Impairment Charges

Our hotels are comprised of operations and cash flows that can clearly be distinguished, operationally and for financial reporting purposes, from the remainder of our operations. Accordingly, we consider our hotels to be components for purposes of determining impairment charges and reporting discontinued operations.

We test for impairment whenever changes in circumstances indicate a hotel's carrying value may not be recoverable. We conduct the test using undiscounted cash flows for the shorter of the hotel's estimated hold period or its remaining useful life. When testing for recoverability of hotels held for investment, we use projected cash flows over its expected hold period. Those hotels held for investment that fail the impairment test are written down to their then current estimated fair value, before any selling expense, and we continue to depreciate the hotel over its remaining useful live.

As part of our long-term strategic plan to enhance stockholder value and achieve or exceed targeted returns on invested capital, we sell and acquire hotels to improve our overall portfolio quality, enhance diversification and improve growth rates. In that regard, we regularly review each hotel in our portfolio in terms of projected performances, future capital expenditure requirements and market dynamics and concentration risk. Based on this analysis, we developed a plan to sell our interests in 38 hotels (30 of which we consolidate the real estate interest and eight of which are owned by unconsolidated joint ventures) that no longer meet our investment criteria. As a consequence, we shortened our estimated hold periods for these hotels, and we tested the consolidated hotels for impairment when they were approved to be marketed for sale. We designated 35 of these 38 hotels as non-strategic in 2010, and early 2011. As result, we recorded 2010 impairment charges of $152.6 million related to 16 of our consolidated non-strategic hotels ($106.4 million related to 11 hotels in continuing operations and $46.2 million related to five hotels included in discontinued operations). In 2011, we designated three additional hotels as non-strategic, which did not result in any impairment charges. When the eight hotels owned by joint ventures are designated by those ventures as non-strategic, the joint ventures will test for impairment based on the reduced estimated hold periods.

For our 2010 impairment charges, we estimated each hotel's fair value by using estimated future cash flows, terminal values based on the projected cash flows and capitalization rates in the range of what is reported in industry publications for operationally similar assets and other available market information. We discounted the cash flows used for determining the fair values using market-based discounts generally used for operationally and geographically similar assets. The inputs used to determine the fair values of these hotels are classified as Level 3 under the authoritative guidance for fair value measurements.

In 2011, we recorded impairment charges of $13.2 million related to consolidated non-strategic hotels ($7.0 million related to two hotels included in continuing operations and $6.2 million related to three hotels included in discontinued operations). The impairment charge related to these hotels was based on revised estimated fair market values obtained through the marketing process or purchaser's contract price less estimated selling costs (for hotels held for sale), which were lower than our net book values. The inputs used to determine the fair values of these hotels are classified as Level 2 under authoritative guidance for fair value measurements.

In 2011, we sold eight consolidated non-strategic hotels.

Two of our loans (totaling $32 million) matured in May 2010. The cash flows for the hotels that secured these loans did not cover debt service, and we stopped funding the shortfalls in December 2009. We were unable to negotiate an acceptable debt modification or reduction that favored our stockholders, and we recorded a $21.1 million impairment charge (recorded in discontinued operations). We transferred these hotels to the lenders in full satisfaction of the related debt, and recorded a $15.2 million gain on extinguishment of debt in 2010.


6.	Impairment Charges— (continued)

In 2009, we recorded a $3.4 million impairment charge (included in discontinued operations) on two sale candidates because they failed updated impairment tests. The valuations used in the 2009 impairment charges were based on third-party offers to purchase (a Level 2 input) at a price less than our previously estimated fair value. These two hotels were sold in December 2009 for gross proceeds of $26 million.

We may record additional impairment charges if operating results of individual hotels are materially different from our forecasts, the economy and lodging industry weakens, or we shorten our contemplated holding period for additional hotels.