first quarter of 2017; however, the FASB issued a one-year deferral in July 2015 so that it now becomes effective during the first quarter of 2018. ASU No. 2014-09 will require either a full retrospective approach or a modified retrospective approach, with early adoption permitted as of the original effective date.
In March 2016, the FASB clarified the principal versus agent guidance in ASU No. 2014-09 with it issuance of Accounting Standards Update No. 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)” (“ASU No. 2016-08”). In particular, ASU No. 2016-08 clarifies how an entity should identify the unit of accounting for the principal versus agent evaluation and how it should apply the control principle to certain types of arrangements, such as service transactions by explaining what a principal controls before the specified good or service is transferred to the customer. In addition, ASU No. 2016-08 reframes the indicators to focus on evidence that an entity is acting as a principal rather than as an agent. ASU No. 2016-08 will become effective, along with ASU No. 2014-09, during the first quarter of 2018. Similar to ASU No. 2014-09, ASU No. 2016-08 will require either a full retrospective approach or a modified retrospective approach, with early adoption permitted as of the original effective date.
In May 2016, the FASB amended ASU No. 2014-09’s guidance on transition, collectability, noncash consideration and the presentation of sales and other similar taxes with its issuance of Accounting Standards Update No. 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients” (“ASU No. 2016-12”). The amendments clarify that, for a contract to be considered completed at transition, all (or substantially all) of the revenue must have been recognized under legacy GAAP. This clarification is important because entities that use the modified retrospective transition approach need to apply the standard only to contracts that are not complete as of the date of initial application, and entities that use the full retrospective approach may apply certain practical expedients to completed contracts. In addition, ASU No. 2016-12 clarifies that an entity should consider the probability of collecting substantially all of the consideration to which it will be entitled in exchange for goods and services expected to be transferred to the customer rather than the total amount promised for all the goods or services in the contract. ASU No. 2016-12 also clarifies that an entity may consider its ability to manage its exposure to credit risk as part of the collectability assessment, as well as that the fair value of noncash consideration should be measured at contract inception when determining the transaction price. Finally, ASU No. 2016-12 allows an entity to make an accounting policy election to exclude from the transaction price certain types of taxes collected from a customer if it discloses that policy. ASU No. 2016-12 will become effective, along with ASU No. 2014-09, during the first quarter of 2018. Similar to ASU No. 2014-09, ASU No. 2016-12 will require either a full retrospective approach or a modified retrospective approach, with early adoption permitted as of the original effective date.
The Company is in the process of evaluating the impact that ASU No. 2014-09, along with the related clarifications and amendments in ASU No. 2016-08 and ASU No. 2016-12, will have on its recognition of revenue included in its consolidated financial statements. While the Company is still evaluating the impact that the ASUs will have on accounting for the gain recognized upon the sale of a hotel, there is a possibility that the adoption of ASU No. 2014-09 will affect the timing of any gain recognition in the consolidated financial statements. For example, under current guidance, a gain on the sale of hotel properties with contingencies and some future involvement is deferred until all contingencies have been removed. Under the new guidance, however, the entire gain on sale may be recognized upon the close of escrow. The Company expects to adopt the new ASUs under the modified retrospective approach.
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 No. 2014-12 became effective during the first quarter of 2016, requiring either a prospective or a modified retrospective approach. The Company’s adoption of ASU No. 2014-12 did not have an effect on its consolidated financial statements, and will not have an effect in the future unless the Company issues grants that fall within its scope.
In August 2014, the FASB issued Accounting Standards Update No. 2014-15, “Presentation of Financial Statements – Going Concern (Subtopic 205-40)” (“ASU No. 2014-15”), which requires management to evaluate an entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or available to be issued, when applicable). The evaluation requires management to perform two steps. Management must first evaluate whether there are conditions and events that raise substantial doubt about the entity’s ability to continue as a going concern (step 1). If management concludes that substantial doubt is raised, management also is required to consider whether its plans alleviate that doubt (step 2). Disclosures in the notes to the financial statements are required if management concludes that substantial doubt exists or that its plans alleviate substantial doubt that was raised. ASU No. 2014-15 requires that management perform a going concern evaluation for annual periods beginning in 2016, and for interim periods within annual periods beginning with the first quarter of 2017. The Company’s adoption of ASU No. 2014-15 in 2016 did not have an effect on its financial statements; however, if in the future the Company determines that there is substantial doubt about the Company’s ability to continue as a going concern, the Company will be required to provide the additional disclosures outlined in ASU No. 2014-15 steps 1 and 2 in its consolidated financial statements.
In February 2015, the FASB issued Accounting Standards Update No. 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis” (“ASU No. 2015-02”), which eliminates the option allowing entities with interests in certain investment funds to follow previous consolidation guidance and makes other changes to both the variable interest model and the voting model. While ASU No. 2015-02 is aimed at asset managers, it will affect all reporting entities involved with limited partnerships or similar entities. In some cases consolidation conclusions will change. In other cases, reporting entities will need to provide additional disclosures about entities that currently aren’t considered VIEs but will be considered VIEs under the new guidance when they have a variable interest in those VIEs. Regardless of whether conclusions change or additional disclosure requirements are triggered, reporting entities will need to re-evaluate limited partnerships or similar entities for consolidation and revise their documentation. ASU No. 2015-02 changes (1) the identification of variable interests (fees paid to a decision maker or service provider), (2) the VIE characteristics for a limited partnership or similar entity and (3) the primary beneficiary determination. ASU No. 2015-02 became effective during the first quarter of 2016, requiring a modified retrospective approach. The Company’s adoption of ASU No. 2015-02 did not have a material effect on its consolidated financial statements.
In September 2015, the FASB issued Accounting Standards Update No. 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments” (“ASU No. 2015-16”), which eliminates the requirement for an acquirer in a business combination to account for measurement-period adjustments retrospectively. In a business combination, if the initial accounting is incomplete as of the end of the reporting period in which the acquisition occurs, the acquirer records provisional amounts based on information available at the acquisition date. The acquirer then adjusts these amounts as it obtains more information about facts and circumstances that existed as of the acquisition date. This period is called the measurement period. It ends when the acquirer receives the information it was seeking about facts and circumstances that existed as of the acquisition date or when it determines that it cannot obtain more information. The measurement period cannot exceed one year from the date of the acquisition. Under the previous guidance, an acquirer must recognize adjustments to provisional amounts during the measurement period retrospectively (i.e., as if the accounting for the business combination had been completed at the acquisition date). That is, the acquirer was required to revise comparative information on the income statement and balance sheet for any prior periods affected. Under ASU No. 2015-16, an acquirer will now recognize measurement-period adjustments during the period in which it determines the amount of the adjustment. The acquirer still must disclose the amounts and reasons for adjustments to the provisional amounts. The acquirer also must disclose, by line item, the amount of the adjustment reflected in the current-period income statement that would have been recognized in previous periods if the adjustment to provisional amounts had been recognized as of the acquisition date. Alternatively, an acquirer may present those amounts separately on the face of the income statement. ASU No. 2015-16 became effective during the first quarter of 2016, requiring a prospective approach. The Company’s adoption of ASU No. 2015-16 will have an effect on its consolidated financial statements and related disclosures when and if the Company has a business combination that requires a significant measurement-period adjustment.
In January 2016, the FASB issued Accounting Standards Update No. 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU No. 2016-01”), which makes targeted amendments to guidance on classifying and measuring financial instruments. ASU No. 2016-01 provides disclosure relief for public companies by eliminating the requirement to disclose the method(s) and significant assumptions used to estimate the fair value of financial instruments measured at amortized cost. ASU No. 2016-01 will become effective during the first quarter of 2018, with early adoption permitted. The Company chose to early adopt ASU No. 2016-01 effective January 1, 2016, and eliminated the disclosure in its consolidated financial statements of the methods and significant assumptions the Company use to calculate the fair value of its debt.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, “Leases (Topic 842)” (“ASU No. 2016-02”), which will require lessees to put most leases on their balance sheets but recognize expenses in the income statement in a manner similar to today’s accounting. The guidance also eliminates today’s real estate-specific provisions and changes the guidance on sale-leaseback transactions, initial direct costs and lease executory costs for all entities. For lessors, the standard modifies the classification criteria and the accounting for sales-type and direct financing leases. All entities will classify leases to determine how to recognize lease-related revenue and expense. Classification will continue to affect amounts that lessors record on the balance sheet. ASU No. 2016-02 will become effective during the first quarter of 2019, and will require a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. The Company is currently evaluating the impact that ASU No. 2016-02 will have on its consolidated financial statements, and, other than the inclusion of operating leases on the Company’s balance sheet, such effects have not yet been determined.
In March 2016, the FASB issued Accounting Standards Update No. 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (“ASU No. 2016-09”), which changes certain aspects of accounting for share-based payments to employees. The new guidance will require all income tax effects of awards to be recognized in the income statement when the awards vest or are settled. It also will allow an employer to repurchase more of an employee’s shares for tax withholding purposes without triggering liability accounting and to make a policy election to account for forfeitures as they occur. ASU No. 2016-09 will become effective during the first quarter of 2017, with early adoption permitted, and will require a modified retrospective approach. As noted below, the Company chose to early adopt ASU No. 2016-09 effective January 1, 2016.
Upon adoption of ASU No. 2016-09, the Company elected to account for forfeitures as they occur. In addition, pursuant to employee statutory withholding obligations, the Company may repurchase more of an employee’s shares for tax withholding purposes up to the maximum statutory tax rate in the employee’s applicable jurisdictions.
In accordance with the transition provisions of the new guidance, the Company adjusted items on its consolidated balance sheet, consolidated statement of equity and consolidated statement of cash flows. The following financial statement line items have been adjusted on the Company’s consolidated balance sheet and consolidated statement of equity for the year ended December 31, 2015 in order to reverse the effects of forfeitures recognized in prior years, and on the consolidated statement of cash flows for the years ended December 31, 2015 and 2014 to reclassify the repurchase of employee common stock for employee withholding obligations from an operating activity to a financing activity (in thousands):
In June 2016, the FASB issued Accounting Standards Update No. 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU No. 2016-13”), which will replace today’s “incurred loss” approach with an “expected loss” model for instruments measured at amortized cost. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, entities will be required to use a new forward looking “expected loss” model that generally will result in the earlier recognition of allowances for losses. In addition, entities will have to disclose significantly more information, including information they use to track credit quality by year of origination for most financing receivables. ASU No. 2016-13 is effective during the first quarter of 2020. ASU No. 2016-13 will require a modified retrospective approach, with early adoption permitted during the first quarter of 2019. The Company is currently evaluating the impact that ASU No. 2016-13 will have on its consolidated financial statements.
In September 2016, the FASB issued Accounting Standards Update No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force)” (“ASU No. 2016-15”), which clarifies how entities should classify certain cash receipts and cash payments on the statement of cash flows. ASU No. 2016-15 addresses certain issues where diversity in practice was identified. It amends existing guidance, which is principles based and often requires judgment to determine the appropriate classification of cash flows as operating, investing or financing activities. In addition, ASU No. 2016-15 clarifies how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. ASU No. 2016-15 is effective during the first quarter of 2018, and will generally require a retrospective approach. Early adoption is permitted. The Company does not believe that the adoption of ASU No. 2016-15 will have a material effect on its consolidated financial statements.
In November 2016, the FASB issued Accounting Standards Update No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force)” (“ASU No. 2016-18”), which will require entities to show the changes in total cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. As a result, entities will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. When cash, cash equivalents, restricted cash and restricted cash equivalents are presented in more than one line item on the balance sheet, the new guidance requires a reconciliation of the totals in the statement of cash flows to the related caption in the balance sheet. This reconciliation can be presented either on the face of the statement of cash flows or in the notes to the financial statements. ASU No. 2016-18 is effective in the first quarter of 2018, and will require a retrospective approach. Early adoption in an interim period is permitted, but any adjustments must be reflected as of the beginning of the fiscal year that includes the interim period. The Company is currently evaluating the impact that ASU No. 2016-18 will have on its consolidated financial statements.
In January 2017, the FASB issued Accounting Standards Update No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business” (“ASU No. 2017-01”), which changes the definition of a business to assist entities with evaluating when a set of transferred assets and activities is a business. Under the new guidance, an entity first determines whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. If this threshold is met, the set of transferred assets and activities is not a business. If it is not met, the entity then evaluates whether the set meets the requirement that a business include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs. ASU No. 2017-01 is effective in the first quarter of 2018, and the guidance is to be applied prospectively. Early adoption is permitted. Once adopted, the Company will be required to analyze future hotel acquisitions to determine if the transaction qualifies as the purchase of a business or an asset. Depending on the Company’s conclusion, ASU No. 2017-01 may have an effect on its consolidated financial statements. |
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Organization and Description of Business (Tables) |
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| Organization and Description of Business | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of number of hotels managed by each third-party manager | As of December 31, 2016, the Company had interests in 28 hotels (the “28 hotels”), one of which was considered held for sale, leaving 27 hotels currently held for investment (the “27 hotels”). The Company’s third-party managers included the following:
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Summary of Significant Accounting Policies (Tables) |
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Dec. 31, 2016 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Summary of Significant Accounting Policies | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of computation of basic and diluted earnings per common share | The following table sets forth the computation of basic and diluted earnings per common share (in thousands, except per share data):
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| Schedule of financial statement adjustments due to adoption of ASU 2016-09 | The following financial statement line items have been adjusted on the Company’s consolidated balance sheet and consolidated statement of equity for the year ended December 31, 2015 in order to reverse the effects of forfeitures recognized in prior years, and on the consolidated statement of cash flows for the years ended December 31, 2015 and 2014 to reclassify the repurchase of employee common stock for employee withholding obligations from an operating activity to a financing activity (in thousands):
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Investment in Hotel Properties (Tables) |
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| Investment in Hotel Properties | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of investment in hotel properties | Investment in hotel properties, net consisted of the following (in thousands):
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| Effect of acquisitions on results of operations | In the Company’s opinion, all significant adjustments necessary to reflect the effects of the acquisitions have been made (in thousands, except per share data):
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| Schedule Of Finite And Indefinite Lived Intangible Assets Included in Investment in Hotel Properties | Intangible assets included in the Company’s investment in hotel properties, net consisted of the following (in thousands):
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| Schedule of amortization expense on intangible assets included in investment in hotel properties | Amortization expense on these intangible assets for the years ended December 31, 2016, 2015 and 2014 consisted of the following (in thousands):
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| Schedule of amortization expense for next five years | For the next five years, amortization expense for the intangible assets noted above is expected to be as follows (in thousands):
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Disposals and Discontinued Operations (Tables) |
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| Held for sale, not considered a discontinued operation | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of assets held for sale | The Company has classified the assets and liabilities related to the Fairmont Newport Beach as held for sale as follows (in thousands):
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| Schedule of operating results for sold entities | The following table provides summary results of operations for the Sheraton Cerritos, BuyEfficient and the Doubletree Guest Suites Times Square, which are included in continuing operations (in thousands):
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| Schedule of operating results for sold entities | The following table sets forth the discontinued operations for the years ended December 31, 2016, 2015 and 2014 for the 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, which the Company sold in 2013, as well as the expense recognized in 2014 for the hotels sold in 2004, 2005, 2010 and 2013 (in thousands):
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Fair Value Measurements and Interest Rate Derivatives (Tables) |
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| Schedule of assets measured at fair value on a recurring and non-recurring basis | The following table presents the Company’s assets measured at fair value on a recurring and non-recurring basis at December 31, 2016 and 2015 (in thousands):
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| Schedule of liabilities measured at fair value on a recurring and non-recurring basis | The following table presents the Company’s liabilities measured at fair value on a recurring and non-recurring basis at December 31, 2016 and 2015 (in thousands):
|
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| Schedule of interest rate derivatives | The Company’s interest rate derivatives consisted of the following at December 31, 2016 and 2015 (dollars in thousands):
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| Schedule of changes in fair value of interest rate derivatives | Changes in the fair values of the Company’s interest rate derivatives resulted in decreases to interest expense for the years ended December 31, 2016, 2015 and 2014 as follows (in thousands):
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Other Assets (Tables) |
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2016 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other Assets | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of other assets | Other assets, net consisted of the following (in thousands):
|
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| Schedule of property and equipment | As of December 31, 2016 and 2015, the property and equipment, net noted above consisted of the following (in thousands):
|
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Notes Payable (Tables) |
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2016 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Notes Payable | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of notes payable | Notes payable consisted of the following at December 31 (in thousands):
|
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| Schedule of aggregate future principal maturities and amortization of notes payable | Aggregate future principal maturities and amortization of notes payable at December 31, 2016, are as follows (in thousands):
|
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| Schedule of deferred finance fees and loss on extinguishment of debt | Deferred financing fees and losses on extinguishment of debt for the years ended December 31, 2016, 2015 and 2014 were as follows (in thousands):
|
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| Schedule of interest incurred and expensed | Interest Expense
Total interest incurred and expensed on the notes payable for the years ended December 31, 2016, 2015 and 2014 was as follows (in thousands):
|
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Other Current Liabilities and Other Liabilities (Tables) |
12 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2016 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other Current Liabilities and Other Liabilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of other current liabilities | Other current liabilities consisted of the following (in thousands):
|
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| Schedule of other liabilities | Other liabilities consisted of the following (in thousands):
|
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Income Taxes (Tables) |
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2016 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Income Taxes | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of income tax provision | The income tax (benefit) provision for the Company is included in the consolidated financial statements as follows (in thousands):
|
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| Schedule of tax effects of temporary differences that gave rise to the deferred tax assets (liabilities) | The tax effects of temporary differences giving rise to the deferred tax assets are as follows (in thousands):
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| Schedule of 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, 2016, 2015 and 2014, distributions paid per share were characterized as follows (unaudited):
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Stockholders' Equity (Tables) |
12 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2016 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stockholders' Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of dividends declared per share | The Company declared dividends per share on its Series D preferred stock, Series E preferred stock, Series F preferred stock and common stock during 2016, 2015 and 2014 as follows:
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Long-Term Incentive Plan (Tables) |
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2016 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Long-Term Incentive Plan | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of amortization expense and forfeitures related to restricted shares and performance awards | As discussed in Note 2, the Company chose to early adopt ASU No. 2016-09 effective January 1, 2016. Upon adoption of ASU No. 2016-09, the Company elected to account for forfeitures as they occur. The Company’s compensation expense and forfeitures related to restricted shares for the years ended December 31, 2016, 2015 and 2014 were as follows (in thousands):
|
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| Schedule of non-vested stock grant activity | The following is a summary of non-vested stock grant activity:
|
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Commitments and Contingencies (Tables) |
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2016 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commitments and Contingencies | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of basic and incentive management fees | Total basic management fees, net of key money incentives received from third-party hotel managers, along with incentive management fees incurred by the Company during the years ended December 31, 2016, 2015 and 2014 were included in the Company’s consolidated statements of operations as follows (in thousands):
|
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| Schedule of License and Franchise Costs | Total license and franchise fees incurred by the Company during the years ended December 31, 2016, 2015 and 2014 were included in the Company’s consolidated statements of operations as follows (in thousands):
|
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| Schedule of assets under capital lease | The capital lease asset was included in investment in hotel properties, net on the Company’s consolidated balance sheets as follows (in thousands):
|
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| Schedule of future minimum lease payments under capital lease | Future minimum lease payments under for the Company’s capital lease together with the present value of the net minimum lease payments as of December 31, 2016 are as follows (in thousands):
|
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| Entity's hotels obligated to unaffiliated third parties under the terms of ground, building and air leases | During 2016, 2015 and 2014, certain of the Company’s hotels were obligated to unaffiliated third parties under the terms of ground, building and air leases as follows:
|
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| Schedule of ground, building and air lease rent | Total rent expense incurred pursuant to ground, building and air lease agreements for the years ended December 31, 2016, 2015 and 2014 was included in property tax, ground lease and insurance in the Company’s consolidated statements of operations as follows (in thousands):
|
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| Schedule of future minimum payments of operating leases | 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, 2016 are as follows (in thousands):
|
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| Schedule of Hotel Geographic Concentration of Risk | As of December 31, 2016, 16 of the Company’s 27 hotels were concentrated in California, Illinois, Massachusetts and the greater Washington DC area as follows:
|
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Quarterly Operating Results (Unaudited) (Tables) |
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Quarterly Operating Results (Unaudited) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of consolidated quarterly results | The Company’s consolidated quarterly results for the years ended December 31, 2016 and 2015 are as follows (in thousands):
|
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Investment in Hotel Properties (Details) - USD ($) $ in Thousands |
Dec. 31, 2016 |
Dec. 31, 2015 |
|---|---|---|
| Investment in Hotel Properties | ||
| Land | $ 531,660 | $ 542,660 |
| Buildings and improvements | 3,135,806 | 3,109,562 |
| Furniture, fixtures and equipment | 512,372 | 480,832 |
| Intangibles | 49,015 | 47,578 |
| Franchise fees | 1,021 | 1,082 |
| Construction in process | 65,449 | 97,974 |
| Investment in hotel properties, gross | 4,295,323 | 4,279,688 |
| Accumulated depreciation and amortization | (1,137,104) | (1,048,836) |
| Investment in hotel properties, net | $ 3,158,219 | $ 3,230,852 |
Investment in Hotel Properties - Future Amortization of Intangible Assets (Details) $ in Thousands |
Dec. 31, 2016
USD ($)
|
|---|---|
| Investment in Hotel Properties | |
| Future amortization expense on intangible assets in 2017 | $ 3,109 |
| Future amortization expense on intangible assets in 2018 | 1,739 |
| Future amortization expense on intangible assets in 2019 | 382 |
| Future amortization expense on intangible assets in 2020 | 347 |
| Future amortization expense on intangible assets in 2021 | $ 347 |
Fair Value Measurements and Interest Rate Derivatives - Fair Value of Debt (Details) - USD ($) $ in Thousands |
Dec. 31, 2016 |
Dec. 31, 2015 |
|---|---|---|
| Percentage of Debt Bearing Fixed Interest Rates | 76.20% | 79.50% |
| Notes payable | $ 935,944 | $ 1,101,480 |
| Level 3 | ||
| Fair value of debt | $ 900,000 | $ 1,100,000 |
Other Assets (Details) - USD ($) $ in Thousands |
1 Months Ended | 12 Months Ended | |
|---|---|---|---|
Dec. 31, 2016 |
Dec. 31, 2016 |
Dec. 31, 2015 |
|
| Other assets, net | |||
| Property and equipment, net | $ 779 | $ 779 | $ 1,341 |
| Land held for development | 188 | ||
| Goodwill | 990 | 990 | 990 |
| Deferred expense on straight-lined third-party tenant leases | 2,876 | 2,876 | 3,336 |
| Interest rate derivatives | 1,749 | 1,749 | 760 |
| Other receivables | 1,673 | 1,673 | 2,201 |
| Other | 1,322 | 1,322 | 1,570 |
| Total other assets, net | 9,389 | 9,389 | 10,386 |
| Gain on sale of assets | $ 18,413 | $ 226,217 | |
| Land Held for Development | |||
| Other assets, net | |||
| Proceeds received from sale of land | 400 | ||
| Gain on sale of assets | $ 200 | ||
Other Assets - Property and Equipment (Details) - USD ($) $ in Thousands |
Dec. 31, 2016 |
Dec. 31, 2015 |
|---|---|---|
| Other Assets | ||
| Property and equipment cost basis | $ 10,807 | $ 10,785 |
| Accumulated depreciation | (10,028) | (9,444) |
| Property and equipment, net | $ 779 | $ 1,341 |
Notes Payable - Deferred Financing Fees and Interest Expense (Details) - USD ($) $ in Thousands |
12 Months Ended | ||
|---|---|---|---|
Dec. 31, 2016 |
Dec. 31, 2015 |
Dec. 31, 2014 |
|
| Deferred Financing Fees | |||
| Payments of deferred financing costs | $ 1,759 | $ 5,861 | $ 2,346 |
| Accelerated amortization of deferred financing fees | 455 | ||
| Loss on extinguishment of debt | 284 | 2,964 | 4,638 |
| Interest incurred and expensed | |||
| Gain on derivatives, net | (1,426) | (309) | (529) |
| Amortization of deferred financing fees | 2,200 | 3,148 | 2,777 |
| Total interest incurred and expensed on debt and capital lease obligations | 50,283 | 66,516 | 72,315 |
| Notes payable and capital lease obligations | |||
| Interest incurred and expensed | |||
| Interest expense on debt and capital lease obligations | 49,509 | 63,677 | 70,067 |
| Gain on derivatives, net | (1,426) | (309) | (529) |
| Amortization of deferred financing fees | 2,200 | 3,148 | 2,777 |
| Total interest incurred and expensed on debt and capital lease obligations | $ 50,283 | $ 66,516 | $ 72,315 |
Other Current Liabilities and Other Liabilities (Details) - USD ($) $ in Thousands |
1 Months Ended | 12 Months Ended | |
|---|---|---|---|
Sep. 30, 2016 |
Dec. 31, 2016 |
Dec. 31, 2015 |
|
| Other Current Liabilities | |||
| Property, sales and use taxes payable | $ 16,965 | $ 17,988 | |
| Income tax payable | 211 | 470 | |
| Accrued interest | 1,996 | 3,012 | |
| Advance deposits | 14,505 | 12,727 | |
| Management fees payable | 1,645 | 3,001 | |
| Other | 4,547 | 4,976 | |
| Total other current liabilities | 39,869 | 42,174 | |
| Other Liabilities | |||
| Deferred gain on sale of asset | 7,000 | 7,000 | |
| Interest rate swap derivatives | 437 | ||
| Accrued income tax | 1,596 | ||
| Deferred revenue | 6,045 | 5,881 | |
| Deferred rent | 19,807 | 17,191 | |
| Other | 3,798 | 4,184 | |
| Total other liabilities | 36,650 | $ 36,289 | |
| Unrecognized Tax Benefits and Interest Accrued | |||
| Decrease in uncertain tax position | $ (1,500) | (1,500) | |
| Reversal of interest accrued on uncertain tax position | $ (100) | $ (100) |
Stockholders' Equity - Dividends (Details) - $ / shares |
12 Months Ended | ||
|---|---|---|---|
Dec. 31, 2016 |
Dec. 31, 2015 |
Dec. 31, 2014 |
|
| Dividends | |||
| Common stock dividends declared (in dollars per share) | $ 0.68 | $ 1.41 | $ 0.51 |
| Dividends declared (in dollars per share) | 3.620078 | 3.41 | 2.51 |
| Dividends payable with a combination of cash and stock (in dollars per share) | 1.26 | 0.36 | |
| Series D Cumulative Redeemable Preferred Stock | |||
| Dividends | |||
| Preferred stock dividends declared (in dollars per share) | 0.527778 | 2.00 | 2.00 |
| Series E Cumulative Redeemable Preferred Stock | |||
| Dividends | |||
| Preferred stock dividends declared (in dollars per share) | 1.404450 | ||
| Series F Cumulative Redeemable Preferred Stock | |||
| Dividends | |||
| Preferred stock dividends declared (in dollars per share) | 1.007850 | ||
| Common Stock | |||
| Dividends | |||
| Common stock dividends declared (in dollars per share) | $ 0.680000 | $ 1.41 | $ 0.51 |
Commitments and Contingencies (Details) - USD ($) $ in Thousands |
12 Months Ended | ||
|---|---|---|---|
Dec. 31, 2016 |
Dec. 31, 2015 |
Dec. 31, 2014 |
|
| Basic and incentive management fees incurred | |||
| Basic management fees | $ 33,109 | $ 34,426 | $ 31,485 |
| Incentive management fees | 6,071 | 5,020 | 4,034 |
| Total basic and incentive management fees | 39,180 | 39,446 | 35,519 |
| License and Franchise Agreements | |||
| Franchise assessments | 26,399 | 28,193 | 26,689 |
| Franchise royalties | 10,248 | 11,903 | 11,582 |
| Total franchise costs | $ 36,647 | $ 40,096 | $ 38,271 |
| Minimum | |||
| Management Agreements | |||
| Basic management fees (as a percent) | 2.00% | ||
| Maximum | |||
| Management Agreements | |||
| Basic management fees (as a percent) | 3.50% | ||
| Renovation and Construction Commitments | |||
| Renovation and Construction Commitments | |||
| Remaining construction commitments | $ 38,000 | ||
Quarterly Operating Results (Unaudited) (Details) - USD ($) $ / shares in Units, $ in Thousands |
3 Months Ended | 12 Months Ended | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2016 |
Sep. 30, 2016 |
Jun. 30, 2016 |
Mar. 31, 2016 |
Dec. 31, 2015 |
Sep. 30, 2015 |
Jun. 30, 2015 |
Mar. 31, 2015 |
Dec. 31, 2016 |
Dec. 31, 2015 |
Dec. 31, 2014 |
|
| Quarterly Operating Results (Unaudited) | |||||||||||
| Revenues | $ 289,584 | $ 303,304 | $ 322,160 | $ 274,292 | $ 300,933 | $ 324,595 | $ 339,267 | $ 284,385 | $ 1,189,340 | $ 1,249,180 | $ 1,141,998 |
| Operating income | 37,068 | 48,846 | 63,422 | 21,079 | 41,141 | 52,274 | 69,353 | 17,668 | 170,415 | 180,436 | 156,743 |
| Net income | $ 34,298 | $ 39,427 | $ 65,736 | $ 1,216 | $ 237,575 | $ 63,084 | $ 53,657 | $ 1,203 | $ 140,677 | $ 355,519 | $ 87,939 |
| Income (loss) attributable to common stockholders per share - basic and diluted (in dollars per share) | $ 0.14 | $ 0.16 | $ 0.26 | $ (0.02) | $ 1.12 | $ 0.28 | $ 0.23 | $ (0.02) | $ 0.55 | $ 1.62 | $ 0.37 |
Subsequent Events (Details) - Subsequent Event $ in Millions |
Feb. 10, 2017
USD ($)
room
|
Jan. 11, 2017
USD ($)
|
Jan. 10, 2017
USD ($)
|
|---|---|---|---|
| Fairmont Newport Beach | |||
| Subsequent Events | |||
| Number of rooms sold | room | 444 | ||
| Net proceeds received from sale | $ 125.0 | ||
| Total of Series A and Series B Senior Notes | |||
| Subsequent Events | |||
| Proceeds from issuance of Senior Notes | $ 240.0 | ||
| Series A Senior Notes | |||
| Subsequent Events | |||
| Proceeds from issuance of Senior Notes | $ 120.0 | ||
| Fixed interest rate (as a percent) | 4.69% | ||
| Series B Senior Notes | |||
| Subsequent Events | |||
| Proceeds from issuance of Senior Notes | $ 120.0 | ||
| Fixed interest rate (as a percent) | 4.79% | ||
| Marriott Boston Long Wharf mortgage | |||
| Subsequent Events | |||
| Fixed interest rate (as a percent) | 5.58% | ||
| Repayment of mortgage debt | $ 176.0 |
SCHEDULE III-Reconciliation of Carrying Amounts and Accumulated Depreciation (Details) - Hotel properties - USD ($) $ in Thousands |
12 Months Ended | ||
|---|---|---|---|
Dec. 31, 2016 |
Dec. 31, 2015 |
Dec. 31, 2014 |
|
| Reconciliation of land and buildings and improvements | |||
| Balance at the beginning of the period | $ 3,652,222 | $ 3,807,607 | $ 3,416,762 |
| Acquisitions | 324,844 | ||
| Improvements | 159,786 | 86,615 | 66,001 |
| Changes in reporting presentation | (112,023) | ||
| Dispositions | (32,519) | (242,000) | |
| Balance at the end of the period | 3,667,466 | 3,652,222 | 3,807,607 |
| Reconciliation of accumulated depreciation | |||
| Balance at the beginning of the period | 707,737 | 625,020 | 524,014 |
| Depreciation | 107,409 | 108,153 | 101,006 |
| Changes in reporting presentation | (37,506) | ||
| Retirement | (11,233) | (25,436) | |
| Balance at the end of the period | $ 766,407 | $ 707,737 | $ 625,020 |
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