LaSalle Hotel Properties - FORM 10-Q - July 22, 2015

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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, 2015
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             .
Commission file number 1-14045 
___________________________________
LASALLE HOTEL PROPERTIES
(Exact name of registrant as specified in its charter) 
___________________________________
Maryland
 
36-4219376
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification No.)
 
 
 
7550 Wisconsin Avenue, 10th Floor
Bethesda, Maryland
 
20814
(Address of principal executive offices)
 
(Zip Code)
(301) 941-1500
(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.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Check one:
Large accelerated filer
x
  
Accelerated filer
¨
 
 
 
 
 
Non-accelerated filer
¨  (Do not check if a smaller reporting company)
  
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
Indicate the number of shares outstanding of each of the issuer’s classes of common and preferred shares as of the latest practicable date.
Class
 
Outstanding at July 22, 2015
Common Shares of Beneficial Interest ($0.01 par value)
 
113,113,901

7 ½% Series H Cumulative Redeemable Preferred Shares ($0.01 par value)
 
2,750,000

6 ⅜% Series I Cumulative Redeemable Preferred Shares ($0.01 par value)
 
4,400,000



LASALLE HOTEL PROPERTIES
INDEX



PART I.
Financial Information
 
Item 1.
Financial Statements
LASALLE HOTEL PROPERTIES
Consolidated Balance Sheets
(in thousands, except share data)
 
June 30,
2015
 
December 31,
2014
 
(unaudited)
 
 
Assets:
 
 
 
Investment in hotel properties, net (Note 3)
$
3,858,369

 
$
3,428,556

Property under development
20,460

 
35,613

Cash and cash equivalents
26,586

 
114,131

Restricted cash reserves (Note 5)
21,882

 
21,570

Hotel receivables (net of allowance for doubtful accounts of $371 and $300, respectively)
59,600

 
30,338

Deferred financing costs, net
5,481

 
6,564

Deferred tax assets
1,447

 
1,447

Prepaid expenses and other assets
33,108

 
61,730

Total assets
$
4,026,933

 
$
3,699,949

Liabilities:
 
 
 
Borrowings under credit facilities (Note 4)
$
531,000

 
$
0

Term loans (Note 4)
477,500

 
477,500

Bonds payable (Note 4)
42,500

 
42,500

Mortgage loans (Note 4)
288,704

 
501,090

Accounts payable and accrued expenses
185,576

 
161,835

Advance deposits
34,376

 
19,447

Accrued interest
2,652

 
3,729

Distributions payable
54,009

 
45,462

Total liabilities
1,616,317

 
1,251,563

Commitments and contingencies

 

Equity:
 
 
 
Shareholders’ Equity:
 
 
 
Preferred shares of beneficial interest, $0.01 par value (liquidation preference of $178,750), 40,000,000 shares authorized; 7,150,000 shares issued and outstanding (Note 6)
72

 
72

Common shares of beneficial interest, $0.01 par value, 200,000,000 shares authorized; 113,115,442 shares issued and 113,113,901shares outstanding, and 112,828,536 shares issued and 112,824,508 shares outstanding, respectively (Note 6)
1,131

 
1,127

Treasury shares, at cost (Note 6)
(56
)
 
(138
)
Additional paid-in capital, net of offering costs of $80,146 and $80,124, respectively
2,679,896

 
2,673,888

Accumulated other comprehensive (loss) income (Note 4)
(1,481
)
 
748

Distributions in excess of retained earnings
(272,183
)
 
(233,988
)
Total shareholders’ equity
2,407,379

 
2,441,709

Noncontrolling Interests:
 
 
 
Noncontrolling interests in consolidated entities
17

 
17

Noncontrolling interests of common units in Operating Partnership (Note 6)
3,220

 
6,660

Total noncontrolling interests
3,237

 
6,677

Total equity
2,410,616

 
2,448,386

Total liabilities and equity
$
4,026,933

 
$
3,699,949

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

1

LASALLE HOTEL PROPERTIES
Consolidated Statements of Operations and Comprehensive Income
(in thousands, except share data)
(unaudited)
 
For the three months ended
 
For the six months ended
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
Revenues:
 
 
 
 
 
 
 
Hotel operating revenues:
 
 
 
 
 
 
 
Room
$
242,447

 
$
217,732

 
$
413,038

 
$
365,699

Food and beverage
75,480

 
72,407

 
136,395

 
126,522

Other operating department
21,560

 
19,789

 
39,577

 
34,814

Total hotel operating revenues
339,487

 
309,928

 
589,010

 
527,035

Other income
1,899

 
3,177

 
3,179

 
4,934

Total revenues
341,386

 
313,105

 
592,189

 
531,969

Expenses:
 
 
 
 
 
 
 
Hotel operating expenses:
 
 
 
 
 
 
 
Room
55,998

 
51,467

 
104,719

 
95,151

Food and beverage
49,069

 
50,144

 
94,187

 
91,844

Other direct
4,927

 
6,547

 
8,847

 
11,728

Other indirect (Note 8)
78,877

 
69,779

 
148,879

 
130,202

Total hotel operating expenses
188,871

 
177,937

 
356,632

 
328,925

Depreciation and amortization
45,916

 
39,306

 
88,794

 
77,066

Real estate taxes, personal property taxes and insurance
16,352

 
14,378

 
32,286

 
29,332

Ground rent (Note 5)
4,011

 
3,807

 
7,673

 
6,740

General and administrative
6,501

 
6,034

 
12,768

 
11,526

Acquisition transaction costs (Note 3)
(3
)
 
1,744

 
444

 
1,851

Other expenses
1,259

 
3,050

 
3,604

 
6,257

Total operating expenses
262,907

 
246,256

 
502,201

 
461,697

Operating income
78,479

 
66,849

 
89,988

 
70,272

Interest income
1

 
10

 
7

 
1,799

Interest expense
(13,895
)
 
(14,556
)
 
(27,540
)
 
(28,544
)
Loss from extinguishment of debt (Note 4)
0

 
0

 
0

 
(2,487
)
Income before income tax (expense) benefit
64,585

 
52,303

 
62,455

 
41,040

Income tax (expense) benefit (Note 9)
(5,574
)
 
(4,883
)
 
(706
)
 
1,509

Income before gain on sale of property
59,011

 
47,420

 
61,749

 
42,549

Gain on sale of property (Note 3)
0

 
43,548

 
0

 
43,548

Net income
59,011

 
90,968

 
61,749

 
86,097

Net income attributable to noncontrolling interests:
 
 
 
 
 
 
 
Noncontrolling interests in consolidated entities
(8
)
 
(8
)
 
(8
)
 
(8
)
Noncontrolling interests of common units in Operating Partnership (Note 6)
(139
)
 
(266
)
 
(154
)
 
(260
)
Net income attributable to noncontrolling interests
(147
)
 
(274
)
 
(162
)
 
(268
)
Net income attributable to the Company
58,864

 
90,694

 
61,587

 
85,829

Distributions to preferred shareholders
(3,042
)
 
(4,142
)
 
(6,084
)
 
(8,249
)
Issuance costs of redeemed preferred shares (Note 6)
0

 
(942
)
 
0

 
(942
)
Net income attributable to common shareholders
$
55,822

 
$
85,610

 
$
55,503

 
$
76,638


2


LASALLE HOTEL PROPERTIES
Consolidated Statements of Operations and Comprehensive Income - Continued
(in thousands, except share data)
(unaudited)

 
For the three months ended
 
For the six months ended
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
Earnings per Common Share - Basic:
 
 
 
 
 
 
 
Net income attributable to common shareholders excluding amounts attributable to unvested restricted shares
$
0.49

 
$
0.82

 
$
0.49

 
$
0.74

Earnings per Common Share - Diluted:
 
 
 
 
 
 
 
Net income attributable to common shareholders excluding amounts attributable to unvested restricted shares
$
0.49

 
$
0.82

 
$
0.49

 
$
0.73

Weighted average number of common shares outstanding:
 
 
 
 
 
 
 
Basic
112,728,085

 
103,698,332

 
112,688,122

 
103,695,013

Diluted
113,141,908

 
104,024,472

 
113,094,640

 
104,036,397

 
 
 
 
 
 
 
 
Comprehensive Income:
 
 
 
 
 
 
 
Net income
$
59,011

 
$
90,968

 
$
61,749

 
$
86,097

Other comprehensive income:
 
 
 
 
 
 
 
Unrealized gain (loss) on interest rate derivative instruments (Note 4)
26

 
(4,217
)
 
(4,372
)
 
(6,272
)
Reclassification adjustment for amounts recognized in net income (Note 4)
1,069

 
1,101

 
2,139

 
2,184

 
60,106

 
87,852

 
59,516

 
82,009

Comprehensive income attributable to noncontrolling interests:
 
 
 
 
 
 
 
Noncontrolling interests in consolidated entities
(8
)
 
(8
)
 
(8
)
 
(8
)
Noncontrolling interests of common units in Operating Partnership (Note 6)
(144
)
 
(257
)
 
(150
)
 
(248
)
Comprehensive income attributable to noncontrolling interests
(152
)
 
(265
)
 
(158
)
 
(256
)
Comprehensive income attributable to the Company
$
59,954

 
$
87,587

 
$
59,358

 
$
81,753

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

3

LASALLE HOTEL PROPERTIES
Consolidated Statements of Equity
(in thousands, except per share/unit data)
(unaudited)
 
Preferred
Shares of Beneficial Interest
 
Common
Shares of
Beneficial
Interest
 
Treasury
Shares
 
Additional
Paid-In
Capital
 
Accumulated Other Comprehensive Income (Loss)
 
Distributions
in Excess of
Retained
Earnings
 
Total
Shareholders’
Equity
 
Noncontrolling
Interests in
Consolidated
Entities
 
Noncontrolling Interests of Common Units in Operating Partnership
 
Total Noncontrolling Interests
 
Total Equity
Balance, December 31, 2013
$
95

 
$
1,039

 
$
(14
)
 
$
2,379,246

 
$
4,603

 
$
(281,578
)
 
$
2,103,391

 
$
18

 
$
6,054

 
$
6,072

 
$
2,109,463

Issuance of shares, net of offering costs
0

 
1

 
0

 
560

 
0

 
0

 
561

 
0

 
0

 
0

 
561

Reclassification of preferred shares
(23
)
 
0

 
0

 
(57,757
)
 
0

 
(942
)
 
(58,722
)
 
0

 
0

 
0

 
(58,722
)
Repurchase of common shares into treasury
0

 
0

 
(2,249
)
 
0

 
0

 
0

 
(2,249
)
 
0

 
0

 
0

 
(2,249
)
Deferred compensation, net
0

 
0

 
1,142

 
1,992

 
0

 
0

 
3,134

 
0

 
0

 
0

 
3,134

Adjustments to noncontrolling interests
0

 
0

 
0

 
12

 
0

 
0

 
12

 
0

 
(12
)
 
(12
)
 
0

Distributions on earned shares from share awards with market conditions
0

 
0

 
0

 
0

 
0

 
(75
)
 
(75
)
 
0

 
0

 
0

 
(75
)
Distributions on common shares/units ($0.66 per share/unit)
0

 
0

 
0

 
0

 
0

 
(68,229
)
 
(68,229
)
 
0

 
(194
)
 
(194
)
 
(68,423
)
Distributions on preferred shares
0

 
0

 
0

 
0

 
0

 
(8,249
)
 
(8,249
)
 
(8
)
 
0

 
(8
)
 
(8,257
)
Net income
0

 
0

 
0

 
0

 
0

 
85,829

 
85,829

 
8

 
260

 
268

 
86,097

Other comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized loss on interest rate derivative instruments
0

 
0

 
0

 
0

 
(6,254
)
 
0

 
(6,254
)
 
0

 
(18
)
 
(18
)
 
(6,272
)
Reclassification adjustment for amounts recognized in net income
0

 
0

 
0

 
0

 
2,178

 
0

 
2,178

 
0

 
6

 
6

 
2,184

Balance, June 30, 2014
$
72

 
$
1,040

 
$
(1,121
)
 
$
2,324,053

 
$
527

 
$
(273,244
)
 
$
2,051,327

 
$
18

 
$
6,096

 
$
6,114

 
$
2,057,441

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2014
$
72

 
$
1,127

 
$
(138
)
 
$
2,673,888

 
$
748

 
$
(233,988
)
 
$
2,441,709

 
$
17

 
$
6,660

 
$
6,677

 
$
2,448,386

Issuance of shares, net of offering costs
0

 
2

 
0

 
669

 
0

 
0

 
671

 
0

 
0

 
0

 
671

Repurchase of common shares into treasury
0

 
0

 
(1,727
)
 
0

 
0

 
0

 
(1,727
)
 
0

 
0

 
0

 
(1,727
)
Unit conversion
0

 
2

 
0

 
3,398

 
0

 
0

 
3,400

 
0

 
(3,400
)
 
(3,400
)
 
0

Deferred compensation, net
0

 
0

 
1,809

 
1,927

 
0

 
0

 
3,736

 
0

 
0

 
0

 
3,736

Adjustments to noncontrolling interests
0

 
0

 
0

 
14

 
0

 
0

 
14

 
0

 
(14
)
 
(14
)
 
0

Distributions on earned shares from share awards with market conditions
0

 
0

 
0

 
0

 
0

 
(334
)
 
(334
)
 
0

 
0

 
0

 
(334
)
Distributions on common shares/units ($0.83 per share/unit)
0

 
0

 
0

 
0

 
0

 
(93,364
)
 
(93,364
)
 
0

 
(176
)
 
(176
)
 
(93,540
)
Distributions on preferred shares
0

 
0

 
0

 
0

 
0

 
(6,084
)
 
(6,084
)
 
(8
)
 
0

 
(8
)
 
(6,092
)
Net income
0

 
0

 
0

 
0

 
0

 
61,587

 
61,587

 
8

 
154

 
162

 
61,749

Other comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized loss on interest rate derivative instruments
0

 
0

 
0

 
0

 
(4,364
)
 
0

 
(4,364
)
 
0

 
(8
)
 
(8
)
 
(4,372
)
Reclassification adjustment for amounts recognized in net income
0

 
0

 
0

 
0

 
2,135

 
0

 
2,135

 
0

 
4

 
4

 
2,139

Balance, June 30, 2015
$
72

 
$
1,131


$
(56
)

$
2,679,896


$
(1,481
)

$
(272,183
)

$
2,407,379


$
17


$
3,220


$
3,237


$
2,410,616

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

4

LASALLE HOTEL PROPERTIES
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
 
For the six months ended
 
June 30,
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Net income
$
61,749

 
$
86,097

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
88,794

 
77,066

Amortization of deferred financing costs, mortgage premium and note receivable discount
1,096

 
54

Loss from extinguishment of debt
0

 
2,487

Gain on sale of property
0

 
(43,548
)
Amortization of deferred compensation
3,736

 
3,134

Deferred income tax benefit
0

 
(2,136
)
Allowance for doubtful accounts
71

 
(13
)
Other
100

 
402

Changes in assets and liabilities:
 
 
 
Restricted cash reserves
2,265

 
123

Hotel receivables
(27,962
)
 
(16,952
)
Prepaid expenses and other assets
2,176

 
(8,045
)
Accounts payable and accrued expenses
20,324

 
5,868

Advance deposits
12,864

 
7,507

Accrued interest
(1,077
)
 
(340
)
Net cash provided by operating activities
164,136

 
111,704

Cash flows from investing activities:
 
 
 
Additions to properties
(55,357
)
 
(34,273
)
Improvements to properties
(5,299
)
 
(4,554
)
Acquisition of properties
(439,157
)
 
(127,002
)
Deposit on acquisition
25,000

 
0

Purchase of office furniture and equipment
(124
)
 
(70
)
Repayment of note receivable
0

 
72,000

Restricted cash reserves
(2,577
)
 
(3,797
)
Proceeds from sale of property
0

 
92,706

Property insurance proceeds
470

 
570

Net cash used in investing activities
(477,044
)
 
(4,420
)
Cash flows from financing activities:
 
 
 
Borrowings under credit facilities
653,545

 
358,357

Repayments under credit facilities
(122,545
)
 
(381,963
)
Repayments of mortgage loans
(212,386
)
 
(11,057
)
Payment of deferred financing costs
(13
)
 
(4,878
)
Purchase of treasury shares
(1,727
)
 
(2,249
)
Payment of common offering costs
(192
)
 
(20
)
Distributions on earned shares from share awards with market conditions
(334
)
 
(75
)
Distributions on preferred shares
(6,092
)
 
(8,221
)
Distributions on common shares/units
(84,893
)
 
(58,413
)
Net cash provided by (used in) financing activities
225,363

 
(108,519
)
Net change in cash and cash equivalents
(87,545
)
 
(1,235
)
Cash and cash equivalents, beginning of period
114,131

 
13,388

Cash and cash equivalents, end of period
$
26,586

 
$
12,153

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

5

LASALLE HOTEL PROPERTIES
Notes to Consolidated Financial Statements
(in thousands, except share/unit data)
(unaudited)
1.
Organization
LaSalle Hotel Properties (the “Company”), a Maryland real estate investment trust organized on January 15, 1998, primarily buys, owns, redevelops and leases upscale and luxury full-service hotels located in convention, resort and major urban business markets. The Company is a self-administered and self-managed real estate investment trust (“REIT”) as defined in the Internal Revenue Code of 1986, as amended (the “Code”). As a REIT, the Company is generally not subject to federal corporate income tax on that portion of its net income that is currently distributed to its shareholders. The income of LaSalle Hotel Lessee, Inc. (together with its wholly owned subsidiaries, “LHL”), the Company’s wholly owned taxable REIT subsidiary (“TRS”), is subject to taxation at normal corporate rates.
As of June 30, 2015, the Company owned interests in 47 hotels with over 12,000 guest rooms located in 10 states and the District of Columbia. Each hotel is leased to LHL (see Note 8) under a participating lease that provides for rental payments equal to the greater of (i) a base rent or (ii) a participating rent based on hotel revenues. The LHL leases expire between December 2015 and December 2017. Lease revenue from LHL is eliminated in consolidation. A third-party non-affiliated hotel operator manages each hotel pursuant to a hotel management agreement.
Substantially all of the Company’s assets are held directly or indirectly by, and all of its operations are conducted through, LaSalle Hotel Operating Partnership, L.P., a Delaware limited partnership (the “Operating Partnership”). The Company is the sole general partner of the Operating Partnership. The Company owned, through a combination of direct and indirect interests, 99.9% of the common units of the Operating Partnership at June 30, 2015. The remaining 0.1% is held by limited partners who held 145,223 common units of the Operating Partnership at June 30, 2015. See Note 6 for additional disclosures related to common units of the Operating Partnership.
2.
Summary of Significant Accounting Policies
The accompanying unaudited interim consolidated financial statements and related notes have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and in conformity with the rules and regulations of the Securities and Exchange Commission (“SEC”) applicable to interim financial information. As such, certain information and disclosures normally included in financial statements prepared in accordance with GAAP have been omitted in accordance with the rules and regulations of the SEC. These unaudited consolidated financial statements, in the opinion of management, include all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the consolidated balance sheets, consolidated statements of operations and comprehensive income (loss), consolidated statements of equity and consolidated statements of cash flows for the periods presented. Operating results for the three and six months ended June 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015 due to seasonal and other factors. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.
Basis of Presentation
The consolidated financial statements include the accounts of the Company, the Operating Partnership, LHL and their subsidiaries in which they have a controlling interest, including joint ventures. All significant intercompany balances and transactions have been eliminated.
Use of Estimates
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities, the amounts of contingent assets and liabilities at the balance sheet date and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Substantially all of the Company’s revenues and expenses are generated by the operations of the individual hotels. The Company records revenues and expenses that are estimated by the hotel operators and reviewed by the Company to produce quarterly financial statements because the management contracts do not require the hotel operators to submit actual results within a time frame that permits the Company to use actual results when preparing its Quarterly Reports on Form 10-Q for filing by the deadline prescribed by the SEC. Generally, the Company records actual revenue and expense amounts for the first two months of each quarter and estimated revenue and expense amounts for the last month of each quarter. Each quarter, the Company reviews

6

the estimated revenue and expense amounts provided by the hotel operators for reasonableness based upon historical results for prior periods and internal Company forecasts. The Company records any differences between recorded estimated amounts and actual amounts in the following quarter; historically, these differences have not been material. The Company believes the quarterly revenues and expenses, recorded on the Company’s consolidated statements of operations and comprehensive income (loss) based on an aggregate estimate, are fairly stated.
Investment in Hotel Properties
Upon acquisition, the Company determines the fair value of the acquired long-lived assets, assumed debt and intangible assets and liabilities. The Company’s investments in hotel properties are carried at cost and depreciated using the straight-line method over an estimated useful life of 30 to 40 years for buildings, 15 years for building improvements, the shorter of the useful life of the improvement or the term of the related tenant lease for tenant improvements, 7 years for land improvements, 20 years for golf course land improvements, 20 years for swimming pool assets and 3 to 5 years for furniture, fixtures and equipment. For investments subject to land and building leases that qualify as capital leases, assets are recorded at the estimated fair value of the right to use the leased property at acquisition and depreciated over the shorter of the useful lives of the assets or the term of the respective lease. Renovations and/or replacements that improve or extend the life of the asset are capitalized and depreciated over their estimated useful lives.
The Company is required to make subjective assessments as to the useful lives and classification of its properties for purposes of determining the amount of depreciation expense to reflect each year with respect to those properties. These assessments have a direct impact on the Company’s net income. Should the Company change the expected useful life or classification of particular assets, it would result in a change in depreciation expense and annual net income.
Share-Based Compensation
From time to time, the Company awards shares under the 2014 Equity Incentive Plan (“2014 Plan”), which has approximately nine years remaining, as compensation to executives, employees and members of the Board of Trustees (see Note 7). The shares issued to executives and employees generally vest over three years. The shares issued to members of the Board of Trustees vest immediately upon issuance. The Company recognizes compensation expense for nonvested shares with service conditions or service and market conditions on a straight-line basis over the vesting period based upon the fair value of the shares on the date of issuance, adjusted for forfeitures. Compensation expense for nonvested shares with service and performance conditions is recognized based on the fair value of the estimated number of shares expected to vest, as revised throughout the vesting period, adjusted for forfeitures. The 2014 Plan replaced the 2009 Equity Incentive Plan (“2009 Plan”) in May 2014.
Noncontrolling Interests
The Company’s consolidated financial statements include entities in which the Company has a controlling financial interest. Noncontrolling interest is the portion of equity (net assets) in a subsidiary not attributable, directly or indirectly, to a parent. Such noncontrolling interests are reported on the consolidated balance sheets within equity, separately from the Company’s equity. On the consolidated statements of operations and comprehensive income (loss), revenues, expenses and net income or loss from less-than-wholly-owned subsidiaries are reported at the consolidated amounts, including both the amounts attributable to the Company and noncontrolling interests. Income or loss is allocated to noncontrolling interests based on their weighted average ownership percentage for the applicable period. Consolidated statements of equity include beginning balances, activity for the period and ending balances for shareholders’ equity, noncontrolling interests and total equity.
However, the Company’s noncontrolling interests that are redeemable for cash or other assets at the option of the holder, not solely within the control of the issuer, must be classified outside of permanent equity. The Company makes this determination based on terms in applicable agreements, specifically in relation to redemption provisions. Additionally, with respect to noncontrolling interests for which the Company has a choice to settle the contract by delivery of its own shares, the Company evaluates whether the Company controls the actions or events necessary to issue the maximum number of shares that could be required to be delivered under share settlement of the contract.
As of June 30, 2015, the consolidated results of the Company include the following ownership interests held by owners other than the Company: (i) the common units in the Operating Partnership held by third parties, (ii) the outside preferred ownership interests in a subsidiary and (iii) the outside ownership interest in a joint venture.
Notes Receivable
Notes receivable are carried at cost, net of any premiums or discounts which are recognized as an adjustment of yield over the remaining life of the note using the effective interest method. Interest income is recorded on the accrual basis consistent with

7

the terms of the notes receivable. A note is deemed to be impaired when, based on current information and events, it is probable that the Company will be unable to collect all principal and interest contractually due. Interest previously accrued but not collected becomes part of the Company’s recorded investment in the note receivable for purposes of assessing impairment. The Company
applies interest payments received on non-accrual notes receivable first to accrued interest and then as interest income. Notes receivable return to accrual status when contractually current and the collection of future payments is reasonably assured.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in GAAP when it becomes effective. The new standard is effective for the Company on January 1, 2018. Early application is permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU No. 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.
In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis, which changes the way reporting enterprises evaluate the consolidation of limited partnerships, variable interests and similar entities. This standard will be effective for the first annual reporting period beginning after December 15, 2015 with early adoption permitted. The Company is evaluating the effect that ASU No. 2015-02 will have on its consolidated financial statements and related disclosures, but believes it will not have a material impact on its financial reporting.
In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires debt issuance costs to be presented on the balance sheet as a direct deduction from the carrying amount of the debt liability. This standard will be effective for the first annual reporting period beginning after December 15, 2015 with early adoption permitted. The adoption of this standard will only affect the presentation of the Company’s consolidated balance sheet.
3.
Investment in Hotel Properties
Investment in hotel properties as of June 30, 2015 and December 31, 2014 consists of the following:
 
June 30, 2015
 
December 31, 2014
Land
$
730,735

 
$
601,962

Buildings and improvements
3,600,294

 
3,295,233

Furniture, fixtures and equipment
681,359

 
596,879

Investment in hotel properties, gross
5,012,388

 
4,494,074

Accumulated depreciation
(1,154,019
)
 
(1,065,518
)
Investment in hotel properties, net
$
3,858,369

 
$
3,428,556

As of June 30, 2015 and December 31, 2014, buildings and improvements included capital lease assets of $186,711 and accumulated depreciation included amounts related to capital lease assets of $18,218 and $15,513, respectively. Depreciation of the capital lease assets is included in depreciation and amortization expense in the accompanying consolidated statements of operations and comprehensive income for all periods presented.
Depreciation expense was $45,790 and $88,542 for the three and six months ended June 30, 2015, respectively, and $39,200 and $76,858 for the three and six months ended June 30, 2014, respectively.
Acquisitions
In connection with the acquisition of Hotel Vitale on April 2, 2014, the Company incurred acquisition transaction costs of $1,680 and $1,787 that were expensed as incurred during the three and six months ended June 30, 2014, respectively, which expenses are included in the accompanying consolidated statements of operations and comprehensive income.
On April 30, 2014, the Company acquired a parcel of land located adjacent to the Company’s Onyx Hotel in Boston, MA. The Company incurred transaction costs of $64 that were expensed as incurred during the three and six months ended June 30, 2014, which expenses are included in the accompanying consolidated statements of operations and comprehensive income.
During the first quarter of 2015, the Company acquired 100% interests in two full-service hotels, each of which is leased to LHL. The Company recorded the acquisitions at fair value using model-derived valuations, with the estimated fair value recorded

8

to investment in hotel properties and hotel working capital assets and liabilities. In connection with the acquisitions, the Company incurred acquisition transaction costs that were expensed as incurred. The following is a summary of the acquisitions:
 
 
 
 
 
 
 
 
 
 
 
 
Acquisition
Transaction Costs
Hotel Name
 
Acquisition Date
 
Number of
Rooms
 
Location
 
Purchase
Price
 
Manager
 
For the three months ended June 30, 2015
 
For the six months ended June 30, 2015
Park Central San Francisco
 
January 23, 2015
 
681
 
San Francisco, CA
 
$
350,000

 
Highgate Hotels
 
$
0

 
$
230

The Marker Waterfront Resort
 
March 16, 2015
 
96
 
Key West, FL
 
96,250

 
Highgate Hotels
 
(3
)
 
214

Total
 
 
 
 
 
 
 
$
446,250

 
 
 
$
(3
)
 
$
444

The sources of the funding for the January 23, 2015 acquisition were cash on hand and borrowings under the Company’s senior unsecured credit facility. The source of funding for the March 16, 2015 acquisition was borrowings under the Company’s senior unsecured credit facility. The Company has not yet finalized its determination of fair value for the 2015 acquisitions. A final determination of required fair value adjustments will be made during 2015. Total revenues and net income from the hotels acquired during 2015 of $22,867 and $3,656 for the three months ended June 30, 2015, respectively, and $37,333 and $4,442 for the six months ended June 30, 2015, respectively, are included in the accompanying consolidated statements of operations and comprehensive income.
Dispositions
On June 17, 2014, the Company sold the Hilton Alexandria Old Town for $93,380. This sale does not represent a strategic shift in the Company’s business plan or primary markets, and therefore, does not qualify as discontinued operations. The Company recognized a gain of $43,548 related to the sale of this property, which is included in the accompanying consolidated statements of operations and comprehensive income for the three and six months ended June 30, 2014.
4.
Long-Term Debt
Debt Summary
Debt as of June 30, 2015 and December 31, 2014 consisted of the following:
 
 
 
 
 
 
Balance Outstanding as of
Debt                                                                                  
 
Interest
Rate
 
Maturity
Date
 
June 30,
2015
 
December 31,
2014
Credit facilities
 
 
 
 
 
 
 
 
Senior unsecured credit facility
 
Floating (a)
 
January 2018 (a)
 
$
531,000

 
$
0

LHL unsecured credit facility
 
Floating (b)
 
January 2018 (b)
 
0

 
0

Total borrowings under credit facilities
 
 
 
 
 
531,000

 
0

Term loans
 
 
 
 
 
 
 
 
First Term Loan
 
Floating (c)
 
May 2019
 
177,500

 
177,500

Second Term Loan
 
Floating (c)
 
January 2019
 
300,000

 
300,000

Total term loans
 
 
 
 
 
477,500

 
477,500

Massport Bonds
 
 
 
 
 
 
 
 
Hyatt Boston Harbor (taxable)
 
Floating (d)
 
March 2018
 
5,400

 
5,400

Hyatt Boston Harbor (tax exempt)
 
Floating (d)
 
March 2018
 
37,100

 
37,100

Total bonds payable
 
 
 
 
 
42,500

 
42,500

Mortgage loans
 
 
 
 
 
 
 
 
Westin Copley Place
 
5.28%
 
September 2015 (e)
 
0

 
210,000

Westin Michigan Avenue
 
5.75%
 
April 2016 (f)
 
132,309

 
133,347

Indianapolis Marriott Downtown
 
5.99%
 
July 2016 (f)
 
96,815

 
97,528

The Roger
 
6.31%
 
August 2016
 
59,580

 
60,215

Total mortgage loans
 
 
 
 
 
288,704

 
501,090

Total debt
 
 
 
 
 
$
1,339,704

 
$
1,021,090



9

(a) 
Borrowings bear interest at floating rates equal to, at the Company’s option, either (i) LIBOR plus an applicable margin, or (ii) an Adjusted Base Rate (as defined in the credit agreement) plus an applicable margin. As of June 30, 2015, the rate, including the applicable margin, for the Company’s outstanding LIBOR borrowing of $531,000 was 1.89%. There were no borrowings outstanding at December 31, 2014. The Company has the option, pursuant to certain terms and conditions, to extend the maturity date for two six-month extensions.
(b) 
Borrowings bear interest at floating rates equal to, at LHL’s option, either (i) LIBOR plus an applicable margin, or (ii) an Adjusted Base Rate (as defined in the credit agreement) plus an applicable margin. There were no borrowings outstanding at June 30, 2015 and December 31, 2014. LHL has the option, pursuant to certain terms and conditions, to extend the maturity date for two six-month extensions.
(c) 
Term loans bear interest at floating rates equal to LIBOR plus an applicable margin. The Company entered into separate interest rate swap agreements for the full seven-year term of the First Term Loan (as defined below) and a five-year term ending in August 2017 for the Second Term Loan (as defined below), resulting in fixed all-in interest rates at June 30, 2015 and December 31, 2014 of 3.62% and 2.38%, respectively, at the Company’s current leverage ratio (as defined in the swap agreements).
(d) 
The Massport Bonds are secured by letters of credit issued by U.S. Bank National Association (“U.S. Bank”) that expire in September 2016. The letters of credit have two one-year extension options and are secured by the Hyatt Boston Harbor. The letters of credit cannot be extended beyond the Massport Bonds’ maturity date. The bonds bear interest based on weekly floating rates. The interest rates as of June 30, 2015 were 0.14% and 0.08% for the $5,400 and $37,100 bonds, respectively. The interest rates as of December 31, 2014 were 0.13% and 0.03% for the $5,400 and $37,100 bonds, respectively. The Company incurs an annual letter of credit fee of 1.35%.
(e) 
The Company repaid the mortgage loan on June 1, 2015 through borrowings on its senior unsecured credit facility.
(f) 
The Company intends to repay the mortgage loan upon maturity through either borrowings on its credit facilities, placement of corporate-level debt or proceeds from a property-level mortgage financing.
Future scheduled debt principal payments as of June 30, 2015 are as follows:
2015
$
2,410

2016
286,294

2017
0

2018
573,500

2019
477,500

Total debt
$
1,339,704

A summary of the Company’s interest expense and weighted average interest rates for variable rate debt for the three and six months ended June 30, 2015 and 2014 is as follows:
 
For the three months ended
 
For the six months ended
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
Interest Expense:
 
 
 
 
 
 
 
Interest incurred
$
13,422

 
$
14,023

 
$
26,744

 
$
27,542

Amortization of deferred financing costs
549

 
553

 
1,096

 
1,081

Capitalized interest
(76
)
 
(20
)
 
(300
)
 
(79
)
Interest expense
$
13,895

 
$
14,556

 
$
27,540

 
$
28,544

 
 
 
 
 
 
 
 
Weighted Average Interest Rates for Variable Rate Debt:
 
 
 
 
 
 
 
Senior unsecured credit facility
1.89
%
 
1.86
%
 
1.88
%
 
1.86
%
LHL unsecured credit facility
1.88
%
 
1.85
%
 
1.88
%
 
1.86
%
Massport Bonds
0.09
%
 
0.46
%
 
0.07
%
 
0.45
%
Credit Facilities
On January 8, 2014, the Company refinanced its $750,000 senior unsecured credit facility with a syndicate of banks. The credit facility matures on January 8, 2018, subject to two six-month extensions that the Company may exercise at its option,

10

pursuant to certain terms and conditions, including payment of an extension fee. The credit facility, with a current commitment of $750,000, includes an accordion feature which, subject to certain conditions, entitles the Company to request additional lender commitments, allowing for total commitments up to $1,050,000. Borrowings under the credit facility bear interest at floating rates equal to, at the Company’s option, either (i) LIBOR plus an applicable margin, or (ii) an Adjusted Base Rate (as defined in the credit agreement) plus an applicable margin. Additionally, the Company is required to pay a variable unused commitment fee of 0.25% or 0.30% of the unused portion of the credit facility, depending on the average daily unused portion of the credit facility.
On January 8, 2014, LHL also refinanced its $25,000 unsecured revolving credit facility to be used for working capital and general lessee corporate purposes. The LHL credit facility matures on January 8, 2018, subject to two six-month extensions that LHL may exercise at its option, pursuant to certain terms and conditions, including payment of an extension fee. Borrowings under the LHL credit facility bear interest at floating rates equal to, at LHL’s option, either (i) LIBOR plus an applicable margin, or (ii) an Adjusted Base Rate (as defined in the credit agreement) plus an applicable margin. Additionally, LHL is required to pay a variable unused commitment fee of 0.25% or 0.30% of the unused portion of the credit facility, depending on the average daily unused portion of the LHL credit facility.
The Company’s senior unsecured credit facility and LHL’s unsecured credit facility contain certain financial covenants relating to net worth requirements, debt ratios and fixed charge coverage and other limitations that restrict the Company’s ability to make distributions or other payments to its shareholders upon events of default.
Term Loans
On May 16, 2012, the Company entered into a $177,500 unsecured term loan with a seven-year term maturing on May 16, 2019 (the “First Term Loan”). The First Term Loan bears interest at a variable rate, but was hedged to a fixed interest rate based on the Company’s current leverage ratio (as defined in the swap agreements), which interest rate was 3.62% at June 30, 2015, for the full seven-year term (see “Derivative and Hedging Activities” below).
On January 8, 2014, the Company refinanced its $300,000 unsecured term loan (the “Second Term Loan”). The Second Term Loan includes an accordion feature, which subject to certain conditions, entitles the Company to request additional lender commitments, allowing for total commitments up to $500,000. The Second Term Loan has a five-year term maturing on January 8, 2019 and bears interest at variable rates, but was hedged to a fixed interest rate based on the Company’s current leverage ratio (as defined in the swap agreements), which interest rate was 2.38% at June 30, 2015, through August 2, 2017 (see “Derivative and Hedging Activities” below).
The Company’s term loans contain certain financial covenants relating to net worth requirements, debt ratios and fixed charge coverage and other limitations that restrict the Company’s ability to make distributions or other payments to its shareholders upon events of default.
Derivative and Hedging Activities
The Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. Unrealized gains and losses on the effective portion of hedging instruments are reported in other comprehensive income (loss) (“OCI”). Ineffective portions of changes in the fair value of a cash flow hedge are recognized as interest expense. Amounts reported in accumulated other comprehensive income (loss) (“AOCL”) related to currently outstanding derivatives are recognized as an adjustment to income (loss) as interest payments are made on the Company’s variable rate debt. Effective May 16, 2012, the Company entered into three interest rate swap agreements with an aggregate notional amount of $177,500 for the First Term Loan’s full seven-year term, resulting in a fixed all-in interest rate based on the Company’s current leverage ratio (as defined in the swap agreements), which interest rate was 3.62% at June 30, 2015. Effective August 2, 2012, the Company entered into five interest rate swap agreements with an aggregate notional amount of $300,000 for the Second Term Loan through August 2, 2017, resulting in a fixed all-in interest rate based on the Company’s current leverage ratio (as defined in the swap agreements), which interest rate was 2.38% at June 30, 2015. The Company has designated its pay-fixed, receive-floating interest rate swap derivatives as cash flow hedges. The interest rate swaps were entered into with the intention of eliminating the variability of the terms loans, but can also limit the exposure to any amendments, supplements, replacements or refinancings of the Company’s debt.
The following tables present the effect of derivative instruments on the Company’s consolidated statements of operations and comprehensive income, including the location and amount of unrealized gain (loss) on outstanding derivative instruments in cash flow hedging relationships, for the three and six months ended June 30, 2015 and 2014:

11

 
 
Amount of Gain (Loss) Recognized in OCI on Derivative Instruments
 
Location of Loss Reclassified from AOCL into Net Income
 
Amount of Loss Reclassified from AOCL into Net Income
 
 
 (Effective Portion)
 
 (Effective Portion)
 
 (Effective Portion)
 
 
For the three months ended
 
 
 
 
For the three months ended
 
 
June 30,
 
 
 
 
June 30,
 
 
2015
 
2014
 
 
 
 
2015
 
2014
Derivatives in cash flow hedging relationships:
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
$
26

 
$
(4,217
)
 
Interest expense
 
$
1,069

 
$
1,101

 
 
Amount of Loss Recognized in OCI on Derivative Instruments
 
Location of Loss Reclassified from AOCL into Net Income
 
Amount of Loss Reclassified from AOCL into Net Income
 
 
 (Effective Portion)
 
 (Effective Portion)
 
 (Effective Portion)
 
 
For the six months ended
 
 
 
 
For the six months ended
 
 
June 30,
 
 
 
 
June 30,
 
 
2015
 
2014
 
 
 
 
2015
 
2014
Derivatives in cash flow hedging relationships:
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
$
(4,372
)
 
$
(6,272
)
 
Interest expense
 
$
2,139

 
$
2,184

During the six months ended June 30, 2015 and 2014, the Company did not have any hedge ineffectiveness or amounts that were excluded from the assessment of hedge effectiveness recorded in earnings.
As of June 30, 2015, there was $1,483 in cumulative unrealized loss of which $1,481 was included in AOCL and $2 was attributable to noncontrolling interests. As of December 31, 2014, there was $750 in cumulative unrealized gain of which $748 was included in AOCL and $2 was attributable to noncontrolling interests. The Company expects that approximately $4,283 will be reclassified from AOCL and noncontrolling interests and recognized as a reduction to income in the next 12 months, calculated as estimated interest expense using the interest rates on the derivative instruments as of June 30, 2015.
Extinguishment of Debt
As discussed above, on January 8, 2014, the Company refinanced its senior unsecured credit facility and Second Term Loan and LHL refinanced its unsecured revolving credit facility. The refinancing arrangements for the senior unsecured credit facility and Second Term Loan were considered substantial modifications. The Company recognized a loss from extinguishment of debt of $2,487, which is included in the accompanying consolidated statements of operations and comprehensive income. The loss from extinguishment of debt represents a portion of the unamortized deferred financing costs incurred when the original agreements were executed.
Mortgage Loans
The Company’s mortgage loans are secured by the respective properties. The mortgages are non-recourse to the Company except for fraud or misapplication of funds.
On June 1, 2015, the Company repaid without fee or penalty the Westin Copley Place mortgage loan in the amount of $210,000 plus accrued interest through borrowings under its senior unsecured credit facility. The loan was due to mature in September 2015. On July 20, 2015, the Company entered into a new $225,000 mortgage loan secured by the Westin Copley Place (see Note 13).
The mortgage loans contain debt service coverage ratio tests related to the mortgaged properties. If the debt service coverage ratio for a specific property fails to exceed a threshold level specified in the mortgage, cash flows from that hotel will automatically be directed to the lender to (i) satisfy required payments, (ii) fund certain reserves required by the mortgage and (iii) fund additional cash reserves for future required payments, including final payment. Cash flows may be directed to the lender (“cash trap”) until such time as the property again complies with the specified debt service coverage ratio or the mortgage is paid off.

12

Financial Covenants
Failure of the Company to comply with the financial covenants contained in its credit facilities, term loans and non-recourse secured mortgages could result from, among other things, changes in its results of operations, the incurrence of additional debt or changes in general economic conditions.
If the Company violates the financial covenants contained in any of its credit facilities or term loans described above, the Company may attempt to negotiate waivers of the violations or amend the terms of the applicable credit facilities or term loans with the lenders thereunder; however, the Company can make no assurance that it would be successful in any such negotiations or that, if successful in obtaining waivers or amendments, such amendments or waivers would be on terms attractive to the Company. If a default under the credit facilities or term loans were to occur, the Company would possibly have to refinance the debt through additional debt financing, private or public offerings of debt securities, or additional equity financings. If the Company is unable to refinance its debt on acceptable terms, including at maturity of the credit facilities and term loans, it may be forced to dispose of hotel properties on disadvantageous terms, potentially resulting in losses that reduce cash flow from operating activities. If, at the time of any refinancing, prevailing interest rates or other factors result in higher interest rates upon refinancing, increases in interest expense would lower the Company’s cash flow, and, consequently, cash available for distribution to its shareholders.
A cash trap associated with a mortgage loan may limit the overall liquidity for the Company as cash from the hotel securing such mortgage would not be available for the Company to use. If the Company is unable to meet mortgage payment obligations, including the payment obligation upon maturity of the mortgage borrowing, the mortgage securing the specific property could be foreclosed upon by, or the property could be otherwise transferred to, the mortgagee with a consequent loss of income and asset value to the Company.
As of June 30, 2015, the Company is in compliance with all debt covenants, current on all loan payments and not otherwise in default under the credit facilities, term loans, bonds payable or mortgage loans.
5.
Commitments and Contingencies
Ground, Land and Building, and Air Rights Leases
Eight of the Company’s hotels, San Diego Paradise Point Resort and Spa, Hyatt Boston Harbor, Indianapolis Marriott Downtown, The Hilton San Diego Resort and Spa, Hotel Solamar, Viceroy Santa Monica, The Liberty Hotel and Hotel Vitale, are subject to ground leases under non-cancelable operating leases expiring from March 2026 to December 2102. Additionally, the restaurant facility for Southernmost Hotel Collection is subject to a ground lease, which expires in April 2019, but the Company can begin negotiating a renewal one year in advance of the lease expiration. The ground lease at Hyatt Boston Harbor expires in March 2026, but the Company has options to extend for over 50 years to 2077. None of the remaining ground leases expire prior to 2045. The Westin Copley Place is subject to a long term air rights lease, which expires in December 2077 and requires no payments through maturity. The ground lease related to the Indianapolis Marriott Downtown requires future ground rent payments of one dollar per year. The ground leases at Viceroy Santa Monica, The Liberty Hotel and Hotel Vitale are subject to minimum annual rent increases, resulting in noncash straight-line rent expense of $487 and $980 for the three and six months ended June 30, 2015, respectively, and $501 and $825 for the three and six months ended June 30, 2014, respectively, which is included in total ground rent expense below.
The Roger, Harbor Court Hotel and Hotel Triton are subject to capital leases of land and building which expire in December 2044, April 2048 and January 2048, respectively. At acquisition, the estimated fair value of the remaining rent payments of $4,892, $18,424 and $27,752, respectively, were recorded as capital lease obligations. These obligations, net of amortization, are included in accounts payable and accrued expenses in the accompanying consolidated balance sheets.

13

Total ground rent expense for the three and six months ended June 30, 2015 was $4,011 and $7,673, respectively. Total ground rent expense for the three and six months ended June 30, 2014 was $3,807 and $6,740, respectively. Certain rent payments are based on the hotel’s performance. Actual payments of rent may exceed the minimum required rent due to meeting specified thresholds.
Future minimum rent payments, including capital lease payments, (without reflecting future applicable Consumer Price Index increases) are as follows:
2015
$
6,262

2016
12,730

2017
13,000

2018
13,186

2019
13,162

Thereafter
604,079

 
$
662,419

Reserve Funds for Future Capital Expenditures
Certain of the Company’s agreements with its hotel managers, franchisors and lenders have provisions for the Company to provide funds, generally 4.0% of hotel revenues, sufficient to cover the cost of (a) certain non-routine repairs and maintenance to the hotels and (b) replacements and renewals to the hotels’ capital assets. Certain of the agreements require that the Company reserve this cash in separate accounts. As of June 30, 2015, $16,773 was available in restricted cash reserves for future capital expenditures. The Company has sufficient cash on hand and availability on its credit facilities to cover capital expenditures under agreements that do not require that the Company separately reserve cash.
Restricted Cash Reserves
At June 30, 2015, the Company held $21,882 in restricted cash reserves. Included in such amounts are (i) $16,773 of reserve funds for future capital expenditures, (ii) $2,900 deposited in mortgage escrow accounts pursuant to mortgage obligations to pre-fund a portion of certain operating expenses and debt payments and (iii) $2,209 held by insurance and management companies on the Company’s behalf to be refunded or applied to future liabilities.
Litigation
The nature of hotel operations exposes the Company and its hotels to the risk of claims and litigation in the normal course of their business. The Company is not presently subject to any material litigation nor, to the Company’s knowledge, is any litigation threatened against the Company, other than routine actions for negligence or other claims and administrative proceedings arising in the ordinary course of business, some of which are expected to be covered by liability insurance and all of which collectively are not expected to have a material adverse effect on the liquidity, results of operations, business or financial condition of the Company.
6.
Equity
Common Shares of Beneficial Interest
On January 1, 2015, the Company issued 11,682 common shares of beneficial interest and authorized an additional 4,183 deferred shares to the independent members of its Board of Trustees for their 2014 compensation. These common shares of beneficial interest were issued under the 2014 Plan. Additionally, the Company issued 9,757 common shares of beneficial interest, related to the resignation of a former trustee, for the second of five payouts of his accumulated deferred shares granted as compensation for years 1999 through 2013. These common shares of beneficial interest were issued under the 2009 Plan.
On January 1, 2015, the Company issued 108,779 nonvested shares with service conditions to executives related to the nonvested share awards with market conditions granted on January 26, 2012 (see Note 7 for additional details including vesting information). These common shares of beneficial interest were issued under the 2009 Plan.
On March 19, 2015, the Company issued 62,742 nonvested shares with service conditions to the Company’s executives and employees. The nonvested shares will vest in three annual installments starting January 1, 2016, subject to continued employment. These common shares of beneficial interest were issued under the 2014 Plan.

14

On May 18, 2015, the Company issued 933 nonvested shares with service conditions to an employee of the Company. The nonvested shares will vest in three annual installments starting January 1, 2016, subject to continued employment. These common shares of beneficial interest were issued under the 2014 Plan.
On February 20, 2013, the Company entered into an equity distribution agreement (the “2013 Agreement”) with Raymond James & Associates, Inc. (the “Manager”). Under the terms of the 2013 Agreement, the Company may issue from time to time through or to the Manager, as sales agent or principal, the Company’s common shares of beneficial interest with aggregate gross proceeds totaling up to $250,000. The offering of the Company’s common shares of beneficial interest under the 2013 Agreement will terminate upon the earlier of (i) the sale of common shares having an aggregate offering price of $250,000 or (ii) the termination of the 2013 Agreement by the Manager or Company. No shares were sold year-to-date 2015. As of June 30, 2015, the Company had availability under the 2013 Agreement to issue and sell common shares of beneficial interest having an aggregate offering price of up to $230,057.
Common Dividends
The Company paid the following dividends on common shares/units during the six months ended June 30, 2015:
Dividend per
Share/Unit (1)
 
For the Quarter Ended
 
Record Date
 
Payable Date
$
0.38

 
December 31, 2014
 
December 31, 2014
 
January 15, 2015
$
0.38

 
March 31, 2015
 
March 31, 2015
 
April 15, 2015
(1) Amounts are rounded to the nearest whole cent for presentation purposes.
Treasury Shares
Treasury shares are accounted for under the cost method. During the six months ended June 30, 2015, the Company received 55,577 common shares of beneficial interest related to employees surrendering shares to pay minimum withholding taxes at the time nonvested shares vested and forfeiting nonvested shares upon resignation.
On August 29, 2011, the Company’s Board of Trustees authorized a share repurchase program (the “Repurchase Program”) to acquire up to $100,000 of the Company’s common shares of beneficial interest, with repurchased shares recorded at cost in treasury. As of June 30, 2015, the Company had availability under the Repurchase Program to acquire up to $75,498 of common shares of beneficial interest. However, the Company is not currently authorized by its Board of Trustees to repurchase or offer to repurchase any common shares. If authorized by its Board of Trustees, the Company may resume using the Repurchase Program on a future date.
During the six months ended June 30, 2015, the Company re-issued 58,064 treasury shares related to the grants of nonvested shares.
At June 30, 2015, there were 1,541 common shares of beneficial interest in treasury.
Preferred Shares
On July 3, 2014, the Company redeemed the remaining 2,348,888 7 ¼% Series G Cumulative Redeemable Preferred Shares (the “Series G Preferred Shares”) for $58,722 ($25.00 per share) plus accrued and unpaid dividends through the redemption date, July 3, 2014, of $1,100. The redemption value of the Series G Preferred Shares exceeded their carrying value by $951, of which $942 was incurred in the second quarter of 2014 and is included in the determination of net income attributable to common shareholders for the three and six months ended June 30, 2014. The $951 represents the offering costs related to the redeemed Series G Preferred Shares.
The following preferred shares of beneficial interest were outstanding as of June 30, 2015:
Security Type                                             
 
Number of
Shares
7 ½% Series H Preferred Shares
 
2,750,000

6 ⅜% Series I Preferred Shares
 
4,400,000

The 7 ½% Series H Cumulative Redeemable Preferred Shares (the “Series H Preferred Shares”) and the 6 ⅜% Series I Cumulative Redeemable Preferred Shares (the “Series I Preferred Shares”) (collectively, the “Preferred Shares”) rank senior to the common shares of beneficial interest and on parity with each other with respect to payment of distributions. The Company will not pay any distributions, or set aside any funds for the payment of distributions, on its common shares of beneficial interest

15

unless it has also paid (or set aside for payment) the full cumulative distributions on the Preferred Shares for all past dividend periods and, with respect to the Series H Preferred Shares, for the current dividend period. The outstanding Preferred Shares do not have any maturity date, and are not subject to mandatory redemption. The difference between the carrying value and the redemption amount of the Preferred Shares are the offering costs. In addition, the Company is not required to set aside funds to redeem the Preferred Shares.
The Company may not optionally redeem the Series H Preferred Shares and Series I Preferred Shares prior to January 24, 2016 and March 4, 2018, respectively, except in limited circumstances relating to the Company’s continuing qualification as a REIT or as discussed below. After those dates, the Company may, at its option, redeem the Series H Preferred Shares and Series I Preferred Shares, in whole or from time to time in part, by payment of $25.00 per share, plus any accumulated, accrued and unpaid distributions to and including the date of redemption. In addition, upon the occurrence of a change of control (as defined in the Company’s charter), the result of which the Company’s common shares of beneficial interest and the common securities of the acquiring or surviving entity are not listed on the New York Stock Exchange, the NYSE MKT LLC or the NASDAQ Stock Market, or any successor exchanges, the Company may, at its option, redeem the Preferred Shares in whole or in part within 120 days after the change of control occurred, by paying $25.00 per share, plus any accrued and unpaid distributions to and including the date of redemption. If the Company does not exercise its right to redeem the Preferred Shares upon a change of control, the holders of Series H Preferred Shares and Series I Preferred Shares have the right to convert some or all of their shares into a number of the Company’s common shares of beneficial interest based on a defined formula subject to a cap of 4,680,500 common shares and 8,835,200 common shares, respectively.
Preferred Dividends
The Company paid the following dividends on preferred shares during the six months ended June 30, 2015:
 
 
Dividend per
 
For the
 
 
 
 
Security Type        
 
Share (1)
 
Quarter Ended
 
Record Date
 
Payable Date
7 ½% Series H
 
$
0.47

 
December 31, 2014
 
January 1, 2015
 
January 15, 2015
6 ⅜% Series I
 
$
0.40

 
December 31, 2014
 
January 1, 2015
 
January 15, 2015
7 ½% Series H
 
$
0.47

 
March 31, 2015
 
April 1, 2015
 
April 15, 2015
6 ⅜% Series I
 
$
0.40

 
March 31, 2015
 
April 1, 2015
 
April 15, 2015
(1) 
Amounts are rounded to the nearest whole cent for presentation purposes.
Noncontrolling Interests of Common Units in Operating Partnership
On May 13, 2015, the Company issued an aggregate of 151,077 common shares of beneficial interest in connection with the redemption of 151,077 common units of limited partnership interest held by certain limited partners of the Operating Partnership. These common shares of beneficial interest were issued in reliance on an exemption from registration provided by Section 4(2) under the Securities Act of 1933, as amended, and Regulation D promulgated thereunder. The Company relied on the exemption under Section 4(2) based upon factual representations given by the limited partners who received the common shares of beneficial interest.
As of June 30, 2015, the Operating Partnership had 145,223 common units of limited partnership interest outstanding, representing a 0.1% partnership interest held by the limited partners. As of June 30, 2015, approximately $5,150 of cash or the equivalent value in common shares, at the Company’s option, would be paid to the limited partners of the Operating Partnership if the partnership were terminated. The approximate value of $5,150 is based on the Company’s closing common share price of $35.46 on June 30, 2015, which is assumed to be equal to the value provided to the limited partners upon liquidation of the Operating Partnership. Subject to certain limitations, the outstanding common units of limited partnership interest are redeemable for cash, or at the Company’s option, for a like number of common shares of beneficial interest of the Company.

16

The following schedule presents the effects of changes in the Company’s ownership interest in the Operating Partnership on the Company’s equity:
 
For the six months ended
 
June 30,
 
2015
 
2014
Net income attributable to common shareholders
$
55,503

 
$
76,638

Increase in additional paid-in capital from adjustments to noncontrolling interests of common units in Operating Partnership
14

 
12

Change from net income attributable to common shareholders and adjustments to noncontrolling interests
$
55,517

 
$
76,650

7.
Equity Incentive Plan
The common shareholders approved the 2014 Plan at the 2014 Annual Meeting of Shareholders held on May 7, 2014, which permits the Company to issue equity-based awards to executives, employees, non-employee members of the Board of Trustees and any other persons providing services to or for the Company and its subsidiaries. The 2014 Plan provides for a maximum of 2,900,000 common shares of beneficial interest to be issued in the form of share options, share appreciation rights, restricted or unrestricted share awards, phantom shares, performance awards, incentive awards, other share-based awards, or any combination of the foregoing. In addition, the maximum number of common shares subject to awards of any combination that may be granted under the 2014 Plan during any fiscal year to any one individual is limited to 500,000 shares. The 2014 Plan terminates on February 17, 2024. The 2014 Plan authorized, among other things: (i) the grant of share options that qualify as incentive options under the Code, (ii) the grant of share options that do not so qualify, (iii) the grant of common shares in lieu of cash for trustees’ fees, (iv) grants of common shares in lieu of cash compensation and (v) the making of loans to acquire common shares in lieu of compensation (to the extent permitted by law and applicable provisions of the Sarbanes Oxley Act of 2002). The exercise price of share options is determined by the Compensation Committee of the Board of Trustees, but may not be less than 100% of the fair value of the common shares on the date of grant. Restricted share awards and options under the 2014 Plan vest over a period determined by the Compensation Committee of the Board of Trustees, generally a three year period. The duration of each option is also determined by the Compensation Committee, subject to applicable laws and regulations. At June 30, 2015, there were 2,803,226 common shares available for future grant under the 2014 Plan. Upon the approval of the 2014 Plan by the common shareholders on May 7, 2014, the 2014 Plan replaced the 2009 Plan. The Company will no longer make any grants under the 2009 Plan (although awards previously made under the 2009 Plan that are outstanding will remain in effect in accordance with the terms of that plan and the applicable award agreements).
Nonvested Share Awards with Service Conditions
From time to time, the Company awards shares under the 2014 Plan to executives, employees and members of the Board of Trustees. The nonvested shares issued to executives and employees generally vest over three years based on continued employment. The shares issued to the members of the Board of Trustees vest immediately upon issuance. The Company determines the grant date fair value of the nonvested shares based upon the closing stock price of its common shares on the New York Stock Exchange on the date of grant and number of shares per the award agreements. Compensation costs are recognized on a straight-line basis over the requisite service period and are included in general and administrative expense in the accompanying consolidated statements of operations and comprehensive income.
A summary of the Company’s nonvested share awards with service conditions as of June 30, 2015 is as follows:
 
Number of
Shares
 
Weighted -
Average Grant
Date Fair Value
Nonvested at January 1, 2015
256,379

 
$
31.00

Granted
63,675

 
38.82

Vested
(78,483
)
 
28.60

Forfeited
(12,736
)
 
27.13

Nonvested at June 30, 2015 (1)
228,835

 
$
34.20

(1) 
Amount excludes 84,401 share awards with market conditions which were earned but nonvested due to a service condition as of June 30, 2015.
As of June 30, 2015 and December 31, 2014, there were $5,550 and $5,113, respectively, of total unrecognized compensation costs related to nonvested share awards with service conditions. As of June 30, 2015 and December 31, 2014, these costs were

17

expected to be recognized over a weighted–average period of 1.6 and 1.9 years, respectively. The total intrinsic value of shares vested (calculated as number of shares multiplied by vesting date share price) during the three and six months ended June 30, 2015 was $188 and $3,152, respectively, and during the three and six months ended June 30, 2014 was $3,225 and $5,602, respectively. Compensation costs (net of forfeitures) related to nonvested share awards with service conditions that have been included in general and administrative expense in the accompanying consolidated statements of operations and comprehensive income were $865 and $1,687 for the three and six months ended June 30, 2015, respectively, and $740 and $1,480 for the three and six months ended June 30, 2014, respectively.
Nonvested Share Awards with Market or Performance Conditions
On January 26, 2012, the Company’s Board of Trustees granted a target of 79,823 nonvested share awards with market conditions to executives. On January 1, 2015, the executives earned 136.3% of their 79,823 target number of shares, or 108,779 shares. Of the shares earned, 36,261 shares vested immediately on January 1, 2015, and the remaining 72,518 shares will vest in equal amounts on January 1, 2016 and January 1, 2017 based on continued employment. The executives received a cash payment of $334 on the earned shares equal to the value of all dividends paid on common shares from January 1, 2012 until the determination date, January 1, 2015. As of January 1, 2015, the executives are entitled to receive dividends as declared and paid on the earned shares and to vote the shares.
On March 19, 2015, the Company’s Board of Trustees granted a target of 61,660 nonvested share awards with either market or performance conditions to executives (the “March 19, 2015 Awards”). The actual amounts of the shares awarded with respect to 30,829 of the 61,660 shares will be determined on January 1, 2018, based on the performance measurement period of January 1, 2015 through December 31, 2017, in accordance with the terms of the agreements. The actual amounts of the shares awarded with respect to the remaining 30,831 of the 61,660 shares will be determined on July 1, 2018, based on the performance measurement period of July 1, 2015 through June 30, 2018, in accordance with the terms of the agreements. The actual amounts of the shares awarded will range from 0% to 200% of the target amounts, depending on the performance analysis stipulated in the agreements, and none of the shares are outstanding until issued in accordance with award agreements based on performance. After the actual amounts of the awards are determined (or earned) at the end of the respective performance measurement period, all of the earned shares will be issued and outstanding on those dates. The executives will receive cash payments on the earned shares equal to the value of all dividends paid on common shares from the grant date through the respective determination date. Such amounts will be paid to the awardees on or about January 1, 2018 and July 1, 2018, respectively. Thereafter, the executives will be entitled to receive dividends as declared and paid on the earned shares and to vote the shares. With respect to 30,829 shares, amortization commenced on March 19, 2015, the beginning of the requisite service period, and, with respect to 30,831 shares, amortization will commence on July 1, 2015, the beginning of the requisite service period.
The terms stipulated in the March 19, 2015 Awards used to determine the total amount of the shares consist of the following three tranches: (1) a comparison of the Company’s total return to the total returns’ of seven companies in a designated peer group of the Company, (2) the Company’s actual total return as compared to a Board-established total return goal and (3) a comparison of the Company’s return on invested capital to the return on invested capital of seven companies in a designated peer group of the Company.
The tranches described in (1) and (2) are nonvested share awards with market conditions. For the March 19, 2015 Awards, the grant date fair value of the awards with market conditions were estimated by the Company using historical data under the Monte Carlo valuation method provided by a third party consultant. The final values were determined during the second quarter of 2015 with an insignificant cumulative adjustment to compensation cost recorded. The third tranche is based on “return on invested capital” discussed below, which is a performance condition. The grant date fair values of the tranches with performance conditions were calculated based on the targeted awards, and the valuation is adjusted on a periodic basis.
The capital market assumptions used in the valuations consisted of the following:
•
Factors associated with the underlying performance of the Company’s share price and shareholder returns over the term of the awards including total share return volatility and risk-free interest.
•
Factors associated with the relative performance of the Company’s share price and shareholder returns when compared to those companies which compose the index including beta as a means to breakdown total volatility into market-related and company specific volatilities.
•
The valuation has been performed in a risk-neutral framework.
•
Return on invested capital is a performance condition award measurement. The estimated value was calculated based on the initial face value at the date of grant. The valuation will be adjusted on a periodic basis as the estimated number of awards expected to vest is revised.

18

The assumptions used were as follows for each performance measure:
 
Volatility
 
Interest
Rates
 
Dividend
Yield
 
Stock
Beta
 
Fair Value of
Components
of Award
 
Weighting
of Total
Awards
March 19, 2015 Awards (performance period starting January 1, 2015)
 
 
 
 
 
 
Target amounts
24.40
%
 
0.99
%
 
N/A
 
N/A

 
$
29.25

 
33.40
%
Return on invested capital
N/A

 
N/A

 
N/A
 
N/A

 
$
38.84

 
33.30
%
Peer companies
24.40
%
 
0.99
%
 
N/A
 
1.011

 
$
40.69

 
33.30
%
March 19, 2015 Awards (performance period starting July 1, 2015)
 
 
 
 
 
 
Target amounts
24.40
%
 
0.99
%
 
N/A
 
N/A

 
$
31.86

 
33.40
%
Return on invested capital
N/A

 
N/A

 
N/A
 
N/A

 
$
38.84

 
33.30
%
Peer companies
24.40
%
 
0.99
%
 
N/A
 
1.011

 
$
41.00

 
33.30
%
A summary of the Company’s nonvested share awards with either market or performance conditions as of June 30, 2015 is as follows:
 
Number of
Shares
 
Weighted-
Average Grant
Date Fair Value
Nonvested at January 1, 2015
311,625

 
$
33.62

Granted (1)(2)
90,616

 
36.38

Vested
(53,654
)
 
35.99

Forfeited
0

 
0.00

Nonvested at June 30, 2015
348,587

 
$
33.98

(1) 
Amount includes 30,831 shares awarded on March 19, 2015 for which fair value has been estimated, but amortization into expense has not yet commenced. Amortization of fair value into expense will commence at the beginning of the performance measurement period on July 1, 2015.
(2) 
Amount includes an additional 28,956 shares issued on January 1, 2015 from the January 26, 2012 grant, which were earned in excess of the target amount.
As of June 30, 2015 and December 31, 2014, there were $7,651 and $6,637, respectively, of total unrecognized compensation costs related to nonvested share awards with market or performance conditions. As of June 30, 2015 and December 31, 2014, these costs were expected to be recognized over a weighted–average period of 2.0 years. As of June 30, 2015 and December 31, 2014, there were 308,069 and 254,415 share awards with market or performance conditions vested, respectively. Additionally, there were 84,401 and 29,276 nonvested share awards with market or performance conditions earned but nonvested due to a service condition as of June 30, 2015 and December 31, 2014, respectively. Compensation costs (net of forfeitures) related to nonvested share awards with market or performance conditions that have been included in general and administrative expense in the accompanying consolidated statements of operations and comprehensive income were $1,019 and $2,051 for the three and six months ended June 30, 2015, respectively, and $845 and $1,654 for the three and six months ended June 30, 2014, respectively.

19

8.
LHL
Substantially all of the Company’s revenues are derived from operating revenues generated by the hotels, all of which are leased by LHL.
Other indirect hotel operating expenses consist of the following expenses incurred by the hotels:
 
For the three months ended
 
For the six months ended
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
General and administrative
$
25,822

 
$
22,648

 
$
49,729

 
$
42,695

Sales and marketing
19,894

 
16,120

 
37,845

 
30,908

Repairs and maintenance
9,863

 
9,496

 
19,474

 
18,522

Management and incentive fees
11,727

 
10,984

 
19,055

 
17,148

Utilities and insurance
8,289

 
7,735

 
17,106

 
15,871

Franchise fees
2,503

 
2,419

 
4,331

 
4,241

Other expenses
779

 
377

 
1,339

 
817

Total other indirect expenses
$
78,877

 
$
69,779

 
$
148,879

 
$
130,202

As of June 30, 2015, LHL leased all 47 hotels owned by the Company as follows:

20

 
 
Hotel Properties
 
Location
1.
 
Hotel Amarano Burbank
 
Burbank, CA
2.
 
L’Auberge Del Mar
 
Del Mar, CA
3.
 
Hilton San Diego Gaslamp Quarter
 
San Diego, CA
4.
 
Hotel Solamar
 
San Diego, CA
5.
 
San Diego Paradise Point Resort and Spa
 
San Diego, CA
6.
 
The Hilton San Diego Resort and Spa
 
San Diego, CA
7.
 
Harbor Court Hotel
 
San Francisco, CA
8.
 
Hotel Monaco San Francisco
 
San Francisco, CA
9.
 
Hotel Triton
 
San Francisco, CA
10.
 
Hotel Vitale
 
San Francisco, CA
11.
 
Park Central San Francisco
 
San Francisco, CA
12.
 
Serrano Hotel
 
San Francisco, CA
13.
 
Villa Florence
 
San Francisco, CA
14.
 
Chaminade Resort and Conference Center
 
Santa Cruz, CA
15.
 
Viceroy Santa Monica
 
Santa Monica, CA
16.
 
Chamberlain West Hollywood
 
West Hollywood, CA
17.