LaSalle Hotel Properties - FORM 10-Q

Attached files

file	filename
EX-32.1 - EXHIBIT 32.1 - LaSalle Hotel Properties	lho-2017x0331x10qxex321.htm
EX-31.2 - EXHIBIT 31.2 - LaSalle Hotel Properties	lho-2017x0331x10qxex312.htm
EX-31.1 - EXHIBIT 31.1 - LaSalle Hotel Properties	lho-2017x0331x10qxex311.htm
EX-10.3 - EXHIBIT 10.3 - LaSalle Hotel Properties	lho-2017x0331x10qxex103.htm

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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 March 31, 2017



¨	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, 10^th 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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	x	Accelerated filer	¨

Non-accelerated filer	¨ (Do not check if a smaller reporting company)	Smaller reporting company	¨

		Emerging growth company	¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

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 April 19, 2017
Common Shares of Beneficial Interest ($0.01 par value)		113,219,482
7.5% Series H Cumulative Redeemable Preferred Shares ($0.01 par value)		2,750,000
6.375% Series I Cumulative Redeemable Preferred Shares ($0.01 par value)		4,400,000
6.3% Series J Cumulative Redeemable Preferred Shares ($0.01 par value)		6,000,000

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LASALLE HOTEL PROPERTIES

INDEX



PART I.	Financial Information	1

Item 1.	Financial Statements	1

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	38

Item 4.	Controls and Procedures	38


PART II.	Other Information	38

Item 1.	Legal Proceedings	38

Item 1A.	Risk Factors	38

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	39

Item 3.	Defaults Upon Senior Securities	39

Item 4.	Mine Safety Disclosures	39

Item 5.	Other Information	39

Item 6.	Exhibits	40

	SIGNATURE	41

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PART I.	Financial Information


Item 1.	Financial Statements

LASALLE HOTEL PROPERTIES

Consolidated Balance Sheets

(in thousands, except share data)



	March 31, 2017			December 31, 2016
	(unaudited)
Assets:
Investment in hotel properties, net (Note 3)	$	3,456,271		$	3,672,209
Property under development	15,128			21,078
Assets held for sale (Note 3)	36,241			23,283
Cash and cash equivalents	361,436			134,652
Restricted cash reserves (Note 5)	12,592			15,035
Hotel receivables (net of allowance for doubtful accounts of $296 and $279, respectively)	33,202			35,403
Debt issuance costs for borrowings under credit facilities, net	4,085			1,699
Deferred tax assets	6,992			1,902
Prepaid expenses and other assets	43,503			38,818
Total assets	$	3,969,450		$	3,944,079
Liabilities:
Borrowings under credit facilities (Note 4)	$	0		$	0
Term loans, net of unamortized debt issuance costs (Note 4)	852,861			852,758
Bonds payable, net of unamortized debt issuance costs (Note 4)	42,461			42,455
Mortgage loan, net of unamortized debt issuance costs (Note 4)	223,732			223,494
Accounts payable and accrued expenses	143,638			171,965
Liabilities of assets held for sale (Note 3)	27,096			247
Advance deposits	31,973			33,232
Accrued interest	2,129			2,209
Distributions payable	56,419			56,360
Total liabilities	1,380,309			1,382,720
Commitments and contingencies (Note 5)
Equity:
Shareholders’ Equity:
Preferred shares of beneficial interest, $0.01 par value (liquidation preference of $328,750), 40,000,000 shares authorized; 13,150,000 shares issued and outstanding (Note 6)	132			132
Common shares of beneficial interest, $0.01 par value, 200,000,000 shares authorized; 113,219,482 shares issued and outstanding, and 113,115,442 shares issued and 113,088,074 shares outstanding, respectively (Note 6)	1,132			1,131
Treasury shares, at cost (Note 6)	0			(739		)
Additional paid-in capital, net of offering costs of $85,223	2,830,724			2,830,740
Accumulated other comprehensive income (Note 4)	4,472			2,365
Distributions in excess of retained earnings	(250,660		)	(275,564		)
Total shareholders’ equity	2,585,800			2,558,065
Noncontrolling Interests:
Noncontrolling interests in consolidated entities	17			17
Noncontrolling interests of common units in Operating Partnership (Note 6)	3,324			3,277
Total noncontrolling interests	3,341			3,294
Total equity	2,589,141			2,561,359
Total liabilities and equity	$	3,969,450		$	3,944,079

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

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LASALLE HOTEL PROPERTIES

Consolidated Statements of Operations and Comprehensive Income (Loss)

(in thousands, except share data)

(unaudited)



	For the three months ended
	March 31,
	2017			2016
Revenues:
Hotel operating revenues:
Room	$	178,365		$	181,420
Food and beverage	52,304			56,347
Other operating department	20,367			20,643
Total hotel operating revenues	251,036			258,410
Other income	3,369			1,694
Total revenues	254,405			260,104
Expenses:
Hotel operating expenses:
Room	52,323			52,291
Food and beverage	39,148			42,908
Other direct	4,184			3,683
Other indirect (Note 8)	69,656			71,915
Total hotel operating expenses	165,311			170,797
Depreciation and amortization	47,263			47,628
Real estate taxes, personal property taxes and insurance	16,115			16,191
Ground rent (Note 5)	3,385			3,813
General and administrative	6,554			5,830
Other expenses	1,918			2,178
Total operating expenses	240,546			246,437
Operating income	13,859			13,667
Interest income	142			1,654
Interest expense	(9,827		)	(11,867		)
Loss from extinguishment of debt (Note 4)	(1,706		)	0
Income before income tax benefit	2,468			3,454
Income tax benefit (Note 9)	4,773			5,620
Income before gain on sale of properties	7,241			9,074
Gain on sale of properties (Note 3)	74,358			0
Net income	81,599			9,074
Noncontrolling interests of common units in Operating Partnership (Note 6)	(110		)	(15		)
Net income attributable to the Company	81,489			9,059
Distributions to preferred shareholders	(5,405		)	(3,042		)
Net income attributable to common shareholders	$	76,084		$	6,017

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LASALLE HOTEL PROPERTIES

Consolidated Statements of Operations and Comprehensive Income (Loss) - Continued

(in thousands, except share data)

(unaudited)



	For the three months ended
	March 31,
	2017			2016
Earnings per Common Share - Basic (Note 11):
Net income attributable to common shareholders excluding amounts attributable to unvested restricted shares	$	0.67		$	0.05
Earnings per Common Share - Diluted (Note 11):
Net income attributable to common shareholders excluding amounts attributable to unvested restricted shares	$	0.67		$	0.05
Weighted average number of common shares outstanding:
Basic	112,923,719			112,748,492
Diluted	113,306,209			113,108,158

Comprehensive Income (Loss):
Net income	$	81,599		$	9,074
Other comprehensive income (loss):
Unrealized gain (loss) on interest rate derivative instruments (Note 4)	1,124			(14,252		)
Reclassification adjustment for amounts recognized in net income (Note 4)	985			1,780
	83,708			(3,398		)
Noncontrolling interests of common units in Operating Partnership (Note 6)	(112		)	1
Comprehensive income (loss) attributable to the Company	$	83,596		$	(3,397	)

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

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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 (Loss) Income			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, 2015	$	72	$	1,131	$	(4,798	)	$	2,684,010		$	(97	)	$	(306,051	)	$	2,374,267		$	18	$	3,198		$	3,216		$	2,377,483
Issuance of shares, net of offering costs	0		0		1,584			(1,183		)	0			0			401			0		0			0			401
Repurchase of common shares into treasury	0		0		(1,240		)	0			0			0			(1,240		)	0		0			0			(1,240		)
Deferred compensation, net	0		0		3,021			(1,207		)	0			0			1,814			0		0			0			1,814
Distributions on earned shares from share awards with market conditions	0		0		0			0			0			(151		)	(151		)	0		0			0			(151		)
Distributions on common shares/units ($0.45 per share/unit)	0		0		0			0			0			(50,924		)	(50,924		)	0		(65		)	(65		)	(50,989		)
Distributions on preferred shares	0		0		0			0			0			(3,042		)	(3,042		)	0		0			0			(3,042		)
Net income	0		0		0			0			0			9,059			9,059			0		15			15			9,074
Other comprehensive loss:
Unrealized loss on interest rate derivative instruments	0		0		0			0			(14,234		)	0			(14,234		)	0		(18		)	(18		)	(14,252		)
Reclassification adjustment for amounts recognized in net income	0		0		0			0			1,778			0			1,778			0		2			2			1,780
Balance, March 31, 2016	$	72	$	1,131	$	(1,433	)	$	2,681,620		$	(12,553	)	$	(351,109	)	$	2,317,728		$	18	$	3,132		$	3,150		$	2,320,878

Balance, December 31, 2016	$	132	$	1,131	$	(739	)	$	2,830,740		$	2,365		$	(275,564	)	$	2,558,065		$	17	$	3,277		$	3,294		$	2,561,359
Issuance of shares, net of offering costs	0		0		2,397			(1,157		)	0			0			1,240			0		0			0			1,240
Repurchase of common shares into treasury	0		0		(2,223		)	0			0			0			(2,223		)	0		0			0			(2,223		)
Deferred compensation, net	0		1		565			1,141			0			0			1,707			0		0			0			1,707
Distributions on earned shares from share awards with market conditions	0		0		0			0			0			(190		)	(190		)	0		0			0			(190		)
Distributions on common shares/units ($0.45 per share/unit)	0		0		0			0			0			(50,990		)	(50,990		)	0		(65		)	(65		)	(51,055		)
Distributions on preferred shares	0		0		0			0			0			(5,405		)	(5,405		)	0		0			0			(5,405		)
Net income	0		0		0			0			0			81,489			81,489			0		110			110			81,599
Other comprehensive income:
Unrealized gain on interest rate derivative instruments	0		0		0			0			1,123			0			1,123			0		1			1			1,124
Reclassification adjustment for amounts recognized in net income	0		0		0			0			984			0			984			0		1			1			985
Balance, March 31, 2017	$	132	$	1,132	$	0		$	2,830,724		$	4,472		$	(250,660	)	$	2,585,800		$	17	$	3,324		$	3,341		$	2,589,141

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

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LASALLE HOTEL PROPERTIES

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)



	For the three months ended
	March 31,
	2017			2016
Cash flows from operating activities:
Net income	$	81,599		$	9,074
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	47,263			47,628
Amortization of debt issuance costs	765			878
Loss from extinguishment of debt	1,706			0
Gain on sale of properties	(74,358		)	0
Amortization of deferred compensation	1,707			1,814
Deferred income tax benefit	(5,090		)	(5,907		)
Allowance for doubtful accounts	17			337
Other	361			154
Changes in assets and liabilities:
Restricted cash reserves	61			3,053
Hotel receivables	(880		)	(2,451		)
Prepaid expenses and other assets	(7,127		)	(1,425		)
Accounts payable and accrued expenses	2,288			3,867
Advance deposits	2,649			3,426
Accrued interest	(80		)	(791		)
Net cash provided by operating activities	50,881			59,657
Cash flows from investing activities:
Additions to properties	(12,674		)	(27,025		)
Improvements to properties	0			(9,343		)
Purchase of office furniture and equipment	0			(4		)
Restricted cash reserves	(383		)	(734		)
Proceeds from sale of properties	251,960			0
Property insurance proceeds	283			780
Net cash provided by (used in) investing activities	239,186			(36,326		)
Cash flows from financing activities:
Borrowings under credit facilities	0			378,990
Repayments under credit facilities	0			(56,990		)
Repayments of mortgage loans	0			(286,294		)
Payment of debt issuance costs	(4,510		)	0
Purchase of treasury shares	(2,223		)	(1,240		)
Payment of common offering costs	0			(19		)
Distributions on earned shares from share awards with market conditions	(190		)	(151		)
Distributions on preferred shares	(5,405		)	(3,042		)
Distributions on common shares/units	(50,955		)	(50,898		)
Net cash used in financing activities	(63,283		)	(19,644		)
Net change in cash and cash equivalents	226,784			3,687
Cash and cash equivalents, beginning of period	134,652			5,700
Cash and cash equivalents, end of period	$	361,436		$	9,387

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

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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, is subject to taxation at normal corporate rates.

As of March 31, 2017, the Company owned interests in 43 hotels with approximately 10,880 guest rooms located in seven 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 2017 and December 2019. 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. (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 March 31, 2017. The remaining 0.1% is held by limited partners who held 145,223 common units of the Operating Partnership at March 31, 2017. 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 months ended March 31, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017 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, 2016.

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.

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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. Also, given the timing of the Company’s hotel dispositions (see Note 3), estimates are included in gain on sale of properties in the consolidated statement of operations and comprehensive income (loss) for the three months ended March 31, 2017. Any differences between recorded estimated amounts and actual amounts will be recorded in the subsequent quarter.

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, as amended (“2014 Plan”), which has approximately seven 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 March 31, 2017, 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.

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Variable Interest Entities

The Operating Partnership is a variable interest entity. The Company’s significant asset is its investment in the Operating Partnership, and consequently, substantially all of the Company’s assets and liabilities represent those assets and liabilities of the Operating Partnership. All of the Company’s debt is an obligation of the Operating Partnership.

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 (Topic 606), 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. ASU No. 2014-09 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 adoption is permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is finalizing its evaluation of the effect that ASU No. 2014-09 will have on its consolidated financial statements and related expanded disclosures by working with its hotel operators to analyze its revenue streams and to update its accounting policies. The Company is finalizing its evaluation of each of its revenue streams under the new model and because of the short-term, day-to-day nature of the Company’s hotel revenues the pattern of revenue recognition is not expected to change significantly. Additionally, the Company has historically disposed of hotel properties for cash sales with no contingencies and no future involvement in the hotel operations, and therefore, does not expect ASU No. 2014-09 to significantly impact the recognition of hotel sales. The Company does not believe ASU No. 2014-09 will have a material impact on its consolidated financial statements and is evaluating new disclosure requirements. The Company will adopt the new standard on its effective date of January 1, 2018 under the cumulative effect transition method.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires lessees to record operating and financing leases as assets and liabilities on the balance sheet and lessors to expense costs that are not initial direct leasing costs. This standard will be effective for the first annual reporting period beginning after December 15, 2018. The Company is evaluating the effect that ASU No. 2016-02 will have on its consolidated financial statements and related disclosures. The Company is creating an inventory of its leases and is analyzing its current ground lease obligations. The Company anticipates recording assets and liabilities on its consolidated balance sheets associated with the ground lease obligations under ASU No. 2016-02.

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which clarifies the definition of a business and adds further guidance in evaluating whether a transaction should be accounted for as an acquisition of an asset or a business. This standard will be effective for the first annual period beginning after December 15, 2017, including interim periods within those periods. Early adoption is permitted. The Company early adopted this standard on January 1, 2017.

In February 2017, the FASB issued ASU No. 2017-05, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets, which clarifies the scope of asset decrecognition and adds further guidance for recognizing gains and losses from the transfer of nonfinancial assets in contracts with non-customers. This standard will be effective for the first annual period beginning after December 15, 2017, including interim periods within those periods. Early adoption is permitted. The Company is evaluating the effect that ASU No. 2017-05 will have on its consolidated financial statements and related disclosures.


3.	Investment in Hotel Properties

Investment in hotel properties as of March 31, 2017 and December 31, 2016 consists of the following:



	March 31, 2017			December 31, 2016
Land	$	659,873		$	727,176
Buildings and improvements	3,356,637			3,531,280
Furniture, fixtures and equipment	730,609			769,671
Investment in hotel properties, gross	4,747,119			5,028,127
Accumulated depreciation	(1,290,848		)	(1,355,918		)
Investment in hotel properties, net	$	3,456,271		$	3,672,209

The above table excludes Hotel Triton as the property qualified as held for sale as of March 31, 2017 and its net cost basis has been reclassified from investment in hotel properties, net to assets held for sale in the accompanying consolidated balance sheets. On April 11, 2017, the Company sold Hotel Triton for $14,250 (see Note 13).

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As of March 31, 2017, buildings and improvements included capital lease assets of $149,457 and accumulated depreciation included amounts related to capital lease assets of $23,725. As of March 31, 2017, Hotel Triton was held for sale due to its disposition on April 11, 2017 (see Note 13). Included in assets held for sale is Hotel Triton’s capital lease asset of $34,046 and accumulated depreciation related to its capital lease asset of $3,834. As of December 31, 2016, buildings and improvements included capital lease assets of $183,503 and accumulated depreciation included amounts related to capital lease assets of $26,230. Depreciation of the capital lease assets is included in depreciation and amortization expense in the accompanying consolidated statements of operations and comprehensive income (loss) for all periods presented.

Depreciation expense was $47,131 and $47,494 for the three months ended March 31, 2017 and 2016, respectively.

Dispositions

Upon sale of a hotel, the Company determines its profit from the sale under the full accrual method provided the following applicable criteria are met: a sale is consummated; the buyer’s initial and continuing investments are adequate to demonstrate a commitment to pay for the property; the Company’s receivable, if applicable, is not subject to future subordination; the Company has transferred to the buyer the usual risks and rewards of ownership; and the Company does not have a substantial continuing involvement with the property. If all of these conditions are met, the Company will recognize the full profit on the sale.

During the three months ended March 31, 2017, the Company sold Hotel Deca, Lansdowne Resort and Alexis Hotel. These dispositions do not represent a strategic shift in the Company’s business plan or primary markets, and therefore, do not qualify as discontinued operations. The sale of each property was recorded on the full accrual method.

On January 19, 2017, the Company sold Hotel Deca for $55,000. As of December 31, 2016, Hotel Deca qualified as held for sale. Substantially all of the assets held for sale consisted of investment in hotel properties, net and immaterial prepaid expenses and other assets and the liabilities of assets held for sale consisted of accounts payable and accrued expenses. The Company recognized a gain of $30,607 related to the sale of this property, which is included in the accompanying consolidated statements of operations and comprehensive income (loss) for the three months ended March 31, 2017. The proceeds were used for general corporate purposes.

On March 22, 2017, the Company sold Lansdowne Resort for $133,000. The Company recognized a gain of $10,401 related to the sale of this property, which is included in the accompanying consolidated statements of operations and comprehensive income (loss) for the three months ended March 31, 2017. The proceeds will be used for general corporate purposes and the redemption of the 7.5% Series H Cumulative Redeemable Preferred Shares (the “Series H Preferred Shares”) on May 4, 2017 (see Note 13).

On March 31, 2017, the Company sold Alexis Hotel for $71,625. The Company recognized a gain of $33,350 related to the sale of this property, which is included in the accompanying consolidated statements of operations and comprehensive income (loss) for the three months ended March 31, 2017. The proceeds will be used for general corporate purposes and the redemption of the Series H Preferred Shares on May 4, 2017 (see Note 13).

On April 11, 2017, the Company sold Hotel Triton for $14,250. As of March 31, 2017, substantially all of the assets held for sale consist of investment in hotel properties, net and immaterial prepaid expenses and other assets and the liabilities of assets held for sale consist of accounts payable and accrued expenses. The Company will recognize a gain in the second quarter of 2017 of approximately $6,800 related to the sale of this property (see Note 13).

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4.	Long-Term Debt

Debt Summary

Debt as of March 31, 2017 and December 31, 2016 consisted of the following:



			Balance Outstanding as of
Debt	Interest Rate	Maturity Date	March 31, 2017			December 31, 2016
Credit facilities
Senior unsecured credit facility	Floating ^(a)	January 2021 ^(a)	$	0		$	0
LHL unsecured credit facility	Floating ^(b)	January 2021 ^(b)	0			0
Total borrowings under credit facilities			0			0
Term loans
First Term Loan	Floating/Fixed ^(c)	January 2022	300,000			300,000
Second Term Loan	Floating/Fixed ^(c)	January 2021	555,000			555,000
Debt issuance costs, net			(2,139		)	(2,242		)
Total term loans, net of unamortized debt issuance costs			852,861			852,758
Massport Bonds
Hyatt Regency Boston Harbor (taxable)	Floating ^(d)	March 2018	5,400			5,400
Hyatt Regency Boston Harbor (tax exempt)	Floating ^(d)	March 2018	37,100			37,100
Debt issuance costs, net			(39		)	(45		)
Total bonds payable, net of unamortized debt issuance costs			42,461			42,455
Mortgage loan
Westin Copley Place	Floating ^(e)	August 2018 ^(e)	225,000			225,000
Debt issuance costs, net			(1,268		)	(1,506		)
Total mortgage loan, net of unamortized debt issuance costs			223,732			223,494
Total debt			$	1,119,054		$	1,118,707

^(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. There were no borrowings outstanding at March 31, 2017 and December 31, 2016. 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 March 31, 2017 and December 31, 2016. 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 interest rate swaps to effectively fix the interest rates for the First Term Loan (as defined below) and the Second Term Loan (as defined below). At March 31, 2017 and December 31, 2016, the Company had interest rate swaps on the full amounts outstanding. See “Derivative and Hedging Activities” below. At March 31, 2017, the fixed all-in interest rates for the First Term Loan and Second Term Loan were 2.23% and 2.95%, respectively, at the Company’s current leverage ratio (as defined in the swap agreements). At December 31, 2016, the fixed all-in interest rates for the First Term Loan and Second Term Loan were 2.38% and 2.95%, 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 that expire in September 2017. The letters of credit have a one-year extension option through September 2018 and are secured by the Hyatt Regency Boston Harbor, however, the letters of credit will not be extended beyond the Massport Bonds’ maturity date. The bonds bear interest based on weekly floating rates. The interest rates as of March 31, 2017 were 1.00% and 0.94% for the $5,400 and $37,100 bonds, respectively. The interest rates as of December 31, 2016 were 0.75% and 0.76% for the $5,400 and $37,100 bonds, respectively. The Company incurs an annual letter of credit fee of 1.35%.

^(e)

The mortgage loan matures on August 14, 2018 with three options to extend the maturity date to January 5, 2021, pursuant to certain terms and conditions. The interest-only mortgage loan bears interest at a variable rate ranging from LIBOR plus 1.75% to LIBOR plus 2.00%, depending on Westin Copley Place’s net cash flow (as defined in the loan agreement). The interest rate as of March 31, 2017 was LIBOR plus 1.75%, which equaled 2.67%. The interest rate as of December 31, 2016

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was LIBOR plus 1.75%, which equaled 2.46%. The mortgage loan allows for prepayments without penalty, subject to certain terms and conditions.

Future scheduled debt principal payments as of March 31, 2017 are as follows:



2017	$	0
2018	267,500
2019	0
2020	0
2021	555,000
Thereafter	300,000
Total debt	$	1,122,500

A summary of the Company’s interest expense and weighted average interest rates for unswapped variable rate debt for the three months ended March 31, 2017 and 2016 is as follows:



	For the three months ended
	March 31,
	2017			2016
Interest Expense:
Interest incurred	$	9,140		$	11,184
Amortization of debt issuance costs	765			878
Capitalized interest	(78		)	(195		)
Interest expense	$	9,827		$	11,867

Weighted Average Interest Rates for Unswapped Variable Rate Debt:
Senior unsecured credit facility	N/A			2.13		%
LHL unsecured credit facility	N/A			2.13		%
Massport Bonds	0.70		%	0.11		%
Mortgage loan (Westin Copley Place)	2.54		%	2.17		%

Credit Facilities

On January 10, 2017, the Company refinanced its $750,000 senior unsecured credit facility with a syndicate of banks. As amended, the credit facility now matures on January 8, 2021, subject to two six-month extensions that the Company may exercise at its option, 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 of up to $1,250,000. 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 0.20% or 0.30% of the unused portion of the credit facility, depending on the average daily unused portion of the credit facility.

On January 10, 2017, LHL also refinanced its $25,000 unsecured revolving credit facility to be used for working capital and general lessee corporate purposes. As amended, the LHL credit facility matures on January 10, 2021, 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 0.20% 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 and other covenants, including covenants relating to net worth requirements, debt ratios and fixed charge coverage ratios. In addition, pursuant to the terms of the agreements, if a default or event of default occurs or is continuing, the Company may be precluded from paying certain distributions or other payments to its shareholders.

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The Company and certain of its subsidiaries guarantee the obligations under the Company’s senior unsecured credit facility. While the senior unsecured credit facility does not initially include any pledges of equity interests in the Company’s subsidiaries, in connection with the January 10, 2017 refinancing, such pledges and additional subsidiary guarantees would be required in the event that the Company’s leverage ratio later exceeds 6.50:1.00 for two consecutive fiscal quarters. In the event that such pledge and guarantee requirement is triggered, the pledges and additional guarantees would ratably benefit the Company’s senior unsecured credit facility, the First Term Loan and the Second Term Loan. If at any time the Company’s leverage ratio falls below 6.50:1.00 for two consecutive fiscal quarters, such pledges and additional guarantees may be released.

Term Loans

On January 10, 2017, the Company refinanced its $300,000 unsecured term loan (the “First Term Loan”) that matures on January 10, 2022. The First Term Loan includes an accordion feature, which subject to certain conditions, entitles the Company to request additional lender commitments, allowing for total commitments of up to $500,000. The First Term Loan bears interest at variable rates.

On January 10, 2017, the Company amended and restated its $555,000 unsecured term loan (the “Second Term Loan”) that matures on January 29, 2021. 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 of up to $700,000. The Second Term Loan bears interest at variable rates.

The Company’s term loans contain certain financial and other covenants, including covenants relating to net worth requirements, debt ratios and fixed charge coverage ratios. In addition, pursuant to the terms of the agreements, if a default or event of default occurs or is continuing, the Company may be precluded from paying certain distributions or other payments to its shareholders. The Company has entered into interest rate swaps to effectively fix the LIBOR rates for all of its term loans (see “Derivative and Hedging Activities” below).

The Company and certain of its subsidiaries guarantee the obligations under the Company’s term loans. While the term loans do not initially include any pledges of equity interests in the Company’s subsidiaries, in connection with the January 10, 2017 refinancing, such pledges and additional subsidiary guarantees would be required in the event that the Company’s leverage ratio later exceeds 6.50:1.00 for two consecutive fiscal quarters. In the event that such pledge and guarantee requirement is triggered, the pledges and additional guarantees would ratably benefit the Company’s senior unsecured credit facility, the First Term Loan and the Second Term Loan. If at any time the Company’s leverage ratio falls below 6.50:1.00 for two consecutive fiscal quarters, such pledges and additional guarantees may be released.

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) (“AOCI”) 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 August 2, 2012, the Company entered into five interest rate swap agreements with an aggregate notional amount of $300,000 to hedge the variable interest rate on the First 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 2.23% at March 31, 2017. As of March 31, 2017, the Company has interest rate swaps with an aggregate notional amount of $555,000 to hedge the variable interest rate on the Second Term Loan and, as a result, the fixed all-in interest rate based on the Company’s current leverage ratio (as defined in the swap agreements) is 2.95% through May 16, 2019. From May 16, 2019 through the term of the Second Term Loan, the Company has interest rate swaps with an aggregate notional amount of $377,500 to hedge a portion of the variable interest rate debt on the Second Term Loan. 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.

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The following tables present the effect of derivative instruments on the Company’s accompanying consolidated statements of operations and comprehensive income (loss), including the location and amount of unrealized gain (loss) on outstanding derivative instruments in cash flow hedging relationships, for the three months ended March 31, 2017 and 2016:



	Amount of Gain (Loss) Recognized in OCI on Derivative Instruments					Location of Loss Reclassified from AOCI into Net Income	Amount of Loss Reclassified from AOCI into Net Income
	(Effective Portion)					(Effective Portion)	(Effective Portion)
	For the three months ended						For the three months ended
	March 31,						March 31,
	2017		2016				2017		2016
Derivatives in cash flow hedging relationships:
Interest rate swaps	$	1,124	$	(14,252	)	Interest expense	$	985	$	1,780

During the three months ended March 31, 2017 and 2016, the Company did not have any hedge ineffectiveness or amounts that were excluded from the assessment of hedge effectiveness recorded in earnings.

As of March 31, 2017, there was $4,474 in cumulative unrealized gain of which $4,472 was included in AOCI and $2 was attributable to noncontrolling interests. As of December 31, 2016, there was $2,368 in cumulative unrealized gain of which $2,365 was included in AOCI and $3 was attributable to noncontrolling interests. The Company expects that approximately $3,165 will be reclassified from AOCI 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 March 31, 2017.

Extinguishment of Debt

As discussed above, on January 10, 2017, the Company refinanced its senior unsecured credit facility and First Term Loan and LHL refinanced its unsecured revolving credit facility. The refinancing arrangements for the senior unsecured credit facility and First Term Loan were considered substantial modifications. The Company recognized a loss from extinguishment of debt of $1,706, which is included in the accompanying consolidated statements of operations and comprehensive income (loss) for the three months ended March 31, 2017. The loss from extinguishment of debt represents a portion of the unamortized debt issuance costs incurred for the senior unsecured credit facility when the original agreement was executed and the debt issuance costs incurred in connection with the refinancing of the First Term Loan.

Mortgage Loan

The Company’s mortgage loan is secured by the property. The mortgage is non-recourse to the Company except for fraud or misapplication of funds.

The Company’s mortgage loan contains debt service coverage ratio tests related to the mortgaged property. If the debt service coverage ratio for the property fails to exceed a threshold level specified in the mortgage, cash flows from that hotel may 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.

Financial Covenants

Failure of the Company to comply with financial and other covenants contained in its credit facilities, term loans and non-recourse secured mortgage 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 financial and other 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

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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 March 31, 2017, 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 loan.


5.	Commitments and Contingencies

Ground, Land and Building, and Air Rights Leases

A summary of the Company’s hotels subject to non-cancelable operating leases as of March 31, 2017 is as follows:



Lease Properties	Lease Type	Lease Expiration Date
Southernmost Beach Resort Key West (Restaurant facility)	Ground lease	April 2019 ⁽¹⁾
Hyatt Regency Boston Harbor	Ground lease	March 2026 ⁽²⁾
The Hilton San Diego Resort and Spa	Ground lease	December 2045
San Diego Paradise Point Resort and Spa	Ground lease	May 2050
Hotel Vitale	Ground lease	March 2056 ⁽³⁾
Viceroy Santa Monica	Ground lease	September 2065
Westin Copley Place ⁽⁴⁾	Air rights lease	December 2077
The Liberty Hotel	Ground lease	May 2080
Hotel Solamar	Ground lease	December 2102

⁽¹⁾ The Company can begin negotiating a renewal one year in advance of the lease expiration date.

⁽²⁾ The Company has options, subject to certain terms and conditions, to extend the ground lease for 51 years to 2077.

⁽³⁾The Company has the option, subject to certain terms and conditions, to extend the ground lease for 14 years to 2070.

⁽⁴⁾ No payments are required through maturity.

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 $465 and $477 for the three months ended March 31, 2017 and 2016, respectively, which is included in total ground rent expense. Total ground rent expense for the three months ended March 31, 2017 and 2016 was $3,385 and $3,813, 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.

A summary of the Company’s hotels subject to capital leases of land and building as of March 31, 2017 is as follows:



Lease Properties	Estimated Present Value of Remaining Rent Payments ⁽¹⁾		Lease Expiration Date
The Roger	$	4,892	December 2044
Harbor Court Hotel	$	18,424	April 2048
Hotel Triton	$	25,625	December 2049

⁽¹⁾ At acquisition or as amended, the estimated present value of the remaining rent payments were recorded as capital lease obligations. For The Roger and Harbor Court Hotel, these obligations, net of amortization, are included in accounts payable and accrued expenses in the accompanying consolidated balance sheets. As of March 31, 2017, Hotel Triton was held for sale due to its disposition on April 11, 2017 (see Note 13). Hotel Triton’s capital lease obligation, net of amortization, is included in liabilities of assets held for sale in the accompanying consolidated balance sheets as of March 31, 2017.

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Actual base and participating ground rent payments related to The Roger, Harbor Court Hotel and Hotel Triton were $99, $288 and $456 for the three months ended March 31, 2017, respectively, and $99, $333 and $489 for the three months ended March 31, 2016, respectively.

As of March 31, 2017, future minimum rent payments, including capital lease payments, (without reflecting future applicable Consumer Price Index increases) are as follows:



2017	$	9,812
2018	13,212
2019	13,189
2020	13,562
2021	13,713
Thereafter	587,067
	$	650,555

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 March 31, 2017, $10,787 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 March 31, 2017, the Company held $12,592 in restricted cash reserves. Included in such amounts are $10,787 of reserve funds for future capital expenditures and $1,805 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, 2017, the Company issued 16,010 common shares of beneficial interest and authorized an additional 9,103 deferred shares to the independent members of its Board of Trustees for their 2016 compensation. These common shares of beneficial interest were issued under the 2014 Plan.

On January 31, 2017, the Company issued 27,767 common shares of beneficial interest related to the resignation of a former Board of Trustee member for his accumulated deferred shares granted as compensation for years 2001 through 2016. These common shares of beneficial interest were issued under the 2009 Plan and 2014 Plan.

On March 2, 2017, the Company issued 38,599 common shares of beneficial interest to executives related to the nonvested share awards with either market or performance conditions granted on March 20, 2014 (see Note 7 for additional details including vesting information). These common shares of beneficial interest were issued under the 2009 Plan.

On March 23, 2017, the Company issued 122,816 nonvested shares with service conditions to the Company’s executives and employees. The nonvested shares will vest in three annual installments starting January 1, 2018, subject to continued employment. These common shares of beneficial interest were issued under the 2014 Plan.

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Common Dividends

The Company paid the following dividends on common shares/units during the three months ended March 31, 2017:



Dividend per Share/Unit		For the Quarter Ended	Record Date	Date Paid
$	0.45	December 31, 2016	December 30, 2016	January 17, 2017

Treasury Shares

Treasury shares are accounted for under the cost method. During the three months ended March 31, 2017, the Company received 73,784 common shares of beneficial interest related to employees surrendering shares to pay minimum withholding taxes at the time nonvested shares vested.

The Company’s Board of Trustees previously 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. On February 22, 2017, the Company announced the Board of Trustees authorized an expansion of the Repurchase Program to acquire up to an additional $500,000 of the Company’s common shares of beneficial interest. Including the remaining shares from the previous authorization, the Company now has availability under the Repurchase Program to acquire up to $569,807 of common shares of beneficial interest as of March 31, 2017. The timing, manner, price and actual number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements, market conditions, and other corporate liquidity requirements and priorities. The Repurchase Program may be suspended, modified or terminated at any time for any reason without prior notice. The Repurchase Program does not obligate the Company to acquire any specific number of shares, and all open market repurchases will be made in accordance with applicable rules and regulations setting forth certain restrictions on the method, timing, price and volume of open market share repurchases.

During the three months ended March 31, 2017, the Company re-issued 16,010 treasury shares related to earned 2016 compensation for the Board of Trustees, 27,767 treasury shares related to the resignation of a former Board of Trustees member and his accumulated deferred shares granted as compensation for years 2001 through 2016, 38,001 treasury shares related to the earned share awards with market or performance conditions and 19,374 treasury shares related to the grants of nonvested shares with service conditions.

At March 31, 2017, there were no common shares of beneficial interest in treasury.

Preferred Shares

The following preferred shares of beneficial interest were outstanding as of March 31, 2017:



Security Type		Number of Shares
7.5% Series H Preferred Shares ⁽¹⁾		2,750,000
6.375% Series I Preferred Shares		4,400,000
6.3% Series J Preferred Shares		6,000,000

⁽¹⁾ On April 3, 2017, the Company provided notice to the holders of its Series H Preferred Shares of the redemption of those shares (see Note 13).

The Series H Preferred Shares, the 6.375% Series I Cumulative Redeemable Preferred Shares (the “Series I Preferred Shares”) and the 6.3% Series J Cumulative Redeemable Preferred Shares (the “Series J 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 unless it has also paid (or set aside for payment) (i) the full cumulative distributions on the Series H Preferred Shares for the current and all past dividend periods and (ii) the full cumulative distributions on the Series I Preferred Shares and the Series J Preferred Shares for all past dividend periods. 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.

As of January 24, 2016, the Company may optionally redeem the Series H Preferred Shares. The Company may not optionally redeem the Series I Preferred Shares and the Series J Preferred Shares prior to March 4, 2018 and May 25, 2021, 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 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. In addition, upon the occurrence of a change of control (as

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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. 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, Series I Preferred Shares and Series J 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, 8,835,200 common shares and 12,842,400 common shares, respectively.

Preferred Dividends

The Company paid the following dividends on preferred shares during the three months ended March 31, 2017:



Security Type	Dividend per Share ⁽¹⁾		For the Quarter Ended	Record Date	Date Paid
7.5% Series H	$	0.47	December 31, 2016	December 30, 2016	January 17, 2017
6.375% Series I	$	0.40	December 31, 2016	December 30, 2016	January 17, 2017
6.3% Series J	$	0.39	December 31, 2016	December 30, 2016	January 17, 2017

⁽¹⁾ Amounts are rounded to the nearest whole cent for presentation purposes.

Noncontrolling Interests of Common Units in Operating Partnership

As of March 31, 2017, 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 March 31, 2017, approximately $4,204 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 $4,204 is based on the Company’s closing common share price of $28.95 on March 31, 2017, 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.


7.	Equity Incentive Plan

The 2014 Plan 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 March 31, 2017, there were 2,517,266 common shares available for future grant under the 2014 Plan. 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 nonvested 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 (loss).

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A summary of the Company’s nonvested share awards with service conditions as of March 31, 2017 is as follows:



	Number of Shares		Weighted - Average Grant Date Fair Value
Nonvested at January 1, 2017	236,759		$	30.78
Granted	122,816		29.03
Vested	(87,983	)	29.38
Forfeited	0		0.00
Nonvested at March 31, 2017	271,592		$	30.05

As of March 31, 2017 and December 31, 2016, there were $5,500 and $2,798, respectively, of total unrecognized compensation costs related to nonvested share awards with service conditions. As of March 31, 2017 and December 31, 2016, these costs were expected to be recognized over a weighted-average period of 1.5 and 1.2 years, respectively. The total intrinsic value of shares vested (calculated as number of shares multiplied by vesting date share price) during the three months ended March 31, 2017 and 2016 was $2,681 and $1,722, 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 (loss) were $848 and $775 for the three months ended March 31, 2017 and 2016, 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 (the “January 26, 2012 Awards”). 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 and 36,260 shares vested on January 1, 2015 and January 1, 2016, respectively. On May 6, 2016, upon his termination, all of the former Chief Financial Officer’s 6,882 earned shares vested immediately. The remaining 29,376 earned shares vested on January 4, 2017. 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 20, 2014, the Company’s Board of Trustees granted a target of 57,385 nonvested share awards, exclusive of the 14,582 shares granted to the former Chief Financial Officer, with either market or performance conditions to executives (the “March 20, 2014 Awards”). On February 24, 2017, the executives earned 134.5% of their 28,692 target number of shares, or 38,599 shares, and all of the earned shares vested immediately. The executives also received a cash payment of $190 on the shares equal to the value of all dividends paid on common shares from January 1, 2014 until the determination date, February 24, 2017. As of February 25, 2017, the executives are entitled to receive dividends as declared and paid on the earned shares and to vote the shares. The actual amounts of the shares awarded with respect to the remaining 28,693 of the 57,385 shares will be determined on or about July 1, 2017, based on the performance measurement period of July 1, 2014 through June 30, 2017, in accordance with the terms of the award 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 award 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 performance measurement period, all of the earned shares will be issued and outstanding on the date. 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 determination date. Such amounts will be paid to the awardees on or about July 1, 2017. 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 28,692 shares, amortization commenced on March 20, 2014, the beginning of the requisite service period, and, with respect to 28,693 shares, amortization commenced on July 1, 2014, the beginning of the requisite service period.

On March 23, 2017, the Company’s Board of Trustees granted a target of 124,526 nonvested share awards with either market or performance conditions to executives (the “March 23, 2017 Awards”). The actual amounts of the shares awarded with respect to 62,264 of the 124,526 shares will be determined on or about January 1, 2020, based on the performance measurement period of January 1, 2017 through December 31, 2019, in accordance with the terms of the agreements. The actual amounts of the shares awarded with respect to the remaining 62,262 of the 124,526 shares will be determined on or about July 1, 2020, based on the performance measurement period of July 1, 2017 through June 30, 2020, 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

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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, 2020 and July 1, 2020, 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 62,264 shares, amortization commenced on March 23, 2017, the beginning of the requisite service period, and, with respect to 62,262 shares, amortization will commence on July 1, 2017, the beginning of the requisite service period.

The terms stipulated in the March 23, 2017 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 up to 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 up to 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 23, 2017 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 are expected to be determined during the second quarter of 2017 with an insignificant cumulative adjustment to compensation cost anticipated. 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.

A summary of the Company’s nonvested share awards with either market or performance conditions as of March 31, 2017 is as follows:



	Number of Shares		Weighted- Average Grant Date Fair Value
Nonvested at January 1, 2017	276,183		$	27.36
Granted ⁽¹⁾	134,433		29.22
Vested	(67,975	)	33.32
Forfeited	0		0.00
Nonvested at March 31, 2017	342,641		$	29.27


⁽¹⁾	Amount includes an additional 9,907 shares issued on February 24, 2017 from the March 20, 2014 grant, which were earned in excess of the target amount.

As of March 31, 2017 and December 31, 2016, there were $6,513 and $3,757, respectively, of total unrecognized compensation costs related to nonvested share awards with market or performance conditions. As of March 31, 2017 and December 31, 2016, these costs were expected to be recognized over a weighted-average period of 2.4 and 1.8 years, respectively. As of March 31, 2017 and December 31, 2016, there were 531,507 and 463,532 share awards with market or performance conditions vested, respectively. Additionally, there were zero and 29,376 nonvested share awards with market or performance conditions earned but nonvested due to a service condition as of March 31, 2017 and December 31, 2016, 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 (loss) were $860 and $1,038 for the three months ended March 31, 2017 and 2016, respectively.

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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
	March 31,
	2017		2016
General and administrative	$	24,591	$	24,601
Sales and marketing	17,944		18,581
Repairs and maintenance	9,758		9,836
Management and incentive fees	7,226		7,631
Utilities and insurance	7,843		8,233
Franchise fees	1,837		2,277
Other expenses	457		756
Total other indirect expenses	$	69,656	$	71,915

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As of March 31, 2017, LHL leased all 43 hotels owned by the Company as follows:



	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 Triton ⁽¹⁾	San Francisco, CA
9.	Hotel Vitale	San Francisco, CA
10.	Park Central San Francisco	San Francisco, CA
11.	Serrano Hotel	San Francisco, CA
12.	The Marker San Francisco	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.	Le Montrose Suite Hotel	West Hollywood, CA
18.	Le Parc Suite Hotel	West Hollywood, CA
19.	The Grafton on Sunset	West Hollywood, CA
20.	Hotel George	Washington, DC
21.	Hotel Madera	Washington, DC
22.	Hotel Palomar, Washington, DC	Washington, DC
23.	Hotel Rouge	Washington, DC
24.	Mason & Rook Hotel	Washington, DC
25.	Sofitel Washington, DC Lafayette Square	Washington, DC
26.	The Donovan	Washington, DC
27.	The Liaison Capitol Hill	Washington, DC
28.	Topaz Hotel	Washington, DC
29.	Southernmost Beach Resort Key West	Key West, FL
30.	The Marker Waterfront Resort	Key West, FL
31.	Hotel Chicago	Chicago, IL
32.	Westin Michigan Avenue	Chicago, IL
33.	Hyatt Regency Boston Harbor	Boston, MA
34.	Onyx Hotel	Boston, MA
35.	The Liberty Hotel	Boston, MA
36.	Westin Copley Place	Boston, MA
37.	Gild Hall	New York, NY
38.	The Roger	New York, NY
39.	Park Central Hotel New York (shared lease with WestHouse Hotel New York)	New York, NY
40.	WestHouse Hotel New York	New York, NY
41.	The Heathman Hotel	Portland, OR
42.	Embassy Suites Philadelphia - Center City	Philadelphia, PA
43.	Westin Philadelphia	Philadelphia, PA

⁽¹⁾ Property sold on April 11, 2017 (see Note 13).

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9.	Income Taxes

Income tax benefit was comprised of the following for the three months ended March 31, 2017 and 2016:



	For the three months ended
	March 31,
	2017			2016
LHL’s income tax benefit	$	(5,071	)	$	(5,873	)
Operating Partnership’s income tax expense	298			253
Total income tax benefit	$	(4,773	)	$	(5,620	)

The Company has estimated LHL’s income tax benefit for the three months ended March 31, 2017 by applying an estimated combined federal and state effective tax rate of 39.2% to LHL’s net loss of $12,982. From time to time, the Company may be subject to federal, state or local tax audits in the normal course of business.


10.	Fair Value Measurements

In evaluating fair value, GAAP outlines a valuation framework and creates a fair value hierarchy that distinguishes between market assumptions based on market data (observable inputs) and a reporting entity’s own assumptions about market data (unobservable inputs). The hierarchy ranks the quality and reliability of inputs used to determine fair value, which are then classified and disclosed in one of the three categories. The three levels are as follows:

Level 1—Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity has the ability to access at the measurement date.

Level 2—Observable inputs, other than quoted prices included in level 1, such as interest rates, yield curves, quoted prices in active markets for similar assets and liabilities, and quoted prices for identical or similar assets or liabilities in markets that are not active.

Level 3—Unobservable inputs that are supported by limited market activity. This includes certain pricing models, discounted cash flow methodologies and similar techniques when observable inputs are not available.

The Company estimates the fair value of its financial instruments using available market information and valuation methodologies the Company believes to be appropriate for these purposes. Considerable judgment and subjectivity are involved in developing these estimates and, accordingly, such estimates are not necessarily indicative of amounts that would be realized upon disposition.

Recurring Measurements

For assets and liabilities measured at fair value on a recurring basis, quantitative disclosure of their fair value is as follows:



		Fair Value Measurements at
		March 31, 2017		December 31, 2016
		Using Significant Other Observable
		Inputs (Level 2)
Description	Consolidated Balance Sheet Location
Derivative interest rate instruments	Prepaid expenses and other assets	$	4,745	$	3,295
Derivative interest rate instruments	Accounts payable and accrued expenses	$	268	$	927

The fair value of each derivative instrument is based on a discounted cash flow analysis of the expected cash flows under each arrangement. This analysis reflects the contractual terms of the derivative instrument, including the period to maturity, and utilizes observable market-based inputs, including interest rate curves and implied volatilities, which are classified within level 2 of the fair value hierarchy. The Company also incorporates credit value adjustments to appropriately reflect each parties’ nonperformance risk in the fair value measurement, which utilizes level 3 inputs such as estimates of current credit spreads. However, the Company has assessed that the credit valuation adjustments are not significant to the overall valuation of the derivatives. As a result, the Company has determined that its derivative valuations in their entirety are classified within level 2 of the fair value hierarchy.

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Financial Instruments Not Measured at Fair Value

The following table represents the fair value, derived using level 2 inputs, of financial instruments presented at carrying value in the Company’s consolidated financial statements as of March 31, 2017 and December 31, 2016:



	March 31, 2017				December 31, 2016
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Borrowings under credit facilities	$	0	$	0	$	0	$	0
Term loans	$	855,000	$	856,302	$	855,000	$	857,224
Bonds payable	$	42,500	$	42,500	$	42,500	$	42,500
Mortgage loan	$	225,000	$	225,225	$	225,000	$	225,224

The Company estimated the fair value of its borrowings under credit facilities, term loans, bonds payable and mortgage loan using interest rates ranging from 1.5% to 1.8% as of March 31, 2017 and December 31, 2016 with a weighted average effective interest rate of 1.5% as of March 31, 2017 and December 31, 2016. The assumptions reflect the terms currently available on similar borrowings to borrowers with credit profiles similar to the Company’s.

At March 31, 2017 and December 31, 2016, the carrying amounts of certain of the Company’s financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued expenses and distributions payable were representative of their fair values due to the short-term nature of these instruments and the recent acquisition of these items.


11.	Earnings Per Common Share

The limited partners’ outstanding common units in the Operating Partnership (which may be converted to common shares of beneficial interest) have been excluded from the diluted earnings per share calculation as there would be no effect on the amounts since the limited partners’ share of income or loss would also be added back to net income or loss. Any anti-dilutive shares have been excluded from the diluted earnings per share calculation. Unvested share-based payment awards expected to vest that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. Accordingly, distributed and undistributed earnings attributable to unvested restricted shares (participating securities) have been excluded, as applicable, from net income or loss attributable to common shareholders used in the basic and diluted earnings per share calculations. Net income or loss figures are presented net of noncontrolling interests in the earnings per share calculations.

The computation of basic and diluted earnings per common share is as follows:



	For the three months ended
	March 31,
	2017			2016
Numerator:
Net income attributable to common shareholders	$	76,084		$	6,017
Dividends paid on unvested restricted shares	(122		)	(133		)
Undistributed earnings attributable to unvested restricted shares	(37		)	0
Net income attributable to common shareholders excluding amounts attributable to unvested restricted shares	$	75,925		$	5,884
Denominator:
Weighted average number of common shares - basic	112,923,719			112,748,492
Effect of dilutive securities:
Compensation-related shares	382,490			359,666
Weighted average number of common shares - diluted	113,306,209			113,108,158
Earnings per Common Share - Basic:
Net income attributable to common shareholders excluding amounts attributable to unvested restricted shares	$	0.67		$	0.05
Earnings per Common Share - Diluted:
Net income attributable to common shareholders excluding amounts attributable to unvested restricted shares	$	0.67		$	0.05

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12.	Supplemental Information to Statements of Cash Flows



	For the three months ended
	March 31,
	2017			2016
Interest paid, net of capitalized interest	$	9,142		$	11,780
Interest capitalized	78			195
Income taxes (refunded) paid, net	(57		)	208
Increase in distributions payable on common shares	59			45
Write-off of fully amortized debt issuance costs	5,057			563
Increase (decrease) in accrued capital expenditures	433			(5,341		)
Grant of nonvested shares and awards to employees and executives, net	7,180			4,926
Issuance of common shares for Board of Trustees compensation ⁽¹⁾	1,240			480
In conjunction with the sale of properties, the Company disposed of the following assets and liabilities:
Sale proceeds, net of closing costs	$	252,407		$	0
Other assets	5,803			0
Liabilities	(6,250		)	0
Proceeds from sale of properties	$	251,960		$	0

⁽¹⁾ Refer to Note 6 for issuances of previously deferred shares.


13.	Subsequent Events

The Company paid the following common and preferred dividends subsequent to March 31, 2017:



Security Type	Dividend per Share/Unit ⁽¹⁾		For the Quarter Ended	Record Date	Date Paid
Common Shares/Units	$	0.45	March 31, 2017	March 31, 2017	April 17, 2017
7.5% Series H Preferred Shares	$	0.47	March 31, 2017	March 31, 2017	April 17, 2017
6.375% Series I Preferred Shares	$	0.40	March 31, 2017	March 31, 2017	April 17, 2017
6.3% Series J Preferred Shares	$	0.39	March 31, 2017	March 31, 2017	April 17, 2017

⁽¹⁾ Amounts are rounded to the nearest whole cent for presentation purposes.

On April 3, 2017, the Company provided notice to the holders of its Series H Preferred Shares of the redemption of those shares. The redemption will close on May 4, 2017.

On April 11, 2017, the Company sold Hotel Triton for $14,250. Substantially all of the assets held for sale consist of investment in hotel properties, net and immaterial prepaid expenses and other assets and the liabilities of assets held for sale consist of accounts payable and accrued expenses. The Company will recognize a gain in the second quarter of 2017 of approximately $6,800 related to the sale of this property. The proceeds will be used for general corporate purposes and the redemption of the Series H Preferred Shares on May 4, 2017.


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

The following should be read in conjunction with the consolidated financial statements and notes thereto appearing in Part I - Item 1 of this report.

Forward-Looking Statements

This report, together with other statements and information publicly disseminated by LaSalle Hotel Properties (the “Company”), contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and includes this statement for purposes of complying with these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe the Company’s future plans, strategies and expectations, are generally identifiable by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” “may,” “plan,” “seek,” “should,” “will” or similar expressions. Forward-looking statements in this report include, among others, statements about the

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Company’s business strategy, including its acquisition and development strategies, industry trends, estimated revenues and expenses, ability to realize deferred tax assets and expected liquidity needs and sources (including capital expenditures and the ability to obtain financing or raise capital). You should not rely on forward-looking statements since they involve known and unknown risks, uncertainties and other factors that are, in some cases, beyond the Company’s control and which could materially affect actual results, performances or achievements. Factors that may cause actual results to differ materially from current expectations include, but are not limited to:


•	risks associated with the hotel industry, including competition for guests and meetings from other hotels and alternative lodging companies, increases in wages, energy costs and other operating costs, potential unionization or union disruption, actual or threatened terrorist attacks, any type of flu or disease-related pandemic and downturns in general and local economic conditions;


•	the availability and terms of financing and capital and the general volatility of securities markets;


•	the Company’s dependence on third-party managers of its hotels, including its inability to implement strategic business decisions directly;


•	risks associated with the real estate industry, including environmental contamination and costs of complying with the Americans with Disabilities Act of 1990, as amended, and similar laws;


•	interest rate increases;


•	the possible failure of the Company to maintain its qualification as a real estate investment trust (“REIT”) as defined in the Internal Revenue Code of 1986, as amended (the “Code”) and the risk of changes in laws affecting REITs;


•	the possibility of uninsured losses;


•	risks associated with redevelopment and repositioning projects, including delays and cost overruns;


•	the risk of a material failure, inadequacy, interruption or security failure of the Company’s or the hotel managers’ information technology networks and systems; and


•	the risk factors discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, as updated elsewhere in this report.

Accordingly, there is no assurance that the Company’s expectations will be realized. Any forward-looking statement speaks only as of the date on which it is made. New risks and uncertainties arise over time, and it is not possible for the Company to predict those events or how they may affect the Company. Except as otherwise required by law, the Company disclaims any obligations or undertaking to publicly release any updates or revisions to any forward-looking statement contained herein (or elsewhere) to reflect any change in the Company’s expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. Accordingly, investors should use caution in relying on past forward-looking statements, which were based on results and trends at the time they were made, to anticipate future events or trends.

Overview

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 REIT as defined in 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, is subject to taxation at normal corporate rates.

As of March 31, 2017, the Company owned interests in 43 hotels with approximately 10,880 guest rooms located in seven states and the District of Columbia. Each hotel is leased to LHL 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 2017 and December 2019. A third-party non-affiliated hotel operator manages each hotel pursuant to a hotel management agreement.

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In addition to measuring the Company’s net income (loss), the Company also measures hotel performance by evaluating financial metrics such as room revenue per available room (“RevPAR”), funds from operations attributable to common shareholders and unitholders (“FFO”) and earnings before interest, taxes, depreciation and amortization (“EBITDA”). The Company evaluates the hotels in its portfolio and potential acquisitions using these metrics to determine each portfolio hotel’s contribution or acquisition hotel’s potential contribution toward reaching the Company’s goals of providing income to its shareholders through increases in distributable cash flow and increasing long-term total returns to shareholders through appreciation in the value of its common shares. The Company invests in capital improvements throughout the portfolio to continue to increase the competitiveness of its hotels and improve their financial performance. The Company actively seeks to acquire hotel properties, but continues to face significant competition for acquisitions that meet its investment criteria.

During the first quarter of 2017, the Company’s hotels continued to operate within a generally positive environment. All of the economic indicators the Company tracks were encouraging throughout the quarter. On the more positive side, consumer confidence continued to rise to the highest level this cycle and corporate profits reported thus far for the first quarter have been strong. Unemployment remained below 5.0% and enplanements have been steady, with airline capacity increases expected during 2017. Similarly, estimates for U.S. GDP growth in 2017 have remained stable. The U.S. lodging industry benefited from a positive economic landscape overall and from a historically strong Presidential Inauguration in Washington, DC and the calendar shift of Easter moving from March 2016 to April 2017. However, there were signs of moderation, and the industry RevPAR grew at a rate of 3.4%. During the first quarter, lodging industry demand grew by 2.8% and was partially offset by a 1.9% supply increase. Industry-wide pricing was moderate, leading to average daily rate (“ADR”) growth of 2.5%. The Company’s portfolio benefited from the operating environment, and RevPAR increased during the first quarter by 1.4%.

For the first quarter of 2017, the Company had net income applicable to common shareholders of $76.1 million, or $0.67 per diluted share. FFO was $49.0 million, or $0.43 per diluted share/unit (based on 113,451,432 weighted average shares and units outstanding during the three months ended March 31, 2017) and EBITDA was $135.6 million. RevPAR for the hotel portfolio was $177.56, which was an increase of 1.4% compared to the first quarter of 2016. Occupancy grew by 0.2% and ADR increased by 1.2%.

Please refer to “Non-GAAP Financial Measures” for a detailed discussion of the Company’s use of FFO and EBITDA and a reconciliation of FFO and EBITDA to net income or loss attributable to common shareholders, a measurement computed in accordance with U.S. generally accepted accounting principles (“GAAP”).

Critical Accounting 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 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.

The Company’s management has discussed the policy of using estimated hotel operating revenues and expenses with the Audit Committee of its Board of Trustees. The Audit Committee has reviewed the Company’s disclosure relating to the estimates in this “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” section.

See “Critical Accounting Policies” in the “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” section of the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 for other critical accounting policies and estimates of the Company.

Comparison of the Three Months Ended March 31, 2017 to the Three Months Ended March 31, 2016

Industry travel was stronger during the three months ended March 31, 2017, compared to the same prior year period. Industry demand grew by 2.8% and industry supply increased by 1.9%, which kept industry occupancy at a high level, leading to moderate pricing power and ADR growth during the period. With respect to the Company’s hotels, occupancy grew by 0.2% during the three months ended March 31, 2017 and ADR increased 1.2%, which resulted in RevPAR improvement of 1.4% year-over-year.

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Hotel Operating Revenues

Hotel operating revenues, including room, food and beverage and other operating department revenues, decreased $7.4 million from $258.4 million in 2016 to $251.0 million in 2017. This decrease is primarily due to the sale of the 2016 and 2017 hotel dispositions, which consist of the sales of Indianapolis Marriott Downtown, Hotel Deca, Lansdowne Resort and Alexis Hotel (collectively, the “2016 and 2017 Disposition Properties”). The 2016 and 2017 Disposition Properties, which are not comparable year-over-year, contributed $11.1 million to the decrease in hotel operating revenues, mostly attributable to the Indianapolis Marriott Downtown. Additionally, the seven San Francisco hotel properties experienced a combined $5.5 million decrease primarily due to the Moscone Convention Center’s expansion project, which resulted in lowered ADR, RevPAR and occupancy throughout the market. A decrease of $1.0 million from Park Central Hotel New York and WestHouse Hotel New York further contributed to the overall decrease, which was primarily due to new supply year-over-year in the market.

These decreases are partially offset by a $9.2 million increase at the Company’s nine properties located in Washington, DC as a result of the 2017 Presidential Inauguration and the completion of the Mason & Rook Hotel renovation.

The Liberty Hotel and San Diego Paradise Point Resort and Spa experienced significant increases in total room, food and beverage and other operating department revenues. The Liberty Hotel had an increase of $1.6 million as a result of the completion of the hotel renovation, and high group business resulted in a $1.3 million increase at the San Diego Paradise Point Resort and Spa.

Hotel operating revenues across the remainder of the portfolio remained relatively constant, decreasing a net $1.9 million across 23 additional hotels in the portfolio.

Other Income

Other income increased $1.7 million from $1.7 million in 2016 to $3.4 million in 2017 primarily due to increased insurance gains from insurance proceeds related to minor property damage at various properties.

Hotel Operating Expenses

Hotel operating expenses decreased a net $5.5 million from $170.8 million in 2016 to $165.3 million in 2017. This overall decrease is primarily due to $6.6 million from the results of the 2016 and 2017 Disposition Properties, which are not comparable year-over-year, again, mostly attributable to the Indianapolis Marriott Downtown. In addition, the seven San Francisco hotel properties had a combined $3.9 million decrease in expenses which corresponds to the decrease in revenues.

These decreases are partially offset by a combined $3.9 million increase at the Company’s nine properties located in Washington, DC as a result of the 2017 Presidential Inauguration and the completion of the Mason & Rook Hotel renovation.

Hotel operating expenses across the remainder of the portfolio remained relatively constant, increasing a net $1.1 million across the 27 additional hotels in the portfolio.

Depreciation and Amortization

Depreciation and amortization expense decreased $0.3 million from $47.6 million in 2016 to $47.3 million in 2017. Depreciation and amortization expense attributable to the 2016 and 2017 Disposition Properties, which are not comparable year-over-year, decreased $1.8 million. This decrease was mostly offset by a net $1.5 million increase across the remaining hotels in the portfolio due to the depreciation of new assets placed into service reflecting the Company’s recent renovation activity.

Real Estate Taxes, Personal Property Taxes and Insurance

Real estate taxes, personal property taxes and insurance expenses decreased $0.1 million from $16.2 million in 2016 to $16.1 million in 2017. This decrease is primarily due to $0.4 million attributable to the 2016 and 2017 Disposition Properties, which are not comparable year-over-year. Real estate taxes and personal property taxes increased by $0.5 million across the remaining hotels in the portfolio primarily due to a decrease in real estate taxes capitalized as part of the various renovation projects in 2016. Insurance expense decreased by $0.2 million reflecting slightly lower premiums throughout the portfolio.

Ground Rent

Ground rent decreased $0.4 million from $3.8 million in 2016 to $3.4 million in 2017 primarily due to a $0.4 million credit received at a San Diego property as a result of an operational audit. Certain hotels are subject to ground rent under operating leases which call for either fixed or variable payments based on the hotel’s performance.

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General and Administrative

General and administrative expense increased $0.8 million from $5.8 million in 2016 to $6.6 million in 2017 primarily due to increased compensation costs and professional fees.

Other Expenses

Other expenses decreased $0.3 million from $2.2 million in 2016 to $1.9 million in 2017 primarily due to a net decrease of $1.5 million in management transition expenses, severance and pre-opening costs at a number of properties across the portfolio. Slightly offsetting this decrease, losses from property damage, which are largely covered by insurance proceeds, and retail lease expenses, increased a net $1.2 million in 2017.

Interest Income

Interest income decreased $1.6 million from $1.7 million in 2016 to $0.1 million in 2017 as a result of the sale of the Company’s junior mezzanine loan (the “Mezzanine Loan”), which was secured by pledges of equity interests in the entities that own the hotel properties, Shutters on the Beach and Casa Del Mar, in July 2016.

Interest Expense

Interest expense decreased $2.1 million from $11.9 million in 2016 to $9.8 million in 2017 due to a decrease in the Company’s weighted average debt outstanding, partially offset by an increase in the weighted average interest rate. The Company’s weighted average debt outstanding decreased from $1.52 billion in 2016 to $1.17 billion in 2017 due primarily to repayments of mortgage loans and paydowns on the unsecured credit facilities with proceeds from the following:


•	the issuance of the 6.3% Series J Cumulative Redeemable Preferred Shares (the “Series J Preferred Shares”) in May 2016;


•	the sale of Indianapolis Marriott Downtown in July 2016;


•	the sale of Mezzanine Loan in July 2016;


•	the sale of Hotel Deca in January 2017; and


•	positive operating results from the hotel properties.

The Company’s weighted average interest rate, including the effect of capitalized interest, increased from 2.80% in 2016 to 3.02% in 2017. This increase is due in part to a decrease in the Company’s borrowings on its senior unsecured credit facility, which had a weighted average interest rate of 2.13% in 2016. Interest capitalized on renovations decreased $0.1 million from $0.2 million in 2016 to $0.1 million in 2017.

Loss from Extinguishment of Debt

Loss from extinguishment of debt of $1.7 million in 2017 relates to the January 10, 2017 refinancing of the Company’s senior unsecured credit facility and First Term Loan (as defined below), which were considered substantial modifications. The loss from extinguishment of debt represents a portion of the unamortized debt issuance costs incurred for the senior unsecured credit facility when the original agreement was executed and the debt issuance costs incurred in connection with the refinancing of the First Term Loan.

Income Tax Benefit

Income tax benefit decreased $0.8 million from $5.6 million in 2016 to $4.8 million in 2017. This decrease is primarily the result of a decrease in LHL’s net loss before income tax benefit of $1.5 million from $14.5 million in 2016 to $13.0 million in 2017. For the quarter ended March 31, 2017, LHL’s income tax benefit was calculated using an estimated combined federal and state effective tax rate of 39.2%.

Gain on Sale of Properties

The gain on sale of properties is $74.4 million which consists of a $30.6 million gain relating to the sale of Hotel Deca on January 19, 2017, a $10.4 million gain relating to the sale of the Lansdowne Resort on March 22, 2017 and a $33.4 million gain relating to the sale of Alexis Hotel on March 31, 2017.

Noncontrolling Interests in Consolidated Entities

Noncontrolling interests in consolidated entities represent the allocation of income or loss to the outside preferred ownership interests in a subsidiary and the outside ownership interest in a joint venture.

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Noncontrolling Interests of Common Units in Operating Partnership

Noncontrolling interests of common units in Operating Partnership represents the allocation of income or loss of the Operating Partnership to the common units held by third parties based on their weighted average percentage ownership throughout the period. At March 31, 2017, third party limited partners held 0.1% of the common units in the Operating Partnership.

Distributions to Preferred Shareholders

Distributions to preferred shareholders increased $2.4 million from $3.0 million in 2016 to $5.4 million in 2017 due to distributions on the Series J Preferred Shares, which were issued on May 25, 2016.

Non-GAAP Financial Measures

FFO and EBITDA

The Company considers the non-GAAP measures of FFO and EBITDA to be key supplemental measures of the Company’s performance and should be considered along with, but not as alternatives to, net income or loss as a measure of the Company’s operating performance. 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 and EBITDA to be helpful in evaluating a real estate company’s operations.

The White Paper on FFO approved by the National Association of Real Estate Investment Trusts (“NAREIT”) in April 2002, as revised in 2011, defines FFO as net income or loss (computed in accordance with GAAP), excluding gains or losses from sales of properties and items classified by GAAP as extraordinary, plus real estate-related depreciation and amortization and impairment writedowns, and after comparable adjustments for the Company’s portion of these items related to unconsolidated entities and joint ventures. The Company computes FFO consistent with standards established by NAREIT, which may not be comparable to FFO reported by other REITs that do not define the term in accordance with the current NAREIT definition or that interpret the current NAREIT definition differently than the Company.

With respect to FFO, the Company believes that excluding the effect of extraordinary items, real estate-related depreciation and amortization and impairments, and the portion of these items related to unconsolidated entities, all of which are based on historical cost accounting and which may be of limited significance in evaluating current performance, 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. However, FFO may not be helpful when comparing the Company to non-REITs.

With respect to EBITDA, the Company believes that excluding the effect of non-operating expenses and non-cash charges, and the portion of these items related to unconsolidated entities, all of which are also based on historical cost accounting and may be of limited significance in evaluating current performance, can help eliminate the accounting effects of depreciation and amortization, and financing decisions and facilitate comparisons of core operating profitability between periods and between REITs, even though EBITDA also does not represent an amount that accrues directly to common shareholders.

FFO and EBITDA do not represent cash generated from operating activities as determined by GAAP and should not be considered as alternatives to net income, cash flows from operations or any other operating performance measure prescribed by GAAP. FFO and EBITDA are not measures of the Company’s liquidity, nor are FFO and EBITDA indicative of funds available to fund the Company’s cash needs, including its ability to make cash distributions. These measurements do not reflect cash expenditures for long-term assets and other items that have been and will be incurred. FFO and EBITDA may include funds that may not be available for management’s discretionary use due to functional requirements to conserve funds for capital expenditures, property acquisitions and other commitments and uncertainties. To compensate for this, management considers the impact of these excluded items to the extent they are material to operating decisions or the evaluation of the Company’s operating performance.

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The following is a reconciliation between net income attributable to common shareholders and FFO attributable to common shareholders and unitholders for the three months ended March 31, 2017 and 2016 (in thousands, except share and unit data):



		For the three months ended
		March 31,

LaSalle Hotel Properties - FORM 10-Q - April 19, 2017

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