Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2013

 

OR

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                   to                  

 

Commission File Number 001-35169

 


 

RLJ LODGING TRUST

(Exact Name of Registrant as Specified in Its Charter)

 


 

Maryland

 

27-4706509

(State or Other Jurisdiction of Incorporation or Organization)

 

(I.R.S. Employer Identification No.)

 

3 Bethesda Metro Center, Suite 1000

 

 

Bethesda, Maryland

 

20814

(Address of Principal Executive Offices)

 

(Zip Code)

 

(301) 280-7777

(Registrant’s Telephone Number, Including Area Code)

 


 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  x Yes  o 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).  x Yes  o No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

x

 

Accelerated filer

 

o

 

 

 

 

 

 

 

Non-accelerated filer

 

o  (do not check if a smaller reporting company)

 

Smaller reporting company

 

o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  o Yes  x No

 

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

 

As of July 31, 2013, 122,735,453 common shares of beneficial interest of the Registrant, $0.01 par value per share, were outstanding.

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

 

 

Page

 

 

 

PART I. FINANCIAL INFORMATION

 

 

 

Item 1.

Financial Statements.

 

 

 

 

 

Combined Consolidated Financial Statements (unaudited)

 

 

Balance Sheets as of June 30, 2013 and December 31, 2012

1

 

Statements of Operations and Comprehensive Income for the three and six months ended June 30, 2013 and 2012

2

 

Statements of Changes in Equity for the six months ended June 30, 2013 and 2012

3

 

Statements of Cash Flows for the six months ended June 30, 2013 and 2012

5

 

Notes to Combined Consolidated Financial Statements

6

 

 

 

Item 2.

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

20

Item 3.

Quantitative and Qualitative Disclosures about Market Risk.

34

Item 4.

Controls and Procedures.

35

 

 

 

PART II. OTHER INFORMATION

 

 

 

Item 1.

Legal Proceedings.

36

Item 1A.

Risk Factors.

36

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

36

Item 3.

Defaults Upon Senior Securities.

36

Item 4.

Mine Safety Disclosures.

36

Item 5.

Other Information.

37

Item 6.

Exhibits.

37

 

 

 

Signatures

 

38

 

ii



Table of Contents

 

PART I. FINANCIAL INFORMATION

 

Item 1.         Financial Statements.

 

RLJ Lodging Trust

Combined Consolidated Balance Sheets

(Amounts in thousands, except share and per share data)

 

 

 

June 30,

 

December 31,

 

 

 

2013

 

2012

 

 

 

(unaudited)

 

 

 

Assets

 

 

 

 

 

Investment in hotel and other properties, net

 

$

3,221,671

 

$

3,073,483

 

Investment in loans

 

12,357

 

12,426

 

Cash and cash equivalents

 

262,897

 

115,861

 

Restricted cash reserves

 

65,088

 

64,787

 

Hotel and other receivables, net of allowance of $313 and $194, respectively

 

33,781

 

22,738

 

Deferred financing costs, net

 

9,619

 

11,131

 

Deferred income tax asset

 

2,381

 

2,206

 

Purchase deposits

 

7,233

 

9,910

 

Prepaid expense and other assets

 

38,822

 

33,843

 

Total assets

 

$

3,653,849

 

$

3,346,385

 

Liabilities and Equity

 

 

 

 

 

Borrowings under revolving credit facility

 

$

 

$

16,000

 

Mortgage loans

 

985,558

 

997,651

 

Term loans

 

400,000

 

400,000

 

Accounts payable and accrued expense

 

81,114

 

87,575

 

Deferred income tax liability

 

4,041

 

4,064

 

Advance deposits and deferred revenue

 

11,832

 

8,508

 

Accrued interest

 

2,093

 

2,284

 

Distributions payable

 

26,111

 

22,392

 

Total liabilities

 

1,510,749

 

1,538,474

 

 

 

 

 

 

 

Commitments and Contingencies (Note 10)

 

 

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Preferred shares of beneficial interest, $0.01 par value, 50,000,000 shares authorized; zero shares issued and outstanding at June 30, 2013 and December 31, 2012, respectively.

 

 

 

Common shares of beneficial interest, $0.01 par value, 450,000,000 shares authorized; 122,735,453 and 106,565,516 shares issued and outstanding at June 30, 2013 and December 31, 2012, respectively.

 

1,227

 

1,066

 

Additional paid-in-capital

 

2,173,483

 

1,841,449

 

Accumulated other comprehensive income

 

4,527

 

 

Distributions in excess of net earnings

 

(54,409

)

(52,681

)

Total shareholders’ equity

 

2,124,828

 

1,789,834

 

 

 

 

 

 

 

Noncontrolling interest

 

 

 

 

 

Noncontrolling interest in joint venture

 

6,921

 

6,766

 

Noncontrolling interest in Operating Partnership

 

11,351

 

11,311

 

Total noncontrolling interest

 

18,272

 

18,077

 

Total equity

 

2,143,100

 

1,807,911

 

Total liabilities and equity

 

$

3,653,849

 

$

3,346,385

 

 

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

 

1



Table of Contents

 

RLJ Lodging Trust

Combined Consolidated Statements of Operations and Comprehensive Income

(Amounts in thousands, except share and per share data)

(unaudited)

 

 

 

For the three months ended June 30,

 

For the six months ended June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Revenue

 

 

 

 

 

 

 

 

 

Operating revenue

 

 

 

 

 

 

 

 

 

Room revenue

 

$

229,111

 

$

194,396

 

$

415,098

 

$

352,587

 

Food and beverage revenue

 

25,113

 

22,402

 

48,343

 

41,906

 

Other operating department revenue

 

7,351

 

6,003

 

13,569

 

11,105

 

Total revenue

 

261,575

 

222,801

 

477,010

 

405,598

 

Expense

 

 

 

 

 

 

 

 

 

Operating expense

 

 

 

 

 

 

 

 

 

Room expense

 

47,271

 

40,841

 

90,541

 

77,640

 

Food and beverage expense

 

17,246

 

15,508

 

33,823

 

29,948

 

Management fee expense

 

9,398

 

7,621

 

16,800

 

13,910

 

Other operating expense

 

73,384

 

64,961

 

140,083

 

123,332

 

Total property operating expense

 

147,299

 

128,931

 

281,247

 

244,830

 

Depreciation and amortization

 

31,910

 

31,428

 

63,321

 

65,099

 

Property tax, insurance and other

 

16,574

 

12,439

 

31,327

 

25,052

 

General and administrative

 

9,083

 

7,478

 

17,894

 

14,737

 

Transaction and pursuit costs

 

1,255

 

2,795

 

2,344

 

2,814

 

Total operating expense

 

206,121

 

183,071

 

396,133

 

352,532

 

Operating income

 

55,454

 

39,730

 

80,877

 

53,066

 

Other income

 

91

 

106

 

170

 

190

 

Interest income

 

240

 

418

 

536

 

837

 

Interest expense

 

(16,874

)

(20,373

)

(33,838

)

(40,484

)

Loss on disposal

 

 

(634

)

 

(634

)

 

 

 

 

 

 

 

 

 

 

Income before income tax expense

 

38,911

 

19,247

 

47,745

 

12,975

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

(345

)

(281

)

(571

)

(875

)

Income from continuing operations

 

38,566

 

18,966

 

47,174

 

12,100

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from discontinued operations

 

2,415

 

53

 

2,391

 

(2

)

 

 

 

 

 

 

 

 

 

 

Net income

 

40,981

 

19,019

 

49,565

 

12,098

 

 

 

 

 

 

 

 

 

 

 

Net (income) loss attributable to non-controlling interests

 

 

 

 

 

 

 

 

 

Noncontrolling interest in consolidated joint venture

 

(203

)

38

 

(155

)

408

 

Noncontrolling interest in common units of Operating Partnership

 

(268

)

(172

)

(407

)

(134

)

Net income attributable to common shareholders

 

$

40,510

 

$

18,885

 

$

49,003

 

$

12,372

 

 

 

 

 

 

 

 

 

 

 

Basic per common share data:

 

 

 

 

 

 

 

 

 

Net income per share attributable to common shareholders before discontinued operations

 

$

0.31

 

$

0.18

 

$

0.41

 

$

0.11

 

Discontinued operations

 

0.02

 

 

0.02

 

 

Net income per share attributable to common shareholders

 

$

0.33

 

$

0.18

 

$

0.43

 

$

0.11

 

Weighted-average number of common shares

 

121,520,253

 

105,388,743

 

114,208,435

 

105,360,778

 

 

 

 

 

 

 

 

 

 

 

Diluted per common share data:

 

 

 

 

 

 

 

 

 

Net income per share attributable to common shareholders before discontinued operations

 

$

0.31

 

$

0.18

 

$

0.41

 

$

0.11

 

Discontinued operations

 

0.02

 

 

0.02

 

 

Net income per share attributable to common shareholders

 

$

0.33

 

$

0.18

 

$

0.43

 

$

0.11

 

Weighted-average number of common shares

 

122,280,431

 

105,454,679

 

114,912,726

 

105,414,876

 

 

 

 

 

 

 

 

 

 

 

Amounts attributable to the Company’s common shareholders:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

38,112

 

$

18,832

 

$

46,629

 

$

12,374

 

Income from discontinued operations

 

2,398

 

53

 

2,374

 

(2

)

Net income

 

$

40,510

 

$

18,885

 

$

49,003

 

$

12,372

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

Net income attributable to the Company

 

$

40,510

 

$

18,885

 

$

49,003

 

$

12,372

 

Unrealized gain on interest rate derivatives

 

5,004

 

381

 

4,527

 

375

 

Comprehensive income attributable to the Company

 

$

45,514

 

$

19,266

 

$

53,530

 

$

12,747

 

 

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

 

2



Table of Contents

 

RLJ Lodging Trust

Combined Consolidated Statements of Changes in Equity

(Amounts in thousands, except share data)

(unaudited)

 

 

 

Shareholders’ Equity

 

Accumulated

 

Noncontrolling Interests

 

 

 

 

 

Common Stock

 

Distributions

 

Other

 

 

 

 

 

Total

 

 

 

 

 

Shares

 

Par Value

 

Additional Paid-
in-Capital

 

in excess of
net earnings

 

Comprehensive
Income

 

Operating
Partnership

 

Consolidated
Joint Venture

 

Noncontrolling
Interests

 

Total Equity

 

Balance at December 31, 2012

 

106,565,516

 

$

1,066

 

$

1,841,449

 

$

(52,681

)

$

 

$

11,311

 

$

6,766

 

$

18,077

 

$

1,807,911

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

49,003

 

 

407

 

155

 

562

 

49,565

 

Unrealized gain on interest rate derivative

 

 

 

 

 

4,527

 

 

 

 

4,527

 

Proceeds from sale of common stock, net

 

15,870,000

 

159

 

327,386

 

 

 

 

 

 

 

327,545

 

Issuance of restricted stock

 

377,830

 

3

 

(3

)

 

 

 

 

 

 

Amortization of share based compensation

 

 

 

6,348

 

 

 

 

 

 

6,348

 

Share grants to trustees

 

3,005

 

 

68

 

 

 

 

 

 

68

 

Shares acquired to satisfy minimum required federal and state tax withholding on vesting restricted stock

 

(78,628

)

(1

)

(1,765

)

 

 

 

 

 

(1,766

)

Forfeiture of restricted stock

 

(2,270

)

 

 

 

 

 

 

 

 

Distributions on common shares and units

 

 

 

 

(50,731

)

 

(367

)

 

(367

)

(51,098

)

Balance at June 30, 2013

 

122,735,453

 

$

1,227

 

$

2,173,483

 

$

(54,409

)

$

4,527

 

$

11,351

 

$

6,921

 

$

18,272

 

$

2,143,100

 

 

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

 

3



Table of Contents

 

 

 

Shareholders’ Equity

 

Accumulated

 

Noncontrolling Interests

 

 

 

 

 

Common Stock

 

Distributions

 

Other

 

 

 

 

 

Total

 

 

 

 

 

Shares

 

Par Value

 

Additional Paid-
in-Capital

 

in excess of
net earnings

 

Comprehensive
Loss

 

Operating
Partnership

 

Consolidated
Joint Venture

 

Noncontrolling
Interests

 

Total Equity

 

Balance at December 31, 2011

 

106,279,049

 

$

1,063

 

$

1,835,011

 

$

(18,960

)

$

(1,782

)

$

11,486

 

$

7,170

 

$

18,656

 

$

1,833,988

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

 

 

12,372

 

 

134

 

(408

)

(274

)

12,098

 

Unrealized gain on interest rate derivative

 

 

 

 

 

375

 

 

 

 

375

 

Issuance of restricted stock

 

436,646

 

4

 

(4

)

 

 

 

 

 

 

Amortization of share based compensation

 

 

 

3,213

 

 

 

 

 

 

3,213

 

Share grants to trustees

 

4,352

 

 

80

 

 

 

 

 

 

80

 

Shares acquired to satisfy minimum required federal and state tax withholding on vesting restricted stock

 

(59,465

)

 

(1,069

)

 

 

 

 

 

(1,069

)

Forfeiture of restricted stock

 

(26,506

)

 

 

 

 

 

 

 

 

Distributions on common shares and units

 

 

 

 

(35,215

)

 

(296

)

 

(296

)

(35,511

)

Balance at June 30, 2012

 

106,634,076

 

$

1,067

 

$

1,837,231

 

$

(41,803

)

$

(1,407

)

$

11,324

 

$

6,762

 

$

18,086

 

$

1,813,174

 

 

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

 

4



Table of Contents

 

RLJ Lodging Trust

Combined Consolidated Statements of Cash Flows

(Amounts in thousands)

(unaudited)

 

 

 

For the six months ended June 30,

 

 

 

2013

 

2012

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

49,565

 

$

12,098

 

Adjustments to reconcile net income to cash flow provided by operating activities:

 

 

 

 

 

Gain on extinguishment of indebtedness

 

(2,425

)

 

Depreciation and amortization

 

63,353

 

65,151

 

Amortization of deferred financing costs

 

1,588

 

2,062

 

Amortization of deferred management fees

 

500

 

500

 

Loss on disposal

 

 

634

 

Share grants to trustees

 

68

 

80

 

Amortization of share based compensation

 

6,348

 

3,213

 

Deferred income taxes

 

(198

)

(279

)

Changes in assets and liabilities:

 

 

 

 

 

Hotel and other receivables, net

 

(10,335

)

(9,136

)

Prepaid expense and other assets

 

(5,805

)

(5,629

)

Accounts payable and accrued expense

 

(5,736

)

(14,566

)

Advance deposits and deferred revenue

 

3,011

 

3,838

 

Accrued interest

 

(191

)

228

 

Net cash flow provided by operating activities

 

99,743

 

58,194

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Acquisition of hotel and other properties, net of cash acquired

 

(184,165

)

(182,690

)

Purchase deposits

 

2,677

 

 

Proceeds from principal payments on investment in loans

 

69

 

102

 

Improvements and additions to hotel and other properties

 

(25,984

)

(76,991

)

Additions to property and equipment

 

(48

)

(241

)

(Funding of) releases from restricted cash reserves, net

 

(301

)

5,203

 

Net cash flow used in investing activities

 

(207,752

)

(254,617

)

Cash flows from financing activities:

 

 

 

 

 

Borrowings under revolving credit facility

 

83,000

 

85,000

 

Repayments under revolving credit facility

 

(99,000

)

 

Proceeds from mortgage loans

 

 

85,000

 

Payment of mortgage principal

 

(7,279

)

(91,549

)

Repurchase of common shares

 

(1,766

)

(1,069

)

Distributions on common shares

 

(47,012

)

(33,563

)

Distributions on Operating Partnership units

 

(367

)

(282

)

Payment of deferred financing costs

 

(76

)

(1,750

)

Proceeds from issuance of common shares

 

327,545

 

 

Net cash flow provided by financing activities

 

255,045

 

41,787

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

147,036

 

(154,636

)

Cash and cash equivalents, beginning of period

 

115,861

 

310,231

 

Cash and cash equivalents, end of period

 

$

262,897

 

$

155,595

 

 

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

 

5



Table of Contents

 

RLJ Lodging Trust

Notes to the Combined Consolidated Financial Statements

(unaudited)

 

1.              Organization

 

RLJ Lodging Trust (the “Company”) was formed as a Maryland real estate investment trust (“REIT”) on January 31, 2011. The Company is a self-advised and self-administered REIT that acquires primarily premium-branded, focused-service and compact full-service hotels. The Company qualified and elected to be taxed as a REIT for U.S. federal income tax purposes, commencing with the portion of its taxable year ended December 31, 2011.

 

Substantially all of the Company’s assets are held by, and all of its operations are conducted through, RLJ Lodging Trust, L.P. (the “Operating Partnership”). The Company is the sole general partner of the Operating Partnership. As of June 30, 2013, there were 123,629,453 units of limited partnership interest in the Operating Partnership (“OP units”) outstanding and the Company owned, through a combination of direct and indirect interests, 99.3% of the outstanding OP units.

 

As of June 30, 2013, the Company owned 149 properties, comprised of 147 hotels with approximately 22,300 rooms and two planned hotel conversions, located in 22 states and the District of Columbia, interests in land parcels located adjacent to certain hotels and an interest in two mortgage loans secured by hotels.  The Company, through wholly-owned subsidiaries, owned a 100% interest in all of its properties, with the exception of the Doubletree Metropolitan Hotel New York City, in which the Company, through wholly-owned subsidiaries, owned a 95% controlling interest in a joint venture, DBT Met Hotel Venture, LP, which was formed to engage in hotel operations related to the Doubletree Metropolitan hotel. An independent operator manages each property.

 

2.              Summary of Significant Accounting Policies

 

Basis of Presentation and Principles of Consolidation

 

The accompanying unaudited combined consolidated financial statements and related notes have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and in conformity with the rules and regulations of the SEC applicable to financial information. As such, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted in accordance with the rules and regulations of the SEC.  The accompanying unaudited financial statements include adjustments based on management’s estimates (consisting of normal recurring adjustments), which the Company considers necessary for the fair statement of the combined consolidated balance sheets, statements of operations and comprehensive income, statements of changes in equity and statements of cash flows for the periods presented. The unaudited combined consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto as of and for the year ended December 31, 2012, included in our Annual Report on Form 10-K filed with the SEC on February 28, 2013.  Operating results for the three and six months ended June 30, 2013 are not necessarily indicative of actual operating results for the entire year.

 

The unaudited combined consolidated financial statements include the accounts of the Company, the Operating Partnership and its wholly-owned subsidiaries, including a joint venture.  All significant intercompany balances have been eliminated in consolidation.

 

Reporting Periods

 

As of June 30, 2013, the Company owned five hotels that were managed by affiliates of Marriott International (“Marriott”).  Beginning January 1, 2013, the Company’s hotels managed by Marriott were accounted for on a calendar year basis.  Prior to January 1, 2013, the Company’s hotels managed by Marriott were accounted for on a fiscal year comprised of 52 or 53 weeks ending on the Friday closest to December 31. The Company’s results for the three and six months ended June 30, 2012 include the results of operations for the Company’s Marriott-managed hotels for the 24-week period ended June 15, 2012.

 

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Reclassifications

 

Certain prior year amounts in these financial statements have been reclassified to conform to the current year presentation with no impact to net income, shareholders’ equity or cash flows.

 

Use of Estimates

 

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

 

Revenue Recognition

 

The Company’s revenue comprises hotel operating revenue, such as room revenue, food and beverage revenue and revenue from other hotel operating departments (such as telephone, parking and business centers). These revenues are recorded net of any sales and occupancy taxes collected from guests. All rebates or discounts are recorded as a reduction in revenue, and there are no material contingent obligations with respect to rebates and discounts offered by the hotels. All revenues are recorded on an accrual basis as earned. Appropriate allowances are made for doubtful accounts and are recorded as bad debt expense. The allowances are calculated as a percentage of aged accounts receivable.  Cash received prior to guest arrival is recorded as an advance from the guest and recognized as revenue at the time of occupancy.

 

Incentive payments received pursuant to entry into management agreements are deferred and amortized into income over the life of the respective agreements.  In May 2012, the Company received an incentive payment of $4.0 million related to purchasing a hotel and entering into a franchise agreement, which is being recognized over the remaining term of the franchise agreement.  As of June 30, 2013, there was approximately $3.9 million remaining to be recognized.

 

Investment in Hotel and Other Properties

 

The Company’s acquisitions generally consist of land, land improvements, buildings, building improvements, furniture, fixtures and equipment (“FF&E”), and inventory. The Company may also acquire intangibles related to in-place leases, management agreements and franchise agreements when properties are acquired.  The Company allocates the purchase price among the assets acquired and liabilities assumed based on their respective fair values.

 

The Company’s investments in hotels and other properties are carried at cost and are depreciated using the straight-line method over estimated useful lives of 15 years for land improvements, 15 years for building improvements, 40 years for buildings and three to five years for FF&E. Intangible assets arising from acquisitions are amortized using the straight-line method over the non-cancelable portion of the term of the agreement.  Maintenance and repairs are expensed and major renewals or improvements are capitalized. Upon the sale or disposition of a fixed asset, the asset and related accumulated depreciation are removed from the accounts and the related gain or loss is included in discontinued operations.

 

The Company considers each individual property to be an identifiable component of the business.  In accordance with the guidance on impairment or disposal of long-lived assets, the Company does not consider a property as “held for sale” until it is probable that the sale will be completed within one year and the other requisite criteria for such classification have been met.  Once a property is designated as held for sale the operations for that property are included in discontinued operations.  The Company does not depreciate properties so long as they are classified as held for sale.  Upon designation of a property as being held for sale and quarterly thereafter, the Company reviews the realizability of the carrying value, less cost to sell, in accordance with the guidance.  Any such adjustment in the carrying value of a property classified as “held for sale” is reflected in discontinued operations, as an impairment charge.

 

The Company assesses the carrying values of each property whenever events or changes in circumstances indicate that the carrying amounts of these properties may not be fully recoverable.  Recoverability of the property is measured by comparison of the carrying amount of the property to the estimated future undiscounted cash flows which take into account current market conditions and the Company’s intent with respect to holding or disposing of the property.  If the Company’s analysis indicates that the carrying value of the property is not recoverable on an undiscounted cash flow basis, it recognizes an impairment charge for the amount by which the carrying value exceeds the fair value of the property. Fair value is

 

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determined through various valuation techniques, including internally developed discounted cash flow models, comparable market transactions and third party appraisals, where considered necessary.

 

The use of projected future cash flows is based on assumptions that are consistent with a market participant’s future expectations for the travel industry and economy in general and the Company’s expected use of the underlying properties.  The assumptions and estimates about future cash flows and capitalization rates are complex and subjective.  Changes in economic and operating conditions that occur subsequent to a current impairment analysis and the Company’s ultimate use of the property could impact these assumptions and result in future impairment charges of the properties.

 

Franchise Agreements

 

As of June 30, 2013, 142 of the Company’s hotel properties were operated under franchise agreements with terms ranging from 10 to 30 years. The franchise agreements for these hotels allow the properties to operate under the respective brands. Pursuant to the franchise agreements, the Company pays a royalty fee, generally between 3.0% and 6.0% of room revenue, plus additional fees for marketing, central reservation systems and other franchisor costs that amount to between 1.0% and 4.3% of room revenue. Certain hotels are also charged a royalty fee of between 2.0% and 3.0% of food and beverage revenues.  Franchise fees are included in other hotel expenses in the accompanying unaudited combined consolidated financial statements.

 

Earnings Per Share

 

Basic earnings per common share is calculated by dividing net income attributable to common shareholders by the weighted-average number of common shares outstanding during the period excluding the weighted average number of unvested restricted shares outstanding during the period.  Diluted earnings per common share is calculated by dividing net income attributable to common shareholders by the weighted average number of common shares outstanding during the period, plus any shares that could potentially be outstanding during the period.  Potential shares consist of unvested restricted share grants and unvested performance units, calculated using the treasury stock method.  Any anti-dilutive shares have been excluded from the diluted earnings per share calculation.

 

Share-based Compensation

 

From time to time, the Company may issue share-based awards under the 2011 Equity Incentive Plan (the “2011 Plan”), as compensation to officers, employees and non-employee trustees (see Note 11). The vesting of awards issued to officers and employees is based on either continued employment (time-based) or based on the relative total shareholder returns of the Company and continued employment (performance-based), as determined by the Board of Trustees at the date of grant. For time-based awards, the Company recognizes compensation expense for non-vested shares on a straight-line basis over the vesting period based upon the fair market value of the shares on the date of grant, adjusted for forfeitures.  For performance-based awards, the Company recognizes compensation expense over the requisite service period for each award, based on the fair market value of the shares on the date of grant, as determined using a Monte Carlo simulation, adjusted for forfeitures.

 

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3.              Acquisition of Hotel and Other Properties

 

During the six months ended June 30, 2013, the Company acquired the following properties, which were funded through a combination of available cash and borrowings under its credit facility:

 

Property

 

Location

 

Acquisition Date

 

Management Company

 

Rooms

 

Purchase Price

 

%
Interest

 

Courtyard Houston Downtown

 

Houston, TX

 

March 19, 2013

 

White Lodging Services

 

191

 

$

34.3

 

million

 

100

%

Residence Inn Houston Downtown

 

Houston, TX

 

March 19, 2013

 

White Lodging Services

 

171

 

29.4

 

million

 

100

%

Humble Tower Apartments (1)

 

Houston, TX

 

March 19, 2013

 

The Sterling Group

 

82

 

15.6

 

million

 

100

%

Courtyard Waikiki Beach

 

Honolulu, HI

 

June 17, 2013

 

Highgate Hotels

 

399

 

75.3

 

million

 

100

%

Vantaggio Suites Cosmo (2)

 

San Francisco, CA

 

June 21, 2013

 

n/a

 

150

 

29.4

 

million

 

100

%

 

 

 

 

 

 

 

 

993

 

$

184.0

 

million

 

 

 

 


(1) Conversion to a 166-room SpringHill Suites expected to be complete by mid-2015.

(2) The property is not currently open for operations. Conversion to a 150-room Courtyard expected to be complete by late 2014.

 

During the six months ended June 30, 2012, the Company acquired the following properties, which were funded through a combination of available cash and borrowings under its credit facility:

 

Hotel

 

Location

 

Acquisition Date

 

Management Company

 

Rooms

 

Purchase Price

 

%
Interest

 

Residence Inn Bethesda

 

Bethesda, MD

 

May 29, 2012

 

Marriott International

 

187

 

$

64.5

 

million

 

100

%

Courtyard New York Manhattan/Upper East Side

 

New York, NY

 

May 30, 2012

 

Highgate Hotels

 

226

 

82.0

 

million

 

100

%

Hilton Garden Inn San Francisco/Oakland Bay Bridge

 

Emeryville, CA

 

June 11, 2012

 

Davidson Hotels & Resorts

 

278

 

36.2

 

million

 

100

%

 

 

 

 

 

 

 

 

691

 

$

182.7

 

million

 

 

 

 

The allocation of purchase price for the properties acquired was as follows (in thousands):

 

 

 

June 30,

 

June 30,

 

 

 

2013

 

2012

 

Land and land improvements

 

$

24,132

 

$

40,711

 

Buildings and improvements

 

160,070

 

135,727

 

Furniture, fixtures and equipment

 

3,151

 

6,220

 

Lease intangibles

 

342

 

 

Management agreement intangibles

 

(3,695

)

 

Total Purchase Price

 

$

184,000

 

$

182,658

 

 

The allocation of the purchase price for the Courtyard Waikiki Beach is preliminary due to certain market information not yet being available.  See Note 14 for detail of other assets acquired and liabilities assumed in conjunction with the Company’s acquisitions.

 

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Table of Contents

 

For the properties acquired during the six months ended June 30, 2013, total revenues and net income (loss) from the date of acquisition through June 30, 2013 are included in the accompanying combined consolidated statements of operations for the three and six months ended June 30, 2013, as follows (in thousands).  For the properties acquired during the six months ended June 30, 2012, total revenues and net income (loss) from the date of acquisition through June 30, 2012 are included in the accompanying combined consolidated statements of operations for the three and six months ended June 30, 2012, as follows (in thousands):

 

 

 

2013 acquisitions

 

 

 

For the three
months ended
June 30, 2013

 

For the six
months ended
June 30,2013

 

Revenue

 

$

5,868

 

$

6,561

 

Net income (loss)

 

$

319

 

$

(568

)

 

 

 

2012 acquisitions

 

 

 

For the three
months ended
June 30, 2012

 

For the six
months ended
June 30,2012

 

Revenue

 

$

3,022

 

$

3,022

 

Net loss

 

$

(2,413

)

$

(2,413

)

 

The following unaudited condensed pro forma financial information presents the results of operations as if the 2013 acquisitions had taken place on January 1, 2012 and the 2012 acquisitions had taken place on January 1, 2011.  The unaudited condensed pro forma financial information is not necessarily indicative of what actual results of operations of the Company would have been assuming the 2013 and 2012 acquisitions had taken place on January 1, 2012 and 2011, respectively, nor does it purport to represent the results of operations for future periods.  Operating results for the Vantaggio Suites Cosmo have not been included in the following unaudited condensed pro forma financial information as the acquisition was an asset purchase, not a business combination.  The unaudited condensed pro forma financial information is as follows (in thousands, except share and per share data):

 

 

 

For the three months ended June 30,

 

For the six months ended June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Revenue

 

$

266,219

 

$

244,531

 

$

492,266

 

$

447,920

 

Net income

 

$

39,663

 

$

24,948

 

$

51,914

 

$

21,287

 

Net income per share attributable to common shareholders - basic

 

$

0.33

 

$

0.24

 

$

0.45

 

$

0.20

 

Net income per share attributable to common shareholders - diluted

 

$

0.32

 

$

0.24

 

$

0.45

 

$

0.20

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares outstanding - basic

 

121,520,253

 

105,388,743

 

114,208,435

 

105,360,778

 

Weighted average number of shares outstanding - diluted

 

122,280,431

 

105,454,679

 

114,912,726

 

105,414,876

 

 

4.              Discontinued Operations

 

In November 2011, the Company elected to cease the subsidization of debt service on the mortgage loan secured by the SpringHill Suites Southfield, Michigan. In January 2012, the Company received notice of an event of default for failure to

 

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make the required monthly payments. Under the terms of the mortgage loan, the lender received the monthly net cash from operations from the hotel. In December 2012, the Company entered into a deed in lieu of foreclosure agreement with the lender, providing for a consensual transfer of the property to the lender or its designee.  On May 30, 2013, the Company transferred title to the hotel to the lenders pursuant to the deed in lieu of foreclosure arrangement.  The Company removed the hotel’s net assets and liabilities in its combined consolidated balance sheet in May 2013 and recorded a gain on extinguishment of indebtedness of approximately $2.4 million to discontinued operations at that time.

 

Operating results of discontinued operations were as follows (in thousands):

 

 

 

For the three months ended June 30,

 

For the six months ended June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Operating revenues

 

$

353

 

$

454

 

$

805

 

$

852

 

Operating expenses

 

270

 

400

 

676

 

783

 

Operating income

 

83

 

54

 

129

 

69

 

Interest expense

 

(93

)

(1

)

(163

)

(71

)

Income (loss) from discontinued operations before gain on sale

 

(10

)

53

 

(34

)

(2

)

Gain on extinguishment of indebtedness

 

2,425

 

 

2,425

 

 

Net income (loss) from discontinued operations

 

$

2,415

 

$

53

 

$

2,391

 

$

(2

)

 

5.              Investment in Hotel and Other Properties

 

Investment in hotel and other properties as of June 30, 2013 and December 31, 2012 consisted of the following (in thousands):

 

 

 

June 30,

 

December 31,

 

 

 

2013

 

2012

 

Land and land improvements

 

$

587,616

 

$

563,524

 

Buildings and improvements

 

2,823,966

 

2,655,086

 

Furniture, fixtures and equipment

 

455,374

 

438,807

 

Intangibles

 

2,199

 

1,857

 

 

 

3,869,155

 

3,659,274

 

Accumulated depreciation and amortization

 

(647,484

)

(585,791

)

Investment in hotel and other properties, net

 

$

3,221,671

 

$

3,073,483

 

 

For the three and six months ended June 30, 2013, depreciation and amortization expense related to investment in hotel and other properties was approximately $31.8 million and $63.1 million (excluding discontinued operations), respectively. For the three and six months ended June 30, 2012, depreciation and amortization expense related to investment in hotel and other properties was approximately $31.3 million and $64.9 million (excluding discontinued operations), respectively.

 

Impairment

 

The Company determined that there was no impairment of any assets for each of the three or six month periods ended June 30, 2013 or 2012.

 

6.              Debt

 

Revolving Credit Facility and Term Loans

 

The Company entered into a credit agreement on November 20, 2012 that provides for (i) an unsecured revolving credit facility of up to $300.0 million with a scheduled maturity date of November 20, 2016 with a one-year extension option (the “Revolver”), and (ii) an unsecured term loan of $275.0 million with a scheduled maturity date of November 20, 2017 (the “Five-Year Term Loan”).   The credit agreement amends and restates in its entirety the Company’s prior unsecured revolving

 

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credit facility, which was originally entered into as of June 20, 2011.  In addition, on November 20, 2012 the Company also entered into an unsecured term loan of $125.0 million with a scheduled maturity date of November 20, 2019 (the “Seven-Year Term Loan”).

 

The credit agreements for these loans require that a group of no less than 20 of the Company’s hotel properties remain unencumbered by outstanding indebtedness.  The credit agreements contain certain financial covenants relating to the Company’s maximum leverage ratio, minimum fixed charge coverage ratio, minimum tangible net worth and maximum secured indebtedness.  If an event of default exists, the Company is not permitted to make distributions to shareholders, other than those required to qualify for and maintain REIT status.  As of June 30, 2013, the Company was in compliance with all financial covenants.

 

The Company incurred $5.2 million in fees related to the credit agreements that were deferred and are being amortized over the term of the Revolver, the Five-Year Term Loan and the Seven-Year Term Loan, respectively.

 

Borrowings under the Revolver, the Five-Year Term Loan and the Seven-Year Term Loan bear interest at variable rates equal to the London InterBank Offered Rate (“LIBOR”) plus an applicable margin.  The margin ranges from 1.70% to 3.00%, depending on the Company’s leverage ratio, as calculated under the terms of each facility.  The Company incurs an unused facility fee on the Revolver of between 0.25% and 0.35%, based on the amount by which the maximum borrowing amount exceeds the total principal balance of outstanding borrowings.

 

Under the terms of the credit agreement for the Revolver, one or more standby letters of credit, up to a maximum aggregate outstanding balance of $30.0 million, may be issued on behalf of the Company by the lenders under the Revolver.  The Company will incur a fee of 0.125% of the value of each standby letter of credit that is issued on its behalf.  Any outstanding standby letters of credit would reduce the available borrowings on the Revolver by a corresponding amount.  No standby letters of credit were outstanding at June 30, 2013. The Company also may borrow up to a maximum aggregate outstanding balance of $40.0 million of swingline loans.  Any outstanding swingline loans reduce the available borrowings under the Revolver by a corresponding amount.  No swingline loans were outstanding at June 30, 2013.

 

For the three and six months ended June 30, 2013, the Company incurred an unused commitment fee on the Revolver of approximately $0.3 million and $0.5 million, respectively.  At June 30, 2013, outstanding borrowings on the Revolver, the Five-Year Term Loan and the Seven-Year Term Loan were zero, $275.0 million and $125.0 million, respectively.  At June 30, 2013, the interest rates on the Five-Year Term Loan and the Seven-Year Term Loan were 2.04% and 2.44%, respectively. For the three months ended June 30, 2013, interest expense incurred on the Revolver, the Five-Year Term Loan and the Seven-Year Term Loan was zero, $1.4 million and $0.8 million, respectively.  For the six months ended June 30, 2013, interest expense incurred on the Revolver, the Five-Year Term Loan and the Seven-Year Term Loan was $0.1 million, $2.8 million and $1.5 million, respectively.

 

Prior Credit Facility

 

The Company entered into an unsecured revolving credit facility on June 20, 2011, that provided for maximum borrowings of up to $300.0 million.  The credit facility required that a group of no less than 15 of the Company’s hotel properties remain unencumbered by outstanding indebtedness.  The credit facility contained certain financial covenants relating to the Company’s maximum leverage ratio, minimum fixed charge coverage ratio, minimum tangible net worth and maximum secured indebtedness.  If an event of default existed, the Company was not permitted to make distributions to shareholders, other than those required to qualify for and maintain REIT status.  As of June 30, 2012, the Company was in compliance with all financial covenants.   On November 20, 2012, the unsecured revolving credit facility agreement was amended and restated in its entirety with the Revolver and Five-Year Term Loan as discussed above.

 

The Company incurred $3.0 million in fees related to the credit facility that were deferred and were being amortized over the term of the credit facility.  On November 20, 2012, when the unsecured revolving credit facility agreement was amended and restated in its entirety, approximately $1.7 million of the fees unamortized at the time of the amendment and restatement were transferred to the Revolver and will be amortized over the term of that credit facility.

 

Borrowings under the credit facility bore interest at variable rates equal to LIBOR plus an applicable margin.  The margin ranged from 2.25% to 3.25%, depending on the Company’s leverage ratio, as calculated under the terms of the credit facility.  The Company incurred an unused facility fee of between 0.30% and 0.40%, based on the amount by which the maximum

 

12



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borrowing amount exceeded the total principal balance of outstanding borrowings.

 

The Company incurred interest expense on the credit facility for the three and six months ended June 30, 2012 of approximately $0.6 million and $0.6 million, respectively.  For the three and six months ended June 30, 2012, the Company incurred an unused commitment fee of approximately $0.2 million and $0.5 million, respectively.  There were $85.0 million of borrowings outstanding at June 30, 2012.

 

Mortgage Loans

 

As of June 30, 2013 and December 31, 2012, the Company was subject to the following mortgage loans (in thousands):

 

 

 

Number

 

Interest rate at

 

 

 

 

 

 

 

 

 

of Assets

 

June 30,

 

Maturity

 

Principal balance at,

 

Lender 

 

Encumbered

 

2013 (1)

 

Date

 

June 30, 2013

 

December 31, 2012

 

Wells Fargo

 

1

 

4.60%

(2)

Oct 2014

(3)

$

68,500

 

$

68,500

 

Wells Fargo

 

1

 

3.79%

(2)

Oct 2014

(3)

17,500

 

17,500

 

Wells Fargo

 

1

 

3.79%

(2)

Oct 2014

(3)

21,000

 

21,000

 

Wells Fargo

 

1

 

3.79%

(2)

Oct 2014

(3)

11,000

 

11,000

 

Wells Fargo

 

1

 

3.79%

(2)

Oct 2014

(3)

24,000

 

24,000

 

Capmark Financial Group

 

1

 

6.12%

 

April 2015

 

4,135

 

4,202

 

Capmark Financial Group

 

1

 

5.55%

 

May 2015

 

11,107

 

11,298

 

Capmark Financial Group

 

1

 

5.55%

 

June 2015

 

4,818

 

4,901

 

Barclay’s Bank

 

1

 

5.55%

 

June 2015

 

2,518

 

2,561

 

Barclay’s Bank

 

1

 

5.55%

 

June 2015

 

4,133

 

4,203

 

Barclay’s Bank

 

1

 

5.55%

 

June 2015

 

9,634

 

9,798

 

Barclay’s Bank

 

1

 

5.55%

 

June 2015

 

8,598

 

8,745

 

Barclay’s Bank

 

1

 

5.55%

 

June 2015

 

7,708

 

7,839

 

Barclay’s Bank

 

1

 

5.60%

 

June 2015

 

5,345

 

5,434

 

Barclay’s Bank

 

1

 

5.60%

 

June 2015

 

8,282

 

8,422

 

Barclay’s Bank

 

1

 

5.55%

 

June 2015

 

5,048

 

5,134

 

Barclay’s Bank

 

1

 

5.55%

 

June 2015

 

33,472

 

34,042

 

Barclay’s Bank

 

1

 

5.60%

 

June 2015

 

6,359

 

6,466

 

Barclay’s Bank

 

1

 

5.55%

 

June 2015

 

5,665

 

5,762

 

Barclay’s Bank

 

1

 

5.55%

 

June 2015

 

6,510

 

6,621

 

Barclay’s Bank

 

1

 

5.60%

 

June 2015

 

8,296

 

8,437

 

Barclay’s Bank

 

1

 

5.55%

 

June 2015

 

6,504

 

6,614

 

Barclay’s Bank

 

1

 

5.55%

 

June 2015

 

7,159

 

7,280

 

Barclay’s Bank

 

1

 

5.55%

 

June 2015

 

6,510

 

6,621

 

Barclay’s Bank

 

1

 

5.55%

 

June 2015

 

7,431

 

7,558

 

Barclay’s Bank

 

1

 

5.55%

 

June 2015

 

9,326

 

9,484

 

Capmark Financial Group

 

1

 

5.50%

 

July 2015

 

6,562

 

6,673

 

Barclay’s Bank

 

1

 

5.44%

 

Sept 2015

 

10,702

 

10,883

 

PNC Bank (4)

 

7

 

2.54%

(2)

May 2016

(5)

85,000

 

85,000

 

Merrill Lynch

 

1

 

6.29%

 

July 2016

 

9,117

 

9,180

 

Merrill Lynch

 

1

 

6.29%

 

July 2016

 

5,531

 

5,531

 

Merrill Lynch

 

1

 

6.29%

 

July 2016

 

7,631

 

7,684

 

Merrill Lynch

 

1

 

6.29%

 

July 2016

 

9,133

 

9,194

 

Wachovia Securities (6)

 

43

 

6.29%

 

July 2016

 

483,949

 

487,296

 

Wachovia Securities

 

1

 

6.29%

 

July 2016

 

6,537

 

6,582

 

Wells Fargo / Morgan Stanley

 

2

 

6.29%

 

July 2016

 

34,583

 

34,823

 

Wells Fargo / Morgan Stanley

 

1

 

6.29%

 

July 2016

 

6,706

 

6,753

 

Wells Fargo / Morgan Stanley

 

1

 

6.29%

 

July 2016

 

9,549

 

9,616

 

VFC Partners 20 LLC

 

 

 

 

 

 

 

(7)

5,014

 

 

 

87

 

 

 

 

 

$

985,558

 

$

997,651

 

 


(1)         Interest rate at June 30, 2013 gives effect to interest rate hedges and LIBOR floors, as applicable.

(2)         Requires payments of interest only until the commencement of the extension period(s).

(3)         Maturity date may be extended for up to two additional one-year terms at the Company’s option (subject to the Company’s prior satisfaction of certain conditions and advance notice of the exercise of the Company’s option).

(4)         The seven hotels encumbered by the PNC Bank loan are cross-collateralized.

(5)         Maturity date may be extended for one one-year term at the Company’s option (subject to the Company’s prior satisfaction of certain conditions and advance notice of the exercise of the Company’s option).

(6)         The 43 hotels encumbered by the Wachovia Securities loans are cross-collateralized.

(7)         Loan was extinguished in May 2013 in conjunction with the transfer of title pursuant to a deed in lieu of foreclosure arrangement.

 

Some mortgage agreements are subject to customary financial covenants.  The Company was in compliance with these

 

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covenants at June 30, 2013 and December 31, 2012.

 

In November 2011, the Company elected to cease the subsidization of debt service on the mortgage loan secured by the Courtyard Goshen, Indiana.  In December 2011, the Company received notice of an event of default for failure to make the required monthly payments.  In May 2012, an Order Appointing Receiver (the “Order”) was entered in the Elkhart County, Indiana, Superior Court No. 1.  In June 2012, the receiver, pursuant to the Order, took control of the property for the benefit of the lender of the mortgage loan.  As of June 30, 2013, the principal balance outstanding was $5.5 million.  In February 2013, the lender filed suit against the Company claiming amounts due from the Company in its capacity as a guarantor of certain borrower obligations.  The Company disputes the lender’s claim and intends to defend itself against the claim.

 

7.              Financial Instruments: Derivatives and Hedging

 

The Company employs interest rate swaps and caps to hedge against interest rate fluctuations. For derivative instruments designated as cash flow hedges, unrealized gains and losses on the effective portion are reported in accumulated other comprehensive income (loss), a component of shareholders’ equity.  Unrealized gains and losses on the ineffective portion of all designated hedges are recognized in earnings in the current period.  For derivative instruments not designated as hedging instruments, unrealized gains or losses are recognized in earnings in the current period.

 

At June 30, 2013, the fair value of interest rate swap assets of $4.5 million was included in prepaid expenses and other assets in the accompanying combined consolidated financial statements.  At June 30, 2013 and December 31, 2012, the aggregate fair value of interest rate swap liabilities of $0.2 million and $0.5 million, respectively, was included in accounts payable and accrued expenses in the accompanying combined consolidated financial statements.

 

As of June 30, 2013 and December 31, 2012, the Company had entered into the following interest rate swaps and caps (in thousands):

 

 

 

Notional value at

 

Hedge

 

 

 

Fair value at

 

Hedge type

 

June 30, 2013

 

December 31, 2012

 

interest rate

 

Maturity

 

June 30, 2013

 

December 31, 2012

 

Swap-cash flow (1)

 

$

40,000

 

$

40,000

 

1.00

%

10/6/2013

 

$

(112

)

$

(265

)

Swap-cash flow (1)

 

31,000

 

31,000

 

1.00

%

10/6/2013

 

(87

)

(205

)

Interest rate cap (1)

 

 

60,000

 

1.00

%

6/29/2013

 

 

 

Swap-cash flow (2)

 

275,000

 

 

1.12

%

11/20/2017

 

4,527

 

 

 

 

$

346,000

 

$

131,000

 

 

 

 

 

$

4,328

 

$

(470

)

 


(1) Undesignated as a cash flow hedge

(2) Designated as a cash flow hedge

 

As of June 30, 2013 and December 31, 2012, there was approximately $4.5 million and zero, respectively, in unrealized gains included in accumulated other comprehensive income related to interest rate hedges that are effective in offsetting the variable cash flows.  There was no ineffectiveness recorded on designated hedges during each the three or six months ended June 30, 2013 or 2012.

 

8.              Fair Value

 

Fair Value Measurement

 

Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or most advantageous market.  The fair value hierarchy has three levels of inputs, both observable and unobservable:

 

·                  Level 1— Inputs include quoted market prices in an active market for identical assets or liabilities.

 

·                  Level 2 — Inputs are market data, other than Level 1, that are observable either directly or indirectly.  Level 2 inputs include quoted market prices for similar assets or liabilities, quoted market prices in an inactive market, and other observable information that can be corroborated by market data.

 

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·                  Level 3 — Inputs are unobservable and corroborated by little or no market data.

 

Fair Value of Financial Instruments

 

The estimated fair values of financial instruments have been determined by the Company using available market information and appropriate valuation methods.  Considerable judgment is required in interpreting market data to develop the estimates of fair value.  Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange.  The use of different market assumptions and/or estimation methods may have a material effect on the estimated fair value amounts.  The Company used the following market assumptions and/or estimation methods:

 

·                  Cash and cash equivalents, hotel receivables, accounts payable and accrued expenses - The carrying amounts reported in the combined consolidated balance sheet for these financial instruments approximate fair value because of their short maturities.

 

·                  Investment in collateralized loans - Fair value is determined by obtaining a third-party appraisal or discounting the future contractual cash flows to the present value using a current market interest rate. The market rate is determined by giving consideration to one or both of the following criteria, as appropriate: (1) interest rates for loans of comparable quality and maturity, and (2) the value of the underlying collateral. The fair values of the Company’s investment in collateralized loans are generally classified within Level 3 of the valuation hierarchy.  The fair value at June 30, 2013 and December 31, 2012 was $22.1 million and $23.0 million, respectively.

 

·                  Variable rate mortgage notes payable and borrowings under the credit facility - The carrying amounts reported in the combined consolidated balance sheets for these financial instruments approximate fair value.  The Company estimates the fair value of its variable rate debt by using estimated market rates for similar loans with similar terms and loan to value ratios, which is a Level 3 input. As a result, the Company determined that its variable rate mortgage notes payable in their entirety are classified in Level 3 of the fair value hierarchy.

 

·                  Fixed rate mortgage notes payable - The fair value estimated at June 30, 2013 and December 31, 2012 of $735.6 million and $745.3 million, respectively, is calculated based on the net present value of payments over the term of the loans using estimated market rates for similar mortgage loans with similar terms and loan to value ratios, which is a Level 3 input. As a result, the Company determined that its fixed rate mortgage notes payable in their entirety are classified in Level 3 of the fair value hierarchy.  The carrying value of fixed rate mortgage notes payable at June 30, 2013 and December 31, 2012 was $758.6 million and $770.7 million, respectively.

 

Recurring Fair Value Measurements

 

The following table presents the Company’s fair value hierarchy for those financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2013 (in thousands):

 

 

 

Fair Value at June 30, 2013

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Interest rate swap asset

 

$

 

$

4,527

 

$

 

$

4,527

 

Interest rate swap liability

 

$

 

$

(199

)

$

 

$

(199

)

Total

 

$

 

$

4,328

 

$

 

$

4,328

 

 

The fair values of the derivative financial instruments are determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. The Company determined that the significant inputs, such as interest yield curves and discount rates, used to value its derivatives fall within Level 2 of the fair value hierarchy and that the credit valuation adjustments associated with the Company’s counterparties and its own credit risk utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its

 

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counterparties. As of June 30, 2013, the Company assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and determined that the credit valuation adjustments were not significant to the overall valuation of its derivatives. As a result, the Company determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

 

9.              Income Taxes

 

The Company elected to be taxed as a real estate investment trust under Sections 856 through 860 of the Internal Revenue Code when it filed its U.S. federal tax return for its short taxable year ended December 31, 2011.  To qualify as a REIT, the Company must meet a number of organizational and operational requirements, including a requirement that it distribute at least 90% of its adjusted taxable income to its shareholders, subject to certain adjustments and excluding any net capital gain.  The Company’s intention is to adhere to these requirements and maintain the qualification for taxation as a REIT.  As a REIT, the Company is not subject to federal corporate income tax on that portion of net income that is currently distributed to its shareholders.  However, the Company’s taxable REIT subsidiaries (“TRS”) will generally be subject to federal, state, and local income taxes.

 

The Company accounts for income taxes using the asset and liability method.  Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities from a change in tax rates is recognized in earnings in the period when the new rate is enacted.

 

The Company had no accruals for tax uncertainties as of June 30, 2013 and December 31, 2012.

 

10.       Commitments and Contingencies

 

Ground Leases

 

The Courtyard Waikiki Beach is subject to a ground lease with a term extending to 2112.  The annual ground rent is $3.5 million through 2016, after which the annual rent shall increase by the increase, if any, in the Consumer Price Index (“CPI”) from the immediately preceding calendar year.  The increase is limited to five percent per annum for the first 10 years in which the annual rent is subject to increase, and six percent per annum during the seven subsequent years in which the annual rent is subject to increase.  Thereafter, there is no cap on the increase in the CPI.  For both the three and six months ended June 30, 2013, $0.1 million of rent was incurred.  There was no ground rent expense in 2012 as this property was acquired in 2013.

 

Restricted Cash Reserves

 

The Company is obligated to maintain reserve funds for capital expenditures at the hotels (including the periodic replacement or refurbishment of FF&E) as determined pursuant to the management agreements, franchise agreements and/or mortgage loan documents. The management agreements, franchise agreements and/or mortgage loan documents require the Company to reserve restricted cash ranging from 1.0% to 5.0% of the individual hotel’s revenues and maintain the reserves in restricted cash reserve escrows. Any unexpended amounts will remain the property of the Company upon termination of the management agreements, franchise agreements or mortgage loan documents. Additionally, some loan agreements require the Company to reserve restricted cash for the periodic payment of real estate taxes and insurance. As of June 30, 2013 and December 31, 2012, approximately $65.1 million and $64.8 million, respectively, was available in restricted cash reserves for future capital expenditures, real estate taxes and insurance.

 

Litigation

 

Neither the Company nor any of its subsidiaries are currently involved in any regulatory or legal proceedings that management believes will have a material adverse effect on the financial position, operations or liquidity of the Company.

 

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11.       Equity Incentive Plan

 

The Company may issue equity-based awards to officers, employees, non-employee trustees and other eligible persons under the 2011 Plan. The 2011 Plan provides for a maximum of 5,000,000 common shares of beneficial interest to be issued in the form of share options, share appreciation rights, restricted share awards, unrestricted share awards, share units, dividend equivalent rights, long-term incentive units, other equity-based awards and cash bonus awards.

 

Non-vested Restricted Share Awards

 

From time to time, the Company may award non-vested shares under the 2011 Plan, as compensation to officers, employees and non-employee trustees. The shares issued to officers and employees vest over a period of time as determined by the Board of Trustees at the date of grant. The Company recognizes compensation expense for non-vested shares on a straight-line basis over the vesting period based upon the fair market value of the shares on the date of issuance, adjusted for forfeitures.

 

A summary of the non-vested shares as of June 30, 2013 is as follows:

 

 

 

2013

 

 

 

Number of
Shares

 

Weighted Average
Grant Date Fair
Value

 

Unvested at January 1,

 

1,013,673

 

$

17.80

 

Granted

 

377,830

 

21.55

 

Vested

 

(215,538

)

18.21

 

Forfeited

 

(2,270

)

18.90

 

Unvested at June 30,

 

1,173,695

 

$

18.93

 

 

For the three and six months ended June 30, 2013, the Company recognized approximately $2.2 million and $4.1 million, respectively, of share-based compensation expense related to these restricted share awards.  For the three and six months ended June 30, 2012, the Company recognized approximately $1.7 million and $3.2 million, respectively, of share-based compensation expense related to these restricted share awards.  As of June 30, 2013, there was $21.2 million of total unrecognized compensation costs related to non-vested share awards and these costs were expected to be primarily recognized over a weighted-average period of 2.7 years. The total fair value of shares vested (calculated as number of shares multiplied by vesting date share price) during the six months ended June 30, 2013 was approximately $4.8 million.

 

Performance Units

 

The Company awarded performance units to certain employees under the 2011 Plan.  The performance units vest over a four-year period, including three years of performance-based vesting (“measurement period”) plus an additional one year of time-based vesting.

 

As of June 30, 2013, there were 1.0 million unvested performance units outstanding with a weighted average grant date fair value of $15.36 per performance unit.

 

For the three and six months ended June 30, 2013, the Company recognized $1.1 million and $2.2 million, respectively, of share-based compensation expense related to performance unit awards.  There was no share-based compensation expense during the three or six months ended June 30, 2012 related to the performance units as they were granted in the third quarter of 2012.  As of June 30, 2013, there was $11.2 million of total unrecognized compensation cost related to the performance units and these costs are expected to be recognized over a weighted-average period of 2.6 years.

 

As of June 30, 2013, there were 3,077,497 common shares available for future grant under the 2011 Plan.  Any performance units that convert into restricted shares will reduce the number of common shares available for future grant under the 2011 Plan.

 

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12.       Earnings per Common Share

 

Basic earnings per common share is calculated by dividing net income attributable to common shareholders by the weighted-average number of common shares outstanding during the period excluding the weighted average number of unvested restricted shares outstanding during the period. Diluted earnings per common share is calculated by dividing net income attributable to common shareholders by the weighted average number of common shares outstanding during the period, plus any shares that could potentially be outstanding during the period. Potential shares consist of unvested restricted share grants and unvested performance units, calculated using the treasury stock method. Any anti-dilutive shares have been excluded from the diluted earnings per share calculation.

 

Unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating shares and are considered in the computation of earnings per share pursuant to the two-class method. If there were any undistributed earnings allocable to participating shares, they would be deducted from net income attributable to common shareholders utilized in the basic and diluted earnings per share calculations.

 

For the three months ended June 30, 2013 and 2012, approximately $0.1 million and $12,000, respectively, represented undistributed earnings that were allocable to participating shares.  For the six months ended June 30, 2013 and 2012, no earnings representing undistributed earnings were allocated to participating shares because the Company paid dividends in excess of net income.

 

The limited partners’ outstanding limited partnership units in the Operating Partnership (which may be redeemed for common shares of beneficial interest under certain circumstances) have been excluded from the diluted earnings per share calculation as there was no effect on the amounts for the three and six months ended June 30, 2013 and 2012, since the limited partners’ share of income would also be added back to net income attributable to common shareholders.

 

The computation of basic and diluted earnings per common share is as follows (in thousands, except share and per share data):

 

 

 

For the three months ended,

 

For the six months ended,

 

 

 

June 30, 2013

 

June 30, 2012

 

June 30, 2013

 

June 30, 2012

 

Numerator:

 

 

 

 

 

 

 

 

 

Net income attributable to common shareholders before discontinued operations

 

$

38,095

 

$

18,832

 

$

46,612

 

$

12,374

 

Add: Income (loss) from discontinued operations

 

2,415

 

53

 

2,391

 

(2

)

Net income attributable to common shareholders

 

40,510

 

18,885

 

49,003

 

12,372

 

Less: Dividends paid on unvested restricted shares

 

(241

)

(199

)

(497

)

(411

)

Less: Undistributed earnings attributable to unvested restricted shares

 

(124

)

(12

)

 

 

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

 

$

40,145

 

$

18,674

 

$

48,506

 

$

11,961

 

Denominator:

 

 

 

 

 

 

 

 

 

Weighted-average number of common shares - basic

 

121,520,253

 

105,388,743

 

114,208,435

 

105,360,778

 

Unvested restricted shares

 

247,894

 

65,936

 

211,290

 

54,098

 

Unvested performance units

 

512,284

 

 

493,001

 

 

Weighted-average number of common shares - diluted

 

122,280,431

 

105,454,679

 

114,912,726

 

105,414,876

 

 

 

 

 

 

 

 

 

 

 

Net income per share attributable to common shareholders before discontinued operations - basic

 

$

0.31

 

$

0.18

 

$

0.41

 

$

0.11

 

Discontinued operations

 

0.02

 

 

0.02

 

 

Net income per share attributable to common shareholders - basic

 

$

0.33

 

$

0.18

 

$

0.43

 

$

0.11

 

 

 

 

 

 

 

 

 

 

 

Net income per share attributable to common shareholders before discontinued operations - diluted

 

$

0.31

 

$

0.18

 

$

0.41

 

$

0.11

 

Discontinued operations

 

0.02

 

 

0.02

 

 

Net income per share attributable to common shareholders - diluted

 

$

0.33

 

$

0.18

 

$

0.43

 

$

0.11

 

 

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13.       Related Party Transactions

 

RLJ Companies LLC and its affiliates, a related party, periodically provide or receive services or pay or collect certain amounts to or from the Company. At June 30, 2013 and December 31, 2012, there was approximately $56,000 and $45,000, respectively, due from RLJ Companies, LLC which was included in other assets.

 

14.       Supplemental Information to Statements of Cash Flows (in thousands)

 

 

 

For the six months ended June 30,

 

 

 

2013

 

2012

 

 

 

 

 

 

 

Interest paid

 

$

32,441

 

$

38,265

 

 

 

 

 

 

 

Income taxes paid

 

$

1,108

 

$

1,221

 

 

 

 

 

 

 

Supplemental investing and financing transactions:

 

 

 

 

 

In conjunction with the acquisitions, the Company acquired and assumed the following assets and liabilities:

 

 

 

 

 

Purchase of real estate

 

$

187,695

 

$

182,658

 

Accounts receivable

 

708

 

71

 

Other assets

 

340

 

556

 

Advance deposits

 

(313

)

(163

)

Accounts payable and accrued expenses

 

(4,265

)

(432

)

Acquisition of hotel and other properties

 

$

184,165

 

$

182,690

 

 

 

 

 

 

 

In conjunction with the hotel disposals, the Company disposed of the following assets and liabilities:

 

 

 

 

 

Sale of real estate

 

$

(2,458

)

$

 

Other assets

 

(503

)

 

Other liabilities

 

572

 

 

Gain on extinguishment of indebtedness

 

(2,425

)

 

Forgiveness of indebtedness

 

4,814

 

 

Disposition of hotel properties

 

$

 

$

 

 

 

 

 

 

 

Supplemental non-cash transactions:

 

 

 

 

 

Change in fair market value of designated interest rate swaps

 

$

4,527

 

$

375

 

 

 

 

 

 

 

Accrued capital expenditures

 

$

109

 

$

1,813

 

 

 

 

 

 

 

Distributions payable

 

$

26,111

 

$

17,742

 

 

15.       Subsequent Events

 

On July 15, 2013, the Company paid a dividend of $0.205 per common share to shareholders of record at June 28, 2013.

 

On August 6, 2013, the Company was the successful bidder at a foreclosure sale of the 78-room Residence Inn Atlanta Midtown/Historic.  The property collateralized one of the mortgage loans held by the Company.

 

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Item 2.   Management’s Discussion and Analysis of Results of Operations and Financial Condition.

 

The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this report, as well as the information contained in our Annual Report on Form 10-K for the year ended December 31, 2012, filed with the SEC on February 28, 2013 (the “Annual Report”), which is accessible on the SEC’s website at www.sec.gov.

 

Statement Regarding Forward-Looking Information

 

The following information contains certain statements, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, that are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements generally are identified by the use of the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “plan,” “may,” “will,” “will continue,” “intend,” “should,” “may” or similar expressions.   Although we believe that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, beliefs and expectations, such forward-looking statements are not predictions of future events or guarantees of future performance and our actual results could differ materially from those set forth in the forward-looking statements.  Some factors that might cause such a difference include the following: the current global economic uncertainty, increased direct competition, changes in government regulations or accounting rules, changes in local, national and global real estate conditions, declines in the lodging industry, seasonality of the lodging industry, risks related to natural disasters, such as earthquakes and hurricanes, hostilities, including future terrorist attacks or fear of hostilities that affect travel, our ability to obtain lines of credit or permanent financing on satisfactory terms, changes in interest rates, access to capital through offerings of our common and preferred shares of beneficial interest, or debt, our ability to identify suitable acquisitions, our ability to close on identified acquisitions and integrate those businesses and inaccuracies of our accounting estimates.  Given these uncertainties, undue reliance should not be placed on such statements.

 

Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. We caution investors not to place undue reliance on these forward-looking statements and urge investors to carefully review the disclosures we make concerning risks and uncertainties in the sections entitled “Risk Factors,” “Forward-Looking Statements,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report, as well as risks, uncertainties and other factors discussed in this Quarterly Report on Form 10-Q and identified in other documents filed by us with the SEC.

 

Overview

 

We are a self-advised and self-administered Maryland real estate investment trust, or REIT, that acquires primarily premium-branded, focused-service and compact full-service hotels. We are one of the largest U.S. publicly-traded lodging REITs in terms of both number of hotels and number of rooms. Our hotels are concentrated in urban and dense suburban markets that we believe exhibit multiple demand generators and high barriers to entry.

 

Our strategy is to acquire primarily premium-branded, focused-service and compact full-service hotels. Focused-service hotels typically generate most of their revenue from room rentals, have limited food and beverage outlets and meeting space and require fewer employees than traditional full-service hotels. We believe premium-branded, focused-service and compact full-service hotels have the potential to generate attractive returns relative to other types of hotels due to their ability to achieve RevPAR levels at or close to those achieved by traditional full-service hotels while achieving higher profit margins due to their more efficient operating model and less volatile cash flows.

 

We recognize the challenging geopolitical environment and the possibility that the current economic recovery might not be as robust as anticipated or that economic conditions could deteriorate.  However, with growth in lodging supply expected to be below historical averages for the next few years and corporate profits rising, we currently do not anticipate any significant slowdown in lodging fundamentals.  Accordingly, we remain cautiously optimistic that we are in the midst of a multiyear lodging recovery.

 

Furthermore, we believe that attractive acquisition opportunities that meet our investment profile remain available in the market. We believe our cash on hand and expected access to capital (including availability under our unsecured revolving

 

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credit facility) along with our senior management team’s experience, extensive industry relationships and asset management expertise, will enable us to compete effectively for such acquisitions and enable us to generate additional internal and external growth.

 

As of June 30, 2013, we owned 149 properties, comprised of 147 hotels with approximately 22,300 rooms and two planned hotel conversions, located in 22 states and the District of Columbia, interests in land parcels located adjacent to certain hotels and an interest in two mortgage loans secured by hotels.  We own, through wholly-owned subsidiaries, 100% of the interests in 146 hotels and two planned hotel conversions and a 95% interest in one hotel.

 

We elected to be taxed as a REIT, for U.S. federal income tax purposes, when we filed our U.S. federal tax return for the taxable year ended December 31, 2011. Substantially all of our assets are held by, and all of our operations are conducted through, our operating partnership RLJ Lodging Trust, L.P. (the “Operating Partnership”). We are the sole general partner of our operating partnership. As of June 30, 2013, we owned, through a combination of direct and indirect interests, 99.3% of the units of limited partnership interest in the Operating Partnership (“OP units”).

 

Our Customers

 

Substantially all of our hotels consist of premium-branded focused-service and compact full-service hotels. As a result of this property profile, the majority of our customers are transient in nature. Transient business typically represents individual business or leisure travelers. The majority of our hotels are located in the business districts and suburban markets of major metropolitan areas. Accordingly, business travelers represent the majority of the transient demand at our hotels. As a result, macroeconomic factors impacting business travel have a greater effect on our business than factors impacting leisure travel.

 

Group business is typically defined as a minimum of 10 guestrooms booked together as part of the same piece of business. Group business may or may not use the meeting space at any given hotel. Given the limited meeting space at the majority of our hotels, group business that utilizes meeting space represents a smaller component of our customer base.

 

A number of our hotels are affiliated with brands marketed toward extended-stay customers. Extended-stay customers are generally defined as those staying five nights or longer. Reasons for extended stays may include, but are not limited to, training and/or special project business, relocation, litigation and insurance claims.

 

Our Revenues and Expenses

 

Our revenue is primarily derived from hotel operations, including the sale of rooms, food and beverage revenue and other operating department revenue, which consists of telephone, parking and other guest services.

 

Our operating costs and expenses consist of the costs to provide hotel services, including room expense, food and beverage expense, management fees and other operating expenses. Room expense includes housekeeping wages and payroll taxes, reservation systems, room supplies, laundry services and front desk costs. Food and beverage expense primarily includes the cost of food, the cost of beverages and associated labor costs. Other hotel expenses include labor and other costs associated with the other operating department revenue, as well as labor and other costs associated with administrative departments, franchise fees, sales and marketing, repairs and maintenance and utility costs. Our hotels are managed by independent, third-party management companies under long-term agreements under which the management companies typically earn base and incentive management fees based on the levels of revenues and profitability of each individual hotel. We generally receive a cash distribution from the hotel management companies on a monthly basis, which reflects hotel-level sales less hotel-level operating expenses.

 

Critical Accounting Policies

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of our financial statements and the reported amounts of revenues and expenses during the reporting period. Actual amounts may differ significantly from these estimates and assumptions. We have provided a summary of our significant accounting policies in the notes to the combined consolidated financial statements included elsewhere in this filing. We have set forth below those accounting policies that we believe require material subjective or complex judgments and have the most significant impact on our financial condition and

 

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results of operations. We evaluate our estimates, assumptions and judgments on an ongoing basis, based on information that is then available to us, our experience and various matters that we believe are reasonable and appropriate for consideration under the circumstances.

 

Investment in Hotel and Other Properties

 

Our acquisitions generally consist of land, land improvements, buildings, building improvements, furniture, fixtures and equipment (“FF&E”), and inventory. We may also acquire intangibles related to in-place leases, management agreements and franchise agreements when properties are acquired.  We allocate the purchase price among the assets acquired and liabilities assumed based on their respective fair values.

 

Our investments in hotels and other properties are carried at cost and are depreciated using the straight-line method over estimated useful lives of 15 years for land improvements, 15 years for building improvements, 40 years for buildings and three to five years for FF&E. Intangible assets arising from favorable or unfavorable leases are amortized using the straight-line method over the non-cancelable portion of the term of the agreement.  Maintenance and repairs are expensed and major renewals or improvements are capitalized. Upon the sale or disposition of a fixed asset, the asset and related accumulated depreciation are removed from the accounts and the related gain or loss is included in discontinued operations.

 

We consider each individual property to be an identifiable component of the business.  In accordance with the guidance on impairment or disposal of long-lived assets, we do not consider a property as “held for sale” until it is probable that the sale will be completed within one year and the other requisite criteria for such classification have been met.  Once a property is designated as held for sale the operations for that property are included in discontinued operations.  We do not depreciate properties so long as they are classified as held for sale.  Upon designation of a property as being held for sale and quarterly thereafter, we review the realizability of the carrying value, less cost to sell, in accordance with the guidance.  Any such adjustment in the carrying value of a property classified as held for sale is reflected in discontinued operations.

 

We assess the carrying values of each property whenever events or changes in circumstances indicate that the carrying amounts of these properties may not be fully recoverable.  Recoverability of the property is measured by comparison of the carrying amount of the property to the estimated future undiscounted cash flows which take into account current market conditions and  our intent with respect to holding or disposing of the property.  If our analysis indicates that the carrying value of the property is not recoverable on an undiscounted cash flow basis, it recognizes an impairment charge for the amount by which the carrying value exceeds the fair value of the property. Fair value is determined through various valuation techniques, including internally developed discounted cash flow models, comparable market transactions and third party appraisals, where considered necessary.

 

The use of projected future cash flows is based on assumptions that are consistent with a market participant’s future expectations for the travel industry and economy in general and our plans to manage the underlying properties.  However, assumptions and estimates about future cash flows and capitalization rates are complex and subjective.  Changes in economic and operating conditions and our ultimate investment intent that occur subsequent to a current impairment analysis could impact these assumptions and result in future impairment charges of the properties.

 

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Results of Operations

 

At June 30, 2013 and 2012, we owned 149 and 143 properties, respectively (excluding one hotel carried as discontinued operations for the three and six months ended June 30, 2013 and 2012).  All properties owned during these periods have been included in our results of operations during the respective periods or since their date of acquisition.  Based on when a property is acquired or closed for renovation, operating results for certain properties are not comparable for the three and six months ended June 30, 2013 and 2012.  The properties listed in the table below are hereafter referred to as non-comparable properties:

 

 

 

 

 

 

 

Non-comparable property for the

 

Property

 

Location

 

Acquisition Date

 

three months ended
June 30, 2013 and
2012

 

six months ended
June 30, 2013 and
2012

 

Hotel Indigo New Orleans Garden District (1)

 

New Orleans, LA

 

October 26, 2010

 

x

 

x

 

Residence Inn Bethesda Hotel Downtown

 

Bethesda, MD

 

May 29, 2012

 

x

 

x

 

Courtyard New York / Manhattan Upper East Side

 

New York, NY

 

May 30, 2012

 

x

 

x

 

Hilton Garden Inn San Francisco / Oakland Bay Bridge

 

Emeryville, CA

 

June 11, 2012

 

x

 

x

 

Embassy Suites Boston/Waltham

 

Waltham, MA

 

November 13, 2012

 

x

 

x

 

Courtyard Houston Downtown

 

Houston, TX

 

March 19, 2013

 

x

 

x

 

Residence Inn Houston Downtown

 

Houston, TX

 

March 19, 2013

 

x

 

x

 

Humble Tower Apartments (2)

 

Houston, TX

 

March 19, 2013

 

x

 

x

 

Courtyard Waikiki Beach

 

Honolulu, HI

 

June 17, 2013

 

x

 

x

 

Vantaggio Suites Cosmo (3)

 

San Francisco, CA

 

June 21, 2013

 

x

 

x

 

 


(1) Property was closed for renovation until December 27, 2012.

(2) Conversion to a 166-room SpringHill Suites expected to be complete by mid-2015.

(3) The property is not currently open for operations. Conversion to a 150-room Courtyard expected to be complete by late 2014.

 

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Comparison of the three months ended June 30, 2013 to the three months ended June 30, 2012

 

Income from continuing operations for the three months ended June 30, 2013 was $38.6 million compared to $19.0 million for the three months ended June 30, 2012, representing an increase of $19.6 million. This improved performance was primarily due to a $38.8 million, or 17.4%, increase in total revenue (including $21.0 million arising from non-comparable properties) and a decrease in interest expense of $3.5 million, or 17.2%.  This increase in performance was partially offset by the net impact of a $23.0 million, or 12.6%, increase in total operating expenses.  The increase in total operating expenses was primarily attributable to $14.8 million from non-comparable properties.

 

 

 

For the three months ended June 30,

 

 

 

 

 

 

 

2013

 

2012

 

$ change

 

% change

 

 

 

(amounts in thousands)

 

 

 

Revenue

 

 

 

 

 

 

 

 

 

Operating revenue

 

 

 

 

 

 

 

 

 

Room revenue

 

$

229,111

 

$

194,396

 

$

34,715

 

17.9

%

Food and beverage revenue

 

25,113

 

22,402

 

2,711

 

12.1

%

Other operating department revenue

 

7,351

 

6,003

 

1,348

 

22.5

%

Total revenue

 

261,575

 

222,801

 

38,774

 

17.4

%

 

 

 

 

 

 

 

 

 

 

Expense

 

 

 

 

 

 

 

 

 

Operating expense

 

 

 

 

 

 

 

 

 

Room expense

 

47,271

 

40,841

 

6,430

 

15.7

%

Food and beverage expense

 

17,246

 

15,508

 

1,738

 

11.2

%

Management fee expense

 

9,398

 

7,621

 

1,777

 

23.3

%

Other operating expense

 

73,384

 

64,961

 

8,423

 

13.0

%

Total property operating expense

 

147,299

 

128,931

 

18,368

 

14.2

%

Depreciation and amortization

 

31,910

 

31,428

 

482

 

1.5

%

Property tax, insurance and other

 

16,574

 

12,439

 

4,135

 

33.2

%

General and administrative

 

9,083

 

7,478

 

1,605

 

21.5

%

Transaction and pursuit costs

 

1,255

 

2,795

 

(1,540

)

(55.1

)%

Total operating expense

 

206,121

 

183,071

 

23,050

 

12.6

%

Operating income

 

55,454

 

39,730

 

15,724

 

39.6

%

Other income

 

91

 

106

 

(15

)

(14.2

)%

Interest income

 

240

 

418

 

(178

)

(42.6

)%

Interest expense

 

(16,874

)

(20,373

)

3,499

 

(17.2

)%

Loss on disposal

 

 

(634

)

634

 

(100.0

)%

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

38,911

 

19,247

 

19,664

 

102.2

%

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

(345

)

(281

)

(64

)

22.8

%

Income from continuing operations

 

38,566

 

18,966

 

19,600

 

103.3

%

 

 

 

 

 

 

 

 

 

 

Income from discontinued operations

 

2,415

 

53

 

2,362

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

40,981

 

19,019

 

21,962

 

115.5

%

 

 

 

 

 

 

 

 

 

 

Net (income) loss attributable to non-controlling interests

 

 

 

 

 

 

 

 

 

Noncontrolling interest in joint venture

 

(203

)

38

 

(241

)

 

 

Noncontrolling interest in common units of Operating Partnership

 

(268

)

(172

)

(96

)

55.8

%

 

 

 

 

 

 

 

 

 

 

Net income attributable to common shareholders

 

$

40,510

 

$

18,885

 

$

21,625

 

114.5

%

 

Revenue

 

Total revenue increased $38.8 million, or 17.4%, to $261.6 million for the three months ended June 30, 2013 from $222.8 million for the three months ended June 30, 2012. The increase was a result of $21.0 million in revenue attributable to non-comparable properties and an 8.4% increase in RevPAR at the comparable properties.

 

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Table of Contents

 

The following are the quarter-to-date key hotel operating statistics for hotels owned at June 30, 2013 and 2012, respectively:

 

 

 

For the three months ended
June 30,

 

 

 

 

 

2013

 

2012

 

% Change

 

Number of properties (at end of period)

 

149

 

143

 

4.2

%

Occupancy %

 

78.7

%

76.9

%

2.4

%

ADR

 

$

145.71

 

$

135.09

 

7.9

%

RevPAR

 

$

114.67

 

$

103.86

 

10.4

%

 

Portfolio RevPAR increased to $114.67 from $103.86, a 10.4% increase.  RevPAR, excluding non-comparable properties, increased 8.4% and was driven by a 2.0% increase in occupancy and a 6.3% increase in ADR.

 

Room Revenue

 

Our portfolio consists primarily of focused-service and compact full-service hotels that generate the majority of their revenues through room sales.  Room revenue increased $34.7 million, or 17.9%, to $229.1 million for the three months ended June 30, 2013 from $194.4 million for the three months ended June 30, 2012.  This increase was a result of $18.2 million of room revenue from non-comparable properties and an 8.4% increase in RevPAR at the comparable properties.

 

Food and Beverage Revenue

 

Food and beverage revenue increased $2.7 million, or 12.1%, to $25.1 million for the three months ended June 30, 2013 from $22.4 million for the three months ended June 30, 2012. The increase includes $1.7 million in food and beverage revenue arising from non-comparable properties.  Food and beverage revenue for the remainder of the portfolio increased $1.0 million.

 

Other Operating Department Revenue

 

Other operating department revenue, which includes revenue derived from ancillary sources such as telephone charges and parking fees, increased $1.3 million, or 22.5%, to $7.4 million for the three months ended June 30, 2013 from $6.0 million for the three months ended June 30, 2012.  This increase was primarily due to $1.2 million of other operating department revenue from non-comparable properties.

 

Hotel Operating Expense

 

Hotel operating expense increased $18.4 million, or 14.2%, to $147.3 million for the three months ended June 30, 2013 from $128.9 million for the three months ended June 30, 2012. This increase includes $12.1 million in hotel operating expense attributable to non-comparable properties. The remaining increase was primarily attributable to higher room expense, other operating department costs, and management and franchise fees at the comparable properties.  Room expense and other operating department costs were driven by higher occupancy at hotels not under renovation.  Management fees and franchise fees, which are computed as a percentage of gross revenue and room revenue, respectively, increased as a result of higher revenues.

 

Depreciation and Amortization

 

Depreciation and amortization expense increased $0.5 million, or 1.5%, to $31.9 million for the three months ended June 30, 2013 from $31.4 million for the three months ended June 30, 2012. The increase is the result of a $2.2 million increase in depreciation and amortization expense arising from non-comparable properties, partially offset by FF&E at hotels being fully depreciated during the periods.

 

Property Tax, Insurance and Other

 

Property tax, insurance and other expense increased $4.1 million, or 33.2%, to $16.6 million for the three months

 

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Table of Contents

 

ended June 30, 2013 from $12.4 million for the three months ended June 30, 2012.  The increase includes $1.3 million in property tax, insurance and other expense attributable to non-comparable properties.  The remaining increase of $2.8 million is the net impact of increasing property tax assessments offset by favorable resolution of property tax appeals at comparable properties.

 

General and Administrative

 

General and administrative expense increased $1.6 million, or 21.5%, to $9.1 million for the three months ended June 30, 2013 from $7.5 million for the three months ended June 30, 2012.  The increase in general and administrative expense is primarily attributable to an increase in amortization of restricted share awards of $1.6 million.

 

Transaction and Pursuit Costs

 

Transaction and pursuit costs decreased $1.5 million to $1.3 million for the three months ended June 30, 2013 from $2.8 million for the three months ended June 30, 2012.  There were two acquisitions during the three months ended June 30, 2013 resulting in transaction costs of $1.2 million compared to three transactions during the three months ended June 30, 2012 resulting in transaction costs of $2.8 million.

 

Interest Expense

 

Interest expense decreased $3.5 million, or 17.2%, to $16.9 million for the three months ended June 30, 2013 from $20.4 million for the three months ended June 30, 2012.  The decrease in interest expense was the result of a decrease of $4.4 million of interest expense due to the $331.0 million of mortgage principal balances that were paid down, the expiration of unfavorable interest rate hedges resulting in a decrease in hedge related interest expense of $0.5 million, a $0.1 million decrease in mortgage interest expense due to decreases in principal balances as the result of mortgage amortization and a decrease in amortization of deferred financing fees of $0.3 million.  The offsetting increase was primarily due to interest incurred in 2013 on the Five-Year Term Loan and the Seven-Year Term Loan of $1.4 million and $0.7 million, respectively, that was not incurred in 2012.

 

Income Taxes

 

As part of our structure, we own taxable REIT subsidiaries (“TRSs”) that are subject to federal and state income taxes.  The effective tax rates were 3.81% and 18.67% for the three months ended June 30, 2013 and 2012, respectively. The decrease in rate is primarily a result of a reduction in state taxes paid at our Operating Partnership.

 

Income from Discontinued Operations

 

Income from discontinued operations increased $2.4 million to $2.4 million for the three months ended June 30, 2013 from $0.1 million for the three months ended June 30, 2012.  Income from discontinued operations for the three months ended June 30, 2013 includes a $2.4 million gain on extinguishment of indebtedness from the SpringHill Suites Southfield, Michigan.

 

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Table of Contents

 

Comparison of the six months ended June 30, 2013 to the six months ended June 30, 2012

 

Income from continuing operations for the six months ended June 30, 2013 was $47.2 million compared to $12.1 million for the six months ended June 30, 2012, representing an increase of $35.1 million. This improved performance was primarily due to a $71.4 million, or 17.6%, increase in total revenue (including $35.6 million arising from non-comparable properties) and a decrease in interest expense of $6.6 million, or 16.4%.  This increase in performance was partially offset by the net impact of a $43.6 million, or 12.4%, increase in total operating expenses.   The increase in total operating expenses was primarily attributable to $29.3 million from non-comparable properties.

 

 

 

For the six months ended June 30,

 

 

 

 

 

 

 

2013

 

2012

 

$ change

 

% change

 

 

 

(amounts in thousands)

 

 

 

Revenue

 

 

 

 

 

 

 

 

 

Hotel operating revenue

 

 

 

 

 

 

 

 

 

Room revenue

 

$

415,098

 

$

352,587

 

$

62,511

 

17.7

%

Food and beverage revenue

 

48,343

 

41,906

 

6,437

 

15.4

%

Other operating department revenue

 

13,569

 

11,105

 

2,464

 

22.2

%

Total revenue

 

477,010

 

405,598

 

71,412

 

17.6

%

 

 

 

 

 

 

 

 

 

 

Expense

 

 

 

 

 

 

 

 

 

Hotel operating expense

 

 

 

 

 

 

 

 

 

Room

 

90,541

 

77,640

 

12,901

 

16.6

%

Food and beverage

 

33,823

 

29,948

 

3,875

 

12.9

%

Management fees

 

16,800

 

13,910

 

2,890

 

20.8

%

Other hotel expenses

 

140,083

 

123,332

 

16,751

 

13.6

%

Total hotel operating expense

 

281,247

 

244,830

 

36,417

 

14.9

%

Depreciation and amortization

 

63,321

 

65,099

 

(1,778

)

(2.7

)%

Property tax, insurance and other

 

31,327

 

25,052

 

6,275

 

25.0

%

General and administrative

 

17,894

 

14,737

 

3,157

 

21.4

%

Transaction and pursuit costs

 

2,344

 

2,814

 

(470

)

(16.7

)%

Total operating expense

 

396,133

 

352,532

 

43,601

 

12.4

%

Operating income

 

80,877

 

53,066

 

27,811

 

52.4

%

Other income

 

170

 

190

 

(20

)

(10.5

)%

Interest income

 

536

 

837

 

(301

)

(36.0

)%

Interest expense

 

(33,838

)

(40,484

)

6,646

 

(16.4

)%

Loss on disposal

 

 

(634

)

634

 

(100.0

)%

 

 

 

 

 

 

 

 

 

 

Income from continuing operations before income taxes

 

47,745

 

12,975

 

34,770

 

(268.0

)%

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

(571

)

(875

)

304

 

(34.7

)%

Income from continuing operations

 

47,174

 

12,100

 

35,074

 

289.9

%

 

 

 

 

 

 

 

 

 

 

Income from discontinued operations

 

2,391

 

(2

)

2,393

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

49,565

 

12,098

 

37,467

 

309.7

%

 

 

 

 

 

 

 

 

 

 

Net (income) loss attributable to non-controlling interests

 

 

 

 

 

 

 

 

 

Noncontrolling interest in joint venture

 

(155

)

408

 

(563

)

(138.0

)%

Noncontrolling interest in common units of Operating Partnership

 

(407

)

(134

)

(273

)

(203.7

)%

 

 

 

 

 

 

 

 

 

 

Net income attributable to common shareholders

 

$

49,003

 

$

12,372

 

$

36,631

 

296.1

%

 

Revenue

 

Total revenue increased $71.4 million, or 17.6%, to $477.0 million for the six months ended June 30, 2013 from $405.6 million for the three months ended June 30, 2012. The increase was a result of $35.6 million in revenue attributable to non-comparable properties and a 9.5% increase in RevPAR at the comparable properties.

 

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Table of Contents

 

The following are the year-to-date key hotel operating statistics for hotels owned at June 30, 2013 and 2012, respectively:

 

 

 

For the six months ended

 

 

 

 

 

June 30,

 

 

 

 

 

2013

 

2012

 

% Change

 

Number of properties (at end of period)

 

149

 

143

 

4.2

%

Occupancy %

 

74.6

%

72.3

%

3.1

%

ADR

 

$

141.11

 

$

130.78

 

7.9

%

RevPAR

 

$

105.28

 

$

94.60

 

11.3

%

 

Portfolio RevPAR increased to $105.28 from $94.60, an 11.3% increase.  RevPAR, excluding non-comparable properties, increased 9.5% and was driven by a 2.8% increase in occupancy and a 6.5% increase in ADR.

 

Room Revenue

 

Our portfolio consists primarily of focused-service and compact full-service hotels that generate the majority of their revenues through room sales.  Room revenue increased $62.5 million, or 17.7%, to $415.1 million for the six months ended June 30, 2013 from $352.6 million for the six months ended June 30, 2012.  This increase was a result of $30.6 million of room revenue from non-comparable properties and a 9.5% increase in RevPAR at the comparable properties.

 

Food and Beverage Revenue

 

Food and beverage revenue increased $6.4 million, or 15.4%, to $48.3 million for the six months ended June 30, 2013 from $41.9 million for the six months ended June 30, 2012. The increase includes $3.4 million in food and beverage revenue arising from non-comparable properties.  Food and beverage revenue for the remainder of the portfolio increased $3.0 million.

 

Other Operating Department Revenue

 

Other operating department revenue, which includes revenue derived from ancillary sources such as telephone charges and parking fees, increased $2.5 million, or 22.2%, to $13.6 million for the six months ended June 30, 2013 from $11.1 million for the six months ended June 30, 2012.  This increase was primarily due to $1.7 million of other operating department revenue from non-comparable properties and a $0.6 million increase in parking revenue from comparable properties.

 

Hotel Operating Expense

 

Hotel operating expense increased $36.4 million, or 14.9%, to $281.2 million for the six months ended June 30, 2013 from $244.8 million for the six months ended June 30, 2012. This increase includes $21.9 million in hotel operating expense attributable to non-comparable properties. The remaining increase was primarily attributable to higher room expense, other operating department costs, and management and franchise fees at the comparable properties.  Room expense and other operating department costs were driven by higher occupancy at hotels not under renovation.  Management fees and franchise fees, which are computed as a percentage of gross revenue and room revenue, respectively, increased as a result of higher revenues.

 

Depreciation and Amortization

 

Depreciation and amortization expense decreased $1.8 million, or 2.7%, to $63.3 million for the six months ended June 30, 2013 from $65.1 million for the six months ended June 30, 2012. The decrease is a result of $3.1 million of accelerated depreciation of FF&E that underwent renovations during the six months ended June 30, 2012 but not in 2013 and FF&E at other hotels being fully depreciated during the periods.  Partially offsetting this was a $4.6 million increase in depreciation and amortization expense arising from non-comparable properties.

 

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Table of Contents

 

Property Tax, Insurance and Other

 

Property tax, insurance and other expense increased $6.3 million, or 25.0%, to $31.3 million for the six months ended June 30, 2013 from $25.1 million for the six months ended June 30, 2012.  The increase includes $2.2 million in property tax, insurance and other expense attributable to non-comparable properties.  The remaining increase of $4.1 million is the net impact of increasing property tax assessments offset by favorable resolution of property tax appeals at the comparable properties.

 

General and Administrative

 

General and administrative expense increased $3.2 million, or 21.4%, to $17.9 million for the six months ended June 30, 2013 from $14.7 million for the six months ended June 30, 2012.  The increase in general and administrative expense is primarily attributable to an increase in amortization of restricted share awards of $3.1 million.

 

Transaction and Pursuit Costs

 

Transaction and pursuit costs decreased $0.5 million to $2.3 million for the six months ended June 30, 2013 from $2.8 million for the six months ended June 30, 2012.  There were five acquisitions during the six months ended June 30, 2013 resulting in transaction costs of $2.2 million compared to three during the six months ended June 30, 2012 resulting in transaction costs of $2.8 million.

 

Interest Expense

 

Interest expense decreased $6.6 million, or 16.4%, to $33.8 million for the six months ended June 30, 2013 from $40.5 million for the six months ended June 30, 2012.  The decrease in interest expense was the result of a decrease of $9.0 million of interest expense due to the $331.0 million of mortgage principal balances that were paid down, the expiration of unfavorable interest rate hedges resulting in a decrease in hedge related interest expense of $0.9 million, a $0.6 million decrease in mortgage interest expense due to decreases in principal balances as the result of mortgage amortization and a decrease in amortization of deferred financing fees of $0.5 million.  The offsetting increase was primarily due to interest incurred in 2013 on the Revolver, the Five-Year Term Loan and the Seven-Year Term Loan of $0.1 million, $2.8 million and $1.5 million, respectively, that was not incurred in 2012.

 

Income Taxes

 

As part of our structure, we own taxable REIT subsidiaries (“TRSs”) that are subject to federal and state income taxes.  The effective tax rates were 303.43% and 4.99% for the six months ended June 30, 2013 and 2012, respectively. The increase in rate is primarily due to an increase in book income recorded at the TRS.  Our tax expense decreased $0.3 million to $0.6 million for the six months ended June 30, 2013 from $0.9 million for the six months ended June 30, 2012, primarily as a result of a reduction in state taxes paid at our Operating Partnership.

 

Income from Discontinued Operations

 

Income from discontinued operations increased $2.4 million to $2.4 million for the six months ended June 30, 2013.  Income from discontinued operations for the six months ended June 30, 2013 includes a $2.4 million gain on extinguishment of indebtedness from the SpringHill Suites Southfield, Michigan.

 

Non-GAAP Financial Measures

 

We consider the following non-GAAP financial measures useful to investors as key supplemental measures of our performance: (1) FFO, (2) Adjusted FFO, (3) EBITDA, and (4) Adjusted EBITDA. These non-GAAP financial measures should be considered along with, but not as alternatives to, net income or loss as a measure of our operating performance. FFO, Adjusted FFO, EBITDA and Adjusted EBITDA, as calculated by us, may not be comparable to FFO, Adjusted FFO, EBITDA and Adjusted EBITDA as reported by other companies that do not define such terms exactly as we define such terms.

 

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Funds From Operations

 

We calculate FFO in accordance with standards established by the National Association of Real Estate Investment Trusts, or NAREIT, which defines FFO as net income or loss (calculated in accordance with GAAP), excluding gains or losses from sales of real estate, items classified by GAAP as extraordinary, the cumulative effect of changes in accounting principles, plus depreciation and amortization, and adjustments for unconsolidated partnerships and joint ventures. Historical cost accounting for real estate assets implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, most real estate industry investors consider FFO to be helpful in evaluating a real estate company’s operations. We believe that the presentation of FFO provides useful information to investors regarding our operating performance by excluding the effect of depreciation and amortization, gains or losses from sales for real estate, extraordinary items and the portion of items related to unconsolidated entities, all of which are based on historical cost accounting, and that FFO can facilitate comparisons of operating performance between periods and between REITs, even though FFO does not represent an amount that accrues directly to common shareholders. Our calculation of FFO may not be comparable to measures calculated by other companies who do not use the NAREIT definition of FFO or do not calculate FFO per diluted share in accordance with NAREIT guidance. Additionally, FFO may not be helpful when comparing us to non-REITs.  We present FFO attributable to common shareholders, which includes our OP units, because our OP units are redeemable for common shares.  We believe it is meaningful for the investor to understand FFO attributable to all common shares and OP units.

 

We further adjust FFO for certain additional items that are not in NAREIT’s definition of FFO, such as hotel transaction and pursuit costs, the amortization of share-based compensation, and certain other expenses that we consider outside the normal course of business. We believe that Adjusted FFO provides useful supplemental information to investors regarding our ongoing operating performance that, when considered with net income and FFO, is beneficial to an investor’s understanding of our operating performance.

 

The following is a reconciliation of our GAAP net income to FFO and Adjusted FFO for the three and six months ended June 30, 2013 and 2012 (in thousands):

 

 

 

For the three months ended June 30,

 

For the six months ended June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Net income

 

$

40,981

 

$

19,019

 

$

49,565

 

$

12,098

 

Depreciation and amortization

 

31,910

 

31,428

 

63,321

 

65,099

 

Loss on disposal

 

 

634

 

 

634

 

Gain on extinguishment of indebtedness (1)

 

(2,425

)

 

(2,425

)

 

Noncontrolling interest in joint venture

 

(203

)

38

 

(155

)

408

 

Adjustments related to discontinued operations (2)

 

8

 

26

 

32

 

52

 

Adjustments related to joint venture (3)

 

(121

)

(113

)

(242

)

(211

)

FFO attributable to common shareholders

 

70,150

 

51,032

 

110,096

 

78,080

 

Transaction and pursuit costs

 

1,255

 

2,795

 

2,344

 

2,814

 

Amortization of share based compensation

 

3,334

 

1,754

 

6,348

 

3,213

 

Other expenses (4)

 

11

 

177

 

24

 

177

 

Adjusted FFO

 

$

74,750

 

$

55,758

 

$

118,812

 

$

84,284

 

 


(1)  Represents the gain on the transfer of title to the SpringHill Suites Southfield, Michigan hotel to the lenders pursuant to a deed in lieu of foreclosure.  The gain is included in Discontinued Operations.

(2)  Includes depreciation and amortization expense from discontinued operations.

(3)  Includes depreciation and amortization expense allocated to the noncontrolling interest in joint venture.

(4)  Includes less than $0.1 million for the three and six months ended June 30, 2013 and $0.2 million for the three and six months ended June 30, 2012, respectively, of legal expenses outside the normal course of operations.

 

Earnings Before Interest, Taxes, Depreciation and Amortization

 

EBITDA is defined as net income or loss excluding: (1) interest expense; (2) provision for income taxes, including income taxes applicable to sales of assets; and (3) depreciation and amortization. We consider EBITDA useful to an investor in evaluating and facilitating comparisons of our operating performance between periods and between REITs by removing the impact of our capital structure (primarily interest expense) and asset base (primarily depreciation and amortization) from our operating results.  In addition, EBITDA is used as one measure in determining the value of hotel acquisitions and dispositions. We present EBITDA attributable to common shareholders, which includes our OP units, because our OP units

 

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are redeemable for common shares.  We believe it is meaningful for the investor to understand EBITDA attributable to all common shares and OP units.

 

We further adjust EBITDA for certain additional items such as discontinued operations, hotel transaction and pursuit costs, the amortization of share-based compensation and certain other expenses that we consider outside the normal course of business. We believe that Adjusted EBITDA provides useful supplemental information to investors regarding our ongoing operating performance that, when considered with net income and EBITDA, is beneficial to an investor’s understanding of our operating performance.

 

The following is a reconciliation of our GAAP net income to EBITDA and Adjusted EBITDA for the three and six months ended June 30, 2013 and 2012 (in thousands):

 

 

 

For the three months ended June 30,

 

For the six months ended June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Net income

 

$

40,981

 

$

19,019

 

$

49,565

 

$

12,098

 

Depreciation and amortization

 

31,910

 

31,428

 

63,321

 

65,099

 

Interest expense, net (1)

 

16,868

 

20,363

 

33,825

 

40,462

 

Income tax expense

 

345

 

281

 

571

 

875

 

Noncontrolling interest in joint venture

 

(203

)

38

 

(155

)

408

 

Adjustments related to discontinued operations (2)

 

101

 

27

 

195

 

123

 

Adjustments related to joint venture (3)

 

(121

)

(287

)

(242

)

(559

)

EBITDA

 

89,881

 

70,869

 

147,080

 

118,506

 

 

 

 

 

 

 

 

 

 

 

Transaction and pursuit costs

 

1,255

 

2,795

 

2,344

 

2,814

 

Gain on extinguishment of indebtedness (4)

 

(2,425

)

 

(2,425

)

 

Loss on disposal

 

 

634

 

 

634

 

Amortization of share based compensation

 

3,334

 

1,754

 

6,348

 

3,213

 

Other expenses (5)

 

11

 

177

 

24

 

177

 

Adjusted EBITDA

 

$

92,056

 

$

76,229

 

$

153,371

 

$

125,344

 

 


(1)  Excludes amounts attributable to investment in loans of $0.2 million and $0.5 million for the three and six months ended June 30, 2013, respectively and $0.4 million and $0.8 million for the three and six months ended June 30, 2012, respectively.

(2)  Includes depreciation, amortization and interest expense from discontinued operations.

(3)  Includes depreciation, amortization and interest expense allocated to the noncontrolling interest in joint venture.

(4)  Represents the gain on the transfer of title to the SpringHill Suites Southfield, Michigan hotel to the lenders pursuant to a deed in lieu of foreclosure.  The gain is included in Discontinued Operations.

(5)  Includes less than $0.1 million for the three and six months ended June 30, 2013 and $0.2 million for the three and six months ended June 30, 2012, respectively, of legal expenses outside the normal course of operations.

 

Liquidity and Capital Resources

 

Our short-term liquidity requirements consist primarily of funds necessary to pay for operating expenses and other expenditures directly associated with our properties, including:

 

·                  recurring maintenance and capital expenditures necessary to maintain our properties in accordance with brand standards;

 

·                  interest expense and scheduled principal payments on outstanding indebtedness;

 

·                  distributions necessary to qualify for taxation as a REIT; and

 

·                  capital expenditures to improve our properties, including capital expenditures required by our franchisors in connection with our formation transactions and recent property acquisitions.

 

We expect to meet our short-term liquidity requirements generally through net cash provided by operations, existing cash balances and, if necessary, short-term borrowings under our unsecured revolving credit facility and proceeds from our recent underwritten public offering of common shares.  On March 25, 2013, the Company completed an offering of 15,870,000

 

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common shares generating gross proceeds of approximately $342.8 million and proceeds, net of underwriter’ discounts and other offering costs, of approximately $327.5 million.

 

Our long-term liquidity requirements consist primarily of funds necessary to pay for the costs of acquiring additional properties and redevelopments, renovations, expansions and other capital expenditures that need to be made periodically with respect to our properties and scheduled debt payments. We expect to meet our long-term liquidity requirements through various sources of capital, including our unsecured revolving credit facility and future equity (including OP units) or debt offerings, existing working capital, net cash provided by operations, long-term hotel mortgage indebtedness and other secured and unsecured borrowings.  However, there are a number of factors that may have a material adverse effect on our ability to access these capital sources, including the current state of overall equity and credit markets, our degree of leverage, the value of our unencumbered assets and borrowing restrictions imposed by lenders, general market conditions for REITs, our operating performance and liquidity and market perceptions about us. The success of our business strategy will depend, in part, on our ability to access these various capital sources.

 

Our properties will require periodic capital expenditures and renovation to remain competitive.  In addition, acquisitions, redevelopments or expansions of properties will require significant capital outlays.  We may not be able to fund such capital improvements solely from net cash provided by operations because we must distribute annually at least 90% of our REIT taxable income, determined without regard to the deductions for dividends paid and excluding net capital gain, to qualify and maintain our qualification as a REIT, and we are subject to tax on any retained income and gain.  As a result, our ability to fund capital expenditures, acquisitions or property redevelopment through retained earnings is very limited.  Consequently, we expect to rely heavily upon the availability of debt or equity capital for these purposes.  If we are unable to obtain the necessary capital on favorable terms, or at all, our financial condition, liquidity, results of operations and prospects could be materially and adversely affected.

 

Revolving Credit Facility and Term Loans

 

We entered into a credit agreement on November 20, 2012 that provides for (i) an unsecured revolving credit facility of up to $300.0 million with a scheduled maturity date of November 20, 2016 with a one-year extension option (the “Revolver”), and (ii) an unsecured term loan of $275.0 million with a scheduled maturity date of November 20, 2017 (the “Five-Year Term Loan”).   The credit agreement amends and restates in its entirety our prior unsecured revolving credit facility, which was originally entered into as of June 20, 2011.  In addition, on November 20, 2012 we also entered into an unsecured term loan of $125.0 million with a scheduled maturity date of November 20, 2019 (the “Seven-Year Term Loan”).

 

The credit agreements for these loans require that a group of no less than 20 of our hotel properties remain unencumbered by outstanding indebtedness.  The credit agreements contain certain financial covenants relating to our maximum leverage ratio, minimum fixed charge coverage ratio, minimum tangible net worth and maximum secured indebtedness.  If an event of default exists we are not permitted to make distributions to shareholders, other than those required to qualify for and maintain REIT status.  As of June 30, 2013, we were in compliance with all financial covenants.

 

We incurred $5.2 million in fees related to the credit agreements that were deferred and are being amortized over the term of the Revolver, the Five-Year Term Loan and the Seven-Year Term Loan, respectively.

 

Borrowings under the Revolver, the Five-Year Term Loan and the Seven-Year Term Loan bear interest at variable rates equal to the London InterBank Offered Rate (“LIBOR”) plus an applicable margin.  The margin ranges from 1.70% to 3.00%, depending on our leverage ratio, as calculated under the terms of each facility.  We incur an unused facility fee on the Revolver of between 0.25% and 0.35%, based on the amount by which the maximum borrowing amount exceeds the total principal balance of outstanding borrowings.

 

Under the terms of the credit agreement for the Revolver, one or more standby letters of credit, up to a maximum aggregate outstanding balance of $30.0 million, may be issued on our behalf by the lenders holding the unsecured revolving credit facility.  We will incur a fee of 0.125% of the value of each standby letter of credit that is issued on its behalf.  Any outstanding standby letters of credit would reduce the available borrowings on the unsecured revolving credit facility by a corresponding amount.  No standby letters of credit were outstanding at June 30, 2013. We also may borrow up to a maximum aggregate outstanding balance of $40.0 million of swingline loans.  Any outstanding swingline loans would reduce the available borrowings on the credit facility by a corresponding amount.  No swingline loans were outstanding at June 30, 2013.

 

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For the three and six months ended June 30, 2013, we incurred an unused commitment fee on the Revolver of approximately $0.3 million and $0.5 million, respectively.  At June 30, 2013, outstanding borrowings on the Revolver, the Five-Year Term Loan and the Seven-Year Term Loan were zero, $275.0 million and $125.0 million, respectively.  For the three months ended June 30, 2013, interest expense incurred on the Revolver, the Five-Year Term Loan and the Seven-Year Term Loan was zero, $1.4 million and $0.8 million, respectively.  For the six months ended June 30, 2013, interest expense incurred on the Revolver, the Five-Year Term Loan and the Seven-Year Term Loan was $0.1 million, $2.8 million and $1.5 million, respectively.

 

We incurred interest expense on the prior credit facility for the three and six months ended June 30, 2012 of approximately $0.6 million and $0.6 million, respectively.  For the three and six months ended June 30, 2012, we incurred an unused commitment fee of approximately $0.2 million and $0.5 million, respectively.  There were $85.0 million of borrowings outstanding at June 30, 2012.

 

Sources and Uses of Cash

 

As of June 30, 2013, we had $262.9 million of cash and cash equivalents compared to $115.9 million at December 31, 2012.

 

Cash flows from Operating Activities

 

Net cash flow provided by operating activities totaled $99.7 million for the six months ended June 30, 2013. Net income of $49.6 million included significant non-cash expenses, including $63.4 million of depreciation and amortization, $1.6 million of amortization of deferred financing costs, $0.5 million of amortization of deferred management fees, and $6.3 million of amortization of share based compensation, partially offset by $2.4 million of gain on extinguishment of indebtedness and $0.2 million of deferred income taxes. In addition, changes in operating assets and liabilities due to the timing of cash receipts and payments from our properties resulted in net cash outflow of $19.1 million.

 

Net cash flow provided by operating activities totaled $58.2 million for the six months ended June 30, 2012. Net income of $12.1 million was partially offset by significant non-cash expenses, including $65.2 million of depreciation and amortization, $2.1 million of amortization of deferred financing costs, $0.5 million of amortization of deferred management fees, $0.6 million loss on disposal and $3.2 million of amortization of share based compensation. In addition, changes in operating assets and liabilities due to the timing of cash receipts and payments from our hotels resulted in net cash outflow of $25.5 million.

 

Cash flows from Investing Activities

 

Net cash flow used in investing activities totaled $207.8 million for six months ended June 30, 2013 primarily due to $184.2 million used for the purchase of five properties, $26.0 million in routine capital improvements and additions to hotels and other properties and the net funding of $0.3 million of restricted cash reserves, offset by the application of $2.7 million of purchase deposits.

 

Net cash flow used in investing activities totaled $254.6 million for six months ended June 30, 2012 primarily due to $182.7 million used for the purchase of three hotels, $15.1 million for a major redevelopment project, $61.9 million in routine capital improvements and additions to hotels and other properties, $0.2 million of additions to property and equipment, offset by the net release of restricted cash reserves of $5.2 million.

 

Cash flows from Financing Activities

 

Net cash flow provided by financing activities totaled $255.0 million for six months ended June 30, 2013 primarily due to $327.5 million provided from the issuance and sale of common shares and $83.0 million in borrowings on the Revolver.  This was offset by $99.0 million of repayments on the Revolver, $7.3 million in payments of mortgage principal, $1.8 million paid to repurchase common shares to satisfy employee statutory minimum federal and state tax obligations of certain employees in connection with the vesting of restricted common shares issued to such employees under our 2011 Plan and $47.4 million of distributions on common shares and OP units.

 

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Net cash flow provided by financing activities totaled $41.8 million for six months ended June 30, 2012 primarily due to $85.0 million of borrowings under the credit facility and $85.0 million of proceeds from mortgage loans. This was offset by $91.5 million of mortgage loan repayments, $1.1 million paid to repurchase common shares to satisfy employee statutory minimum federal and state tax obligations of certain employees in connection with the vesting of restricted common shares issued to such employees under our 2011 Plan, $33.8 million of distributions on common shares and OP units and $1.8 million paid for deferred financing fees.

 

Capital Expenditures and Reserve Funds

 

We maintain each of our properties in good repair and condition and in conformity with applicable laws and regulations, franchise agreements and management agreements. The cost of all such routine improvements and alterations are paid out of FF&E reserves, which are funded by a portion of each property’s gross revenues. Routine capital expenditures are administered by the property management companies. However, we have approval rights over the capital expenditures as part of the annual budget process for each of our properties.

 

From time to time, certain of our hotels may be undergoing renovations as a result of our decision to upgrade portions of the hotels, such as guestrooms, public space, meeting space, and/or restaurants, in order to better compete with other hotels in our markets. In addition, upon acquisition of a hotel we often are required to complete a property improvement plan in order to bring the hotel up to the respective franchisor’s standards. If permitted by the terms of the management agreement, funding for a renovation will first come from the FF&E reserves. To the extent that the FF&E reserves are not available or adequate to cover the cost of the renovation, we will fund all or the remaining portion of the renovation with cash and cash equivalents on hand, our Revolver and/or other sources of available liquidity.

 

With respect to some of our hotels that are operated under franchise agreements with major national hotel brands and for some of our hotels subject to first mortgage liens, we are obligated to maintain FF&E reserve accounts for future capital expenditures at these hotels. The amount funded into each of these reserve accounts is generally determined pursuant to the management agreements, franchise agreements and/or mortgage loan documents for each of the respective hotels, and typically ranges between 1.0% and 5.0% of the respective hotel’s total gross revenue. As of June 30, 2013, approximately $47.4 million was held in FF&E reserve accounts for future capital expenditures.

 

Off-Balance Sheet Arrangements

 

As of June 30, 2013, we had no off-balance sheet arrangements.

 

Inflation

 

We rely entirely on the performance of the properties and their ability to increase revenues to keep pace with inflation. Increases in the costs of operating our hotels due to inflation would adversely affect the operating performance of our TRSs, which in turn, could inhibit the ability of our TRSs to make required rent payments to us.  Hotel management companies, in general, possess the ability to adjust room rates daily to reflect the effects of inflation. However, competitive pressures may limit the ability of our hotel management companies to raise room rates.

 

Seasonality

 

Depending on a hotel’s location and market, operations for the hotel may be seasonal in nature. This seasonality can be expected to cause fluctuations in our quarterly operating performance. For hotels located in non-resort markets, demand is generally lower in the winter months due to decreased travel and higher in the spring and summer months during the peak travel season.  Accordingly, we expect that we will have lower revenue, operating income and cash flow in the first and fourth quarters and higher revenue, operating income and cash flow in the second and third quarters.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Market risk includes risks that arise from changes in interest rates, equity prices and other market changes that affect market sensitive instruments. Our primary market risk exposure is to changes in interest rates on our variable rate debt. As of June 30, 2013, we had approximately $627.0 million of total variable debt outstanding (or 45.3% of total indebtedness) with a weighted average interest rate of 2.68% per annum.  If market rates of interest on our variable rate debt outstanding as of

 

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June 30, 2013 were to increase by 1.00%, or 100 basis points, interest expense would  decrease future earnings and cash flows by approximately $5.7 million annually, taking into account our existing contractual hedging arrangements.

 

Our interest rate risk objectives are to limit the impact of interest rate fluctuations on earnings and cash flows and to lower our overall borrowing costs. To achieve these objectives, we manage our exposure to fluctuations in market interest rates through the use of fixed rate debt instruments to the extent that reasonably favorable rates are obtainable. We have entered into derivative financial instruments such as interest rate swaps or caps to mitigate our interest rate risk or to effectively lock the interest rate on a portion of our variable rate debt. We do not enter into derivative or interest rate transactions for speculative purposes.

 

The following table provides information about our financial instruments that are sensitive to changes in interest rates. For debt obligations outstanding as of June 30, 2013, the following table presents principal repayments and related weighted average interest rates by contractual maturity dates (in thousands):

 

 

 

2014

 

2015

 

2016

 

2017

 

2018

 

Thereafter

 

Total

 

Fixed rate debt

 

$

 

$

185,822

 

$

572,736

 

$

 

$

 

$

 

$

758,558

 

Weighted average interest rate

 

 

5.56

%

6.29

%

 

 

 

6.11

%

Variable rate debt

 

$

142,000

 

$

 

$

85,000

 

$

275,000

 

$

 

$

125,000

 

$

627,000

 

Weighted average interest rate

 

4.18

%

 

2.54

%

2.04

%

 

2.44

%

2.68

%

Total

 

$

142,000

 

$

185,822

 

$

657,736

 

$

275,000

 

$

 

$

125,000

 

$

1,385,558

 

 

The foregoing table reflects indebtedness outstanding as of June 30, 2013 and does not consider indebtedness, if any, incurred or repaid after that date. Our ultimate realized gain or loss with respect to interest rate fluctuations will depend on the exposures that arise during future periods, prevailing interest rates, and our hedging strategies at that time.

 

Changes in market interest rates on our fixed rate debt impact the fair value of the debt, but such changes have no impact on our combined consolidated financial statements.  If interest rates rise, and our fixed rate debt balance remains constant, we expect the fair value of our debt to decrease. As of June 30, 2013, the estimated fair value of our fixed rate debt was $735.6 million, which is based on having the same debt service requirements that could have been borrowed at the date presented, at prevailing current market interest rates.

 

Item 4.                     Controls and Procedures.

 

Disclosure Controls and Procedures

 

In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Company’s management, with the participation of the Chief Executive Officer and the Chief Financial Officer, carried out an evaluation of the effectiveness of the Company’s “disclosure controls and procedures”, as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act, as of the end of the period covered by this report. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2013.

 

Changes in Internal Control over Financial Reporting

 

There have been no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15 and 15d-15 of the Exchange Act) during the period ended June 30, 2013 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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Table of Contents

 

PART II.  OTHER INFORMATION

 

Item 1.                     Legal Proceedings.

 

The nature of the operations of the hotels exposes our hotels, the Company and the Operating Partnership to the risk of claims and litigation in the normal course of their business. Other than routine litigation arising out of the ordinary course of business, the Company is not presently subject to any litigation nor, to the Company’s knowledge, is any litigation threatened against the Company.

 

Item 1A.            Risk Factors.

 

For a discussion of our potential risks and uncertainties, see the information under the heading “Risk Factors” in the  Annual Report which is accessible on the SEC’s website at www.sec.gov. There have been no material changes to the risk factors previously disclosed in the Annual Report.

 

Item 2.                     Unregistered Sales of Equity Securities and Use of Proceeds.

 

Unregistered Sales of Equity Securities

 

The Company did not sell any securities during the quarter ended June 30, 2013 that were not registered under the Securities Act of 1933, as amended.

 

Issuer Purchases of Equity Securities

 

During the six months ended June 30, 2013, certain of our employees surrendered common shares owned by them to satisfy their statutory minimum federal and state tax obligations of certain employees in connection with the vesting of restricted common shares issued to such employees under our 2011 Plan.

 

The following table summarizes all of these repurchases during the six months ended June 30, 2013:

 

Period

 

Total number
of shares
purchased

 

Average price
paid per share

 

Total number of
shares purchased as
part of publicly
announced plans or
programs

 

Maximum number
of shares that may
yet be purchased
under the plans or
programs

 

January 1, 2013 through January 31, 2013

 

 

 

N/A

 

N/A

 

February 1, 2012 through February 28, 2013

 

24,545

(1)

$

21.00

 

 

N/A

 

March 1, 2013 through March 31, 2013

 

9,794

(1)

$

21.63

 

 

N/A

 

April 1, 2013 through April 30, 2013

 

 

 

N/A

 

N/A

 

May 1, 2013 through May 31, 2013

 

33,948

(1)

$

23.55

 

 

N/A

 

June 1, 2013 through June 30, 2013

 

10,341

(1)

$

23.18

 

 

N/A

 

Total

 

78,628

 

 

 

 

 

 

 

 


(1) The number of shares purchased represents common shares surrendered by certain of our employees to satisfy their statutory minimum federal and state tax obligations associated with the vesting of restricted common shares issued under our 2011 Plan. With respect to these common shares, the price paid per common share is based on the closing price of our common shares as of the date of the determination of the statutory minimum federal income tax.

 

Item 3.                     Defaults Upon Senior Securities.

 

None.

 

Item 4.                     Mine Safety Disclosures

 

Not Applicable.

 

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Table of Contents

 

Item 5.                     Other information.

 

None.

 

Item 6.                     Exhibits.

 

The following exhibits are filed as part of this report:

 

Exhibit Index

 

Exhibit
Number

 

Description of Exhibit

 

 

 

31.1*

 

Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2*

 

Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1*

 

Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS

 

XBRL Instance Document

 

Submitted electronically with this report

101.SCH

 

XBRL Taxonomy Extension Schema Document

 

Submitted electronically with this report

101.CAL

 

XBRL Taxonomy Calculation Linkbase Document

 

Submitted electronically with this report

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

 

Submitted electronically with this report

101.LAB

 

XBRL Taxonomy Label Linkbase Document

 

Submitted electronically with this report

101.PRE

 

XBRL Taxonomy Presentation Linkbase Document

 

Submitted electronically with this report

 

 

 

 


* Filed herewith

 

37



Table of Contents

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

RLJ LODGING TRUST

 

 

Dated: August 7, 2013

/s/ THOMAS J. BALTIMORE, JR.

 

Thomas J. Baltimore, Jr.

 

President, Chief Executive Officer and Trustee

 

 

 

 

Dated: August 7, 2013

/s/ LESLIE D. HALE

 

Leslie D. Hale

 

Executive Vice President, Chief Financial Officer and Treasurer

 

(Principal Financial Officer)

 

 

 

 

Dated: August 7, 2013

/s/ CHRISTOPHER A. GORMSEN

 

Christopher A. Gormsen

 

Chief Accounting Officer

 

(Principal Accounting Officer)

 

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Table of Contents

 

Exhibit Index

 

Exhibit
Number

 

Description of Exhibit

31.1*

 

Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2*

 

Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1*

 

Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS

 

XBRL Instance Document

Submitted electronically with this report

101.SCH

 

XBRL Taxonomy Extension Schema Document

Submitted electronically with this report

101.CAL

 

XBRL Taxonomy Calculation Linkbase Document

Submitted electronically with this report

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

Submitted electronically with this report

101.LAB

 

XBRL Taxonomy Label Linkbase Document

Submitted electronically with this report

101.PRE

 

XBRL Taxonomy Presentation Linkbase Document

Submitted electronically with this report

 


*Filed herewith

 

39