UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20142016
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| ¨ | 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: 000-55394
AMERICAN REALTY CAPITAL HOSPITALITY INVESTORS TRUST, INC.
(Exact name of registrant as specified in its charter)
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| Maryland | | 80-0943668 |
| (State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
405 Park Ave., 14th Floor New York, NY3950 University Drive, Fairfax, VA
| | 1002222030 |
| (Address of principal executive offices) | | (Zip Code) |
(212) 415-6500(571) 529-6390 |
| (Registrant's telephone number, including area code) |
| Securities registered pursuant to section 12(b) of the Act: None |
| Securities registered pursuant to section 12(g) of the Act: Common stock, $0.01 par value per share (Title of class) |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No
Indicate by check mark whether the registrant 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes ¨ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filer ¨ | | Accelerated filer ¨ |
Non-accelerated filer ¨ | (Do not check if a smaller reporting company) | Smaller reporting company x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No
There is no established public market for the registrant's shares of common stock. The registrant is currently conducting the ongoing initial public offering of its shares of common stock pursuant to its Registration Statement on Form S-11 (File No. 333-190698), which shares are being sold at $25.00 per share, with discounts available for certain categories of purchasers. The total value of the registrant's common stock held by non-affiliates of the registrant as of June 30, 2014, the last business day of the registrant's most recently completed second fiscal quarter, was $21.1 million based on a per share value of $25.00 (or $23.75 for shares issued under the distribution reinvestment plan).
The number of outstanding shares of the registrant's common stock on March 15, 20152017 was 15,095,63438,813,408 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement to be delivered to stockholders in connection with the registrant's 20152017 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K. The registrant intends to file its proxy statement within 120 days after its fiscal year end.
AMERICAN REALTY CAPITAL HOSPITALITY TRUST, INC.
FORM 10-K
Year Ended December 31, 20142016
This Annual Report on Form 10-K may contain registered trademarks, including Hampton Inn®, Hampton Hotels®Inn and Suites®, Homewood Suites®, Embassy Suites®, DoubleTree® and Hilton Garden Inn®, which are the exclusive property of Hilton Worldwide, Inc.® and its subsidiaries and affiliates, Courtyard® by Marriott, Fairfield Inn®, Fairfield Inn and Suites®, TownePlace Suites®, SpringHill Suites®, and Residence Inn® and Westin® which are the exclusive property of Marriott International, Inc.® or one of its affiliates, Westin® which is the exclusive property of Starwood HotelsHyatt House® and Resorts Worldwide® or one of its affiliates, Hyatt Place®, which isare the exclusive property of Hyatt Hotels Corporation® or one of its affiliates, and Holiday Inn® and Holiday Inn Express®Express and Suites®, which areis the exclusive property of Intercontinental Hotels Group® or one of its affiliates, and Red Lion Inn & Suites®, which is the exclusive property of Red Lion Hotels Corporation or one of its affiliates. For convenience, the applicable trademark or service mark symbol has been omitted but will be deemed to be included wherever the above referenced terms are used.
Forward-Looking Statements
Certain statements included in this Annual Report on Form 10-K are forward-looking statements. Those statements include statements regarding the intent, belief or current expectations of American Realty Capital Hospitality Investors Trust, Inc. (the "Company" "we" "our" “our company” or "us") and members of our management team, as well as the assumptions on which such statements are based, and generally are identified by the use of words such as "may," "will," "seeks," "anticipates," "believes," "estimates," "expects," "plans," "intends," "should" or similar expressions. Actual results may differ materially from those contemplated by such forward-looking statements. Further, forward-looking statements speak only as of the date they are made, and we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time, unless required by law.
The following are some of the risks and uncertainties, although not all risks and uncertainties, that could cause our actual results to differ materially from those presented in our forward-looking statements:
We have entered into agreements with Brookfield Strategic Real Estate Partners II Hospitality REIT II LLC (the “Brookfield Investor”), pursuant to which, among other things, the Brookfield Investor has purchased $135.0 million in units of a new class of limited partner interests in our operating history. This inexperience makespartnership entitled “Class C Units” (the “Class C Units”), and the Brookfield Investor has agreed to purchase additional Class C Units in an aggregate amount of up to $265.0 million at subsequent closings (“Subsequent Closings”). We may require funds, which may not be available on favorable terms or at all, in addition to our future performance difficultoperating cash flow, cash on hand and the proceeds that may be available from sales of Class C Units at Subsequent Closings, which are subject to predict.conditions, to meet our capital requirements.
AllThe interests of the Brookfield Investor may conflict with our interests and the interests of our executive officersstockholders, and the Brookfield Investor has significant governance and other rights that could be used to control or influence our decisions or actions.
The prior approval rights of the Brookfield Investor will restrict our operational and financial flexibility and could prevent us from taking actions that we believe would be in the best interest of our business.
There can be no assurance we will be able to complete our pending acquisition of additional hotel properties and any failure to do so, in whole or in part, could cause us to lose all or a portion of the $10.5 million deposit we have made with respect to this pending acquisition.
We no longer pay distributions and there can be no assurance we will resume paying distributions in the future.
We may not be able to make additional investments unless we are also officers, managers and/or holdersable to identify an additional source of capital on favorable terms and obtain prior approval from the Brookfield Investor.
We have a direct or indirect controlling interest inhistory of operating losses and there can be no assurance that we will ever achieve profitability.
We have terminated our advisory agreement with our advisor, American Realty Capital Hospitality Advisors, LLC (the "Advisor"“Advisor”), Realty Capital Securities, LLC (the "Dealer Manager"), orand other entities affiliatedagreements with the parentits affiliates as part of our Sponsor, AR Capital, LLC ("American Realty Capital").transition from external management to self-management. As a result, our executive officers, our Advisor and its affiliates face conflictspart of interest, including significant conflicts created by our Advisor's compensation arrangements with us. These conflicts could result in unanticipated actions.
Because investment opportunities that are suitable for us may also be suitable for other American Realty Capital advised investment programs, our Advisor and its affiliates face conflicts of interest relating to the purchase of properties and other investments and such conflicts may not be resolved in our favor, meaning that we could invest in less attractive assets, which could reduce the investment return to our stockholders.
We intend to use substantially all available proceeds of our initial public offering of common stock (our "IPO" or our "Offering") following the completion on February 27, 2015 of our acquisition of a portfolio of 116 hotel assets (the "Grace Portfolio") to reduce our borrowings to our intended limit, which may limit our ability to pay distributions or acquire additional properties for some time. The continued use of substantially all offering proceeds to repay debt will reduce the available cash flow to fund working capital, acquisitions, capital expenditures and other general corporate purposes, which could have a material adverse impact onthis transition, our business may be disrupted and reduce cash available for distributions to holders of our common stock.
We focus on acquiring a diversified portfolio of hospitality assets located in the United States and are subjectwe may become exposed to risks inherent in concentrating investments in the hospitality industry.
We may purchase real estate assets located in Canada and Mexico,to which may subject us to additional risks.we have not historically been exposed.
No public market currently exists, or may ever exist, for shares of our common stock and our shares are, and may continue to be, illiquid.
All of the properties we own are hotels, and we are subject to risks inherent in the hospitality industry.
Increases in interest rates could increase the amount of our debt payments andpayments.
We have incurred substantial indebtedness, which may limit our abilityfuture operational and financial flexibility.
We depend on our operating partnership and its subsidiaries for cash flow and are effectively structurally subordinated in right of payment to their obligations, which include distribution and redemption obligations to holders of Class C Units and the preferred equity interests issued by two of our subsidiaries that indirectly own 115 of our hotels (the “Grace Preferred Equity Interests”).
The amount we would be required to pay distributionsholders of Class C Units in a fundamental sale transaction may discourage a third party from acquiring us in a manner that might otherwise result in a premium price to our stockholders.
We may be unable to obtain the financing needed to complete acquisitions.
We incurred substantial additional indebtedness to consummate the Grace Acquisition, which may have a material adverse effect on our financial condition and results of operations.
We may not generate cash flows sufficient to pay our distributions to stockholders, and, as such, we may be forced to borrow at higher rates or depend on our Advisor and its affiliates to waive reimbursements of certain expenses and fees to fund our operations.
We are obligated to pay fees to our Advisor and its affiliates, which may be substantial.
We may be unable to maintain cash distributions or increase distributions over time.
Our organizational documents permit us to pay distributions from unlimited amounts of any source. Since our inception, all of our distributions have been paid from offering proceeds. We may continue in the future to pay distributions from sources other than from our cash flows from operations, including the net proceeds from the Offering. There are no established limits on the amounts of net proceeds and borrowings that we may use to fund such distribution payments.
Distributions paid will reduce the amount of capital we ultimately invest in properties and other permitted investments and may negatively impact the value of our stockholders' investment.
We intend to pay distributions from cash flows from operations following the completion of the Grace Acquisition, but our ability to do so depends on our abilityfail to realize the expected benefits of the acquisitionour acquisitions of the Grace Portfolio from which a substantial amount of our future cash flows from operations are expected to be generated. Failure to realize the expected benefits of the acquisition of the Grace Portfolio,hotels within the anticipated timeframe or at all and we may incur unexpected costs.
Our operating results will be affected by economic and regulatory changes that have an adverse impact on the real estate market in general, and we may not be profitable or realize growth in the incurrencevalue of unexpected costs,our real estate properties.
A prolonged economic slowdown, a lengthy or severe recession or declining real estate values could have a material adverse effect onharm our financial conditioninvestments.
Our real estate investments are relatively illiquid and results of operations and our ability to pay distributions from cash flow from operations.
We are subject to risks associated with any dislocationssome restrictions on sale, and therefore we may not be able to dispose of properties at the time of our choosing or liquidity disruptions that may exist or occur in the credit markets of the United States from time to time.on favorable terms.
Our failure to qualify or to continue to qualify to be treated as a real estate investment trust for U.S. federal income tax purposes ("REIT") which would result in higher taxes, may adversely affect operations and would reduce our NAV and cash available for distributions.could have a material adverse effect on us.
All forward-looking statements should also be read in light of the risks identified in Item 1A of this Annual Report on Form 10-K.
PART I
Item 1. Business.
We were incorporated on July 25, 2013 as a Maryland corporation and intend to elect and qualify to be taxedqualified as a REIT beginning with ourthe taxable year ended December 31, 2014. We were formed primarily to acquire lodging properties in the midscale limited service, extended stay, select service, upscale select service, and upper upscale full service segments within the hospitality sector. As of December 31, 2016, we had acquired or had an interest in a total of 141 hotels with a total of 17,193 guestrooms located in 32 states. As of December 31, 2016, all but one of our hotels operated under a franchise or license agreement with a national brand owned by one of Hilton Worldwide, Inc., Marriott International, Inc., Hyatt Hotels Corporation, Intercontinental Hotels Group and Red Lion Hotels Corporation or one of their respective subsidiaries or affiliates.
On January 7, 2014, we commenced our IPO on a "reasonable best efforts" basis of up to 80,000,000 shares of common stock, $0.01 par value per share, at a price of $25.00 per share, subject to certain volume and other discounts, pursuant to a registration statement on Form S-11 (File No. 333-190698), as amended (the "Registration Statement"), filed with the U.S. Securities and Exchange Commission (the "SEC") under the Securities Act of 1933,well as amended (the "Securities Act"). The Registration Statement also covers up to 21,052,631 shares of common stock available pursuant to a distribution reinvestment planthe Distribution Reinvestment Plan (the "DRIP") under which our common stockholders maycould elect to have their cash distributions reinvested in additional shares of our common stock.
On November 15, 2015, we suspended our IPO, and, on November 18, 2015, Realty Capital Securities, LLC (the "Former Dealer Manager"), the dealer manager of our IPO, suspended sales activities, effective immediately. On December 31, 2015, we terminated the Former Dealer Manager as the dealer manager of our IPO.
On March 28, 2016, we announced that, because we required funds in addition to our operating cash flow and cash on hand to meet our capital requirements, beginning with distributions payable with respect to April 2016, we would pay distributions to our stockholders in shares of common stock at a price initiallyinstead of cash.
On July 1, 2016, our board of directors approved an estimated net asset value per share of common stock (“Estimated Per-Share NAV”) equal to $23.75$21.48 based on an estimated fair value of our assets less the estimated fair value of our liabilities, divided by 36,636,016 shares of our common stock outstanding on a fully diluted basis as of March 31, 2016, which was published on the same date. This was the first time that our board of directors determined an Estimated Per-Share NAV. We anticipate that we will publish an updated Estimated Per-Share NAV on at least an annual basis.
On January 7, 2017, the third anniversary of the commencement of our IPO, it terminated in accordance with its terms.
On January 12, 2017, we, along with our operating partnership, Hospitality Investors Trust Operating Partnership, L.P. (then known as American Realty Capital Hospitality Operating Partnership, L.P., the “OP”), entered into (i) a Securities Purchase, Voting and Standstill Agreement (the “SPA”) with the Brookfield Investor, as well as related guarantee agreements with certain affiliates of the Brookfield Investor, and (ii) a Framework Agreement (the “Framework Agreement”) with the Advisor, our property managers, American Realty Capital Hospitality Properties, LLC and American Realty Capital Hospitality Grace Portfolio, LLC (together, the “Property Manager”), Crestline Hotels & Resorts, LLC (“Crestline”), an affiliate of the Advisor and the Property Manager, American Realty Capital Hospitality Special Limited Partnership, LLC (the “Special Limited Partner”), another affiliate of the Advisor and the Property Manager, and, for certain limited purposes, the Brookfield Investor.
In connection with our entry into the SPA, we suspended paying distributions to stockholders entirely and suspended our DRIP. Currently, under the Brookfield Approval Rights (as defined below), prior approval is required before we can declare or pay any distributions or dividends to our common stockholders, except for cash distributions equal to or less than $0.525 per annum per share.
On March 31, 2017, the initial closing under the SPA (the “Initial Closing”) occurred and various transactions and agreements contemplated by the SPA were consummated and executed, including but not limited to:
the sale by us and purchase by the Brookfield Investor of one share of a new series of preferred stock designated as the Redeemable Preferred Share, par value $0.01 per share which is 95%(the “Redeemable Preferred Share”), for a nominal purchase price; and
the sale by us and purchase by the Brookfield Investor of 9,152,542.37 Class C Units, for a purchase price of $14.75 per Class C Unit, or $135.0 million in the aggregate.
Subject to the terms and conditions of the offering priceSPA, we also have the right to sell, and the Brookfield Investor has agreed to
purchase, additional Class C Units in our IPO.
We were formedan aggregate amount of up to primarily acquire$265.0 million at subsequent closings (each, a diversified portfolio of income producing real estate properties, focusing predominantly on lodging properties in the midscale limited service, extended stay, select-service, upscale select-service,"Subsequent Closing") that may occur through February 2019. The Subsequent Closings are subject to conditions, and upper-upscale full-service segments within the hospitality sector. We will havethere can be no limitation as to the brand of franchise or license with which our hotelsassurance they will be associated. All such properties may be acquired and operated by us alonecompleted on their current terms, or jointly with another party. We may also originate or acquire first mortgage loans secured by real estate.at all.
Substantially all of our business is conducted through American Realty Capital Hospitality Operating Partnership, L.P. (our "OP" or "Operating Partnership"). The Company isthe OP. Prior to the Initial Closing, we were the sole general partner and holdsheld substantially all of the units of limited partner interestsinterest in the OP entitled “OP Units” ("OP Units"). Following the Initial Closing, the Brookfield Investor holds all the issued and outstanding Class C Units, representing $135.0 million in liquidation preference with respect to the OP that ranks senior in payment of distributions and in the distribution of assets to the OP Units held by us that correspond to shares of our common stock, BSREP II Hospitality II Special GP, OP LLC (the “Special General Partner”), is the special general partner of the OP, with certain non-economic rights that apply if we are unable to redeem the Class C Units when required to do so, as described below. Class C Units are convertible into OP Units based on an initial conversion price of $14.75, subject to anti-dilution and other adjustments upon the occurrence of certain events and transactions. OP Units, in turn, are generally redeemable for shares of our common stock on a one-for-one-basis or the cash value of a corresponding number of shares, at our election, in accordance with the terms of the limited partnership agreement of the OP. Holders of Class C Units are also entitled to receive, with respect to each Class C Unit, fixed, quarterly cumulative cash distributions at a rate of 7.50% per annum from legally available funds. If we fail to pay these cash distributions when due, the per annum rate will increase to 10% until all accrued and unpaid distributions required to be paid in cash are reduced to zero. Holders of Class C Units are also entitled to receive, with respect to each Class C Unit, a fixed, quarterly cumulative distribution payable in Class C Units at a rate of 5% per annum ("PIK Distributions"). Upon our failure to redeem the Brookfield Investor when required to do so pursuant to the limited partnership agreement of the OP, the 5% per annum PIK Distribution rate will increase to a per annum rate of 7.50% and would further increase by 1.25% per annum for the next quarterly periods thereafter, up to a maximum per annum rate of 12.50%.
Without obtaining the prior approval of the majority of the then outstanding Class C Units, the OP is restricted from taking certain actions including equity issuances, debt incurrences, payment of dividends or other distributions, redemptions or repurchases of securities, property acquisitions and property sales and dispositions. In addition, pursuant to the terms of the Redeemable Preferred Share, in addition to other governance and board rights, the Brookfield Investor has elected and has a continuing right to elect two directors (each, a "Redeemable Preferred Director") to our board of directors, and we are similarly restricted from taking those actions without the prior approval of at least one of the Redeemable Preferred Directors. Prior approval of at least one of the Redeemable Preferred Directors is also required to approve the annual business plan (including the annual operating and capital budget) required under the terms of the Redeemable Preferred Share (the "Annual Business Plan"), hiring and compensation decisions related to certain key personnel (including our executive officers) and various matters related to the structure and composition of our board of directors. These restrictions (collectively referred to herein as the “Brookfield Approval Rights”) are subject to certain exceptions and conditions, including that, after March 31, 2022, no prior approval will be required for equity issuances, debt incurrences and property sales if the proceeds therefrom are used to redeem the then outstanding Class C Units in full. Subject to certain limitations, the Brookfield Approval Rights are subject to temporary and permanent suspension in connection with any failure by the Brookfield Investor to purchase Class C Units at any Subsequent Closing as required pursuant to the SPA. In addition, the Brookfield Approval Rights will no longer apply if the liquidation preference applicable to all Class C Units held by the Brookfield Investor and its affiliates is reduced to $100.0 million or less due to the exercise by holders of Class C Units of their redemption rights under the limited partnership agreement of the OP.
Prior to March 31, 2022, if we consummate a liquidation, sale of all or substantially all of the assets, dissolution or winding-up, whether voluntary or involuntary, sale, merger, reorganization, reclassification or recapitalization or other similar event (a “Fundamental Sale Transaction”), we are required to redeem the Class C Units for cash at a premium based on how long the Class C Units have been outstanding. Following March 31, 2022, the holders of Class Units may require us to redeem any or all Class C Units for an amount in cash equal to the liquidation preference. We will also be required, at the option of the holders thereof, to redeem Class C Units, for the same premium applicable in a Fundamental Sale Transaction, upon the occurrence of certain events related to our failure to qualify as a REIT, the occurrence of a material breach by us of certain provisions of the limited partnership agreement of the OP or, for an amount equal to the liquidation preference, the rendering of a judgment enjoining or otherwise preventing the exercise of certain rights under the limited partnership agreement of the OP. If we are unable to redeem any Class C Units when required to do so, the Brookfield Investor will be able to elect a majority of our board of directors and may cause us, through the exercise of the rights of the Special General Partner, to commence selling our assets until the Class C Units have been fully redeemed.
At any time and from time to time on or after March 31, 2022, we have the right to elect to redeem all or any part of the issued and outstanding Class C Units for an amount in cash equal to the liquidation preference. In addition, if we list our common stock on a national securities exchange prior to that date, we will have certain rights to redeem all but $0.10 of the liquidation preference of each issued and outstanding Class C Unit for cash subject to payment of a make whole premium and
certain rights of the Class C Unit holders to convert their retained liquidation preference into OP Units prior to March 31, 2024.
See Note 17 - Subsequent Events to our accompanying consolidated/combined financial statements included in this Annual Report on Form 10-K for additional information regarding the terms of the SPA and the transactions and agreements contemplated thereby that were consummated and executed at the Initial Closing, including the rights, privileges and preferences of the Class C Units.
Also at the Initial Closing, as contemplated by the SPA and the Framework Agreement, we changed our name from American Realty Capital Hospitality Trust, Inc. to Hospitality Investors Trust, Inc. and the name of the OP from American Realty Capital Hospitality Operating Partnership, L.P. to Hospitality Investors Trust Operating Partnership, L.P. and completed various other actions required to effect our transition from external management to self-management.
Prior to the Initial Closing, we had no direct employees. We have retained ouremployees, and we depended on the Advisor to manage certain aspects of our affairs on a day-to-day basis. Ourbasis pursuant to our advisory agreement with the Advisor is wholly owned by American Realty Capital Hospitality Special Limited Partner, LLC (the "Special Limited Partner""Advisory Agreement"), a Delaware limited liability company, which is. In addition, the special limited partner of our OP. We have retained American Realty Capital Hospitality Properties, LLC (the "Property Manager") to serveProperty Manager served as our property manager and the Property Manager hashad retained Crestline Hotels & Resorts, LLC (the "Sub-Property Manager"), an entity under common control with the parent of American Realty Capital IX, LLC (the "Sponsor"), to provide services, including locating investments, negotiating financing and operating certain hotel assets in our portfolio.
The DealerAdvisor, the Property Manager an entityand Crestline are under common control with AR Capital, LLC ("AR Capital"), the parent of our sponsor, and AR Global Investments, LLC ("AR Global"), the Sponsor, serves assuccessor to certain of AR Capital's businesses.
At the dealer managerInitial Closing, the Advisory Agreement was terminated and certain employees of the Offering. The Advisor Special Limited Partner, Property Manager, Sub-Property Manager and Dealer Manager are related parties and receive fees, distributions and other compensation for services related toor its affiliates (including Crestline) who had been involved in the Offering and the investment and management of our assets.day-to-day operations, including all of our executive officers, became our employees. We also terminated all of our other agreements with affiliates of the Advisor except for our hotel-level property management agreements with Crestline and entered into a transition services agreement with each of the Advisor and Crestline, pursuant to which we will receive their assistance in connection with investor relations/shareholder services and support services for pending transactions in the case of the Advisor and accounting and tax related services in the case of Crestline until June 29, 2017 except as set forth below. The transition services agreement with Crestline for accounting and tax related services will automatically renew for successive 90-day periods unless either party elects to terminate. The transition services agreement with the Advisor with respect to the support services for pending transactions expires on April 30, 2017 unless extended for an additional 30 days by written notice delivered prior to the expiration date.
Prior to the Initial Closing, we, directly or indirectly through our taxable REIT subsidiaries, had entered into agreements with the Property Manager, which, in turn, had engaged Crestline or a third-party sub-property manager to manage our hotel properties. These agreements were intended to be coterminous, meaning that the term of our agreement with the Property Manager was the same as the term of the Property Manager’s agreement with the applicable sub-property manager for the applicable hotel properties, with certain exceptions. Following the Initial Closing, we no longer have any agreements with the Property Manager and instead contract directly or indirectly, through our taxable REIT subsidiaries, with Crestline and the third-party property management companies that previously served as sub-property managers to manage our hotel properties.
Crestline is a leading hospitality management company in the United States and, as of December 31, 2016, had 105 hotels and 15,552 rooms under management in 28 states and the District of Columbia. As of December 31, 2016, 71 of our hotels and 9,436 rooms were managed by Crestline, and 70 of our hotels and 7,757 rooms were managed by third-party property managers.
As of December 31, 2016, we had approximately 38.5 million shares of common stock outstanding and had received total proceeds of approximately $913.0 million from the IPO and shares issued under the DRIP, net of repurchases. The shares outstanding include shares of common stock issued as stock distributions as a result of our change in distribution policy adopted by our board of directors in March 2016. Shares are only issued pursuant to our DRIP in connection with distributions paid in cash. In connection with our entry into the SPA, our board of directors suspended the payment of distributions to our stockholders in shares of common stock and suspended our DRIP. We will not issue any additional shares of common stock under the DRIP or recommence paying distributions in cash or in shares of our common stock unless and until our board of directors lifts these suspensions and subject to the Brookfield Approval Rights.
See Note - 17 Subsequent Events to our accompanying consolidated/combined financial statements included in this Annual Report on Form 10-K for additional information regarding changes to our relationship with AR Capital, AR Global, the Advisor, the Property Manager and their affiliates, and our transition to self-management.
Investment Objectives
Our investment objectives were originally premised on the amount of proceeds we expected to raise in our IPO.
Following the suspension of our IPO in 2015, our primary business objective is to maximize stockholder value by maintaining long-term growth in cash distributionshas been a focus on meeting our capital requirements and generating attractive risk-adjusted returns to our stockholders. To achieve this, we focus on maximizing the internal growthvalue of our existing portfolio by acquiring properties that we believe have strong cash flow potentialcontinuing to invest in our hotels primarily through brand-mandated property improvement plans (“PIPs”), and dynamics. We seekthrough intensive asset management. While receipt of all the proceeds from our sale of Class C Units at the Initial Closing and Subsequent Closings would provide the liquidity needed to create a portfolio withsatisfy certain of our liquidity and capital requirements, including our obligation to redeem the potential to generate attractive risk-adjusted returns across varying economic cycles, including by taking advantage of opportunities to acquire hotel properties at what we believe are attractive prices$242.9 million in the current economic environment.
Our core strategy for achieving these objectives is to acquire, own, manage and seek to enhance theliquidation value of lodging properties. We will adjust our investment focus from time to time based upon market conditionsthe Grace Preferred Equity Interests outstanding following the Initial Closing by February 27, 2019 and our Advisor’s and Sub-Property Manager’s views on relative value as market conditions change.
We believe that the following market factors and attributescertain of our investment model are particularly importantPIP obligations, these amounts may not be sufficient to satisfy all of our abilitycapital requirements. We may need to seekadditional debt or equity financing consisting of common stock, preferred stock or warrants, or any combination thereof to meet our capital requirements, which may not be available on favorable terms or at all, and may only be obtained subject to the Brookfield Approval Rights. Moreover, the Subsequent Closings are subject to conditions, and there can be no assurance they will be completed on their current terms, or at all.
Subject to the Brookfield Approval Rights, including the requirement that at least one Redeemable Preferred Director approve our Annual Business Plan, we intend to continue pursuing our core investment objective:strategies:
Lodging Properties. We have primarily acquired and intend to continue to acquire primarily lodging properties in the midscale limited service, extended stay select-service, upscale select-service and upper-upscale full-serviceselect-service segments within the hospitality sector.sector in secondary markets with strong demand generators. We believe these segments can provide more stable cash flows than full service hotels and less market volatility than primary market locations.
Our Investment ModelPortfolio in the Current Economic Environment. We believe the current macroeconomic environment improving real estate fundamentals, and current market conditions will continuecontinues to createoffer attractive opportunities to acquire hotel properties at prices that represent discounts to replacement cost and provide potential for significant long-term value appreciation. Given the conditions of the current economic environment and the experience and expertise ofappreciation for our Advisor and our Sub-Property Manager, we expect to be well-positioned to capitalize on these opportunities to create an attractive investment portfolio and maximize stockholder returns.portfolio.
Our Lodging-Centric and Opportunistic Investment Strategy. Lodging properties can provide investors with an attractive blend of current cash flow and opportunity for capital appreciation.We focus on lodging properties. Growth in United States hotel revenue per available room ("RevPAR"), has historically been closely correlated with growth in United States gross domestic product. Lodging properties do not have a fixed lease structure, unlike other property types, and therefore rental rates
on lodging properties can be determined on virtually a daily basis. Therefore, as the United States economy continues to strengthen, we anticipate RevPAR growth, along with the related growth in property operating income and valuations, to culminate in an overall improvement ofWe believe that lodging industry fundamentals over the course ofin our investment period.targeted asset classes continue to be favorable.
The Lodging Sector. The We believe theoperationally intense nature of lodging assets presents opportunities to employ a variety of strategies to enhance value, including brand and management changes, revenue and expense management, strategic capital expenditures and repositioning. Our asset management approach is designed to capitalize on opportunities during periods of strong growth and also to exploit efficiencies and operating leverage during periods of slower growth.
Discount to Replacement Cost. We have purchased and, if we make any additional acquisitions, we intend to continue to purchase, properties valued at a discount to replacement cost using currentthen-current market rates.
Acquisitions
Targeted Leverage. We will financeIn March 2014 we closed on the acquisition of interests in six hotels through fee simple, leasehold and joint venture interests (the "Barceló Portfolio") for an aggregate purchase price of $110.1 million, exclusive of closing costs. In February 2015, we closed on the acquisition of interests in 116 hotels through fee simple and leasehold interests (the "Grace Portfolio") for an aggregate purchase price of $1.8 billion, exclusive of closing costs. In October 2015, we closed on the acquisition of interests in 10 hotels through fee simple interests (the "First Summit Portfolio") from Summit Hotel OP, LP, the operating partnership of Summit Hotel Properties, Inc., and affiliates thereof (collectively, "Summit") for an aggregate purchase price of $150.1 million, exclusive of closing costs. In November and December 2015, we closed on the acquisition of interests in four hotels through fee simple interests (the "First Noble and Second Noble Portfolios") for an aggregate purchase price of $107.6 million, exclusive of closing costs. During December 2015 and January 2016, we terminated our portfolio conservativelyobligations to acquire 24 additional hotels, including obligations to Summit, and as a result forfeited an aggregate of $41.1 million in non-refundable deposits. In February 2016, we completed the acquisition of six hotels through fee simple interests from Summit (the "Third Summit Portfolio") for an aggregate purchase price of $108.3 million, exclusive of closing costs, $20.0 million of which was funded with the proceeds from a loan from Summit (the "Summit Loan").
Also in February 2016, we reinstated our obligation under a previously terminated agreement with Summit to purchase ten hotels for an aggregate purchase price of $89.1 million from Summit (the "Pending Acquisition") and made a new purchase price deposit of $7.5 million with proceeds from the Summit Loan. Under the reinstated agreement, Summit has the right to market and ultimately sell any or all of the hotels to be purchased to a bona fide third party purchaser without our consent at a target leverage levelany time prior to the completion of approximately 50% loan-to-value, which ratioour Pending Acquisition. Whether or not Summit engages, or is successful, in any efforts to market these hotels is beyond our control and, accordingly, there can be no assurance we will be determined afterable to complete our Pending Acquisition in whole or in part. In June 2016, Summit informed us that two of the closeten hotels had been sold, thereby reducing the Pending Acquisition to eight hotels for an aggregate purchase price of $77.2 million. In January 2017, in connection with our Offering and onceentry into the SPA, we have invested substantially allextended the proceeds thereof.scheduled closing date of the Pending Acquisition to April 27, 2017 (or October 24,
Monthly Distributions. 2017 in the case of one hotel) and made an additional purchase price deposit of $3.0 million in the form of a new loan by Summit to us.
We intend to pay distributions monthly,utilize $26.9 million of the proceeds from the Initial Closing to fund a portion of the closing consideration for the seven hotels to be purchased in our Pending Acquisition on April 27, 2017. We will require additional debt or equity financing to fund the remaining $32.4 million in closing consideration for the seven hotels to be purchased in our Pending Acquisition on April 27, 2017. Summit has informed us that the hotel that is scheduled to be sold on October 24, 2017 is subject to a pending purchase and sale agreement with a third party, but we will require additional debt or equity financing to fund the remaining $10.5 million of the closing consideration for the one hotel to be purchased October 24, 2017 if Summit does not sell it to a third party and we are ultimately required to purchase it. There can be no assurance such financing will be available on favorable terms, or at all. Moreover, such financing may only be obtained subject to the Brookfield Approval Rights, and there can be no assurance this prior approval will be obtained when requested, or at all. Any failure to complete our Pending Acquisition in whole or in part could cause us to default under the reinstated purchase agreement and forfeit all or a portion of the $10.5 million deposit.
The outstanding principal of the Summit Loan, which was $26.7 million following the Initial Closing, and any accrued interest thereon, will become immediately due and payable at closing if we close our Pending Acquisition before February 11, 2018, the maturity date of the Summit Loan. We intend to cover by FFO once we have invested substantially allutilize $23.7 million of the proceeds of our Offering, as described under Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Funds from Operations and Modified Funds from Operations.”
Exit Strategy. We expect to sell our assets, sell or merge our company, or list our company within three to six years after the end of our Offering. Our primary offering is expected to continue for two years from the effectiveness of the offering, subjectInitial Closing to our right to extend the offering for an additional one-year period. fund this repayment.
Although we may extendare permitted to complete our Offering via a follow-on offering,Pending Acquisition without prior approval, we are significantly restricted under the Brookfield Approval Rights in our ability to make future acquisitions, and there can be no assurance any required prior approval would be obtained when requested, or at this time, weall. We also do not expect to make future acquisitions unless we can obtain equity or debt financing in addition to the offeringadditional capital available to continue for more than three yearsus from effectiveness. Shouldthe sale of Class C Units at Subsequent Closings, which also would require prior approval.
With respect to prior acquisitions, we pursue a follow-on offering, our primary offering will be deemed to terminate upon the close of such follow-on offering. Our board of directors, in consultation with management, may determine that it is in our best interests to begin the process of engaging advisors (including an entity under common control with American Realty Capital) to consider such exit alternatives at such time during our Offering stage as it can reasonably determine that all of the securities being offered in our Offering will be sold within a reasonable period (i.e. three to six months).
Acquisition and Investment Policies
Primary Investment Focus
Our primary investment focus is to create value through prudent capital investments and aggressive asset management. We believe it is currently a unique time to accumulate a high quality portfolio in major and secondary markets at historically attractive prices with discounts to replacement cost in a low interest rate environment. We seekhave sought properties that we believe meet the following investment criteria:
Strong location:
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◦ | hotel properties located in markets with higher barriers to entry, including those markets in the top 50 metropolitan areas, with a secondary focus on the next 100 markets in close proximity to major market demand generating locations and landmarks; |
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◦ | hotels located in close proximity to multiple demand generating landmarks, including businesses and corporate headquarters, retail centers, airports, medical facilities, tourist attractions and convention centers, with a diverse source of potential guests, including corporate, government and leisure travelers; and |
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◦ | hotels located in markets exhibiting barriers to entry due to strong franchise areas of protection or other factors. |
hotel properties located in markets with higher barriers to entry, including those markets in the top 50 metropolitan areas, with a focus on the next 100 markets in close proximity to major market demand generating locations and landmarks;
hotels located in close proximity to multiple demand generating landmarks, including businesses and corporate headquarters, retail centers, airports, medical facilities, tourist attractions and convention centers, with a diverse source of potential guests, including corporate, government and leisure travelers; and
hotels located in markets exhibiting barriers to entry due to strong franchise areas of protection or other factors.
Market leaders: Hotel properties that are proven leaders in market share, setting the rates in the market and providing superior meeting space, services or amenities.
Good condition: Hotel properties that are well-maintained, as determined based on our review of third-party property condition reports and other data obtained during our due diligence process.
Investing in Real Property
We plan to acquire and own hotels located throughout the United States. We may also acquire hotels located in
Canada and Mexico. We intend to acquire a diversifiedThe portfolio we have acquired consists of lodging properties in the midscale limited service, extended stay, select-service, upscale select-service, and upper-upscale full-service segments within the hospitality sector. Full-service hotels generally provide a full complement of guest amenities including restaurants, concierge and room service, porter service or valet parking. Select-service and limited-service hotels typically do not include these amenities. Extended-stay hotels
generally offer high-quality, residential style lodging with an extensive package of services and amenities for extended-stay business and leisure travelers.
We have no limitation as to the brand of franchise or license with which ouracquired lodging properties are associated.
Acquisitions
On March 21, 2014, we closed on the acquisition of interests in six hotels through fee simple, leasehold and joint venture interests (the "Barceló Portfolio") for an aggregate purchase price of $110.1 million, exclusive of closing costs. See Item 2 "Properties" for further details and Item 15 "Exhibits and Financial Statement Schedules" for the consolidated/combined financial statements of the hotels in the Barceló Portfolio.
On February 27, 2015, we acquired the Grace Portfolio. The aggregate purchase price of the Grace Portfolio was approximately $1.8 billion, exclusive of closing costs. We funded approximately $230.1 million of the purchase price with cash-on-hand raised in our initial public offering, approximately $903.9 million through the assumption of existing indebtedness collateralized by 96 of the hotels in the Grace Portfolio and approximately $227.0 million by incurring new indebtedness collateralized by the remaining 20 hotels in the Grace Portfolio and one of the hotels in the Barceló Portfolio. The remaining $447.1 million of the purchase price was satisfied by the issuance to affiliates of the sellers of the Grace Portfolio of preferred equity interests in two of our indirect subsidiaries that are indirect owners of the 116 hotels comprising the Grace Portfolio (the "Grace Preferred Equity Interests").
Other Real Estate and Real Estate-Related Loans and Securities
Although not our primary focus, we may, from time to time, make investments in other real estate properties and real estate-related loans and securities. We do not expect these types of assets to exceed 10% of our assets after the proceeds of our Offering have been fully invested, nor represent a substantial portion of our assets at any one time. If we do make such investments, we will primarily focus on investments in first mortgages secured by hotel properties. The other real estate-related debt investments in which we may invest include: mortgages (other than first mortgages secured by hotel properties); mezzanine bridge and other loans; debt and derivative securities related to real estate assets, including mortgage-backed securities; collateralized debt obligations; debt securities issued by real estate companies; and credit default swaps. Our criteria for investing in loans are substantially the same as those involved in our investment in properties; however, we will also evaluate such investments based on the current income opportunities presented.
Investments in Equity Securities
We may make equity investments in other REITs and other real estate companies that operate assets meeting our investment objectives. We may purchase the common or preferred stock of these entities or options to acquire their stock. We will target a public company that owns real estate or real estate-related assets when we believe its stock is trading at a discount to that company’s net asset value. We may eventually seek to acquire or gain a controlling interest in the companies that we target. We do not expect our non-controlling equity investments in other public companies to exceed 5% of the proceeds of our Offering, assuming we sell the maximum offering amount, or to represent a substantial portion of our assets at any one time. In addition, we do not expect our non-controlling equity investments in other public companies combined with our investments in real estate properties outside of our target hospitality investments and other real estate-related investments to exceed 10% of our portfolio.
Acquisition Structure
We intend to acquire real estate and real-estate related assets directly, for example, by acquiring fee interests in real property, or by purchasing interests, including controlling interests, in REITs or other “real estate operating companies,” such as real estate management companies and real estate development companies, that own real property. We also may acquire real estate assetshave acquired lodging properties through investments in joint venture entities, including joint venture entities in which we may not own a controlling interest. We anticipate that ourOur assets generally will beare held in wholly and majority-owned subsidiaries, of the Company, each formed to hold a particular asset. In order for the income from our hotel investments to constitute “rents from real property” for purposes of the gross income tests required for REIT qualification, we must lease each of our hotels to a wholly-ownedwholly owned subsidiary of our taxable REIT subsidiary, ("TRS"), or to an unrelated third party.
International Investments
We plan to acquirehave acquired and own hotels located throughout the United States. We may also acquire hotels located in Canada and Mexico.
Joint VenturesProperty Management Agreements
We may enter into joint ventures, partnerships and other co-ownership arrangements for the purpose of making investments. Some of the potential reasons to enter into a joint venture would be to acquire assets we could not otherwise acquire, to reduce our capital commitment to a particular asset or to benefit from certain expertise that a partner might have.
Financing Strategies and Policies
We expectPrior to the Initial Closing, we, directly or indirectly through our taxable REIT subsidiaries, had entered into agreements with the Property Manager, which, in turn, had engaged Crestline or a third-party sub-property manager to manage our hotel properties. These agreements were intended to be coterminous, meaning that the term of our agreement with the Property Manager was the same as the term of the Property Manager’s agreement with the applicable sub-property manager for the applicable hotel properties, with certain exceptions. Following the Initial Closing, we no longer have any agreements with the Property Manager and instead contract directly or indirectly, through our taxable REIT subsidiaries, with Crestline and the third-party property management companies that previously served as sub-property managers to manage hotel properties.
As of March 15, 2017, 71 of the hotel assets we have acquired were managed by Crestline and 70 of the hotel assets we have acquired were managed by third-party sub-property managers. As of March 15, 2017, our third-party sub-property managers were Hampton Inns Management LLC and Homewood Suites Management LLC, affiliates of Hilton Worldwide Holdings Inc. (42 hotels), Interstate Management Company, LLC (5 hotels), InnVentures IVI, LP (2 hotels) and McKibbon Hotel Management, Inc. (21 hotels). On April 3, 2017, as contemplated by the Framework Agreement, the five hotels managed by Interstate Management Company, LLC are scheduled to transition to be managed by Crestline.
For hotels that are managed by Crestline, our management agreements have a 20-year term, renewing automatically for three five-year terms unless either party provides advance notice of non-renewal. These management agreements are generally only terminable by us prior to expiration for cause, including performance-related reasons, except, beginning on the first day of the 49th month following the completionInitial Closing, we will have an “on-sale” termination right upon payment of a fee in an amount equal to two and one half times the property management fee in the trailing 12 months, subject to customary adjustments.
For hotels that are managed by a third-party property manager, our management agreements with the applicable third-party property manager generally have an initial term of approximately one to five years, renewable at our option for one-year terms, and are generally terminable by us at any time subject to 60 - 90 days’ notice.
If, during the six years immediately following the Initial Closing, we sell a hotel managed by Crestline, we will have the right to terminate the applicable property management agreement with respect to any property that is being sold and concurrently replace it with a comparable hotel owned by us and managed pursuant to a short-term agreement, by terminating that hotel’s existing third-party property manager and retaining Crestline on the same terms as the property management agreement being replaced.
For their services under these hotel management agreements, Crestline and our third-party property managers receive a base property management fee and are also, in some cases, eligible to receive an incentive management fee if hotel operating profit exceeds certain thresholds.
We pay a property management fee of up to 3.0% of the monthly gross receipts from the properties to Crestline or a third-party property manager, as applicable. We reimburse the costs and expenses incurred by Crestline or any third-party property manager on our behalf, including legal, travel and other out-of-pocket expenses that are directly related to the management of specific properties, as well as fees and expenses of any property manager. We do not, however, reimburse Crestline or any third-party property manager for general overhead costs or for the wages and salaries and other employee-related expenses of employees of such property managers other than employees or subcontractors who are engaged in the on-site operation, management, maintenance or access control of our Offeringproperties, and, in certain circumstances, who are engaged in off-site activities.
We also pay to Crestline an annual incentive fee equal to 15% of the investment of substantially allamount by which the proceeds thereof our debt financing will be approximately 50%operating profit from the properties managed by Crestline for such fiscal year (or partial fiscal year) exceeds 8.5% of the total investment of such properties. We may, in the future, pay similar fees to third-party property managers with respect to properties managed by third-party property managers.
For these purposes, “total investment” means the sum of (i) the price paid to acquire the property, including closing costs, conversion costs, and transaction costs; (ii) additional invested capital; and (iii) any other costs paid in connection with the acquisition of the property, whether incurred pre- or post-acquisition.
Franchise Agreements
All but one of our hotels operate under a franchise or license agreement with a national brand that is separate from the agreement with Crestline or a third-party property manager pursuant to which the operations of the hotel are managed. Our franchise agreements grant us the right to the use of the brand name, systems and marks with respect to specified hotels and establish various management, operational, record-keeping, accounting, reporting and marketing standards and procedures with which the licensed hotel must comply. In addition, the franchisor establishes requirements for the quality and condition of the hotel and its furniture, fixtures and equipment, and we are obligated to expend such funds as may be required to maintain the hotel in compliance with those requirements. We are required to make related escrow reserve deposits for these expenditures under our indebtedness.
Typically, our franchise agreements provide for a license fee, or royalty, of 5% to 6% of gross room revenues. In addition, we generally pay 3.7% to 5.2% of gross room revenues as program or reservation fees for the system-wide benefit of brand hotels.
Our typical franchise agreement provides for a term of 15 to 20 years, although some have shorter terms. The agreements typically provide no renewal or extension rights and are not assignable. If we breach one of these agreements, in addition to losing the right to use the brand name for the applicable hotel, we may be liable, under certain circumstances, for liquidated damages.
Financing Strategies and Policies
As of December 31, 2016, we had $1.4 billion in outstanding indebtedness and $290.2 million in liquidation value of Grace Preferred Equity Interests (which is treated as indebtedness for accounting purposes). At the Initial Closing, we redeemed $47.3 million in liquidation value of Grace Preferred Equity Interests. See “Item 2. Properties - Debt.”
As of December 31, 2016, our real estate investmentsloan-to-value ratio was 72% including the Grace Preferred Equity Interests and our other assets. loan-to-value ratio excluding the Grace Preferred Equity Interests was 60%. Because we have raised less proceeds in our IPO than originally contemplated, our ability to achieve our original investment objective of a loan-to-value ratio of 50% has also been adversely affected.
Under our charter, the maximum amount of our total indebtedness shallmay not exceed 300% of our total “net assets” (as(which is generally defined in our charter)charter as our assets less our liabilities) as of the date of any borrowing, which is generally expectedequal to be approximately 75% of the cost of our investments; however, we may exceed that limit if such excess is approved by a majority of our independent directors and disclosed to stockholders in our next quarterly report following that borrowing, along with the justification for exceeding such limit. This charter limitation, however, does not apply to individual real estate assets or investments. In all events, we expect that our secured and unsecured borrowings will be reasonable in relation to the net value of our assets and will be reviewed by our board of directors at least quarterly.
Prior to our entry into an agreementagreements related to acquire the Grace Portfolio in Mayour acquisition and financing activities during 2014 and 2015, a majority of our independent directors waived the total portfolio leverage requirement of our charter with respect to the acquisition of the Grace Portfolioand financing activities should such total portfolio leverage exceed 300% of our total "net assets" upon thein connection with such acquisition of the Grace Portfolio. Following the acquisition of the Grace Portfolio in February 2015, ourand financing activities. Our total portfolio leverage (which includes the Grace Preferred Equity Interests) has significantly exceeded this 300% limit at times. As of December 31, 2016, our total portfolio leverage was 236%.
Pursuant to the Brookfield Approval Rights, prior approval of any debt incurrence is required except for as specifically set forth in the Annual Business Plan and we expect it will continue to do so for some time. Accordingly, we intend to use substantially all available offering proceeds following the acquisitionrefinancing of the Grace Portfolio to reduce our borrowings to our intended limit, which is below the 300% maximum limit. Following the acquisition of the Grace Portfolioexisting debt in February 2015, thea principal amount ofnot greater than the amount to be refinanced and on terms no less favorable to us. We are also subject to certain covenants, such as debt service coverage ratios and negative pledges, in our outstanding secured financing, which excludes the Grace Preferred Equity Interests, is approximately 60% of the total value ofexisting indebtedness that restrict our real estate investments and our other assets.ability to make future borrowings.
The form of our indebtedness may be long term or short term, secured or unsecured, fixed or floating rate or in the form of a revolving credit facility, repurchase agreements or warehouse lines of credit. Our AdvisorWe will seek to obtain financing on our behalf on the most favorable terms available.
Except with respect to the borrowing limits contained in our charter, we may reevaluate and change our debt policy in the future without a stockholder vote. The covenants in our existing indebtedness may not be changed without consent of our lenders. The Brookfield Approval Rights generally cannot be changed without the approval of the Brookfield Investor as well as, with respect to the terms of the Redeemable Preferred Share, a stockholder vote. Factors that we would consider when reevaluating or changing our debt policy include: then-current economic conditions, the relative cost and availability of debt and equity capital, any investment opportunities, the ability of our properties and other investments to generate sufficient cash flow to cover debt service requirements and other similar factors. Further, we may increase or decrease our ratio of debt to book value in connection with any change of our borrowing policies.
We do not borrow from our Advisor or its affiliates to purchase properties or make other investments unless a majority of our directors, including a majority of our independent directors, not otherwise interested in the transaction approves the transaction as being fair, competitive and commercially reasonable and no less favorable to us than comparable loans between unaffiliated parties.
Tax Status
We intend to electelected and qualifyqualified to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"), commencing with our taxable year ended December 31, 2014. We intend to operate in such a manner as to continue to qualify for taxation as a REIT under the Code. However, no assurance can be given that we will operate in a manner so as to continue to qualify or remain qualified as a REIT. If we qualify for taxation as a REIT, weWe generally, with the exception of our taxable REIT subsidiaries, will not be subject to federal corporate income tax to the extent that we distribute annually all of our REIT taxable income (which does not equal net income as calculated in accordance with accounting principles generally accepted inGAAP) determined without regards to the United States of America ("GAAP"))deduction for dividends paid and excluding net capital gain, to our stockholders and comply with various other requirements applicable to REITs. Even if we qualify for taxation as a REIT, we may be subject to certain state and local taxes on our income and property, and federal income and excise taxes on our undistributed income and taxable REIT subsidiaries.
Competition
The hotel industry is highly competitive. This competition could reduce occupancy levels and operating income at our properties, which would adversely affect our operations. We face competition from many sources. We face competition from other hotels both in the immediate vicinity and the geographic market where our hotels are located. Over-building of hotels in the markets in which we operate may increase the number of rooms available and may decrease occupancy and room rates. In addition, increases in operating costs due to inflation and other factors may not be offset by increased room rates. We also face competition from nationally recognized hotel brands with which we willare not be associated, as well as from other hotels associated with nationally recognized hotel brands with which we are associated.
In addition to competing with traditional hotels and lodging facilities, we compete with alternative lodging companies, including third-party providers of short-term rental properties and serviced apartments, such as Airbnb. We compete based on a number of factors, including room rates, quality of accommodations, service levels, convenience of location, reputation, reservation systems, brand recognition and supply and availability of alternative lodging.
We compete with many other entities engaged in real estate investment activities, to locate suitable properties to acquireincluding individuals, corporations, bank and purchasers to buy our properties. These competitors includeinsurance company investment accounts, other REITs, specialty finance companies, savings and loan associations, banks, mortgage bankers, insurance companies, mutual funds, institutional investors, investment banking firms, lenders, governmental bodiesreal estate limited partnerships, and other entities. We also compete with other REITs with asset acquisition objectives similar to ours and others may be organizedentities engaged in the future. Somereal estate investment activities, many of these competitors, including larger REITs,which have substantially greater marketing and financial resources than we have and generallydo. In addition, affiliates of the Brookfield Investor are or may be ablein the business of making investments in, and have or may have investments in, other businesses similar to accept more risk than we can prudently manage. In addition, these same entities seek financing through similar channels. Therefore, weand that may compete with them for institutional investors in a market where funds for real estate investment may decrease.
Competition from these and other third-party real estate investors may limit the number of suitable investment opportunities available. It also may result in higher prices, lower yields and a narrower spread of yields over our borrowing costs, making it more difficult for us to acquire new investments on attractive terms.business.
Regulations
Our investments will beare subject to various federal, state and local laws, ordinances and regulations, including, among other things, zoning regulations, land use controls, environmental controls relating to air and water quality and noise pollution. We will obtain all permits and approvals that we believe are necessary under current law to operate our investments.
Environmental
As an owner of real estate,property, we are subject to various environmental laws of federal, state and local governments. Management does not believe that compliancelaws and regulations regarding environmental, health and safety matters. These laws and regulations address, among other things, asbestos, polychlorinated biphenyls, fuel, oil management, wastewater discharges, air emissions, radioactive materials, medical wastes, and hazardous wastes, and in certain cases, the costs of complying with existingthese laws has had, or will have, a material adverse effect on our financial condition or results of operations inand regulations and the future. However, we cannot predict the impact of unforeseen environmental contingencies or new or changed laws or regulations onpenalties for non-compliance can be substantial. Even with respect to properties that we do not operate or manage, we may be acquired directlyheld primarily or indirectly injointly and severally liable for costs relating to the future. In most circumstances, we have hired,investigation and intend to hire, third parties to conduct Phase I environmental reviewsclean-up of any property from which there is or has been an actual or threatened release of a regulated material and any other affected properties, regardless of whether we knew of or caused the release. Such costs typically are not limited by law or regulation and could exceed the property's value. In addition, we may be liable for certain other costs, such as governmental fines and injuries to persons, property or natural resources, as a result of any such actual or threatened release.
We did not make any material capital expenditures in connection with environmental, health, and safety laws, ordinances and regulations in 2016 and do not expect that we intendwill be required to purchase.make any such material capital expenditures during 2017.
Employees
As of December 31, 2014,2016 and immediately prior to the Initial Closing, we had no direct employees. The employees, and we depended on the Advisor to manage certain aspects of our affairs on a day-to-day basis pursuant to the Advisory Agreement, and we also depended on other affiliates of the Advisor and other affiliatesto perform a full range of real estate services for us, including acquisitions, property management, accounting, legal, asset management, wholesale brokerage, transfer agent and investor relations services. We are dependent on these affiliates for services that are essential to us, including the sale of shares of our common stock, asset acquisition decisions,and property management and other general administrative responsibilities. Inservices.
At the event that anyInitial Closing, the Advisory Agreement was terminated and certain employees of these companies were unablethe Advisor or its affiliates (including Crestline) who had been involved in the management of our day-to-day operations, including all of our executive officers, became our employees. Following the Initial Closing, we had approximately 20 full-time employees. The staffs at our hotels are employed by our third-party hotel managers. At the Initial Closing, we also terminated all of our other agreements with affiliates of the Advisor except for our hotel-level property management agreements with Crestline, and entered into a transition services agreement with each of the Advisor and Crestline, pursuant to provide thesewhich we will receive their assistance in connection with investor relations/shareholder services and support services for pending transactions in the case of the Advisor and accounting and tax related services in the case of Crestline until June 29, 2017 except as set forth below. The transition services agreement with Crestline for accounting and tax related services will automatically renew for successive 90-day periods unless either party elects to us, we would be requiredterminate. The transition services agreement with the Advisor with respect to provide suchthe support services ourselves or obtain such services from other sources.for pending transactions expires on April 30, 2017 unless extended for an additional 30 days by written notice delivered prior to the expiration date.
Financial Information About Industry Segments
We have determined that we have one reportable segment, with activities related to investing in real estate. Our investments in real estate generate room revenue and other income through the operation of the properties, which comprise 100% of the total consolidated/combinedconsolidated revenues. Management evaluates the operating performance of our investments in real estate on an individual property level, none of which represent a reportable segment.
Available Information
We electronically file annual reportsAnnual Reports on Form 10-K, quarterly reportsQuarterly Reports on Form 10-Q, current reportsCurrent Reports on Form 8-K, (includingproxy statements and all amendments to those reports) and proxy statementsfilings with the SEC. We also filed with the SEC our Registration Statement in connection with our current offering. You may read and copy any materials we file with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, D.C. 20549, or you may obtain information by calling the SEC at 1-800-SEC-0330. The SEC maintains a website at http://www.sec.gov that contains reports, proxy statements and information statements, and other information, which you may obtain free of charge. In addition, copies of our filings with the SEC may be obtained from the website maintained for us and our affiliates at www.archospitalityreit.com.www.HITREIT.com. Access to these filings is free of charge. We are not incorporating our website or any information from the website into this Form 10-K.
Item 1A. Risk Factors.
Set forth below are the risk factors that we believe are material to our investors. The occurrence of any of the risks discussed in this Annual Report on Form 10-K could have a material adverse effect on our business, financial condition, results of operations, our ability to pay distributions (although we are not currently paying distributions) and the value of an investment in our common stock.
Risks Related to an Investment in American Realty Capital Hospitality Investors Trust, Inc.
We have a limited prior operating history and rely on our Advisor to conduct our operations; our Advisor has limited operating history and limited experience operating a public company.
We have a limited operating history and our stockholders should not rely upon the past performance of other real estate investment programs sponsored by American Realty Capital to predict our future results. We were incorporated on July 25, 2013.
Our Advisor had no operations prior to the commencement of our Offering. Our executive officers have limited experience managing public companies. For these reasons, our stockholders should be especially cautious when drawing conclusions about
our future performance and they should not assume that it will be similar to the prior performance of other programs sponsored by American Realty Capital. Our limited operating history, our Advisor’s limited prior experience operating a public company and our Sponsor’s limited experience in connection with investments of the type being made by us significantly increase the risk and uncertainty our stockholders face in making an investment in our shares.
Our stockholders should consider our prospects in light of the risks, uncertainties and difficulties frequently encountered by companies that are, like us, in their early stage of development. To be successful in this market, we must, among other things:
identify and acquire investments that further our investment strategies;
increase awareness of the American Realty Capital Hospitality Trust, Inc. name within the investment products market;
expand and maintain our network of licensed securities brokers and other agents;
attract, integrate, motivate and retain qualified personnel to manage our day-to-day operations;
respond to competition for our targeted real estate properties and other investments, as well as for potential investors; and
continue to build and expand our operations structure to support our business.
We cannot guarantee that we will succeed in achieving these goals, and our failure to do so could cause our stockholders to lose all or a portion of their investment.
We have a history of operating losses and there can be no assurancecannot assure our stockholders that we will achieve profitability.
Since inception in July 2013 through December 31, 2014,2016, we have incurred net losses (calculated in accordance with GAAP) equal to $14.8$181.4 million. The extent of our future operating losses and the timing of the profitability are highly uncertain, and we may never achieve or sustain profitability.
Our stockholders may be more likely to sustain a loss on their investment because our Sponsor does not have as strong an economic incentive to avoid losses as does a sponsor who has made significant equity investments in its company.
The Special Limited Partner, which is wholly owned by our Sponsor and wholly owns our Advisor, has invested only $200,000 in us through the purchase of 8,888 shares of our common stock at $22.50 per share, reflecting the fact that selling commissions and dealer manager fees were not paid on the sale. The Special Limited Partner may not sell this initial investment while our Sponsor remains our Sponsor, but it may transfer such shares to affiliates. Therefore, if we are successful in raising enough proceeds to be able to reimburse our Advisor for our significant organization and offering expenses, our Sponsor will have little exposure to loss in the value of our shares. Without this exposure, our investors may be at a greater risk of loss because our Sponsor may have less to lose from a decrease in the value of our shares as does a sponsor that makes more significant equity investments in its company.
There isBecause no public trading market for our shares currently exists and there may never be one. Therefore,our share repurchase program has been terminated, it will beis difficult for our stockholders to sell their shares.shares of our common stock.
There is no regular established trading market for shares of our common stock and there can be no assurance one will develop. Our charter does not require our directors to seek stockholder approval to liquidate our assets by a specified date, nor does our charter require our directors to list our shares for trading on a national securities exchange by a specified date. OurWe currently have no plans to list our shares of common stock are not listed on a national securities exchange, there is no public market for our shares and may never be one.exchange. Until our shares are listed, if ever, stockholders may not sell their shares unless the buyer meets the applicable suitability and minimum purchase standards. In addition, our charter prohibits the ownership of more than 9.8%4.9% in value of the aggregate of outstanding shares of capital stock or more than 9.8%4.9% in value or number of shares, whichever is more restrictive, of any class or series of our stock, unless exempted (prospectively or retroactively) by our board of directors, which may inhibit large investors from purchasing our stockholders' shares. In its sole discretion,
Our share repurchase program (the "SRP"), which permitted our stockholders to sell their shares back to us subject to certain conditions and limitations, was suspended by our board of directors could amend, suspend or terminateduring January 2017 in connection with our share repurchase program (our "SRP") uponentry into the SPA and terminated effective as of April 30, days’ notice. Further,2017 in connection with the Initial Closing. We did not make any repurchases of our common stock pursuant to our SRP includes numerous restrictions that would limit a stockholder’s ability(except in January 2016 with respect to sell hisrequests received during the year ended December 31, 2015) or her shares. otherwise during the year ended December 31, 2016 and have not, and will not, make any repurchase of our common stock during the period between January 1, 2017 and the effectiveness of the termination of the SRP.
Therefore, it is difficult for our stockholders to sell their shares promptly or at all. If a stockholder is able to sell his or her shares, it would likely be at a substantial discount to the public offering price. It is also likely that our shares would not be accepted as the primary collateral for a loan. Because of the illiquid nature of our shares, investors should purchase our shares only as a long-term investment and be prepared to hold them for an indefinite period of time.price paid.
We may changerequire funds, which may not be available on favorable terms or at all, in addition to our targeted investments without stockholder consent.operating cash flow, cash on hand and the proceeds that may be available from sales of Class C Units at Subsequent Closings, which are subject to conditions, to meet our capital requirements.
Our major capital requirements following the Initial Closing include capital expenditures required pursuant to our PIPs and related reserve deposits, interest and principal payments under our indebtedness, distributions and mandatory redemptions payable with respect to the Grace Preferred Equity Interests and distributions payable with respect to Class C Units. We have investedare also required to fund up to $69.7 million in a portfolio of lodging properties in the midscale limited service, extended stay, select-service, upscale select-service and upper-upscale full-service segments within the hospitality sector. Weclosing consideration for our Pending Acquisition (including amounts we intend to allocate no more than 10%finance), and failure to do so could cause us to forfeit up to $10.5 million in non-refundable earnest money deposits previously paid. The outstanding principal of the Summit Loan, which was $26.7 million following the Initial Closing, and any accrued interest thereon will become immediately due and payable at closing if we close our portfolioPending Acquisition before February 11, 2018, the maturity date of the Summit Loan. Following our redemption of $47.3 million in liquidation value of Grace Preferred Equity Interests with a portion of the proceeds from the Initial Closing, we are required to other real estate properties and real estate-related loans and securities, such as mortgage, mezzanine, bridge and other loans; debt and derivative securities related to real estate assets, including mortgage-backed securities; collateralized debtredeem an additional $19.4 million,
obligations; debt securitiesrepresenting 50.0% of the aggregate amount originally issued, by real estate companies; credit default swaps;February 27, 2018, and the remaining $223.5 million by February 27, 2019.
Prior to the suspension of our IPO in November 2015, we depended, and expected to continue to depend, in substantial part on proceeds from our IPO to meet our major capital requirements. Our IPO terminated in accordance with its terms in January 2017. Because we required funds in addition to operating cash flow and cash on hand to meet our capital requirements, we undertook and evaluated a variety of transactions to generate additional liquidity to address our capital requirements, including changing our distribution policy, extending certain of our obligations under PIPs, extending obligations to pay contingent consideration, marketing and selling assets and seeking debt or equity securitiesfinancing transactions. In January 2017, we entered into the SPA and the Framework Agreement, and the consummation of other REITsthe transactions contemplated by these agreements in March 2017 has, and real estate companies. is expected to continue to, generate additional liquidity through the sale of Class C Units to the Brookfield Investor at the Initial Closing and at Subsequent Closings, as well as cost savings realized as part of our transition to self-management through reduced property management fees and the elimination of external asset management fees to the Advisor (offset by expenses previously borne by the Advisor that will now be incurred directly by us as a self-managed company).
We dobelieve these sources of additional liquidity will allow us to meet our existing capital requirements, although there can be no assurance the amounts actually generated will be sufficient for these purposes. The Subsequent Closings are subject to conditions, and may not expectbe completed on their current terms, or at all, and the cost savings from our non-controllingtransition to self-management may not be realized to the extent we are anticipating, or at all. Accordingly, we may require additional liquidity to meet our capital requirements, which may not be available on favorable terms or at all. Any additional debt or equity investmentsfinancing consisting of common stock, preferred stock or warrants, or any combination thereof to meet our capital requirements may also only be obtained subject to the Brookfield Approval Rights, and there can be no assurance this prior approval will be provided when requested, or at all. If obtained, any additional or alternative debt or equity financing could be on terms that would not be favorable to us or our stockholders, including high interest rates, in other public companiesthe case of debt financing, and substantial dilution, in the case of equity issuances or convertible securities. Moreover, because we are required to exceed 5%use 35% of the proceeds from the issuance of interests in us or any of our Offering, assuming we sellsubsidiaries, to redeem the Grace Preferred Equity Interests at par, up to a maximum offering amount. Weof $350 million in redemptions for any 12-month period, it may make adjustmentsbe more difficult to obtain equity financing from an alternative source in an amount required to meet our portfolio based on real estatecapital requirements.
Furthermore, our ability to identify and consummate a potential transaction or transactions with a source of equity or debt financing is dependent upon a number of factors that may be beyond our control, including, among other factors, market conditions, industry trends and investment opportunities,the interest of third parties in our business and assets. In addition, any potential transaction or transactions may be subject to conditions such as consents from our lenders and franchisors, which we might not be able to obtain, and the process of seeking alternative sources of financing is time-consuming, causes our management to divert their focus from our day-to-day business and results in our incurring expenses outside the normal course of operations.
The interests of the Brookfield Investor may changeconflict with our targeted investmentsinterests and investment guidelines at any time without the consentinterests of our stockholders, whichand the Brookfield Investor has significant governance and other rights that could result inbe used to control or influence our making investmentsdecisions or actions.
As the holder of all of the issued and outstanding Class C Units, the Brookfield Investor has interests that are different from our interests and possibly riskier than,the interests of our current investments. A change in our investments or investment guidelines may increase our exposure to interest rate risk, default riskstockholders. Moreover, as the holder of the Redeemable Preferred Share and real estate market fluctuations, all of which could adversely affect the valueissued and outstanding Class C Units, the Brookfield Investor has the Brookfield Approval Rights, the ability to elect two of the seven directors on our board of directors and approve two independent directors, the right to convert Class C Units into shares of our common stock and our abilityother rights, including the redemption and distribution rights associated with the Class C Units, that are significant. These rights can be used, in isolation or in combination, to make distributionscontrol or influence, directly or indirectly, various corporate, financial or operational decisions or actions we might otherwise take, or decide not to take, as well as any matter requiring approval of our stockholders.
IfUnder the Brookfield Approval Rights, without obtaining the prior approval of the majority of the then outstanding Class C Units, subject to certain exceptions, the OP is restricted from taking certain actions including equity issuances, debt incurrences, payment of dividends or other distributions, redemptions or repurchases of securities, property acquisitions and property sales and dispositions. In addition, pursuant to the terms of the Redeemable Preferred Share, we internalize our management functions, we may be unableare similarly restricted from taking those actions without the prior approval of at least one of the Redeemable Preferred Directors. Prior approval of at least one of the Redeemable Preferred Directors is also required to obtainapprove the Annual Business Plan, hiring and compensation decisions related to certain key personnel (including our executive officers) and our abilityvarious matters related to achieve our investment objectives could be delayed or hindered, which could adversely affect our ability to pay distributions to our stockholdersthe structure and the valuecomposition of their investment.
We may engage in an internalization transaction and become self-managed in the future. If we internalize our management functions, certain key employees may not become our employees, but may instead remain employees of our Advisor or its affiliates. An inability to manage an internalization transaction effectively could thus result in our incurring excess costs and suffering deficiencies in our disclosure controls and procedures or our internal control over financial reporting. Such deficiencies could cause us to incur additional costs and our management's attention could be diverted from most effectively managing our investments, which could result in us being sued and incurring litigation-associated costs in connection with the internalization transaction.
Because we are dependent upon our Advisor, our Property Manager, our Sub-Property Manager and their affiliates to conduct our operations, and we have engaged third-party sub-property managers to manage certain properties, any adverse changes in the financial health of our Advisor, our Property Manager, our Sub-Property Manager or third-party sub-property managers or their affiliates or our relationship with them could hinder our operating performance and the return on our stockholders’ investments.
We are dependent on our Advisor, our Property Manager and our Sub-Property Manager, which are responsible for our day-to-day operations and are primarily responsible for the selection of investments to be recommended to our board of directors. We are also dependent on our Property Manager, our Sub-Property Manager
As the holder of the Redeemable Preferred Share, for so long as it remains outstanding, the Brookfield Investor has the right to elect two Redeemable Preferred Directors (each of whom may be removed and third-party sub-property managers to manage certain of our real estate assets. Our Advisor and our Property Manager had no prior operating history before they were formed in connectionreplaced with or without cause at any time by the Offering. Our Advisor depends upon the fees and other compensation that it receives from us in connection with the purchase, management and sale of assets to conduct its operations.
Any adverse changes in the financial condition of such entities or certain of their affiliates or in our relationship with them could hinder its or their ability to successfully manage our operations and our portfolio of investments.
The loss of or the inability to obtain key real estate professionals at our Advisor, our Sub-Property Manager or our Dealer Manager could delay or hinder implementation of our investment strategies, which could limit our ability to make distributions and decrease the value of our stockholders' investment.
Our success depends to a significant degree upon the contributions of certain executive officers, including Bruce D. Wardinski, Jonathan P. Mehlman and Edward T. Hoganson at our Advisor and Edward M. Weil, Jr.Brookfield Investor), William E. Dwyer III and Louisa H. Quarto at our Dealer Manager, as well as James A. Carroll and Pierre M. Donahue at our Sub-Property Manager. These individuals mayto approve (such approval not remain associated with us. If any of these persons were to cease their association with us, our operating results could suffer. We do not intend to maintain key person life insurance on any person. Our future success depends, in large part, upon our Advisor and its affiliates' ability to hire and retain highly skilled managerial, operational and marketing professionals. Competition for such professionals is intense, and our Advisor and its affiliates may be unsuccessful in attracting and retaining such skilled individuals. Maintaining relationships with firms that have special expertise in certain servicesunreasonably withheld, conditioned or detailed knowledge regarding real properties in certain geographic regions will be important for us to effectively compete with other investors for properties in such regions. We may be unsuccessful in establishing and retaining such relationships. If we lose or are unable to obtain the services of highly skilled professionals or do not establish or maintain appropriate strategic relationships, our ability to implement our investment strategies could be delayed or hindered, and the value of our stockholders’ investments may decline.delayed)
Disclosures madetwo additional independent directors to be recommended and nominated by American Realty Capital Properties, Inc. an entity previously sponsoredour board of directors for election by our stockholders at each annual meeting. Prior approval of at least one Redeemable Preferred Directors is also required to approve increasing or decreasing the number of directors on our board of directors and nominating or appointing the chairperson of our board of directors.
As of the date of this Annual Report on Form 10-K, the Brookfield Investor does not own or control any shares of our common stock, and, as such, cannot directly participate in the outcome of matters requiring approval of our stockholders, except to the extent of the one vote the holder of the Redeemable Preferred Share has as part of a single class with the holders of our common stock at any annual or special meeting of stockholders and the separate class vote of the Redeemable Preferred Share required for any action, including any amendment to our charter, that would alter the terms of the Redeemable Preferred Share or the rights of its holder. However, giving effect to the immediate conversion of all 9,152,542 Class C Units held by the parentBrookfield Investor as of the date of this Annual Report on Form 10-K into OP Units which are subsequently redeemed for shares of our Sponsorcommon stock in accordance with the terms of the limited partnership agreement of the OP, the Brookfield Investor, on an as-converted basis and including shares of common stock issued by us at the Initial Closing pursuant to the Framework Agreement, would own approximately 18.8% of the voting power of our common stock. Any such redemption may adversely affectalso be made in cash instead of shares of our common stock, at our option.
Pursuant to the SPA, the Brookfield Investor, together with certain of its affiliates, will be subject to certain restrictions that will limit its ability to raise substantial funds.
On October 29, 2014, American Realty Capital Properties, Inc. (“ARCP”) announced that its audit committee had concluded that the previously issued financial statements and other financial information contained in certain public filings should no longer be relied upon. This conclusion was based on the preliminary findingsleverage any ownership of an investigation conducted by ARCP’s audit committee which concluded that certain accounting errors were made by ARCP personnel that were not corrected after being discovered, resulting in an overstatement of AFFO and an understatement of ARCP’s net loss for the three and six months ended June 30, 2014. ARCP also announced the resignation of its chief accounting officer and its chief financial officer. ARCP’s former chief financial officer also was chief financial officer, treasurer and secretaryshares of our company,common stock to control or influence our Advisor and our Property Manager during the period from August 2013management or policies. These restrictions include customary standstill restrictions related to, September 2013. This individual also is one of the non-controlling owners of the parent of our Sponsor, but does not have a role in managing our businessamong other things, acquisition proposals, proxy solicitations, attempts to elect or our Sponsor’s business. In December 2014, ARCP announced the resignation of its executive chairman, who was also the chairmanremove members of our board of directors, until his resignationlimits on December 29, 2014. This individual also is currentlyacquiring more than 15% of our common stock then outstanding on an as-converted basis in addition to shares of our common stock on an as-converted basis acquired upon the conversion and subsequent redemption of Class C Units and a memberrequirement to vote any shares of our common stock in excess of 35% of the total number of shares of our common stock in accordance with the recommendations of our board of managersdirectors. In addition, at the Initial Closing, as contemplated by and pursuant to the SPA, we granted the Brookfield Investor and its affiliates a waiver of the aggregate share ownership limits, and permitted the Brookfield Investor and its affiliates to own up to 49.9% in the aggregate of the outstanding shares of our Sub-Property Managercommon stock. However, these restrictions are generally of limited duration and oneremain subject to other conditions and exceptions, and there can be no assurance that the Brookfield Investor will not otherwise be able to use its ownership of our common stock, in isolation or in combination with the Brookfield Approval Rights or its other rights as the sole holder of the controlling membersRedeemable Preferred Share and Class C Units, to control or influence our management or policies, as well as matters required to be submitted to our stockholders for approval.
The Brookfield Investor may have an interest in our pursuing acquisitions, divestitures and other transactions that, in its judgment, could enhance its investment in us, even though such transactions might involve risks to our stockholders, or in preventing us from pursuing a transaction that might otherwise be beneficial to our stockholders. The scope and potential impact of the parentexercise of the redemption rights of holders of Class C Units may also have a significant impact on our decision-making in certain circumstances, including whether or not we pursue a Fundamental Sale Transaction.
Moreover, the Brookfield Investor and its affiliates engage in a broad spectrum of activities, including investments in the hospitality industry. In the ordinary course of their business activities, the Brookfield Investor and its affiliates may engage in activities where their interests conflict with ours or those of our Sponsor.stockholders, including activities related to additional investments they may make in companies in the hospitality and related industries. In addition, Bruce G. Wiles, our chairman and a Redeemable Preferred Director, is the president and chief operating officer of Thayer Lodging Group, LLC, a hotel investment company and an affiliate of the Brookfield Investor. The articles supplementary governing the Redeemable Preferred Share provide that none of the Brookfield Investor or any of its affiliates, or any of their respective directors, executive officers, employees, agents, representatives, incorporators, stockholders, equityholders, controlling persons, principals, managers, advisors, managing members, members, general partners, limited partners or portfolio companies will have any obligation to refrain from competing with us, making investments in or having relationships with competing businesses. Under the articles supplementary, we have agreed to renounce any interest or expectancy, or right to be offered an opportunity to participate in, any business opportunity or corporate opportunity presented to the Brookfield Investors or its affiliates (which may include, without limitation, any Redeemable Preferred Director). The Brookfield Investor or its affiliates also may pursue acquisition opportunities that may be complementary to our business, and, as a result, those acquisition opportunities may be unavailable to us. In addition, the Brookfield Investor or its affiliates may have an interest in pursuing acquisitions, divestitures and other transactions that, in their judgment, could enhance their respective investments, even though such transactions might involve risks to us or our stockholders.
On March 2, 2015, ARCP announcedTo the extent the interests of the Brookfield Investor conflict with our interests or the interests of our stockholders, this conflict may not be resolved in our favor or in favor of our stockholders due to the significant governance and other rights of
the Brookfield Investor. Moreover, the rights and interests of the Brookfield Investor will limit or preclude the ability of our other stockholders to influence corporate matters.
The Brookfield Approval Rights, including the requirement that we conduct our operations in accordance with the Annual Business Plan approved by at least one Redeemable Preferred Director, will restrict our operational and financial flexibility and could prevent us from taking actions that we believe would be in the best interest of our business.
In general, the Brookfield Approval Rights restrict us from taking various financial and operational actions without the prior approval of a majority of the then outstanding Class C Units as well the prior approval of at least one Redeemable Preferred Director, which is also required for our board of directors to approve the Annual Business Plan. The Annual Business Plan with respect to each fiscal year is required to include projections for such year with respect to revenues, operating expenses and property-level capital expenditures, as well as any plans for asset sales or dispositions and a liquidity plan.
If the proposed Annual Business Plan (or any portion thereof) is rejected, we will work with the Redeemable Preferred Directors in good faith to resolve the objections, and we are permitted to continue to operate in accordance with the Annual Business Plan then in effect for the prior fiscal year. However, there is no assurance we will be able to resolve any objection on terms that are favorable to us, or our stockholders.
These restrictions reduce our flexibility in conducting our operations and could prevent us from taking actions that we believe would be in the best interest of our business. Failure to comply with Annual Business Plan or otherwise comply with the Brookfield Approval Rights could result in a material breach under the limited partnership agreement of the OP, which, if not cured or waived, could give rise to a right for the holders of Class C Units to require the Company to redeem any Class C Units submitted for redemption for an amount equivalent to what the holders of Class C Units would have been entitled to receive in a Fundamental Sale Transaction if the date of redemption were the date of the consummation of the Fundamental Sale Transaction. These amounts are set forth under “Risks Related to Our Corporate Structure -The amount we would be required to pay holders of Class C Units in a Fundamental Sale Transaction may discourage a third party from acquiring us in a manner that might otherwise result in a premium price to our stockholders.”
Financial and operating covenants in the agreements governing our indebtedness may also limit our operational and financial flexibility, and failure to comply with these covenants could cause an event of default under our indebtedness.
There can be no assurance we will be able to complete our Pending Acquisition and any failure to do so, in whole or in part, could cause us to lose all or a portion of the $10.5 million deposit.
We intend to utilize $26.9 million of the proceeds from the Initial Closing to fund a portion of the closing consideration for the seven hotels to be purchased in our Pending Acquisition on April 27, 2017. We will require additional debt or equity financing to fund the remaining $32.4 million in closing consideration for the seven hotels to be purchased in our Pending Acquisition on April 27, 2017. There can be no assurance such financing will be available on favorable terms, or at all. Moreover, such financing may only be obtained subject to the Brookfield Approval Rights, and there can be no assurance this prior approval will be obtained when requested, or at all. Any failure to complete our Pending Acquisition in whole or in part could cause us to default under the reinstated purchase agreement and forfeit all or a portion of the $10.5 million deposit.
The outstanding principal of the Summit Loan, which was $26.7 million following the Initial Closing, and any accrued interest thereon will become immediately due and payable at closing if we close our Pending Acquisition before February 11, 2018, the maturity date of the Summit Loan. We intend to utilize $23.7 million of the proceeds from the Initial Closing to fund this repayment.
Moreover, although the closing of our Pending Acquisition is scheduled for April 27, 2017 (or October 24, 2017 in the case of one hotel), Summit has the right to market and ultimately sell any or all of the hotels to be purchased to a bona fide third party purchaser without our consent at any time prior to the completion of its audit committee’s investigation and filed amendments to its Form 10-K forour Pending Acquisition. If any hotel is sold in this manner, the year ended December 31, 2013 and its Form 10-Q for the quarters ended March 31, 2014 and June 30, 2014. According to these filings, these amendments corrected errors in ARCP’s financial statements and in its calculation of AFFO that resulted in overstatements of AFFO for the years ended December 31, 2011, 2012 and 2013 and the quarters ended March 31, 2013 and 2014 and June 30, 2014 and described certain results of its investigations, including matters relating to payments to, and transactions with, affiliates of the parent of our Sponsor and certain equity awards to certain officers and directors. In addition, ARCP disclosed that the audit committee investigation had found material weaknesses in ARCP’s internal control over financial reporting and its disclosure controls and procedures. ARCP also disclosed that the SEC has commenced a formal investigation, that the United States Attorney’s Office for the Southern District of New York contacted counsel for both ARCP’s audit committee and ARCPagreement will terminate with respect to such hotel and the matter and that the Secretary of the Commonwealth of Massachusetts has issued a subpoena for various documents. On March 30, 2015, ARCP filed its Form 10-K for the year ended December 31, 2014. ARCP’s filings with the SEC are available at the internet site maintainedpurchase price will be reduced by the SEC, www.sec.gov.
Since the initial announcementamount allocated to such hotel. Whether or not Summit engages, or is successful, in October, a number of participating broker-dealers temporarily suspended their participation in the distribution ofany efforts to market these hotels is beyond our Offering. Although certain of these broker-dealers have reinstated their participation, we cannot predict the length of time the remaining temporary suspensions will continue or whether all participating broker-dealers will reinstate their participation in the distribution of our Offering. As a result, our ability to raise substantial funds may be adversely impacted.
Since our inception, all of our distributions have been paid from offering proceeds. Distributions paid from sources other than our cash flows from operations, particularly from proceeds of our IPO, will result in us having fewer funds available for the acquisition of propertiescontrol and, other real estate-related investments and may dilute our stockholders' interests in us, which may adversely affect our ability to fund future distributions with cash flows from operations and may adversely affect our stockholders' overall return.
Our cash flows used in operations were $9.7 million for the year ended December 31, 2014, and we have had negative cash flows from operations since our inception, in July 2013. During the year ended December 31, 2014, we paid distributions of $3.5 million, all of which was funded from offering proceeds, including offering proceeds which were reinvested in common stock issued pursuant to the DRIP. Since our inception, all of our distributions have been paid from offering proceeds.
We may pay distributions from unlimited amounts of any source, including borrowing funds, using proceeds from our Offering, issuing additional securities or selling assets. We have not established any limit on the amount of proceeds from our Offering that may be used to fund distributions, except in accordance with our organizational documents and Maryland law.
We expect that future distributions will be paid from our cash flow from operations following the acquisition of the Grace Portfolio, butaccordingly, there can be no assurance we will be able to generate sufficient cash flow from operationscomplete our Pending Acquisition in whole or in part.
Summit has informed us that the hotel that is scheduled to do so. We may continuebe sold on October 24, 2017 is subject to a pending purchase and sale agreement with a third party, but we will require additional debt or equity financing to fund the remaining $10.5 million of the closing consideration for the one hotel to be purchased October 24, 2017 if Summit does not sell it to a third party and we are ultimately required to purchase it.
Whether or not we complete our Pending Acquisition, in the futurewhole or in part, we will still be subject to pay distributions from sources other than from our cash flows from operations,several risks, including the net proceeds from this offering.incurrence of legal, accounting and due diligence costs relating to the transaction that are payable whether or not the transaction is completed.
Using proceeds from our Offering to pay distributions, especially if the distributions are not reinvested through our DRIP, reduces cash available for investment in assets or other purposes and will likely reduce our per share stockholder equity.
We may continue not to generate sufficient cash flows from operations to fully pay distributions, and our ability to use cash flows from operations to pay distributions in the future may also be adversely impacted by our substantial indebtedness. If we have not generated sufficient cash flows from our operations and other sources, such as from borrowings, the sale of additional securities, advances from our Advisor, and our Advisor’s deferral, suspension or waiver of its fees and expense reimbursements, to fund distributions, we may continue to use the proceeds from our Offering, although we currently intend to use substantially
We may not be able to make additional investments unless we are able to identify an additional source of capital on favorable terms and obtain prior approval from the Brookfield Investor.
We will not be able to make additional investments unless we can obtain equity or debt financing in addition to the additional capital available to us from the sale of Class C Units at Subsequent Closings. The Subsequent Closings are subject to conditions and may not be completed on their currently contemplated terms, or at all. Further, any additional investments we make will generally be subject to the Brookfield Approval Rights, and there can be no assurance this prior approval will be obtained when requested, or at all.
Because we may not be able to make additional investments, our portfolio may be less diversified in terms of the number of investments owned and the types of investments that we own. As a result, the likelihood of our profitability being affected by the performance of any one of our investments is increased. We will also continue to operate with a higher level of leverage than we would if we were continuing to raise proceeds in our IPO, resulting in higher debt service obligations and less financial and operational flexibility.
We no longer pay distributions and there can be no assurance we will resume paying distributions in the future.
Because we required funds in addition to our operating cash flow and cash on hand to meet our capital requirements, beginning with distributions payable with respect to April 2016, we suspended cash distributions and began paying distributions to our stockholders in shares of common stock. In connection with our entry into the SPA in January 2017, we suspended paying distributions to stockholders entirely. Currently, under the Brookfield Approval Rights, prior approval is required before we can declare or pay any distributions or dividends to our common stockholders, except for cash distributions equal to or less than $0.525 per annum per share. There can be no assurance that we will resume paying distributions in cash or shares of common stock in the future. Our ability to make future cash distributions will depend on our future cash flows and may be dependent on our ability to obtain additional liquidity, which may not be available on favorable terms, or at all.
To the extent we pay cash distributions in the future, they may be funded from sources other than cash flow from operations. Funding distributions from any of sources other than cash flow from operations may negatively impact the value of an investment in our common stock. We funded all of our cash distributions from our inception in July 2013 through the suspension of cash distributions in March 2016 using proceeds from our Offering to reduceIPO or our borrowings,DRIP, which reduced the capital available for other purposes that could limitincrease the value of an investment in our ability to pay distribution from proceeds from our Offering for some time. Moreover, our board of directors may change our distribution policy, in its sole discretion, at any time. Distributions made from offering proceeds are a return of capital to stockholders, from which we will have already paid offering expenses in connection with our IPO. We have not established any limit on the amount of proceeds from our Offering that may be used to fund distributions, except that, in accordance with our organizational documents and Maryland law, we may not make distributions that would: (1) cause us to be unable to pay our debts as they become due in the usual course of business; (2) cause our total assets to be less than the sum of our total liabilities plus senior liquidation preferences, if any; or (3) jeopardize our ability to qualify as a REIT.
common stock. Funding distributions from borrowings could restrict the amount we can borrow for investments, which may among other things, affect our earnings.profitability. Funding distributions with the sale of assets or the proceeds of our Offering may affect our ability to generate additional operating cash flows. Funding distributions from the sale of additional securities could dilute our stockholders'each stockholder's interest in us if we sell shares of our common stock or securities that are convertible or exercisable into shares of our common stock to third-party investors. Payment of distributions from the mentioned sources could restrict our ability to generate sufficient cash flows from operations, affect our earnings or affect the distributions payable to our stockholders upon a liquidity event, any or all of which may have an adverse effect on our stockholders' investment in our common stock.
We may be unable to maintain current cash distributions or increase distributions over time.
We intend to pay distributions from cash flows from operations following the completion of the Grace Acquisition, but our ability to do so depends on our ability to realize the expected benefits of the acquisition of the Grace Portfolio from which a substantial amount of our future cash flows from operations are expected to be generated. Failure to realize the expected benefits of the acquisition of the Grace Portfolio, within the anticipated timeframe or at all, or the incurrence of unexpected costs, could have a material adverse effect on our financial condition and results of operations and our ability to pay distributions from cash flow from operations. See “- Risks Related to the Grace Acquisition - Our earnings and FFO per share may decline as a result of the acquisition of the Grace Portfolio.”
The amount of cash available for distributions is affected by many other factors, such as operating income from our properties and our operating expense levels. Our actual results may differ significantly from the assumptions used by our board of directors in establishing the distribution rate to stockholders. Wealso may not have sufficient cash from operations to make a distribution required to qualify for or maintain our qualificationREIT status.
Acquired properties may expose us to unknown liability.
We have acquired properties subject to liabilities and without any recourse, or with only limited recourse, against the prior owners or other third parties with respect to unknown liabilities. As a result, if a liability were asserted against us based upon ownership of those properties, we might have to pay substantial sums to settle or contest it, which could adversely affect our results of operations, cash flow and the market value of our securities. Unknown liabilities with respect to acquired properties might include:
liabilities for clean-up of undisclosed environmental contamination;
claims by tenants, vendors or other persons against the former owner of the properties;
liabilities incurred in the ordinary course of business; and
claims for indemnification by general partners, directors, officers and others indemnified by the former owners of the properties.
We may not be successful in integrating and operating the hotels we have acquired.
We acquired the Grace Portfolio in February 2015. We have acquired 20 hotels pursuant to the SN Acquisitions in the fourth quarter of 2015 and first quarter of 2016, and may acquire up to eight additional hotels later during 2017 pursuant to our Pending Acquisition. There are many challenges related to our achieving the expected benefits associated with integrating and operating the hotels we have acquired, and any other hotels we may acquire in the future, including the following:
we may be unable to successfully maintain consistent standards, controls, policies and procedures;
the integration of the hotels we have acquired and any other hotels we may acquire in the future may disrupt our ongoing operations or the ongoing operations of those hotels, and our management’s attention may be diverted away from other business concerns;
the hotels we have acquired and any other hotels we may acquire in the future may fail to perform as expected and market conditions may result in lower than expected occupancy and room rates;
we may spend more than budgeted amounts to make necessary improvements or renovations to the hotels we have acquired and any other hotels we may acquire in the future;
some of the hotels we have acquired are, and some hotels we acquire in the future may be, located in unfamiliar markets where we face risks associated with an incomplete knowledge or understanding of the local market, a REIT. Accordingly,limited number of established business relationships in the area and a relative unfamiliarity with local governmental and permitting procedures;
the hotels we have acquired and any other hotels we may acquire in the future may subject us to liabilities and without any recourse, or with only limited recourse, with respect to unknown liabilities;
even if we enter into agreements for the acquisition of hotels in the future, these agreements are subject to customary conditions to closing, including completion of due diligence investigations to our satisfaction and other conditions that are not within our control, which may not be satisfied, and we may be unable to complete an acquisition after making a non-refundable deposit and incurring certain other acquisition-related costs;
we may be unable to finance any future acquisitions on favorable terms in the time period we desire, or at all;
we may not be able to obtain adequate insurance coverage for new properties acquired in future acquisitions; and
we may incur significant costs and divert management attention in connection with evaluating and negotiating potential acquisitions, including ones that we are subsequently unable to complete.
We may fail to realize the expected benefits, and may incur unexpected costs associated with, the acquisition of the Grace Portfolio and our other completed acquisitions and, to the extent we are able to obtain additional debt or equity financing, our Pending Acquisition, within the anticipated timeframe or at all.
The loss of a brand license for any reason, including due to our failure to make required capital expenditures, could adversely affect our financial condition and results of operations.
All but one of our hotels operate under licensed brands pursuant to franchise agreements with hotel brand companies. The maintenance of the brand licenses for our hotels is subject to the hotel brand companies’ operating standards and other terms and conditions, including the ability to require us to make capital expenditures pursuant to property improvement plans, or PIPs, which set forth their renovation requirements. PIPs were required in connection with our acquisition of the Grace Portfolio and our other completed acquisitions and will also be required in connection with any hotels we acquire in the Pending Acquisition and, likely, in connection with the acquisition of any additional hotels in the future. Pursuant to the terms of our existing indebtedness, we estimate we are required to make at least an aggregate of $24.1 million in periodic PIP reserve deposits during 2017 to cover a portion of the estimated costs of the PIPs. We will also be required to make additional PIP reserve payments during future periods.
Of the $135.0 million in gross proceeds from the sale of Class C Units at the Initial Closing, we have retained $15.0 million that may be used to fund PIPs and related lender reserves. Following the Initial Closing, $22.1 million in Class C Units expected to be issued at Subsequent Closings may be available to meet capital requirements other than Grace Preferred Equity Interests, including funding PIPs and related lender reserves. We may need to seek additional debt or equity financing consisting of common stock, preferred stock or warrants, or any combination thereof to fund PIPs and related lender reserves, which may not be available on favorable terms or at all, and may only be obtained subject to the Brookfield Approval Rights. Moreover, the Subsequent Closings are subject to conditions, and there can be no assurance they will be completed on their current terms, or at all.
Any failure to make PIP reserve deposits when required could lead to a default under the relevant portion of our indebtedness. Moreover, in connection with any future revisions to our franchise or hotel management agreements or a refinancing of our indebtedness, franchisors may require that we make further renovations or enter into additional PIPs. Any change to any of our PIPs that would reasonably be expected to increase the cost of such PIPs by more than 10% in the aggregate above the cost for such PIPs set forth in the applicable franchise agreement or Annual Business Plan is subject to the Brookfield Approval Rights, and there can be no assurance this prior approval will be obtained when requested, or at all. In addition, upon regular inspection of our hotels, franchisors may determine that additional renovations are required to bring the physical condition of our hotels into compliance with the specifications and standards each franchisor or hotel brand has developed.
If we default on a franchise agreement as a result of our failure to comply with the PIP requirements, the franchisor may have the right to terminate the applicable agreement, we may be required to pay the franchisor liquidated damages, and we may also be in default under the applicable hotel indebtedness. In addition, if we do not have enough reserves for or access to capital to supply needed funds for capital improvements throughout the life of the investment in a property and there is insufficient cash available from our operations, we may be required to defer necessary improvements to a property, which may cause that property to suffer from a greater risk of obsolescence, a decline in value, or decreased cash flow.
If we were to lose a brand license for any reason, including failure to meet the requirements of our PIPs, we would be required to re-brand the affected hotel(s). As a result, the underlying value of a particular hotel could decline significantly from the loss of associated name recognition, marketing support, participation in guest loyalty programs and the centralized system provided by the franchisor, which, among other things, could reduce income from the impacted hotel and require us to recognize an impairment charge on the hotel. Furthermore, the loss of a franchise license at a particular hotel could harm our relationship with the hotel brand company, which could impede our ability to operate other hotels under the same brand, limit our ability to obtain new franchise licenses from the franchisor in the future on favorable terms, or at all, and cause us to incur significant costs to obtain a new franchise license for the particular hotel (including a likely requirement of a property improvement plan for the new brand, a portion of the costs of which would be related solely to the change in brand rather than substantively improving the property). Moreover, the loss of a franchise license could also be an event of default under our indebtedness that secures the property if we are unable to find a suitable replacement.
In connection with our transition to self-management, our business may be disrupted and we may become exposed to risks to which we have not historically been exposed.
Prior to the Initial Closing, we had no employees, and we depended on the Advisor and its affiliates to conduct all our operations. At the Initial Closing, the Advisory Agreement was terminated and certain employees of the Advisor or its affiliates (including Crestline) who had been involved in the management of our day-to-day operations, including all of our executive officers, became our employees. We also terminated all of our other agreements with affiliates of the Advisor except for our hotel-level property management agreements with Crestline and entered into a transition services agreement with each of the Advisor and Crestline, pursuant to which we will receive their assistance in connection with investor relations/shareholder services and support services for pending transactions in the case of the Advisor and accounting and tax related services in the case of Crestline until June 29, 2017 except as set forth below. The transition services agreement with Crestline for accounting and tax related services will automatically renew for successive 90-day periods unless either party elects to terminate. The transition services agreement with the Advisor with respect to the support services for pending transactions expires on April 30, 2017 unless extended for an additional 30 days by written notice delivered prior to the expiration date. There can be no assurance, however, that these agreements will be sufficient to prevent any disruption to our business from occurring and that our business, administration and results of operations will not be adversely affected as a result of our transition to self-management. If we are unable to manage the transition to self-management effectively we may incur additional costs and suffer deficiencies in our disclosure controls and procedures or our internal control over financial reporting. Such deficiencies could cause us to incur additional costs and our management’s attention could be diverted from most effectively managing our investments, which could result in us being sued and incurring litigation-associated costs in connection with our transition to self-management.
Moreover, in connection with our transition to self-management, we may be exposed to risks to which we have not historically been exposed. We expect to generate additional liquidity through the cost savings realized as part of our transition to self-management through reduced property management fees and the elimination of external asset management fees to the Advisor. However, some of the expenses previously borne by the Advisor will now be incurred directly by us as a self-managed company, through higher general and administrative expenses. The expected cost savings from our transition to self-management may not be realized to the extent we are anticipating, or at all.
Prior to our becoming self-managed, we did not have separate facilities, communications and information systems nor did we directly employ any employees; the Advisor formerly provided these services. As a result of us becoming self-managed, we now will lease office space, have our own communications and information systems and directly employ a staff. Any failure of our employees or infrastructure to provide these services after self-management could adversely affect our operations. Our business is highly dependent on communications and information systems. Any failure or interruption of our systems could have a material adverse effect on our financial condition and operating results. Additionally, as a direct employer, we will be subject to those potential liabilities that are commonly faced by employers, such as workers disability and compensation claims, potential labor disputes and other employee-related liabilities and grievances, and we will bear the costs of the establishment and maintenance of such plans.
We are dependent on our executive officers and key personnel.
We depend on our executive officers and key personnel to manage our operations and acquire and manage our portfolio of real estate assets. These individuals make major decisions affecting us, all under the direction of our board of directors, subject to the Brookfield Approval Rights.
In particular, our success depends to a significant degree upon the contributions of certain individuals, including our executive officers, Jonathan P. Mehlman, Edward T. Hoganson and Paul C. Hughes. Competition for such skilled personnel is intense, and we cannot assure you that we will be ablesuccessful in attracting and retaining such skilled personnel capable of meeting the needs of our business. Moreover, the Brookfield Approval Rights include the requirement that we obtain the prior approval of at least one Redeemable Preferred Director in connection with hiring and compensation decisions related to certain key personnel (including our executive officers), which could make it more difficult to retain personnel. We cannot guarantee that all, or any particular one of these key personnel, will continue to provide services to us, and the loss of any of these key personnel could cause our operating results to suffer. Further, we have not and do not intend to separately maintain key person life insurance on any of our current level of distributions or that distributions will increase over time.key personnel.
Our rights and the rights of our stockholders to recover claims against our officers, directors and ourthe Advisor are limited, which could reduce our stockholders'stockholders’ and our recovery against them if they cause us to incur losses.
Maryland law provides that a director has no liability in that capacity if he or she performs his or her duties in good faith, in a manner he or she reasonably believes to be in the corporation'scorporation’s best interests and with the care that an ordinarily prudent person in a like position would use under similar circumstances. In addition, subject to certain limitations set forth therein or under Maryland law, our charter provides that no director or officer will be liable to us or our stockholders for monetary damages and requires us to indemnify our directors, our officers and ourthe Advisor and our Advisor'sthe Advisor’s affiliates and permits us to indemnify our employees and agents. We have entered into an indemnification agreement with each of our directors and officers, as well as the Advisor and certain of its affiliates and certain former directors and officers, providing for indemnification of such indemnitees consistent with the provisions of our charter. While the Advisory Agreement and all our other agreements with the Advisor and its affiliates terminated at the Initial Closing (except for our property management agreements with Crestline and a transition services agreement with each of the Advisor and Crestline), the Framework Agreement provides that existing indemnification rights under our organizational documents, the Advisory Agreement, certain property management agreements and the existing indemnification agreement between the Company, its directors and officers, and the Advisor and certain of its affiliates will survive the Initial Closing solely with respect to claims from third parties. We and our stockholders also may have more limited rights against our directors, officers, employees and agents, and ourthe Advisor and its affiliates than might otherwise exist under common law, which could reduce our stockholders'stockholders’ and our recovery against them. In addition, we may be obligated to fund the defense costs incurred by our directors, officers, employees and agents, or our Advisorthe Advisors and its affiliates in some cases, which would decrease the cash otherwise available for distribution to our stockholders.cases.
Commencing with the
Estimated Per-Share NAV pricing date, the offering price for shares in our primary offering and pursuant to our DRIP, as well as the repurchase price for our shares under our SRP, will vary quarterly and will be based on NAV, which will beis based upon subjective estimates, judgments, assumptions and opinions about future events,events.
On July 1, 2016, our board of directors approved an Estimated Per-Share NAV equal to $21.48 as of March 31, 2016, which was published on the same date. This was the first time that our board of directors determined an Estimated Per-Share NAV. It is currently anticipated that we will publish an updated Estimated Per-Share NAV no less frequently than once each calendar year. In connection with these future determinations, we will engage an independent valuer to perform appraisals of our real estate assets in accordance with valuation guidelines established by our board of directors. As with any methodology used to estimate value, the valuation methodologies that will be used by any independent valuer to value our properties involve subjective judgments concerning factors such as comparable sales, rental and alsooperating expense data, capitalization or discount rates, and projections of future rent and expenses. Further, our entry into the negotiated transaction to issue and sell Class C Units with a $14.75 per unit conversion price may not accurately reflectbe an indicator that our net asset value has decreased since our last published Estimated Per-Share NAV and will factor into future calculations of our Estimated Per-Share NAV. As a result, the valuenext valuation of our assets and liabilities at a particular time for other reasons.yielding an Estimated Per-Share NAV could yield an Estimated Per-Share NAV substantially less than $21.48.
Commencing with the filing of Under our second quarterly financial filing with the SEC, pursuant to the Securities Exchange Act of 1934, as amended, following the earlier to occur of (i)valuation guidelines, our acquisition of at least $2.0 billion in total investment portfolio assets or (ii) January 7, 2016 (the "NAV pricing date"), the offering price for shares in our primary offering (to the extent we are still offering shares in our primary offering) and pursuant to our DRIP, as well as the repurchase price for our shares under our SRP, will vary quarterly and will be based on NAV. Our Advisor, with the assistance of a third party, will calculate NAV quarterly by estimatingindependent valuer estimates the market value of our principal real estate and real estate-related assets, and liabilities, many of which may be illiquid.
In calculating NAV, our Advisor will consider an estimate provided by an independent valuer ofwe determine the marketnet value of our real estate assets. Our Advisor willand real estate-related assets and liabilities taking into consideration such estimate provided by the independent valuer. We review suchthe valuation provided by the independent valuer for consistency with its determinations of value and our valuation guidelines and the reasonableness of the independent valuer’svaluer's conclusions. TheOur board of directors reviews the appraisals and valuations and makes a final determination of value may be made by a valuation committee comprisedthe Estimated Per-Share NAV. Although the valuations of our independent directors if our Advisor determines that the appraisals ofreal estate assets by the independent valuer are materially higher or lower than its valuations. The valuations usedreviewed by the independent valuer, our Advisorus and approved by our board of directors, may not be precise becauseneither we nor our board of directors will independently verify the valuation methodologies used to value a real estate portfolio involve subjective judgments, assumptions and opinions about future events, such as comparable sales, rental and operating expense data, capitalization or discount rate, and projections of future rent and expenses. If different judgments, assumptions or opinions were used, a different estimate would likely result.
Each property will be appraised at least annually and appraisals will be spread out over the course of a year so that approximately 25% of all properties are appraised each quarter. Because each property will be appraised only annually, there may be changes in the course of the year that are not fully reflected in the quarterly NAV. As a result, the published NAV may not fully reflect changes in value that may have occurred since the prior quarterly valuation. Moreover, appraised value of a particular property may be greater or less than its potential realizable value, which would cause our estimated NAV to be greater or less than the potential realizable NAV. Any resulting disparity may benefit the selling or non-selling stockholders or purchasers. Further,properties. Therefore, these valuations do not necessarily represent the price at which we would be able to sell an asset.asset, and the appraised value of a particular property may be greater or less than its potential realizable value.
In addition, our
Our Estimated Per-Share NAV may differ significantly from our actual net asset value of a share of our common stock at any given time and may not reflect the price that shares of our common stock would trade at if listed on a national securities exchange, the price that shares would trade in secondary markets or the price a third party would pay to acquire us.
Estimated Per-Share NAV is determined annually and therefore does not reflect changes occurring subsequent to the date of valuation.
Following the initial calculation of Estimated Per-Share NAV, which was published on July 1, 2016, subsequent valuations are expected to occur annually. In connection with any valuation, our board’s estimate of the value of our real estate and real estate-related assets will be partly based on appraisals of our properties, which we expect will only be appraised in connection with the annual valuation.
Because valuations will only occur periodically, Estimated Per-Share NAV may not accurately reflect material events that would impact our actual net asset value and may suddenly change materially if the appraised values of our properties change materially change or the actual operating results differ from what we originally budgeted for that quarter. For example, if a property experiences an unanticipated structural or environmental event,budgeted. In connection with any annual valuation, our estimate of the value of a propertyour real estate and real estate-related assets will be partly based on appraisals of our properties, which we expect will only be appraised in connection with any valuation. Any changes in value that may materially change. Furthermore, if we cannot immediately quantifyhave occurred since the financial impact of any extraordinary events, our NAV as published on any given quartermost recent periodic valuation will not reflectbe reflected in Estimated Per-Share NAV, and there may be a sudden change in the Estimated Per-Share NAV when new appraisals and other material events are reflected. If our actual operating results cause our actual net asset value to change, such events. As a result,change will only be reflected in our Estimated Per-Share NAV when an annual valuation is completed.
Beginning with distributions payable with respect to April 2016 (i.e., after March 31, 2016, the NAV published afterdate as of which our Estimated Per-Share Value was calculated), we began paying distributions to our stockholders in shares of common stock instead of cash and continued to do so until January 2017, when these distributions were suspended in connection with our entry into the announcementSPA. The payment of distributions in common stock diluted the amount of net asset value allocable to each share of common stock (i.e., Estimated Per-Share NAV), because it increased the number of shares of common stock outstanding but did not impact the aggregate value of a material eventstockholder’s investment in shares of common stock.
Our Estimated Per-Share NAV may differ significantly from our actual NAV until we are able to quantify the financial impact of such events and our NAV is appropriately adjusted on a going forward basis.
NAV does not represent the fairnet asset value of our assets less liabilities under GAAP. NAV is not a representation, warranty or guarantee of: (a) what a stockholder would ultimately realize upon a liquidationshare of our assetscommon stock at any given time and settlement of our liabilities or upon any other liquidity event, (b)may not reflect the price that the shares of our common stock would trade at NAVif listed on a national securities exchange, (c) what anythe price that shares would trade in secondary markets or the price a third party would pay to acquire us.
Our business could suffer in an arm’s-length transaction would offer to purchase allthe event we, Crestline or substantially all of our shares of common stock at NAV, and (d)any other party that NAV would equate to a market price for an open-end real estate fund. We will not retroactively adjust the valuation of such assets, the price of our common stock, the price we paid to repurchase shares of our common stock or NAV-based fees we paidprovides us with services essential to our Advisoroperations experiences system failures or cyber-incidents or a deficiency in cybersecurity.
Despite system redundancy, the implementation of security measures and Dealer Manager.
Stockholders' interest in us may be diluted if the price we pay in respectexistence of shares repurchased undera disaster recovery plan, our SRP exceeds the net asset value, at such time as we calculate the NAVinternal information technology systems and those of our share.
The prices we may pay for shares repurchased under our SRP may exceed the NAV of such shares at the time of repurchase, which may reduce the NAV of the remaining shares.
Our stockholders' investment may be subject to additional risks if we make international investments.
We may purchase real estate assets located in Canada and Mexico. Any international investments may be affected by factors peculiar to the laws of the jurisdiction in which the property is located. These laws may expose us to risks that are different from and in addition to those commonly found in the United States. Foreign investments could be subject to the following risks:
governmental laws, rules and policies, including laws relating to the foreign ownership of real property or mortgages and laws relating to the ability of foreign persons or corporations to remove profits earned from activities within the country to the person’s or corporation’s country of origin;
variations in currency exchange rates or exchange controls or other currency restrictions and fluctuations in exchange ratios related to foreign currency;
adverse market conditions caused by inflation or other changes in national or local economic conditions;
changes in relative interest rates;
changes in the availability, cost and terms of mortgage funds resulting from varying national economic policies;
changes in real estateCrestline and other tax rates, the tax treatmentparties that provide us with services essential to our operations are vulnerable to damages from any number of transaction structuressources, including computer viruses, unauthorized access, energy blackouts, natural disasters, terrorism, war and other changestelecommunication failures. Any system failure or accident that causes interruptions in operating expensesour operations could result in a particular country where we have an investment;material disruption to our business.
lack of uniform accounting standards (includingA cyber-incident is considered to be any adverse event that threatens the confidentiality, integrity or availability of information resources. More specifically, a cyber-incident is an intentional attack or an unintentional event that can result in accordancethird parties gaining unauthorized access to systems to disrupt operations, corrupt data or steal confidential information. As reliance on technology in our industry has increased, so have the risks posed to our systems and those of Crestline and other parties that provide us with GAAP);services essential to our operations, both internal and those that have been outsourced. In addition, the risk of a cyber-incident, including by computer hackers, foreign governments and cyber terrorists, has generally increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. Even the most well protected information, networks, systems and facilities remain potentially vulnerable because the techniques used in such attempted attacks and intrusions evolve and generally are not recognized until launched against a target, and in some cases are designed not to be detected and, in fact, may not be detected.
changes in land useThe remediation costs and zoning laws;lost revenues experienced by a victim of a cyber-incident may be significant and significant resources may be required to repair system damage, protect against the threat of future security breaches or to alleviate problems, including reputational harm, loss of revenues and litigation, caused by any breaches. In addition, a security breach or other significant disruption involving our IT networks and related systems or those of Crestline or any other party that provides us with services essential to our operations could:
more stringent environmental laws result in misstated financial reports, violations of loan covenants, missed reporting deadlines and/or changes in these laws;missed permitting deadlines;
changesaffect our ability to properly monitor our compliance with the rules and regulations regarding our qualification as a REIT;
result in the social stabilityunauthorized access to, and destruction, loss, theft, misappropriation or release of, proprietary, confidential, sensitive or otherwise valuable information (including information about guests at our hotels), which others could use to compete against us or for disruptive, destructive or otherwise harmful purposes and outcomes;
result in our inability to maintain the building systems relied upon by our tenants for the efficient use of their leased space;
require significant management attention and resources to remedy any damages that result;
subject us to claims for breach of contract, damages, credits, penalties or termination of leases or other political, economicagreements; or diplomatic developments
adversely impact our reputation among hotel guests and investors generally.
Although we, Crestline and other parties that provide us with services essential to our operations intend to continue to implement industry-standard security measures, there can be no assurance that those measures will be sufficient, and any material adverse effect experienced by us, Crestline and other parties that provide us with services essential to our operations could, in or affecting a country where we have an investment;
legal and logistical barriers to enforcing our contractual rights; and
expropriation, confiscatory taxation and nationalization of our assets located in the markets where we operate.
Any of these risks couldturn, have an adverse effectimpact on us.
We have identified a material weakness in our business, resultsinternal control over financial reporting which could result in a failure to comply with our financial covenants.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. In connection with the preparation of operationsthis Annual Report on Form 10-K, management identified a material weakness in our internal control over financial reporting as of December 31, 2016 relating to the monitoring and oversight of compliance with a single financial covenant included in a non-recourse carve-out guarantee entered into with respect to one of our mortgage loans as described in “Item 9A - Controls and Procedures.” A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. As a result of this material weakness, management has determined that our internal control over financial reporting as of December 31, 2016 was not effective.
Although management has begun taking and intends to take a number of steps to remediate the underlying causes of this material weakness, we cannot assure you that this remediation will occur on a timely basis, or at all. Moreover, we cannot assure you that we will not identify additional material weaknesses in our internal control over financial reporting in the future. If we are unable to remediate this material weakness, or any other material weakness identified in the future, our ability to pay distributionsrecord, process and report financial information accurately, and to prepare financial statements within the time periods specified by the rules and forms of the SEC, could be adversely affected and our stockholders.
Neither we norreputation and business and the value of our Sponsor has any substantial experience investing in properties or other real estate-related assets located outside the United States and wecommon stock may not have the expertise necessary to maximize the return on our international investments.otherwise be adversely affected.
Risks Related to Our Corporate Structure
We depend on the OP and its subsidiaries for cash flow and are effectively structurally subordinated in right of payment to their obligations, which include distribution and redemption obligations to holders of Class C Units and the Grace AcquisitionPreferred Equity Interests.
We are a holding company with no business operations of our own. Our only significant assets are and will be OP Units, representing all the equity interests in the OP other than Class C Units. We conduct, and intend to continue to conduct, all of our business operations through the OP. Accordingly, our only source of cash to pay our obligations is distributions from the OP and its subsidiaries of their net earnings and FFO per share may decline as a result of the acquisition of the Grace Portfolio.
Our earnings and FFO per share may decline as a result of, among other things, our failure to achieve the expected benefits of, or the incurrence of unanticipated costs relatingcash flows. The Class C Units rank senior to the acquisition of the Grace Portfolio.
The risks associated with our acquisition of the Grace Portfolio include, without limitation, the following:
the integration of the Grace Portfolio, which is substantially larger than our portfolio prior to the acquisition of the Grace Portfolio, may be difficult,OP Units and we may be unable to successfully integrate operations, maintain consistent standards, controls, policies and procedures;
the integration of the Grace Portfolio may disrupt our ongoing operations or the ongoing operations of the Grace Portfolio, and our management’s attention may be diverted away fromall other business concerns;
the Grace Portfolio may fail to perform as expected and market conditions may result in lower than expected occupancy and room rates;
we may spend more than budgeted amounts to make necessary improvements or renovations to the Grace Portfolio;
some of the propertiesequity interests in the Grace Portfolio are located in unfamiliar markets where we face risks associated with an incomplete knowledge or understanding of the local market, a limited number of established business relationships in the area and a relative unfamiliarity with local governmental and permitting procedures; and
the Grace Portfolio may subject us to liabilities and without any recourse, or with only limited recourse,OP with respect to unknown liabilities (i.e. if a liability were asserted against us based upon ownershippriority in payment of distributions and in the distribution of assets in the event of the Grace Portfolio, we might have to pay substantial sums to settle it, which could adversely affect our cash flow).
We intend to pay distributions from cash flows from operations following the completionliquidation, dissolution or winding-up of the Grace Acquisition, butOP, whether voluntary or involuntary, or any other distribution of the assets of the OP among its equity holders for the purpose of winding up its affairs.
Each of our OP’s subsidiaries is a distinct legal entity and, under certain circumstances, legal and contractual restrictions may limit our ability to do so depends on our ability to realize the expected benefits of the acquisition of the Grace Portfolio. Failure to realize the expected benefits of the acquisition of the Grace Portfolio, within the anticipated timeframe or at all, or the incurrence of unexpected costs, could have a material adverse effect on our financial condition and results of operations and our ability to pay distributionsobtain cash from cash flow from operations.
As a result of the additional indebtedness incurred and the issuance of the preferred equity interests to acquire the Grace Portfolio, we may experience a potential material adverse effect on our financial condition and results of operations.
On February 27, 2015, we acquired the Grace Portfolio. We funded the purchase price through a combination of $230.1 million in cash on-hand funded with proceeds from the Offering, the assumption of $903.9 million in existing mortgage and mezzanine indebtedness collateralized by 96 of the 116 hotels in the Grace Portfolio, (the "Assumed Grace Indebtedness"), the incurrence of $227.0 million in new mortgage financing secured by the remaining 20 hotels and one of the hotels in the Barceló Portfolio (the "Additional Grace Mortgage Loan" and, together with the Assumed Grace Indebtedness, the "Grace Indebtedness"), and the issuance ofsuch entities. For example, the Grace Preferred Equity Interests for $447.1 million.
were issued by two of our subsidiaries that indirectly own 115 of our hotels and the holders thereof rank senior to us in payment of distributions and in the distribution of assets with respect to those hotels. Our incurrencestockholders’ claims as stockholders are structurally subordinated to all existing and future liabilities and obligations of the Grace IndebtednessOP and the issuance of the Grace Preferred Equity Interests could also have adverse consequences on our business, such as:its subsidiaries, including distribution and redemption
requiring usobligations to use a substantial portionthe holders of our cash flow from operations to service the Grace IndebtednessClass C Units and pay distributions on the Grace Preferred Equity Interests;Interests and property-level obligations to lenders and trade creditors. Therefore, in the event of our bankruptcy, liquidation or reorganization, our assets and those of the OP and its subsidiaries will be available to satisfy our stockholders’ claims as stockholders only after all of our liabilities and obligations and the liabilities and obligations of the OP and its subsidiaries have been paid in full. Following the Initial Closing, our outstanding obligations that would be senior to any claims by our stockholders in the event of our bankruptcy, liquidation or reorganization included $135.0 million in liquidation preference Class C Units, $242.9 million in liquidation value of Grace Preferred Equity Interests and $895.4 million in principal outstanding under outstanding mortgage and mezzanine debt and $26.7 million in principal outstanding under the Summit Loan.
limiting
We are not currently paying cash distributions, and our ability to make future cash distributions will depend on our future cash flows and may be dependent on our ability to obtain additional financingliquidity, which may not be available on favorable terms, or at all. Moreover, under the Brookfield Approval Rights, prior approval is required before we can declare or pay any distributions or dividends to fund our working capital needs, acquisitions, capital expenditurescommon stockholders, except for cash distributions equal to or other debt service requirements or for other purposes;
increasing the costs of incurring additional debt;
increasing our exposure to floating interest rates;
limiting ourless than $0.525 per annum per share. Our ability to competepay cash distributions is also subject to the seniority of Class C Units with other companies thatrespect all distributions by the OP, and we will not be able to make any cash distributions to our common stockholders if we are not as highly leveraged, as we may be less capableable to meet our quarterly distributions obligations to the holders of respondingClass C Units. We are also required to adverse economic and industry conditions;
restricting us from making strategic acquisitions, developing properties or exploiting business opportunities;
restricting the way in which we conduct our business becausemake periodic payments of financial and operating covenants in the agreements governing the Grace Indebtedness, including the rights ofinterest to our lenders to consent before we modify hotel management agreements or franchise agreements and that require usmonthly distributions to replace sub-property managers under certain circumstances;
consent rights the holders of the Grace Preferred Equity Interests willthat have priority over major actions by us relating to the Grace Portfolio, including the sale of certain hotels;
if we are unable to satisfy the redemption, distribution, or other requirements of the Grace Preferred Equity Interests (including if there is a default under the related guarantees provided by our company, our operating partnership and the individual principals of the parent of our Sponsor), holders of the Grace Preferred Equity Interests will have certain rights, including the ability to assume control of the operations of the Grace Portfolio;
exposing us to potential events of default (if not cured or waived) under covenants contained in our debt instruments that could have a material adverse effect on our business, financial condition and operating results;
increasing our vulnerability to a downturn in general economic conditions; and
limiting our ability to react to changing market conditions in our industry.
The impact of any of these potential adverse consequences could have a material adverse effect on our results of operations and financial condition.
We intend to use substantially all available offering proceeds following the acquisition of the Grace Portfolio to reduce our borrowings to our intended limit, which may limit our ability to pay distributions or acquire additional properties for some time.
Prior to our entry into an agreement to acquire the Grace Portfolio in May 2014, a majority of our independent directors waived the total portfolio leverage requirement of our charter with respect to the acquisition of the Grace Portfolio should such total portfolio leverage exceed 300% of our total "net assets" (as defined in our charter) upon the acquisition of the Grace Portfolio. Following the acquisition of the Grace Portfolio in February 2015, our total portfolio leverage (which includes the Grace Preferred Equity Interests) significantly exceeded this 300% limit, and we expect it will continue to do so for some time. Accordingly, we intend to use substantially all available offering proceeds following the acquisition of the Grace Portfolio to reduce our borrowings to our intended limit, which is below the 300% maximum limit. In addition, the principal amount of our outstanding secured financing, which excludes the Grace Preferred Equity Interests, is approximately 60% of the total value of our real estate investments and our other assets.
The $63.1 million principal amount outstanding under the Barceló Promissory Note (defined under “Item 2. Properties”) matures, by its terms, ten business days after the date we raise $70.0 million in common equity in our Offering following the closing of the acquisition of the Grace Portfolio and payment of all acquisition related expenses (including payments to our Advisor and its affiliates), which has not yet occurred. In addition, following the earlier to occur of either (i) the repayment of the Barceló Promissory Note, together with the $3.5 million deferred payment due concurrently, or (ii) the date the gross amount of proceeds from our Offering we receive after the acquisition of the Grace Portfolio and payment of all acquisition related expenses (including payments to our Advisor and its affiliates) exceeds $100.0 million, we are required to use 35% of any equity proceeds from our Offering to redeem the Grace Preferred Equity Interests at par, up to a maximum of $350.0 million in redemptions for any 12-month period. We are required to redeem 50% of the Grace Preferred Equity Interests by
February 27, 2018 and 100% of the Grace Preferred Equity Interests upon the earlier of (i) 90 days following the stated maturity (including extension options) under the Grace Indebtedness, and (ii) February 27, 2019.
While repayment of the Barceló Promissory Note and required redemptions of the Grace Preferred Equity Interests will contribute to reducing our borrowings to our intended limit, we may continue to use substantially all available offering proceeds to repay debt even after we have reduced our borrowings to their intended limit. In addition, the continued use of substantially all offering proceeds to repay debt will reduce the available cash flow to fund working capital, acquisitions, capital expenditures and other general corporate purposes, which could have a material adverse impact on our business and reduce cash available for distributions to holders of our common stock.
Moreover, there can be no assurance we
Our stockholders’ interests in us were diluted by the issuance of Class C Units to the Brookfield Investor and shares of common stock to the Property Manager and the Advisor at the Initial Closing and will be ablefurther diluted to raise the substantial funds requiredextent we issue additional Class C Units at Subsequent Closings and as PIK Distributions.
At the Initial Closing, we issued $135.0 million in liquidation preference of Class C Units to meet these objectivesthe Brookfield Investor pursuant to the SPA, 279,239 shares of our common stock to the Property Manager as consideration pursuant to the Framework Agreement and 524,686 shares of our common stock to the Advisor upon redemption of its limited partnership interests in the OP pursuant to the Framework Agreement. Pursuant to the limited partnership agreement of the OP, Class C Units are convertible into OP Units at an initial conversion price of $14.75, subject to anti-dilution and other adjustments upon the occurrence of certain events and transactions, and OP Units are, in turn, generally redeemable for shares of our common stock on a timely basis,one-for-one-basis or the cash value of a corresponding number of shares, at all. Our Offering is being made on a reasonable best efforts basis, wherebyour election.
Further dilution could also occur with respect to additional Class C Units we issue. Subject to the brokers participating interms and conditions of the Offering are only required to use their reasonable best effortsSPA, we also have the right to sell, our shares and have no firm commitment or obligationthe Brookfield Investor has agreed to purchase, anyadditional Class C Units in an aggregate amount of the shares. Moreover, our Offering must maintain registration in every state in which we offer or sell shares. Generally, such registrationsup to $265.0 million at Subsequent Closings that may occur through February 2019. The Subsequent Closings are for a period of one year,subject to conditions, and there can be no assurance they will be renewedcompleted on their current terms, or otherwise extended annually. Thus,at all. In addition, holders of Class C Units are also entitled to receive, with respect to each Class C Unit, quarterly PIK Distributions payable in Class C Units at a rate of 5% per annum. Moreover, if the Company fails to pay the quarterly cash distributions on Class C Units when due, the per annum rate for cash distributions will increase to 10% until all accrued and unpaid distributions required to be paid in cash are reduced to zero. Any accrued and unpaid distributions would be part of the liquidation preference of Class C Units that are convertible into OP Units and subsequently redeemable for shares of our common stock.
Subject to the Brookfield Approval Rights, we may havealso conduct future offerings of common stock or equity securities that are senior to stop selling shares in any state in which our registration is not renewed or otherwise extended annually. During the period from January 7, 2014 (the date we commenced our Offering) through March 15, 2015, we have received $375.1 million in proceeds from our Offering, allcommon stock for purposes of which has been used to pay distributions, reduce borrowings, acquire properties (including the Grace Portfolio) or for general corporate purposes. There can be no assurance as to the length of time we will be limited in our ability to paydividend distributions or acquire additional properties using proceeds from our Offering.
In addition, if we are unableupon liquidation. We also have, and expect to continue to, raise substantial fundsissue share-based awards to our directors, officers and employees. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we will not achievecannot predict or estimate the amount, timing or nature of our objective of continuing to reduce our fixed operating expenses as a percentage of gross income, and our financial condition and ability to pay distributions could be adversely affected.future offerings. To the extent we issue additional equity interests, our inability to raise substantial funds couldstockholders’ percentage ownership interest in us will be diluted. In addition, depending upon the terms and pricing of any additional offerings and the value of our real estate investments, our investors may also experience dilution in the book value and fair value of their shares.
Additionally, any convertible, exercisable or exchangeable securities that we issue in the future may have rights, preferences and privileges more favorable than those of our common stock and may result in dilution to owners of our being unablecommon stock. Holders of our common stock are not entitled to make required redemptionspreemptive rights or distributions and meet other conditions of the Grace Preferred Equity Interests, the holders of Grace Preferred Equity Interests will have certain rights, including the ability to assume control of the operations of the Grace Portfolio.protections against dilution.
If we are unable to find a replacement guarantor for certain obligations related to the Grace Indebtedness, we will remain dependent on the previous guarantors to remain in this capacity and may be required to make payments, for reimbursements or guarantee fees, to them.
The previous guarantors of the Assumed Grace Indebtedness (who are affiliates of the sellers of the Grace Portfolio) remained as guarantors, together with our company and our operating partnership, following the closing of the acquisition of the Grace Portfolio with respect to certain limited recourse obligations and environmental indemnities under the Assumed Grace Indebtedness, andamount we were required to enter into a supplemental guarantee agreement to ensure that they would remain in this capacity. The supplemental guarantee agreement provides that we, together with our operating partnership and individual principals of the parent of our Sponsor, are jointly and severally liable to reimburse the previous guarantors for any payments they are required to make if their guarantee is called.
The supplemental guarantee agreement also provides that we will be required to pay holders of Class C Units in a guarantee fee of $8.0 million per annum, which will start accruingFundamental Sale Transaction may discourage a third party from acquiring us in August 2016, 18 months following the closing of the acquisition of the Grace Portfolio. Ifa manner that might otherwise result in a premium price to our stockholders.
The amount we are unable to find a replacement guarantor before then or otherwise release the previous guarantors, we willwould be required to pay guarantee fees toholders of Class C Units upon the previous guarantors,consummation of any Fundamental Sale Transaction, which could adversely impactwould generally include any merger or acquisition transaction whereby all shares of our results from operations and our ability to pay distributions. Our results from operations and our ability to pay distributions could also be adversely impacted if the previous guarantors are required to make any payments if their guarantee is called and we are required to reimburse them.common stock or
To comply with brand standards under our franchise agreements, we are required to make capital expenditures, which will be substantial, pursuant to property improvement plans, and we are required to make regular deposits to partially reserve for these amounts under the Grace Indebtedness.
In connection with the Grace Acquisition, our franchisors required property improvement plans ("PIPs"), which set forth their renovation requirements for the hotels in the Grace Portfolio.
Pursuant to the terms of the Assumed Grace Indebtedness, we are required to make an aggregate of $73.5 million in periodic PIP reserve deposits during 2015 and 2016 to cover a portion of the estimated costs of the PIPs on the total 96 hotels collateralizing that debt. In addition, pursuant to a guaranty entered into in connection with the Assumed Grace Indebtedness, we are required to guarantee the difference between (i) the cost of the PIPs with respect to those 96 hotels during the 24-month period following the acquisition of the Grace Portfolio, estimated to be $102.0 million, and (ii) the amount actually deposited into the PIP reserve with respect to the Assumed Grace Indebtedness.
substantially all of our assets would be sold to a third party, prior to March 31, 2022, would include a substantial premium to the liquidation preference. Upon the consummation of a Fundamental Sale Transaction, the holders of Class C Units are entitled to receive, prior to and in preference to any distribution of any of the assets or surplus funds of the Company to the holders of any other limited partnership interests in the OP:
in the case of a Fundamental Sale Transaction consummated on or prior to February 27, 2019, an amount per Class C Unit in cash equal to such Class C Unit’s pro rata share (determined based on the respective Liquidation Preferences of all Class C Units) of an amount equal to (I) $800.0 million less (II) the sum of (i) the difference between (A) $400.0 million and (B) the aggregate purchase price paid under the SPA of all outstanding Class C Units (with the purchase price for Class C Units issued as PIK Distributions being zero for these purposes) and (ii) all cash distributions actually paid to date;
in the case of a Fundamental Sale Transaction consummated after February 27, 2019 and prior to the date that is 57 months and one day after the date of the Initial Closing, an amount per Class C Unit in cash equal to (x) two times the purchase price under the SPA of such Class C Unit (with the purchase price for Class C Units issued as PIK Distributions being zero for these purposes), less (y) all cash distributions actually paid to date; and
in the case of a Fundamental Sale Transaction consummated on or after the date that is 57 months and one day after the Initial Closing, an amount per Class C Unit in cash equal to the liquidation preference of such Class C Unit plus a make whole premium for such Class C Unit calculated based on a discount rate of 5% and the assumption that such Class C Unit had not been redeemed until March 31, 2022, the fifth anniversary of the Initial Closing.
The premium required to be paid to redeem the Class C Units upon consummation of a Fundamental Sale Transaction may have the effect of delaying, deferring or preventing a transaction that might otherwise provide a premium price for holders of our common stock. In addition, subject to the Brookfield Approval Rights, we could issue preferred stock with terms and conditions that could have a priority as to distributions and amounts payable upon liquidation over the rights of the holders of our common stock.
If we are unable to obtain the financing required to redeem any Class C Units when required to do so, the Brookfield Investor will be able to elect a majority of our board of directors and may cause us, through the exercise of the rights of the Special General Partner, to commence selling our assets until the Class C Units have been fully redeemed.
Following the Initial Closing, approximately $135.0 million in liquidation preference of Class C Units was outstanding and an additional $265.0 million in liquidation preference of Class C Units may be issued at Subsequent Closing. Quarterly PIK Distributions will also increase the liquidation preference of the outstanding Class C Units.
From time to time on or after March 31, 2022, the fifth anniversary of the Initial Closing, and at any time following the rendering of a judgment enjoining or otherwise preventing the holders of Class C Units, the Brookfield Investor or the Special General Partner from exercising their respective rights, any holder of Class C Units may, at its election, require us to redeem any or all of its Class C Units for an amount in cash equal to the liquidation preference. In addition, upon the occurrence of certain events related to our failure to qualify as a REIT or the occurrence of a material breach by us of certain provisions of the limited partnership agreement of the OP, in each case, subject to certain notice and cure rights, holders of Class C Units have the right to require us to redeem any Class C Units submitted for redemption for an amount equivalent to what the holders of Class C Units would have been entitled to receive in a Fundamental Sale Transaction if the date of redemption were the date of the consummation of the Fundamental Sale Transaction. These amounts are set forth under “-The amount we would be required to pay holders of Class C Units in a Fundamental Sale Transaction may discourage a third party from acquiring us in a manner that might otherwise result in a premium price to our stockholders.”
Three months after the failure of the OP to redeem Class C Units when required to do so:
the Special General Partner will have, subject to first obtaining any approval (including the approval of our stockholders) required by applicable Maryland law, the exclusive right, power and authority to sell the assets or properties of the OP for cash upon engaging a reputable, national third party sales broker or investment bank reasonably acceptable to holders of a majority of the then outstanding Class C Units to conduct an auction or similar process designed to maximize the sales price, and the proceeds from sales of assets or properties by the Special General Partner must be used first to make any and all payments or distributions due or past due with respect to the Class C Units, regardless of the impact of such payments or distributions on us;
the holder of the Redeemable Preferred Share would have the right to increase the size of our board of directors by a number of directors that would result in the holder of the Redeemable Preferred Share being entitled to nominate and elect a majority of our board of directors and fill the vacancies created by the expansion of our board of directors, subject to compliance with the provisions of our charter requiring at least a majority of our directors to be “Independent Directors”;
the 5% per annum PIK Distribution rate would increase to a per annum rate of 7.50%, and would further increase by 1.25% per annum for the next four quarterly periods thereafter, up to a maximum per annum rate of 12.5%; and
the standstill (but not the standstill on voting) provisions otherwise applicable to the Brookfield Investor and certain of its affiliates would terminate.
Any exercise of these rights following our failure to redeem any Class C Units when required to do so could have a material and adverse effect on our business and results of operations, as well as the value of shares of our common stock. There can be no assurance that we will be able to obtain the financing required to redeem any Class C Units when required to do so on favorable terms, or at all. Moreover, such financing may be subject to the Brookfield Approval Rights, and there can be no assurance this prior approval will be obtained when requested, or at all.
The limit on the number of shares a person may own may discourage a takeover that could otherwise result in a premium price to our stockholders.
Our charter, with certain exceptions, authorizes our directors to take such actions as are necessary and desirable to preserve our qualification as a REIT. Unless exempted (prospectively or retroactively) by our board of directors, no person may own more than 4.9% in value of the aggregate of our outstanding shares of stock or more than 4.9% (in value or in number of shares, whichever is more restrictive) of any class or series of shares of our stock. This restriction may have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all our assets) that might provide a premium price for holders of our common stock. At the Initial Closing, as contemplated by and pursuant to the SPA, we granted the Brookfield Investor and its affiliates a waiver of these aggregate share ownership limits, and permitted the Brookfield Investor and its affiliates to own up to 49.9% in value of the aggregate of the outstanding shares of our stock or up to 49.9% (in value or in number of shares, whichever is more restrictive) of any class or series of shares of our stock, subject to certain terms and conditions.
Maryland law prohibits certain business combinations, which may make it more difficult for us to be acquired and may limit our stockholder’s ability to exit the investment.
Under Maryland law, “business combinations” between a Maryland corporation and an interested stockholder or an affiliate of an interested stockholder are prohibited for five years after the most recent date on which the interested stockholder becomes an interested stockholder. These business combinations include a merger, consolidation, share exchange or, in circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities. An interested stockholder is defined as:
any person who beneficially owns, directly or indirectly, 10% or more of the voting power of the corporation’s outstanding voting stock; or
an affiliate or associate of the corporation who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of the then outstanding stock of the corporation.
A person is not an interested stockholder under the statute if our board of directors approved in advance the transaction by which the person otherwise would have become an interested stockholder. However, in approving a transaction, our board of directors may provide that its approval is subject to compliance, at or after the time of the approval, with any terms and conditions determined by our board of directors.
After the five-year prohibition, any such business combination between the Maryland corporation and an interested stockholder generally must be recommended by our board of directors and approved by the affirmative vote of at least:
80% of the votes entitled to be cast by holders of outstanding shares of voting stock of the corporation; and
two-thirds of the votes entitled to be cast by holders of voting stock of the corporation other than shares held by the interested stockholder with whom or with whose affiliate the business combination is to be effected or held by an affiliate or associate of the interested stockholder.
These super-majority vote requirements do not apply if the corporation’s common stockholders receive a minimum price, as defined under Maryland law, for their shares in the form of cash or other consideration in the same form as previously paid by the interested stockholder for its shares. The business combination statute permits various exemptions from its provisions, including business combinations that are exempted by our board of directors prior to the time that the interested stockholder becomes an interested stockholder. Pursuant to the termsstatute, our board of directors has exempted any business combination involving the Brookfield Investor and certain affiliates of the Additional Grace Mortgage Loan,Brookfield Investor. Consequently, the five-year prohibition and the super-majority vote requirements will not apply to business combinations between us and the Brookfield Investor and certain affiliates of the Brookfield Investor. As a result, the Brookfield Investor and certain affiliates of the Brookfield Investor may be able to enter into business combinations with us that may not be in the best interest of our stockholders, without compliance with the super-majority vote requirements and the other provisions of the statute. The business combination statute may discourage others from trying to acquire control of us and increase the difficulty of consummating any offer to acquire us.
Maryland law limits the ability of a third party to buy a large stake in us and exercise voting power in electing directors, which may discourage a takeover that could otherwise result in a premium price to our stockholders.
The Maryland Control Share Acquisition Act provides that a holder of “control shares” of a Maryland corporation acquired in a “control share acquisition” has no voting rights with respect to such shares except to the extent approved by the affirmative vote of stockholders entitled to cast two-thirds of the votes entitled to be cast on the matter. Shares of stock owned by the acquirer, by officers or by employees who are directors of the acquiror, are excluded from shares entitled to vote on the matter. “Control shares” are voting shares of stock which, if aggregated with all other shares of stock owned by the acquirer or in respect of which the acquirer can exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy), would entitle the acquirer to exercise voting power in electing directors within specified ranges of voting power. Control shares do not include shares the acquiring person is then entitled to vote as a result of having previously obtained stockholder approval or shares acquired directly from the corporation. A “control share acquisition” means, subject to certain exceptions, the acquisition of issued and outstanding control shares. The control share acquisition statute does not apply (a) to shares acquired in a merger, consolidation or share exchange if the corporation is a party to the transaction, or (b) to acquisitions approved or exempted by the charter or bylaws of the corporation. Our bylaws contain a provision exempting from the Maryland Control Share Acquisition Act any and all acquisitions of our stock by any person. There can be no assurance that this provision will not be amended or eliminated at any time in the future.
We are an “emerging growth company” under the federal securities laws and will be subject to reduced public company reporting requirements.
In April 2012, President Obama signed into law the Jumpstart Our Business Startups Act, or the JOBS Act. We are an “emerging growth company,” as defined in the JOBS Act, and are eligible to take advantage of certain exemptions from, or reduced disclosure obligations relating to, various reporting requirements that are normally applicable to public companies.
We could remain an “emerging growth company” for up to five years, or until the earliest of (1) the last day of the first fiscal year in which we have total annual gross revenue of $1 billion or more, (2) December 31 of the fiscal year that we become a “large accelerated filer” as defined in Rule 12b-2 under the Securities and Exchange Act of 1934, as amended (the "Exchange Act"), (which would occur if the market value of our common stock held by non-affiliates exceeds $700 million, measured as of the last business day of our most recently completed second fiscal quarter, and we have been publicly reporting for at least 12 months) or (3) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three-year period. Under the JOBS Act, emerging growth companies are not required to (1) provide an auditor’s attestation report on management’s assessment of the effectiveness of internal control over financial reporting, pursuant to Section 404 of the Sarbanes-Oxley Act, (2) comply with new audit rules adopted by the PCAOB after April 5, 2012 (unless the SEC determines otherwise), (3) provide certain disclosures relating to executive compensation generally required for larger public companies or (4) hold shareholder advisory votes on executive compensation.
Additionally, the JOBS Act provides that an “emerging growth company” may take advantage of an extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies. This means an “emerging growth company” can delay adopting certain accounting standards until such standards are otherwise applicable to private companies. However, we are electing to “opt out” of such extended transition period, and will therefore comply with new or revised accounting standards on the applicable dates on which the adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of such extended transition period for compliance with new or revised accounting standards is irrevocable.
The return on an investment in our common stock may be reduced if we are required to register as an investment company under the Investment Company Act.
We are not registered, and do not intend to register ourselves or any of our subsidiaries, as an investment company under the Investment Company Act. If we become obligated to register ourselves or any of our subsidiaries as an investment company, the registered entity would have to comply with a variety of substantive requirements under the Investment Company Act imposing, among other things:
limitations on capital structure;
restrictions on specified investments;
prohibitions on transactions with affiliates; and
requirements to comply with reporting, record keeping, voting, proxy disclosure and other rules and regulations that would significantly change our operations.
We intend to conduct our operations, directly and through wholly or majority-owned subsidiaries, so that we and each of our subsidiaries is not an investment company under the Investment Company Act. Under Section 3(a)(1)(A) of the Investment Company Act, a company is deemed to be an “investment company” if it is, or holds itself out as being, engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities. Under Section 3(a)(1)(C) of the Investment Company Act, a company is deemed to be an “investment company” if it is engaged, or proposes to engage, in the business of investing, reinvesting, owning, holding or trading in securities and owns or proposes to acquire “investment securities” having a value exceeding 40% of the value of its total assets (exclusive of government securities and cash items) on an unconsolidated basis, which we refer to as the “40% test.” “Investment securities” excludes (A) government securities, (B) securities issued by employees’ securities companies, and (C) securities issued by majority-owned subsidiaries which (i) are not investment companies, and (ii) are not relying on the exception from the definition of investment company under Section 3(c)(1) or 3(c)(7) of the Investment Company Act.
Because we are primarily engaged in the business of acquiring real estate, we believe that our company and most, if not all, of its wholly and majority-owned subsidiaries will not be considered investment companies under either Section 3(a)(1)(A) or Section 3(a)(1)(C) of the Investment Company Act. If we or any of our wholly or majority-owned subsidiaries would ever inadvertently fall within one of the definitions of “investment company,” we intend to rely on the exception provided by Section 3(c)(5)(C) of the Investment Company Act.
Under Section 3(c)(5)(C), the SEC staff generally requires our company to maintain at least 55% of its assets directly in qualifying assets and at least 80% of the entity’s assets in qualifying assets and in a broader category of real estate related assets to qualify for this exception. Mortgage-related securities may or may not constitute such qualifying assets, depending on the characteristics of the mortgage-related securities, including the rights that we have with respect to the underlying loans. Our ownership of mortgage-related securities, therefore, is limited by provisions of the Investment Company Act and SEC staff interpretations.
The method we use to classify our assets for purposes of the Investment Company Act is based in large measure upon no-action positions taken by the SEC staff in the past. These no-action positions were issued in accordance with factual situations that may be substantially different from the factual situations we may face, and a number of these no-action positions were issued more than ten years ago. No assurance can be given that the SEC staff will concur with our classification of our assets. In addition, the SEC staff may, in the future, issue further guidance that may require us to re-classify our assets for purposes of qualifying for an exclusion from regulation under the Investment Company Act. If we are required to re-classify our assets, we may no longer be in compliance with the exclusion from the definition of an “investment company” provided by Section 3(c)(5)(C) of the Investment Company Act.
A change in the value of any of our assets could cause us or one or more of our wholly or majority-owned subsidiaries to fall within the definition of “investment company” and negatively affect our ability to maintain our exemption from regulation under the Investment Company Act. To avoid being required to register our company or any of its subsidiaries as an investment company under the Investment Company Act, we may be unable to sell assets we would otherwise want to sell and may need to sell assets we would otherwise wish to retain. In addition, we may have to acquire additional income- or loss-generating assets that we might not otherwise have acquired or may have to forgo opportunities to acquire interests in companies that we would otherwise want to acquire and would be important to our investment strategy.
If we were required to register our company as an investment company but failed to do so, we would be prohibited from engaging in our business, and civil actions could be brought against us. In addition, our contracts would be unenforceable unless a court required enforcement, and a court could appoint a receiver to take control of us and liquidate our business.
Our stockholders have limited voting rights under our charter and Maryland law.
Pursuant to Maryland law and our charter, our stockholders are entitled to vote only on the following matters without concurrence of our board of directors: (a) election or removal of directors; (b) amendment of the charter, as provided in Article XIII of the charter; (c) dissolution of us; and (d) to the extent required under Maryland law, merger or consolidation of us or the sale or other disposition of all or substantially all of our assets. With respect to all other matters, our board of directors must first adopt a resolution declaring that a proposed action is advisable and direct that such matter be submitted to our stockholders for approval or ratification. Certain matters our board of directors may otherwise direct to be submitted to our stockholders for approval or ratification may also be subject to the Brookfield Approval Rights such that stockholder approval or ratification may not be sufficient for the matter to be decided or become effective. These limitations on voting rights may limit our stockholders’ ability to influence decisions regarding our business.
Subject to the Brookfield Approval Rights, our board of directors may change our investment policies without stockholder approval, which could alter the nature of our stockholder’s investments.
Our charter requires that our independent directors review our investment policies at least annually to determine that the policies we are following are in the best interest of the stockholders. These policies may change over time. The methods of implementing our investment policies also may vary as the commercial debt markets change, new real estate development trends emerge and new investment techniques are developed. Our investment policies, the methods for their implementation, and our other objectives, policies and procedures may be altered by our board of directors without the approval of our stockholders subject to the Brookfield Approval Rights. We may make adjustments to our portfolio based on real estate market conditions and investment opportunities, and we may change our targeted investments and investment guidelines at any time without the consent of our stockholders, which could result in our making investments that are different from, and possibly riskier than, our current investments. As a result, the nature of our stockholder’s investments could change without their consent. A change in our investments or investment guidelines may increase our exposure to interest rate risk, default risk and real estate market fluctuations.
Risks Related to Investments in Real Estate
Our operating results will be affected by economic and regulatory changes that have an aggregateadverse impact on the real estate market in general, and we may not be profitable or realize growth in the value of $20.0 millionour real estate properties.
Our operating results are subject to risks generally incident to the ownership of real estate, including:
changes in periodic PIP reserve deposits during 2015general economic or local conditions;
changes in supply of or demand for similar or competing properties in an area;
changes in interest rates and 2016availability of permanent mortgage funds that may render the sale of a property difficult or unattractive;
changes in tax, real estate, environmental and zoning laws; and
periods of high interest rates and tight money supply.
These and other reasons may prevent us from being profitable or from realizing growth or maintaining the value of our real estate properties.
A prolonged economic slowdown, a lengthy or severe recession or declining real estate values could harm our investments.
Our investments may be susceptible to covereconomic slowdowns or recessions, which could lead to financial losses and a decrease in revenues, earnings and assets. An economic slowdown or recession, in addition to other non-economic factors such as an excess supply of properties, could have a material negative impact on the values of our investments. Declining real estate values will reduce the value of our properties, as well as our ability to refinance our properties and use the value of our existing properties to support the purchase or investment in additional properties. A severe weakening of the economy or a recession could also lead to lower occupancy, which could create an oversupply of rooms resulting in reduced rates to maintain occupancy. There can be no assurance that our real estate investments will not be adversely impacted by a severe slowing of the economy or a recession. Fluctuations in interest rates, limited availability of capital and other economic conditions beyond our control could negatively impact our portfolio and decrease the value of an investment in our common stock.
We have obtained only limited warranties when we purchase properties and have only limited recourse if our due diligence did not identify any issues that lower the value of our properties.
We often purchase properties in their “as is” condition on a “where is” basis and “with all faults,” without any warranties of merchantability or fitness for a particular use or purpose. In addition, purchase agreements often contain only limited warranties, representations and indemnifications that will only survive for a limited period after the closing. The purchase of properties with limited warranties increases the risk that we may lose some or all our invested capital in the property as well as the loss of income from that property.
Our real estate investments are relatively illiquid and subject to some restrictions on sale, and therefore we may not be able to dispose of properties at the time of our choosing or on favorable terms.
The real estate market is affected by many factors, such as general economic conditions, availability of financing, interest rates and other factors, including supply and demand, that are beyond our control. We cannot predict whether we will be able to sell any property for the price or on the terms set by us, or whether any price or other terms offered by a prospective purchaser would be acceptable to us. We cannot predict the length of time needed to find a willing purchaser and to close the sale of a property. We may be required to expend funds to correct defects or to make improvements before a property can be sold. We cannot assure our stockholders that we will have funds available to correct such defects or to make such improvements. In addition, substantially all of our properties serve as collateral under our indebtedness and we have agreed to restrictions under our indebtedness that prohibit the sale of properties at all or unless certain conditions have been met, including the payment of release prices, the maintenance of financial ratios and/or the payment of yield maintenance premiums. We may agree to similar restrictions, or other restrictions, such as a limitation on the amount of debt that can be placed or repaid on a property, with respect to other properties in the future. Our inability to sell a property when we desire to do so may cause us to reduce our selling price for the property. Moreover most dispositions we could make would be subject to the Brookfield Approval Rights and there can be no assurance this prior approval will be obtained when requested, or at all. We have agreed in the limited partnership agreement of the OP that, three months after the failure of the OP to redeem Class C Units when required to do so, the Special General Partner will have certain rights to sell the assets or properties of the OP for cash upon engaging a reputable, national third party sales broker or investment bank to conduct an auction or similar process designed to maximize the sales price, but there can be assurance this process will be successful in achieving the intended outcome. Moreover, the proceeds from sales of assets or properties by the Special General Partner must be used first to make any and all payments or distributions due or past due with respect to the Class C Units, regardless of the impact of such payments or distributions on the Company or the OP.
Upon sales of properties or assets, we may become subject to contractual indemnity obligations and incur material liabilities and expenses, including tax liabilities, change of control costs, prepayment penalties, required debt repayments, transfer taxes and other transaction costs. For example, subject to a replacement right and a right to terminate upon payment of a termination fee beginning in April 2021, four years after the Initial Closing, our management agreements with Crestline do not terminate in connection with a sale, which would require us to obtain the consent of Crestline to terminate the management agreement to effect a sale of a property, which may not be available on commercially reasonable terms, or at all. In addition, the payment of any release price and repayment of mortgage indebtedness will reduce the net proceeds we receive from any asset sales. Any delay in our receipt of proceeds, or diminishment of proceeds, from the sale of a property could adversely impact us.
We have financed and may in the future acquire or finance properties with lock-out provisions, which may prohibit us from selling properties, which could have an adverse effect on our stockholders’ investments.
Lock-out provisions, which are included in certain of our current indebtedness and may be included in our future indebtedness, could materially restrict us from selling or otherwise disposing of or refinancing properties. For example, these provisions may prohibit us or restrict us from prepaying all or a portion of the estimated costsdebt for a period of the PIPs on the total 21 hotels collateralizing that debt. The Grace Indebtedness also requirestime or may require us to deposit 4.0%maintain specified debt levels for a period of time on some or all properties, or may prohibit or restrict us from releasing properties from the gross revenue of the hotels into a separate account for the ongoing replacement or refurbishment of furniture, fixtures and equipment at the hotels.
In connection with any future revisions to our franchise or hotel management agreements or a refinancing of the Grace Indebtedness, our franchisors may require that we make further renovations or enter into additional PIPs. In addition, upon regular inspection of our hotels our franchisors may determine that additional renovations are required to bring the physical condition of our hotels into compliance with the specifications and standards each franchisor or hotel brand has developed.
lender’s liens. These capital expenditures will be substantial and could adverselyprovisions affect our ability to payturn our investments into cash and thus affect cash available for distributions or reduceto our borrowings or use capital forstockholders. Lock-out provisions could also impair our ability to take other corporate purposes. Moreover, if we do not satisfyactions during the PIP renovation requirements,lock-out period that could be in the franchisorbest interests of our stockholders and, therefore, may have an adverse impact on the rightvalue of our shares, relative to terminate the applicable agreement and we mayvalue that would result if the lock-out provisions did not exist. In particular, lock-out provisions could preclude us from participating in major transactions that could result in a disposition of our assets or a change in control even though that disposition or change in control might be in default under our indebtedness. In addition, if we default on a franchise agreement as a resultthe best interests of our failure to comply with the PIP requirements, in general, we will be required to pay the franchisor liquidated damages, and we may also be in default under the Grace Indebtedness.stockholders.
If we are found to be in breach of a ground lease or are unable to renew a ground lease, we could be materially and adversely affected.
Eight of the hotels in the Grace Portfolio are on land subject to ground leases. Accordingly, we only own a long-term leasehold or similar interest in those hotels, and we have no economic interest in the land or buildings at the expiration of the ground lease or permit and will not share in the income stream derived from the lease or permit or in any increase in value of the land associated
with the underlying property. Our ground leases generally have a remaining term of at least 10 years (including renewal options).
If we are found to be in breach of a ground lease, we could lose the right to use the hotel. We could also be in breach ofdefault under the Grace Indebtedness. In addition, unless we can purchase a fee interest in the underlying land and improvements or extend the terms of these leases before their expiration, as to which no assurance can be given, we will lose our right to operate these properties and our interest in the improvements upon expiration of the leases. Our ability to exercise any extension options relating to our ground leases is subject to the condition that we are not in default under the terms of the ground lease at the time that we exercise such options, and we can provide no assurances that we will be able to exercise any available options at such time. Our ability to exercise any extension option is further subject to conditions contained in the Grace Indebtedness.Indebtedness and the Brookfield Approval Rights. Furthermore, we can provide no assurances that we will be able to renew any ground lease upon its expiration. If we were to lose the right to use a hotel due to a breach or non-renewal of the ground lease, we would be unable to derive income from such hotel and would be required to purchase an interest in another hotel to attempt to replace that income, which could materially and adversely affect us.
Risks Related to Conflicts of Interest
Our Advisor and its affiliates, including some of our executive officers, directors and other key real estate professionals, face conflicts of interest caused by their compensation arrangements with us, which could result in actions that are not in the long-term best interests of our stockholders.
Our Advisor and its affiliates receive fees from us, which could be substantial. These fees could influence our Advisor’s advice to us as well as its judgment with respect to:
the continuation, renewal or enforcement of our agreements with affiliates of our Sponsor, including the advisory agreement, the property management agreements, the dealer-manager agreement and the sub-property management agreements between our Property Manager and Sub-Property Manager;
public offerings of equity by us, which will likely entitle our Advisor to increased acquisition fees and asset management subordinated participation interests;
sales of properties and other investments to third parties, which entitle our Advisor and the Special Limited Partner to real estate commissions and possible subordinated incentive distributions, respectively;
acquisitions of properties and other investments from other programs sponsored directly or indirectly by the parent of our Sponsor, which might entitle affiliates of our Sponsor to real estate commissions and possible subordinated incentive fees and distributions in connection with its services for the seller;
acquisitions of properties and other investments from third parties and loan originations to third parties, which entitle our Advisor to acquisition fees and asset management subordinated participation interests;
borrowings to acquire properties and other investments and to originate loans, which borrowings generate financing coordination fees and increase the acquisition fees and asset management subordinated participation interests payable to our Advisor;
whether and when we seek to list our common stock on a national securities exchange, which listing could entitle the Special Limited Partner to a subordinated incentive listing distribution; and
whether and when we seek to sell the company or its assets, which sale could entitle our Advisor to a subordinated participation in net sales proceeds.
The fees our Advisor receives in connection with transactions involving the acquisition of assets are based initially on the purchase price of the investment, including the amount of any loan originations, and are not based on the quality of the investment or the quality of the services rendered to us. This may influence our Advisor to recommend riskier transactions to us, and our Advisor may have an incentive to incur a high level of leverage. In addition, because the fees are based on the purchase price of the investment, it may create an incentive for our Advisor to recommend that we purchase assets at higher prices. In addition, from time to time, subject to the approval of a majority of our independent directors, we may engage one or more entities under common control with the parent of our Sponsor or our Advisor to provide services not provided under existing agreements that are outside of our ordinary course of operations which may create similar incentives. For example, in connection with the Grace Acquisition, we entered into an agreement with an affiliate of our Dealer Manager pursuant to which we will pay a fee equal to 0.25% of the total transaction value.
Our Sub-Property Manager is an affiliate of our Advisor and Property Manager and therefore we may face conflicts of interest in determining whether to assign certain operating assets to our Sub-Property Manager or an unaffiliated property manager.
Our Sub-Property Manager is an affiliate of our Advisor and Property Manager. As of February 27, 2015, 34 of the hotels in the Grace Portfolio and all six of the hotels in the Barceló Portfolio are managed by our Sub-Property Manager and 82 of the hotels in the Grace Portfolio are managed by third-party sub-property managers. Although the lender with respect to the Assumed Grace Indebtedness generally must consent before we terminate, cancel, materially modify, renew or extend any of the hotel management agreements, for a period of two years following the completion of the acquisition of the Grace Portfolio, or until February 27, 2017, we may replace any third-party sub-property manager with our Sub-Property Manager without consent of the lender if certain other conditions have been satisfied. With respect to the Additional Grace Mortgage Loan, we have right to replace a manager as long as no event of default has occurred and we replace the manager with a qualified manager, which includes our Sub-Property Manager. As we acquire additional hotel assets, our Advisor will assign such asset to our Sub-Property Manager or a third-party sub-property manager.
Because our Sub-Property Manager is affiliated with our Advisor, our Advisor faces certain conflicts of interest in making these decisions because of the compensation that will be paid to our Sub-Property Manager.
Our Sub-Property Manager will continue to operate as a hotel property manager and may face competing demands for its time.
Our Sub-Property Manager will face competing demands for its time while it enters into management agreements with hotels not owned by us in the ordinary course of business. Because we intend to rely upon our Sub-Property Manager for its underwriting and operating capabilities, we may be unable to identify potential acquisitions for our portfolio without the investment and underwriting advice provided by the professionals of our Sub-Property Manager. Additionally, the operations of our hotels may be adversely affected by the competing demands for our Sub-Property Manager’s time.
Our Sponsor faces conflicts of interest relating to the acquisition of assets and such conflicts may not be resolved in our favor, meaning that we could invest in less attractive assets, which could limit our ability to make distributions and reduce our stockholders’ overall investment return.
We rely on our Sponsor and the executive officers and other key real estate professionals at our Advisor, our Property Manager and our Sub-Property Manager to identify suitable investment opportunities for us. Several of the other key real estate professionals of our Advisor are also the key real estate professionals at our Sponsor and their other public programs. Many investment opportunities that are suitable for us may also be suitable for other programs sponsored directly or indirectly by American Realty Capital. Generally, our Advisor will not pursue any opportunity to acquire any real estate properties or real estate-related loans and securities that are directly competitive with our investment strategies, unless and until the opportunity is first presented to us, subject to certain exceptions. For so long as we are externally advised, our charter provides that it shall not be a proper purpose for the Company to purchase real estate or any significant asset related to real estate unless our Advisor has recommended the investment to us. Thus, the executive officers and real estate professionals of our Advisor could direct attractive investment opportunities to other entities or investors. Such events could result in us investing in properties that provide less attractive returns, which may reduce our ability to make distributions.
Our Advisor will face conflicts of interest relating to joint ventures, which could result in a disproportionate benefit to the other venture partners at our expense and adversely affect the return on our stockholders' investment.
We may enter into joint ventures with other American Realty Capital-sponsored programs for the acquisition of commercial real estate debt and other commercial real estate investments. Our Advisor may have conflicts of interest in determining which American Realty Capital-sponsored program should enter into any particular joint venture agreement. The co-venturer may have economic or business interests or goals that are or may become inconsistent with our business interests or goals. In addition, our Advisor may face a conflict in structuring the terms of the relationship between our interests and the interest of the affiliated co-venturer and in managing the joint venture. Since our Advisor and its affiliates may control both the affiliated co-venturer and, to a certain extent, us, agreements and transactions between the co-venturers with respect to any such joint venture will not have the benefit of arm’s-length negotiation of the type normally conducted between unrelated co-venturers, which may result in the co-venturer receiving benefits greater than the benefits that we receive. In addition, we may assume liabilities related to the joint venture that exceed the percentage of our investment in the joint venture.
Our Dealer Manager signed a Letter of Acceptance, Waiver and Consent with the Financial Industry Regulatory Authority (“FINRA”); any further action, proceeding or litigation with respect to the substance of the Letter of Acceptance, Waiver and Consent or in connection with any other similar action, proceeding or litigation that may occur, could adversely affect this offering or the pace at which we raise proceeds.
In April 2013, our Dealer Manager received notice and a proposed Letter of Acceptance, Waiver and Consent (“AWC”) from FINRA, the self-regulatory organization that oversees broker dealers, that certain violations of SEC and FINRA rules, including Rule 10b-9 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and FINRA Rule 2010, occurred in connection with its activities as a co-dealer manager for a public offering. Without admitting or denying the findings, our Dealer Manager submitted an AWC, which FINRA accepted on June 4, 2013. In connection with the AWC, our Dealer Manager consented to the imposition of a censure and a fine of $60,000.
To the extent any action would be taken against our Dealer Manager in connection with the above AWC or in connection with any other similar action, proceeding or litigation that may occur, our Dealer Manager could be adversely affected.
American National Stock Transfer, LLC, our affiliated transfer agent, has a limited operating history and a failure by our transfer agent to perform its functions for us effectively may adversely affect our operations.
Our transfer agent is a related party of our Sponsor that has been providing certain transfer agency services for programs sponsored directly or indirectly by AR Capital, LLC since 2013. Because of its limited experience, there is no assurance that our transfer agent will be able to effectively provide transfer agency and registrar services to us. Furthermore, our transfer agent is responsible for supervising third party service providers who may, at times, be responsible for executing certain transfer agency and registrar services. If our transfer agent fails to perform its functions for us effectively, our operations may be adversely affected.
Our officers and the executive chairman of our board of directors face conflicts of interest related to the positions they hold with affiliated entities, which could hinder our ability to successfully implement our business strategy and to generate returns to our stockholders.
Our executive officers also are officers of our Advisor and William M. Kahane is an officer and director of certain other real estate programs sponsored by the American Realty Capital group of companies. As a result, these individuals owe fiduciary duties to these other entities and their stockholders and limited partners, which fiduciary duties may conflict with the duties that they owe to us and our stockholders. Their loyalties to these other entities could result in actions or inactions that are detrimental to our business, which could harm the implementation of our business strategy and our investment and leasing opportunities. Conflicts with our business and interests are most likely to arise from involvement in activities related to: (a) allocation of new investments and management time and services between us and the other entities; (b) our purchase of properties from, or sale of properties to, affiliated entities; (c) the timing and terms of the investment in or sale of an asset; (d) investments with affiliates of our Advisor; (e) compensation to our Advisor; and (f) our relationship with our Dealer Manager. If we do not successfully implement our business strategy, we may be unable to generate the cash needed to make distributions to our stockholders and to maintain or increase the value of our assets. If these individuals act in a manner that is detrimental to our business or favor one entity over another, they may be subject to liability for breach of fiduciary duty.
Risks Related to Our Corporate Structure
We depend on our Operating Partnership and its subsidiaries for cash flow and are effectively structurally subordinated in right of payment to the obligations of our Operating Partnership and its subsidiaries, which could adversely affect our ability to make distributions to our stockholders.
We have no business operations of our own. Our only significant asset is and will be the general and limited partnership interests of our Operating Partnership. We conduct, and intend to conduct, all of our business operations through our Operating Partnership. Accordingly, our only source of cash to pay our obligations is distributions from our Operating Partnership and its
subsidiaries of their net earnings and cash flows. We cannot assure our stockholders that our Operating Partnership or its subsidiaries will be able to, or be permitted to, make distributions to us that will enable us to make distributions to our stockholders from cash flows from operations. Each of our Operating Partnership’s subsidiaries is a distinct legal entity and, under certain circumstances, legal and contractual restrictions may limit our ability to obtain cash from such entities. Therefore, in the event of our bankruptcy, liquidation or reorganization, our assets and those of our Operating Partnership and its subsidiaries will be able to satisfy as the claims of our stockholders only after all of our and our Operating Partnership and its subsidiaries liabilities and obligations have been paid in full.
Our stockholders are limited in their ability to sell their shares pursuant to our SRP and may have to hold their shares for an indefinite period of time.
Our board of directors may amend the terms of our SRP without stockholder approval. Our board of directors also is free to suspend or terminate the program upon 30 days’ notice or to reject any request for repurchase. There is no assurance that funds available for our SRP will be sufficient to accommodate all requests. In addition, the SRP includes numerous restrictions that would limit our stockholders’ ability to sell their shares. Prior to the time our Advisor begins calculating NAV, unless waived by our board of directors, a stockholder must have held his or her shares for at least one year in order to participate in our SRP. Prior to the NAV pricing date, subject to funds being available, the purchase price for shares repurchased under our SRP will be as set forth below (unless such repurchase is in connection with a stockholder’s death or disability): (a) for stockholders who have continuously held their shares of our common stock for at least one year, the price will be the lower of $23.13 and 92.5% of the amount paid for each such share; (b) for stockholders who have continuously held their shares of our common stock for at least two years, the price will be the lower of $23.75 and 95.0% of the amount paid for each such share; (c) for stockholders who have continuously held their shares of our common stock for at least three years, the price will be the lower of $24.38 and 97.5% of the amount paid for each such share; and (d) for stockholders who have held their shares of our common stock for at least four years, the price will be the lower of $25.00 and 100.0% of the amount they paid for each share (in each case, as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to our common stock). These limits might prevent us from accommodating all repurchase requests made in any year.
After the NAV pricing date, stockholders may make daily requests that we repurchase all or a portion (but generally at least 25% of a stockholder’s shares) of their shares pursuant to our SRP and the repurchase price will vary quarterly and will be based on NAV. At such time, we will limit shares repurchased during any calendar year to 5% of the weighted average number of shares outstanding during the prior calendar year. Accordingly, following the NAV pricing date, in order to provide liquidity for repurchases, we intend to maintain 5% of our NAV in excess of $1.0 billion in cash, cash equivalents and other short-term investments and certain types of real estate related assets that can be liquidated more readily than properties, or collectively, liquid assets. There can be no assurance, however, that we will maintain this level of liquid assets, and our stockholders will only be able to have their shares repurchased to the extent that we have sufficient liquid assets to repurchase them. Accordingly, there can be no assurance we will be able to satisfy all repurchase requests made after the NAV pricing date.
See the section entitled “Share Repurchase Program” in the notes to the financial statements contained within this Annual Report on Form 10-K for more information about the SRP. These restrictions severely limit our stockholders’ ability to sell their shares should they require liquidity and limit their ability to recover the value they invested or the fair market value of their shares.
We established the offering price on an arbitrary basis; as a result, the actual value of our stockholders’ investment may be substantially less than what they paid.
Our board of directors has arbitrarily determined the offering price of the shares and such price bears no relationship to our book or asset values, or to any other established criteria for valuing issued or outstanding shares. Because the offering price is not based upon any independent valuation, the offering price is not indicative of the proceeds that our stockholders would receive upon liquidation.
Future offerings of equity securities that are senior to our common stock for purposes of dividend distributions or upon liquidation may adversely affect the per share trading price of our common stock.
In the future, we may attempt to increase our capital resources by making additional offerings of equity securities. Under our charter, we may issue, without stockholder approval, preferred stock or other classes of common stock with rights that could dilute the value of our stockholders’ shares of common stock. Any issuance of preferred stock must be approved by a majority of our independent directors not otherwise interested in the transaction, who will have access, at our expense, to our legal counsel or to independent legal counsel. Upon liquidation, holders of our shares of preferred stock will be entitled to receive our available assets prior to distribution to the holders of our common stock. Additionally, any convertible, exercisable or exchangeable securities that we issue in the future may have rights, preferences and privileges more favorable than those of our common stock and may result in dilution to owners of our common stock. Holders of our common stock are not entitled to preemptive rights or other protections against dilution. Our preferred stock, if issued, could have a preference on liquidating distributions or a preference on dividend payments that could limit our ability to pay dividends to the holders of our common
stock. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, our stockholders bear the risk of our future offerings reducing the per share trading price of our common stock and diluting their interest in us.
Because our Advisor is wholly owned by our Sponsor through the Special Limited Partner, the interests of the Advisor and the Sponsor are not separate and as a result the Advisor may act in a way that is not necessarily our stockholders' interest.
Our Advisor is indirectly wholly owned by our Sponsor through the Special Limited Partner. Therefore, the interests of our Advisor and our Sponsor are not separate and the Advisor’s decisions may not be independent from the Sponsor and may result in the Advisor making decisions to act in ways that are not in our stockholders’ interests.
Our stockholders’ interests in us will be diluted if we issue additional shares, which could reduce the overall value of our stockholders’ investments.
Our common stockholders do not have preemptive rights to any shares we issue in the future. Our charter authorizes us to issue 350,000,000 shares of capital stock, of which 300,000,000 shares are classified as common stock and 50,000,000 shares are classified as preferred stock. Our board may elect to: (a) sell additional shares in this or future public offerings; (b) issue equity interests in private offerings; (c) issue share-based awards to our independent directors, our officers or employees, or to the officers or employees of our Advisor or any of its affiliates; (d) issue shares to our Advisor, or its successors or assigns, in payment of an outstanding fee obligation; or (e) issue shares of our common stock to sellers of properties or assets we acquire in connection with an exchange of limited partnership interests of our OP. To the extent we issue additional equity interests, our stockholders’ percentage ownership interest in us will be diluted. In addition, depending upon the terms and pricing of any additional offerings and the value of our real estate investments, our investors may also experience dilution in the book value and fair value of their shares.
Payment of fees to our Advisor and its affiliates reduces cash available for investment and distributions to our stockholders.
Our Advisor and its affiliates perform services for us in connection with conducting our operations and managing the portfolio of real estate and real estate-related debt and investments. Our Advisor and its affiliates are paid substantial fees and receive substantial distributions for these services, which reduces the amount of cash available for investment in properties or distribution to stockholders.
The limit on the number of shares a person may own may discourage a takeover that could otherwise result in a premium price to our stockholders.
Our charter, with certain exceptions, authorizes our directors to take such actions as are necessary and desirable to preserve our qualification as a REIT. Unless exempted by our board of directors, no person or entity may own more than 9.8% in value of the aggregate of our outstanding shares of stock or more than 9.8% (in value or in number of shares, whichever is more restrictive) of any class or series of shares of our stock. This restriction may have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all our assets) that might provide a premium price for holders of our common stock.
Our charter permits our board of directors to issue stock with terms that may subordinate the rights of common stockholders or discourage a third party from acquiring us in a manner that might result in a premium price to our stockholders.
Our charter permits our board of directors to issue up to 350,000,000 shares of stock. In addition, our board of directors, without any action by our stockholders, may amend our charter from time to time to increase or decrease the aggregate number of shares or the number of shares of any class or series of stock that we have authority to issue. Our board of directors may classify or reclassify any unissued common stock or preferred stock into other classes or series of stock and establish the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms or conditions of redemption of any such stock. Thus, our board of directors could authorize the issuance of preferred stock with terms and conditions that could have a priority as to distributions and amounts payable upon liquidation over the rights of the holders of our common stock. Preferred stock could also have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all our assets) that might provide a premium price for holders of our common stock.
Maryland law prohibits certain business combinations, which may make it more difficult for us to be acquired and may limit our stockholders' ability to exit the investment.
Under Maryland law, “business combinations” between a Maryland corporation and an interested stockholder or an affiliate of an interested stockholder are prohibited for five years after the most recent date on which the interested stockholder becomes an interested stockholder. These business combinations include a merger, consolidation, share exchange or, in circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities. An interested stockholder is defined as:
any person who beneficially owns 10% or more of the voting power of the corporation’s outstanding voting stock; or
an affiliate or associate of the corporation who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of the then outstanding stock of the corporation.
A person is not an interested stockholder under the statute if the board of directors approved in advance the transaction by which he or she otherwise would have become an interested stockholder. However, in approving a transaction, the board of directors may provide that its approval is subject to compliance, at or after the time of approval, with any terms and conditions determined by the board of directors.
After the five-year prohibition, any business combination between the Maryland corporation and an interested stockholder generally must be recommended by the board of directors of the corporation and approved by the affirmative vote of at least:
80% of the votes entitled to be cast by holders of outstanding shares of voting stock of the corporation; and
two-thirds of the votes entitled to be cast by holders of voting stock of the corporation, other than shares held by the interested stockholder with whom or with whose affiliate the business combination is to be effected or held by an affiliate or associate of the interested stockholder.
These super-majority vote requirements do not apply if the corporation’s common stockholders receive a minimum price, as defined under Maryland law, for their shares in the form of cash or other consideration in the same form as previously paid by the interested stockholder for its shares. The business combination statute permits various exemptions from its provisions, including business combinations that are exempted by the board of directors prior to the time that the interested stockholder becomes an interested stockholder. Pursuant to the statute, our board of directors has exempted any business combination involving our Advisor or any affiliate of our Advisor. Consequently, the five-year prohibition and the super-majority vote requirements will not apply to business combinations between us and our Advisor or any affiliate of our Advisor. As a result, our Advisor and any affiliate of our Advisor may be able to enter into business combinations with us that may not be in the best interest of our stockholders, without compliance with the super-majority vote requirements and the other provisions of the statute. The business combination statute may discourage others from trying to acquire control of us and increase the difficulty of consummating any offer.
Maryland law limits the ability of a third-party to buy a large stake in us and exercise voting power in electing directors, which may discourage a takeover that could otherwise result in a premium price to our stockholders.
The Maryland Control Share Acquisition Act provides that “control shares” of a Maryland corporation acquired in a “control share acquisition” have no voting rights except to the extent approved by stockholders by a vote of two-thirds of the votes entitled to be cast on the matter. Shares of stock owned by the acquirer, by officers or by employees who are directors of the corporation, are excluded from shares entitled to vote on the matter. “Control shares” are voting shares of stock which, if aggregated with all other shares of stock owned by the acquirer or in respect of which the acquirer can exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy), would entitle the acquirer to exercise voting power in electing directors within specified ranges of voting power. Control shares do not include shares the acquiring person is then entitled to vote as a result of having previously obtained stockholder approval. A “control share acquisition” means the acquisition of issued and outstanding control shares. The control share acquisition statute does not apply (a) to shares acquired in a merger, consolidation or share exchange if the corporation is a party to the transaction, or (b) to acquisitions approved or exempted by the charter or bylaws of the corporation. Our bylaws contain a provision exempting from the Maryland Control Share Acquisition Act any and all acquisitions of our stock by any person. There can be no assurance that this provision will not be amended or eliminated at any time in the future.
Our stockholders' investment return may be reduced if we are required to register as an investment company under the Investment Company Act.
The Company is not registered, and does not intend to register itself, the Operating Partnership or any of its subsidiaries, as an investment company under the Investment Company Act. If we become obligated to register the Company, the Operating Partnership or any of its subsidiaries as an investment company, the registered entity would have to comply with a variety of substantive requirements under the Investment Company Act imposing, among other things:
limitations on capital structure;
restrictions on specified investments;
prohibitions on transactions with affiliates; and
compliance with reporting, record keeping, voting, proxy disclosure and other rules and regulations that would significantly change our operations.
The Company intends to conduct its operations, directly and through wholly or majority-owned subsidiaries, so that the Company, the Operating Partnership and each of its subsidiaries is not an investment company under the Investment Company
Act. Under Section 3(a)(1)(A) of the Investment Company Act, a company is deemed to be an “investment company” if it is, or holds itself out as being, engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities. Under Section 3(a)(1)(C) of the Investment Company Act, a company is deemed to be an “investment company” if it is engaged, or proposes to engage, in the business of investing, reinvesting, owning, holding or trading in securities and owns or proposes to acquire “investment securities” having a value exceeding 40% of the value of its total assets (exclusive of government securities and cash items) on an unconsolidated basis. Rule 3a-1 under the Investment Company Act, however, generally provides that, notwithstanding Section 3(a)(1)(C) of the Investment Company Act, an issuer will not be deemed to be an “investment company” under the Investment Company Act; provided, that (a) it does not hold itself out as being engaged primarily, or propose to engage primarily, in the business of investing, reinvesting or trading in securities, and (b) on an unconsolidated basis, no more than 45% of the value of its total assets, consolidated with the assets of any wholly owned subsidiary (exclusive of U.S. government securities and cash items), consists of, and no more than 45% of its net income after taxes, consolidated with the net income of any wholly owned subsidiary (for the last four fiscal quarters combined), is derived from, securities other than U.S. government securities, securities issued by employees’ securities companies, securities issued by certain majority-owned subsidiaries of such companies and securities issued by certain companies that are controlled primarily by such companies. We believe that we, our OP and the subsidiaries of our OP will satisfy this exclusion.
A change in the value of any of our assets could cause us or one or more of our wholly or majority-owned subsidiaries to fall within the definition of “investment company” and negatively affect our ability to maintain our exemption from regulation under the Investment Company Act. To avoid being required to register the Company or any of its subsidiaries as an investment company under the Investment Company Act, we may be unable to sell assets we would otherwise want to sell and may need to sell assets we would otherwise wish to retain. In addition, we may have to acquire additional income- or loss-generating assets that we might not otherwise have acquired or may have to forgo opportunities to acquire interests in companies that we would otherwise want to acquire and would be important to our investment strategy. Our Advisor continually reviews our investment activity to attempt to ensure that we will not be regulated as an investment company.
If we were required to register the Company as an investment company but failed to do so, we would be prohibited from engaging in our business, and criminal and civil actions could be brought against us. In addition, our contracts would be unenforceable unless a court required enforcement, and a court could appoint a receiver to take control of us and liquidate our business.
If our stockholders do not agree with the decisions of our board of directors, they only have limited control over changes in our policies and operations and may not be able to change our policies and operations.
Our board of directors determines our major policies, including our policies regarding investments, financing, growth, debt capitalization, REIT qualification and distributions. Our board of directors may amend or revise these and other policies without a vote of the stockholders except to the extent that the policies are set forth in our charter. Under the Maryland General Corporation Law and our charter, our stockholders have a right to vote only on the following:
the election or removal of directors;
any amendment of our charter, except that our board of directors may amend our charter without stockholder approval to (a) increase or decrease the aggregate number of our shares of stock or the number of shares of stock of any class or series that we have the authority to issue, (b) effect certain reverse stock splits and (c) change our name or the name or other designation or the par value of any class or series of our stock and the aggregate par value of our stock;
our liquidation or dissolution;
certain reorganizations of our company, as provided in our charter; and
certain mergers, consolidations or sales or other dispositions of all or substantially all our assets, as provided in our charter.
All other matters are subject to the discretion of our board of directors.
Our board of directors may change our investment policies without stockholder approval, which could alter the nature of their investments.
Our charter requires that our independent directors review our investment policies at least annually to determine that the policies we are following are in the best interest of our stockholders. These policies may change over time. The methods of implementing our investment policies also may vary as the commercial debt markets change, new real estate development trends emerge and new investment techniques are developed. Our investment policies, the methods for their implementation, and our other objectives, policies and procedures may be altered by our board of directors without the approval of our stockholders. As a result, the nature of our stockholders' investment could change without their consent.
General Risks Related to Investments in Real Estate
Our operating results will be affected by economic and regulatory changes that have an adverse impact on the real estate market in general, and we cannot assure our stockholders that we will be profitable or that we will realize growth in the value of our real estate properties.
Our operating results are subject to risks generally incident to the ownership of real estate, including:
changes in general economic or local conditions;
changes in supply of or demand for similar or competing properties in an area;
changes in interest rates and availability of permanent mortgage funds that may render the sale of a property difficult or unattractive;
changes in tax, real estate, environmental and zoning laws; and
periods of high interest rates and tight money supply.
These and other reasons may prevent us from being profitable or from realizing growth or maintaining the value of our real estate properties.
The continued recovery of real estate markets from the recent recession is dependent upon forecasted moderate economic growth, which if significantly slower than expected could have a negative impact on the performance of our investment portfolio.
The U.S. economy is in the process of recovering from a severe global recession and real estate markets have also stabilized and begun to recover. Based on moderate economic growth in the future and historically low levels of new supply in the commercial real estate pipeline, a stronger recovery is forecasted for all property sectors. Nevertheless, this ongoing economic recovery remains fragile and could be slowed or halted by significant external events. As a result, real estate markets could perform lower than expected. A severe weakening of the economy or a renewed recession could also lead to lower occupancy, which could create an oversupply of rooms resulting in reduced rates to maintain occupancy. There can be no assurance that our real estate investments will not be adversely impacted by a severe slowing of the economy or renewed recession. Fluctuations in interest rates, limited availability of capital and other economic conditions beyond our control could negatively impact our portfolio and decrease the value of our stockholders' investment.
Part of our strategy for building our portfolio may involve acquiring assets opportunistically. This strategy will involve a higher risk of loss than more conservative investment strategies.
In order to meet our investment objectives we may acquire opportunistic assets that we can reposition, redevelop or remarket to create value enhancement and capital appreciation. Our strategy for acquiring properties may involve the acquisition of properties in markets that are depressed. To the extent we invest in these types of markets, we will face increased risks relating to changes in local market conditions and increased competition for similar properties in the same market, as well as increased risks that these markets will not recover and the value of our properties in these markets will not increase, or will decrease, over time. For these and other reasons, we cannot assure our stockholders that we will be profitable or that we will realize growth in the value of our real estate properties, and as a result, our ability to make distributions to our stockholders could be affected. Our potential approach to acquiring and operating income-producing hotel properties involves more risk than comparable real estate programs that have a targeted holding period for investments that is longer than ours, utilize leverage to a lesser degree or employ more conservative investment strategies.
We may obtain only limited warranties when we purchase a property and would have only limited recourse if our due diligence did not identify any issues that lower the value of our property, which could adversely affect our financial condition and ability to make distributions to our stockholders.
The seller of a property often sells such property in its “as is” condition on a “where is” basis and “with all faults,” without any warranties of merchantability or fitness for a particular use or purpose. In addition, purchase agreements may contain only limited warranties, representations and indemnifications that will only survive for a limited period after the closing. The purchase of properties with limited warranties increases the risk that we may lose some or all our invested capital in the property as well as the loss of income from that property.
Our inability to sell a property when we desire to do so could adversely impact our ability to pay cash distributions to our stockholders.
The real estate market is affected by many factors, such as general economic conditions, availability of financing, interest rates and other factors, including supply and demand, that are beyond our control. We cannot predict whether we will be able to sell any property for the price or on the terms set by us, or whether any price or other terms offered by a prospective purchaser would be acceptable to us. We cannot predict the length of time needed to find a willing purchaser and to close the sale of a property. In addition, the holders of the Grace Preferred Equity Interests have consent rights over major actions by us relating to
the Grace Portfolio, including the sale of certain hotels. Our inability to obtain the required consents could also limit our ability to sell properties.
We may be required to expend funds to correct defects or to make improvements before a property can be sold. We cannot assure our stockholders that we will have funds available to correct such defects or to make such improvements. Moreover, in acquiring a property, we may agree to restrictions that prohibit the sale of that property for a period of time or impose other restrictions, such as a limitation on the amount of debt that can be placed or repaid on that property. These provisions would restrict our ability to sell a property.
We may not be able to sell our properties at a price equal to, or greater than, the price for which we purchased such property, which may lead to a decrease in the value of our assets.
The value of a property to a potential purchaser may not increase over time, which may restrict our ability to sell a property, or if we are able to sell such property, may lead to a sale price less than the price that we paid to purchase the property.
We may acquire or finance properties with lock-out provisions, which may prohibit us from selling properties, which could have an adverse effect on our stockholders' investment.
Lock-out provisions, which are included in the Grace Indebtedness and may be included in our future indebtedness, could materially restrict us from selling or otherwise disposing of or refinancing properties. For example, these provisions may prohibit us or restrict us from prepaying all or a portion of the debt for a period of time, or may require us to maintain specified debt levels for a period of time on some or all properties, or may prohibit or restrict us from releasing properties from the lender’s lien. These provisions affect our ability to turn our investments into cash and thus affect cash available for distributions to our stockholders. Lock-out provisions could also impair our ability to take other actions during the lock-out period that could be in the best interests of our stockholders and, therefore, may have an adverse impact on the value of our shares, relative to the value that would result if the lock-out provisions did not exist. In particular, lock-out provisions could preclude us from participating in major transactions that could result in a disposition of our assets or a change in control, even though that disposition or change in control might be in the best interests of our stockholders.
We may be unable to adjust our portfolio in response to changes in economic or other conditions or sell a property if or when we decide to do so, limiting our ability to pay cash distributions to our stockholders.
Many factors that are beyond our control affect the real estate market and could affect our ability to sell properties for the price, on the terms or within the time frame that we desire. These factors include general economic conditions, the availability of financing, interest rates and other factors, including supply and demand. In addition, the holders of the Grace Preferred Equity Interests have consent rights over major actions by us relating to the Grace Portfolio, including the sale of certain hotels.
Because real estate investments are relatively illiquid, we have a limited ability to vary our portfolio in response to changes in economic or other conditions. Further, before we can sell a property on the terms we want, it may be necessary to expend funds to correct defects or to make improvements. However, we can give no assurance that we will have the funds available to correct such defects or to make such improvements. We may be unable to sell our properties at a profit. Our inability to sell properties at the time and on the terms we want could reduce our cash flow and limit our ability to make distributions to our stockholders and could reduce the value of our stockholders’ investments. Moreover, in acquiring the Grace Portfolio, we agreed to restrictions that prohibit the sale of properties at all or unless certain conditions have been met, including the maintenance of a minimum ratio of net operating income for the hotels that would continue to collateralize the Assumed Grace Indebtedness following such sale to debt outstanding on those hotels. We may agree to similar restrictions, or other restrictions, such as a limitation on the amount of debt that can be placed or repaid on a property, with respect to other properties in the future. We cannot predict the length of time needed to find a willing purchaser and to close the sale of a property. Our inability to sell a property when we desire to do so may cause us to reduce our selling price for the property. Any delay in our receipt of proceeds, or diminishment of proceeds, from the sale of a property could adversely impact our ability to pay distributions to our stockholders.
If we sell a property by providing financing to the purchaser, we will bear the risk of default by the purchaser, which could delay or reduce the distributions available to our stockholders.
If we decide to sell any of our properties, in some instances, we may sell our properties by providing financing to purchasers. When we provide financing to a purchaser, we will bear the risk that the purchaser may default, which could reduce our cash distributions to stockholders. Even in the absence of a purchaser default, the distribution of the proceeds of the sale to our stockholders, or the reinvestment of the proceeds in other assets, will be delayed until the promissory notes or other property we may accept upon a sale are actually paid, sold, refinanced or otherwise disposed. In some cases, we may receive initial down payments in cash and other property in the year of sale in an amount less than the selling price, and subsequent payments will be spread over a number of years. If any purchaser defaults under a financing arrangement with us, it could negatively impact our ability to pay cash distributions to our stockholders.
Joint venture investments could be adversely affected by our lack of sole decision-making authority, our reliance on the financial condition of co-venturers and disputes between us and our co-venturers.
We own two of our hotels through joint venture arrangements and, subject to the Brookfield Approval Rights, may enter into other joint ventures, partnerships and other co-ownership arrangements (including preferred equity investments) for the purpose of making investments. In such event, we would not be in a position to exercise sole decision-making authority regarding the joint venture. Investments in joint ventures may, under certain circumstances, involve risks not present were a third party not involved, including the possibility that partners or co-venturers might become bankrupt or fail to fund their required capital contributions. Co-venturers may have economic or other business interests or goals which are inconsistent with our business interests or goals, and may be in a position to take actions contrary to our policies or objectives. Such investments may also have the potential risk of impasses on decisions, such as a sale, because neither we nor the co-venturer would have full control over the joint venture. In addition, to the extent our participation represents a minority interest, which is the case with one of the two hotels we have invested in through joint venture arrangements, a majority of the participants may be able to take actions which are not in our best interests because of our lack of full control. Disputes between us and co-venturers may result in litigation or arbitration that would increase our expenses and prevent our officers and/or directors from focusing their time and effort on our business. Consequently, actions by or disputes with co-venturers might result in subjecting properties owned by the joint venture to additional risk. In addition, we may in certain circumstances be liable for the actions of our co-venturers.
Covenants, conditions and restrictions may restrict our ability to operate a property, which may adversely affect our operating costs and reduce the amount of funds available to pay distributions to our stockholders.
Some of our properties may be contiguous to other parcels of real property, comprising part of the same commercial center. In connection with such properties, there are significant covenants, conditions and restrictions, ("CC&Rs") restrictingwhich restrict the operation of such properties and any improvements on such properties, and related to granting easements on such properties. Moreover, the operation and management of the contiguous properties may impact such properties. Compliance with CC&Rs may adversely affect our operating costs and reduce the amount of funds that we have available to pay distributions.
If we set aside insufficient capital reserves, we may be required to defer necessary capital improvements.
If we do not have enough reserves for capital to supply needed funds for capital improvements throughout the life of the investment in a property and there is insufficient cash available from our operations, we may be required to defer necessary improvements to a property, which may cause that property to suffer from a greater risk of obsolescence, a decline in value, or decreased cash flow. If this happens, we may not be able to maintain projected operating results for the affected properties and our results of operations may be negatively impacted. See “-Risks Related to the Grace Acquisition - To comply with brand standards under our franchise agreements, we are required to make capital expenditures, which will be substantial, pursuant to property improvement plans, and we are required to make regular deposits to partially reserve for these amounts under the Grace Indebtedness.”
Our operating expenses may increase in the future which could cause us to raise our room rates, depleting room occupancy and thereby decreasing our cash flow and our operating results.
Operating expenses, such as expenses for fuel, utilities, labor and insurance, are not fixed and may increase in the future. To the extent such increases affect our room rates and therefore our room occupancy at our lodging properties, our cash flow and operating results may be negatively affected.
Our real properties are subject to property taxes that may increase in the future, which could adversely affect our cash flow.
Our real properties are subject to real property taxes that may increase as tax rates change and as the real properties are assessed or reassessed by taxing authorities. If we fail to pay any such taxes, the applicable taxing authority may place a lien on the real property and the real property may be subject to a tax sale.
Uninsured losses relating to real property or excessively expensive premiums for insurance coverage including due to the non-renewal of the Terrorism Risk Insurance Act of 2002, or the TRIA, could reduce our cash flowsflows.
Our general liability coverage, property insurance coverage and umbrella liability coverage on all our properties may not be adequate to insure against liability claims and provide for the returncosts of defense. Similarly, we may not have adequate
coverage against the risk of direct physical damage or to reimburse us on our stockholders’ investments.
Therea replacement cost basis for costs incurred to repair or rebuild each property. Moreover, there are types of losses, generally catastrophic in nature, such as losses due to wars, acts of terrorism, earthquakes, floods, hurricanes, pollution or environmental matters, that are uninsurable or not economically insurable, or may be insured subject to limitations, such as large deductibles or co-payments. Insurance risks associated with such catastrophic events could sharply increase the premiums we pay for coverage against property and casualty claims.
This risk is particularly relevant with respect to potential acts of terrorism. The TRIA,Terrorism Risk Insurance Act of 2002 (the "TRIA"), under which the U.S. federal government bears a significant portion of insured losses caused by terrorism, will expire on December 31, 2020, and there can be no assurance that Congress will act to renew or replace the TRIA following its expiration. In the event that the TRIA is not renewed or replace,replaced, terrorism insurance may become difficult or impossible to obtain at reasonable costs or at all, which may result in adverse impacts and additional costs to us.
Changes in the cost or availability of insurance due to the non-renewal of the TRIA or for other reasons could expose us to uninsured casualty losses. If any of our properties incurs a casualty loss that is not fully insured, the value of our assets will be reduced by any such uninsured loss, which may reduce the value of our stockholders’ investments. In addition, other than any working capital reserve or other reserves we may establish, we have no source of funding to repair or reconstruct any uninsured property. Also, to the extent we must pay unexpectedly large amounts for insurance, we could suffer reduced earnings that would result in lower distributions to stockholders.earnings.
Additionally, mortgage lenders insist in some cases that commercial property owners purchase coverage against terrorism as a condition for providing mortgage loans. Accordingly, to the extent terrorism risk insurance policies are not available at reasonable costs, if at all, our ability to finance or refinance our properties could be impaired. In such instances, we may be required to provide other financial support, either through financial assurances or self-insurance, to cover potential losses. We may not have adequate, or any, coverage for such losses.
Terrorist attacks and other acts of violence, civilian unrest or war may affect the markets in which we operate our business and our profitability.
We may acquire real estate assetsOur properties are located in major metropolitan areas as well as densely populated sub-markets that are susceptible to terrorist attack. In addition, any kind of terrorist activity or violent criminal acts, including terrorist acts against public institutions or buildings or modes of public transportation (including airlines, trains or buses) could have a negative effect on our business. These events may directly impact the value of our assets through damage, destruction, loss or increased security costs. Although we may obtain terrorism insurance, we may not be able to obtain sufficient coverage to fund any losses we may incur. The TRIA, which was designed for a sharing of terrorism losses between insurance companies and the federal government, will expire on December 31, 2020, and there can be no assurance that Congress will act to renew or replace it. See “-Uninsured losses relating to real property or excessively expensive premiums for insurance coverage, including due to the non-renewal of the Terrorism Risk Insurance Act of 2002, or the TRIA, could reduce our cash flows and the return on our stockholders’ investments.”
More generally, any terrorist attack, other act of violence or war, including armed conflicts, could result in increased volatility in, or damage to, the worldwide financial markets and economy. Increased economic volatility could adversely affect our hotel properties’properties' ability to conduct their operations profitably or our ability to borrow money or issue capital stock at acceptable prices and have a material adverse effect on our financial condition, results of operations and ability to pay distributions to our stockholders.prices.
Competition with third parties in acquiring properties and other investments may reduce our profitability and the return on our stockholders'investment.stockholder’s investments.
We compete with many other entities engaged in real estate investment activities, including individuals, corporations, bank and insurance company investment accounts, other REITs, real estate limited partnerships, and other entities engaged in real estate investment activities, many of which have greater resources than we do. In addition, affiliates of the Brookfield Investor are or may be in the business of making investments in, and have or may have investments in, other businesses similar to and that may compete with our business. Larger REITs may enjoy significant competitive advantages that result from, among other things, a lower cost of capital and enhanced operating efficiencies. In addition, the number of entities and the amount of funds competing for suitable investments may increase. Any such increase would result in increased demand for these assets and therefore increased prices paid for them. If we pay higher prices for properties and other investments, our profitability will be reduced and our stockholders may experience a lower return on their investment.investments.
Failure to succeed in new markets or in new property classes may have adverse consequences on our performance.
We may from time to time make acquisitions outside of our existing market areas or the property classes of our primary focus if appropriate opportunities arise. The experience of affiliates of our Sponsor in our existing markets in owning and operating certain classes of property does not ensure that we will be able to operate successfully in new markets, should we choose to enter them, or that we will be successful in new property classes, should we choose to acquire them. We may be exposed to a variety of risks if we choose to enter new markets, including an inability to evaluate accurately local market conditions, to identify appropriate acquisition opportunities, or to hire and retain key personnel, and a lack of familiarity with local governmental and permitting procedures. In addition, we may abandon opportunities to enter new markets or acquire new classes of property that we have begun to explore for any reason and may, as a result, fail to recover expenses already incurred.
Acquiring or attempting to acquire multiple properties in a single transaction may adversely affect our operations.
We acquired interests in 116 hotels in one transaction when we acquired the Grace Portfolio. From timeWe have also acquired 20 additional hotels and may acquire up to time,eight additional hotels in our Pending Acquisition if we are able to identify a source of financing, which may not be available on favorable terms or at all. If we are able to raise additional capital to make additional investments, we may again attempt to acquire multiple properties in a single transaction.transaction, subject to the Brookfield Approval Rights. Portfolio acquisitions are more complex and expensive than single-property acquisitions, and the risk that a multiple-property acquisition does not close may be greater than in a single-property acquisition. Portfolio acquisitions also may result in us owning investments in geographically dispersed markets, placing additional demands on our ability to manage the properties in the portfolio. In addition, a seller may require that a group of properties be purchased as a package even though we may not want to purchase one or more properties in the portfolio. In these situations, if we are unable to identify another person or entity to acquire the unwanted properties, we may be
required to operate or attempt to dispose of these properties. We may be required to accumulate a large amount of cash in order to acquire multiple properties in a single transaction. We would expect the returns
that we earn on such cash to be less than the ultimate returns in real property and therefore, accumulating such cash could reduce the funds available for distributions. Any of the foregoing events may have an adverse effect on our operations.
Our Property Manager’s, our Sub-Property Manager’s
Crestline or any of our third-party sub-property manager's failureproperty managers may fail to integrate their subcontractors into their operations in an efficient manner could reduce the return on our stockholders' investment.manner.
Our Property Manager, our Sub-Property Manager
Crestline or any of our third-party sub-property managerproperty managers may rely on multiple subcontractors for on-site property management of our properties. If Crestline or any of our Property Manager, Sub-Property Manager and third-party sub-property managerproperty managers are unable to integrate these subcontractors into their operations in an efficient manner, Crestline or any of our Property Manager, Sub-Property Manager or third-party sub-property managerproperty managers may have to expend substantial time and money coordinating with these subcontractors, which could have a negative impact on the revenues generated from such properties.
Discovery of previously undetected environmentally hazardous conditions may adversely affect our operating results.
We are subject to various federal, state and local laws and regulations that (a) regulate certain activities and operations that may have environmental or health and safety effects, such as the management, generation, release or disposal of regulated materials, substances or wastes, (b) impose liability for the costs of cleaning up, and damages to natural resources from, past spills, waste disposals on and off-site, or other releases of hazardous materials or regulated substances, and (c) regulate workplace safety. Compliance with these laws and regulations could increase our operational costs. Violation of these laws may subject us to significant fines, penalties or disposal costs, which could negatively impact our results of operations, financial position and cash flows. Under various federal, state and local environmental laws ordinances and regulations (including those of foreign jurisdictions), a current or previous owner or operator of real property may be liable for the cost of removal or remediation of hazardous or toxic substances on, under or in such property. The costs of removal or remediation could be substantial. Such laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. Environmental laws also may impose restrictions on the manner in which property may be used or businesses may be operated, and these restrictions may require substantial expenditures. Environmental laws provide for sanctions for noncompliance and may be enforced by governmental agencies or, in certain circumstances, by private parties. Certain environmental laws and common law principles could be used to impose liability for release of and exposure to hazardous substances, including asbestos-containing materials into the air, and third parties may seek recovery from owners or operators of real properties for personal injury or property damage associated with exposure to released hazardous substances.
In addition, when excessive moisture accumulates in buildings or on building materials, mold growth may occur, particularly if the moisture problem remains undiscovered or is not addressed over a period of time. Some molds may produce airborne toxins or irritants. Concern about indoor exposure to mold has been increasing, as exposure to mold may cause a variety of adverse health effects and symptoms, including allergic or other reactions. As a result, the presence of significant mold at any of our projectsproperties could require us to undertake a costly remediation program to contain or remove the mold from the affected property, which would adversely affect our operating results.property.
The cost of defending
Accordingly, we may incur significant costs to defend against claims of liability, of complianceto comply with environmental regulatory requirements, of remediatingto remediate any contaminated property, or of payingto pay personal injury claims could materially adversely affect our business, assets or results of operations and, consequently, amounts available for distribution to our stockholders.claims.
Environmental
Moreover, environmental laws also may impose liens on property or other restrictions on the manner in which property may be used or businesses may be operated, and these restrictions may require substantial expenditures or prevent us or Crestline or any of our Property Manager, or our Sub-Property Manager and any third party sub-property managerthird-party property managers from operating such properties. Some of these laws and regulations have been amended so as to require compliance with new or more stringent standards as of future dates. Compliance with new or more stringent laws or regulations or stricter interpretation of existing laws may require us to incur material expenditures. Future laws, ordinances or regulations or the discovery of currently unknown conditions or non-compliance may impose material liability under environmental liability.laws.
Costs associated with complying with the Americans with Disabilities Act of 1990 may decrease cash available for distributions.
Our properties may be subject to the Americans with Disabilities Act of 1990, as amended, (the "Disabilities Act").or the Disabilities Act. Under the Disabilities Act, all places of public accommodation are required to comply with federal requirements related to access and use by disabled persons. The Disabilities Act has separate compliance requirements for “public accommodations” and “commercial facilities” that generally require that buildings and services be made accessible and available to people with disabilities. The Disabilities Act’s requirements could require removal of access barriers and could result in the imposition of injunctive relief, monetary penalties or, in some cases, an award of damages. We will attempt to acquire properties that comply with the Disabilities Act or place the burden on the seller or other third party to ensure compliance with the Disabilities Act. We cannot assure our stockholders that we will be able to acquire properties or allocate responsibilities in this manner. Any of our funds used for Disabilities Act compliance will reduce our net income and the amount of cash available for distributions to our stockholders.
Our business and operations would suffer inRisks Related to the event of system failures.
Despite system redundancy, the implementation of security measures and the existence of a disaster recovery plan for our internal information technology systems, our systems are vulnerable to damages from any number of sources, including computer viruses, unauthorized access, energy blackouts, natural disasters, terrorism, war and telecommunication failures. Any system failure or accident that causes interruptions in our operations could results in a material disruption to our business. We may also incur additional costs to remedy damages caused by such disruptions.
The occurrence of cyber incidents, or a deficiency in our cybersecurity, could negatively impact our business by causing a disruption to our operations, a compromise of corruption of our confidential information, and/or damages to our business relationships, all of which could negatively impact our financial results.
A cyber incident is considered to be any adverse event that threatens the confidentiality, integrity or availability of our information resources. More specifically, a cyber incident is an intentional attack or an unintentional event that can include gaining unauthorized access to systems to disrupt operations, corrupt data or steal confidential information. As our reliance on technology has increased, so have the risks posed to our systems, both internal and those we have outsourced. In addition, the risk of a cyber incident, including by computer hackers, foreign governments and cyber terrorists, has generally increased as the number, intensity and sophistication of attempted attacks and instructions from around the world have increased.
Our remediation costs and lost revenues could be significant if we fall victim to a cyber incident. We may be required to expend significant resources to repair system damage, protect against the threat of future security breaches or to alleviate problems, including reputational harm, loss of revenues and litigation, caused by any breaches. Security breaches could also result in and could subject us to significant liability or loss that may not be covered by insurance, damage to our reputation, or a loss of confidence in our security measures, which could harm our business. We also may be found liable for any stolen assets or misappropriated confidential information. Although we intend to continue to implement industry-standard security measures, there can be no assurance that those measures will be sufficient.
The failure of any bank in which we deposit our funds could reduce the amount of cash we have available to pay distributions and make additional investments.
We intend to diversify our cash and cash equivalents among several banking institutions in an attempt to minimize exposure to any one of these entities. However, the Federal Deposit Insurance Corporation ("FDIC"), only insures amounts up to $250,000 per depositor per insured bank. We expect to have cash and cash equivalents and restricted cash deposited in certain financial institutions in excess of federally insured levels. If any of the banking institutions in which we have deposited funds ultimately fails, we may lose our deposits over $250,000. The loss of our deposits could reduce the amount of cash we have available to distribute or invest and could result in a decline in the value of our stockholders’ investments.
Lodging Industry Risks
The hotel industry is very competitive and seasonal and has been affected by economic slowdowns, terrorist attacks and other world events.
The hotel industry is intensely competitive and seasonal in nature and has been affected by the recent economic slowdown, terrorist attacks, military activity in the Middle East, natural disasters and other world events impacting the global economy and the travel and hotel industries, and, as a result, our lodging properties may be adversely affected. Since the hotel industry is intensely competitive, our Property Manager and our Sub-Property Manager may be unable to compete successfully. Additionally, if our competitors’ marketing strategies are more effective, our results of operations, financial condition and cash flows, including our ability to service debt and to make distributions to our stockholders, may be adversely affected. Our lodging properties may continue to be affected by such events, including our hotel occupancy levels and average daily rates, and, as a result, our revenues may decrease or not increase to levels we expect.
Since we do not intend to operate our lodging properties, our revenues depend on the ability of our Property Manager, our Sub-Property Manager and our third-party sub-property managers to compete successfully with other hotels. Some of our competitors may have substantially greater marketing and financial resources than we do. If our Property Manager, Sub-Property Manager or third-party sub-property managers are unable to compete successfully or if our competitors’ marketing strategies are effective, our results of operations, financial condition, ability to service debt and ability to make distributions to our stockholders may be adversely affected.
In addition, the seasonality of the hotel industry can be expected to cause quarterly fluctuations in our revenues and also may be adversely affected by factors outside our control, such as extreme or unexpectedly mild weather conditions or natural disasters, terrorist attacks or alerts, outbreaks of contagious diseases, airline strikes, economic factors and other considerations affecting travel. To the extent that cash flows from operations are insufficient during any quarter, due to temporary or seasonal fluctuations in revenues, we may attempt to borrow in order to make distributions to our stockholders or be required to reduce other expenditures or distributions to stockholders.
Our hotels are subject to all the risks common to the hotel industry and subject to market conditions that affect all hotel properties.
All of the properties we own are hotels, subject to all the risks of the hotel industry. Adverse trends in the hotel industry could adversely affect hotel occupancy and the rates that can be charged for hotel rooms as well as hotel operating expenses, and generally include:
increases in supply of hotel rooms that exceed increases in demand;
increases in energy costs and other travel expenses that reduce business and leisure travel;
reduced business and leisure travel due to continued geo-political uncertainty, including terrorism;terrorism, economic slowdowns, natural disasters and other world events impacting the global economy and the travel and hotel industries;
reduced business and leisure travel from other countries to the United States, where all of our hotels are currently located, due to the strength of the U.S. dollarDollar as compared to the currencies of other countries;
adverse effects of declines in general and local economic activity;
adverse effects of a downturn in the hotel industry; and
risks generally associated with the ownership of hotels and real estate, as discussed below.
We do not have control over the market and business conditions that affect the value of our lodging properties, and adverse changes with respect to such conditions could have an adverse effect on our results of operations, financial condition and cash flows.properties. Hotel properties are subject to varying degrees of risk generally common to the ownership of hotels, many of which are beyond our control, including the following:
increased competition from other existing hotels in our markets;
new hotels entering our markets, which may adversely affect the occupancy levels and average daily rates of our lodging properties;
declines in business and leisure travel;
increases in energy costs, increased threat of terrorism, terrorist events, airline strikes or other factors that may affect travel patterns and reduce the number of business and leisure travelers;
increases in operating costs due to inflation and other factors that may not be offset by increased room rates;
unavailability of labor;
changes in, and the related costs of compliance with, governmental laws and regulations, fiscal policies and zoning ordinances;
inability to adapt to dominant trends in the hotel industry or introduce new concepts and products that take advantage of opportunities created by changing consumer spending patterns and demographics; and
adverse effects of international, national, regional and local economic and market conditions.
Adverse changes in any or all of these factors could have an adverse effect on
The hotel business is seasonal, which affects our results of operations from quarter to quarter.
The hotel industry is seasonal in nature. This seasonality can cause quarterly fluctuations in our financial condition and operating results. Generally, occupancy rates and hotel revenues are greater in the second and third quarters than in the first and fourth quarters.We can provide no assurances that our cash flows thereby adversely impacting our abilitywill be sufficient to service debt and to make distributions to our stockholders.offset any shortfalls that occur as a result of these fluctuations.
As a REIT, we cannot directly
We do not operate our lodging properties, which could adversely affect our results of operations, financial condition and our cash flows, which could impact our ability to service debt and make distributions to our stockholders.properties.
We cannot and do not directly or indirectly operate our lodging properties and, as a result, our results of operations, financial position, ability to service debt and our ability to make distributions to stockholders are dependentwe depend on the ability of our Property Manager, Sub-Property Manager,Crestline and any third-party sub-propertyproperty managers, to operate our hotel properties successfully. In order for us to satisfyBecause of certain REIT qualification rules, we cannot directly operate any lodging properties we may acquireown or actively participate in the decisions affecting their daily operations. Instead, through a TRS, we enter into property management agreements with our Property Manager, which, in turn, enters into sub-property management agreements with a third-party management company, which includes our Sub-Property Manager, or we lease our lodging properties to third-party tenants on a triple net lease basis. We cannot and will not control any such third-party management company or tenants who operate and are responsible for maintenance and other day to day management of our lodging properties, including, but not limited to, the implementation of significant operating decisions. Thus, even if we believe our lodging properties are being operated inefficiently or in a manner that does not result in satisfactory operating results, we may not be able to require the third-party management company or the tenants to change their method of operation of our lodging properties. Our results of operations, financial position, cash flows and our ability to service debt and to make distributions to stockholders are, therefore, dependent on the ability of our Sub-Property Manager and other third-party sub-property managers to operate our lodging properties successfully. Any negative publicity or other adverse developments that affect that operator and/or its affiliated brands generally
may adversely affect our results of operations, financial condition, and consequently cash flows thereby impacting our ability to service debt, and to make distributions tomeet our stockholders.capital requirements. There can be no assurance that an affiliate of oursany management company we engage will continue to manage any lodging properties we acquire.acquire in an efficient and satisfactory manner.
We rely on our Sub-Property Manager,Crestline and third-party sub-propertyproperty managers, to establish and maintain adequate internal controls over financial reporting at our lodging properties. In doing so, our Sub-Property ManagerCrestline and any third-party sub-propertyproperty managers should have policies and procedures in place that allow it to effectively monitor and report to us the operating results of our lodging properties which ultimately are included in our consolidatedconsolidated/combined financial statements. Because the operations of our lodging properties
ultimately become a component of our consolidatedconsolidated/combined financial statements, we evaluate the effectiveness of the internal controls over financial reporting at all our properties, including our lodging properties, in connection with the certifications we provide in our quarterly and annual reports on Form 10-Q and Form 10-K, respectively, pursuant to the Sarbanes-Oxley Act of 2002. If such controls are not effective, the accuracy of the results of our operations that we report could be affected. Accordingly, our ability to conclude that, as a company, our internal controls are effective is significantly dependent upon the effectiveness of internal controls that our Sub-Property ManagerCrestline and third-party sub-propertyproperty managers, will implement at our lodging properties. It is possible that we could have a significant deficiency or material weakness as a result of the ineffectiveness of the internal controls at one or more of our lodging properties.
If we replace our Sub-Property ManagerCrestline or terminate any third-party sub-propertyproperty manager, we may be required by the terms of the relevant management agreement or lease to pay substantial termination fees, and we may experience significant disruptions at the affected lodging properties. We may not be able to make arrangements with a third-party management company with substantial prior lodging experience in the future. If we experience such disruptions, it may adversely affect our results of operations, financial condition and our cash flows, including our ability to service debt and to make distributions tomeet our stockholders.capital requirements.
Our use of the TRStaxable REIT subsidiary structure increases our expenses.
A TRStaxable REIT subsidiary structure subjects us to the risk of increased lodging operating expenses. The performance of our TRStaxable REIT subsidiaries will be based on the operations of our lodging properties. Our operating risks include not only changes in hotel revenues and changes to our TRS’taxable REIT subsidiaries’ ability to pay the rent due to us under the leases, but also increased hotel operating expenses, including, but not limited to, the following cost elements:
wage and benefit costs;
repair and maintenance expenses;
energy costs;
property taxes;
insurance costs; and
other operating expenses.
Any increases in one or more these operating expenses could have a significant adverse impact on our results of operations, cash flows and financial position.
Funds spent to maintain licensed brand standards or the loss of a brand license would adversely affect our financial condition and results of operations.
All but one of our hotels operate under licensed brands pursuant to franchise agreements with hotel brand companies. We anticipate that the hotels we acquire in the future also will operate under licensed brands.
The maintenance of the brand licenses for our hotels is subject to the hotel brand companies’ operating standards and other terms and conditions. Hotel brand companies periodically inspect our hotels to ensure that we and our taxable REIT subsidiaries and our Sub-Property Manager and third-party sub-property managers follow their standards. Failure by us, our taxable REIT subsidiaries, our Sub-Property Manager or a third-party sub-property manager to maintain these standards or other terms and conditions could result in a brand license being terminated. If a franchise agreement terminates due to our failure to make required improvements or to otherwise comply with its terms, we may also be liable to the hotel brand company for a termination payment, which will vary by hotel brand company and by hotel. As a condition of our continued holding of a brand license, a hotel brand company could also possibly require us to make capital expenditures, even if we do not believe the capital improvements are necessary or desirable or will result in an acceptable return on our investment. Nonetheless, we may risk losing a brand license if we do not make hotel brand company-required capital expenditures.
If we were to lose a brand license, we would be required to re-brand the affected hotel(s). As a result, the underlying value of a particular hotel could decline significantly from the loss of associated name recognition, marketing support, participation in guest loyalty programs and the centralized system provided by the franchisor, which could require us to recognize an impairment on the hotel. Furthermore, the loss of a franchise license at a particular hotel could harm our relationship with the
hotel brand company, which could impede our ability to operate other hotels under the same brand, limit our ability to obtain new franchise licenses from the franchisor in the future on favorable terms, or at all, and cause us to incur significant costs to obtain a new franchise license for the particular hotel (including a likely requirement of a property improvement plan for the new brand, a portion of the costs of which would be related solely to the change in brand rather than substantively improving the property). Moreover, the loss of a franchise license could also be an event of default under the Grace Indebtedness if we are unable to find a suitable replacement. Accordingly, if we lose one or more franchise licenses, we could be materially and adversely affected.
Restrictive covenants and other provisions in franchise agreements could preclude us from taking actions with respect to the sale, refinancing or rebranding of a hotel that would otherwise be in our best interest.
Our franchise agreements are long-terms agreements with general prohibitions against or prohibitive payments for early termination and generally contain restrictive covenants and other provisions that do not provide us with flexibility to sell, refinance or rebrand a hotel without the consent of the franchisor. For example, the terms of some of these agreements may restrict our ability to sell a hotel unless the purchaser is not a competitor of the franchisor, enters into a replacement franchise agreement and meets specified other conditions. In addition, our franchise agreements restrict our ability to rebrand particular hotels without the consent of the franchisor, which could result in significant operational disruptions and litigation if we do not obtain the consent. We could be forced to pay consent or termination fees to franchisors (or litigate with them) under these agreements as a condition to changing franchise brands of our hotels (or consent or termination fees to Crestline under our management agreements with respectthem as a condition to our affiliated sub-manager, changing management), and these fees could deter us from taking actions that would otherwise be in our best interest or could cause us to incur substantial expense. In addition, our lenders under the Grace Indebtedness generally must consent before we modify hotel management agreements or franchise agreements. Any default under a franchise agreement could also be a default under the Grace Indebtedness.indebtedness that secures the property.
There are risks associated with employing hotel employees.
We are generally subject to risks associated with the employment of hotel employees. The lodging properties we acquire are leased to one or more TRSs,taxable REIT subsidiaries, which enter into property management agreements with our Property Manager, which, in turn, enters into sub-property management agreements with our Sub-Property ManagerCrestline or a third-party sub-propertyproperty manager to operate the properties that we do not lease to a third party under a net lease.properties. Hotel operating revenues and expenses for these properties are included in our consolidated results of operations. As a result, although we do not directly employ or manage the labor force at our lodging properties, we are subject to many of the costs and risks generally associated with the hotel labor force. Our Sub-Property ManagerCrestline or oura third-party sub-propertyproperty manager is responsible for hiring and maintaining the labor force at each of our lodging properties and for establishing and maintaining the appropriate processes and controls over such activities. From time to time, the operations of our lodging properties may be disrupted through strikes, public demonstrations or other labor actions and related publicity. We may also incur increased legal costs and indirect labor costs as a result of the aforementioned disruptions, or contract disputes
or other events. OurCrestline or a third-party sub-property managersproperty manager may be targeted by union actions or adversely impacted by the disruption caused by organizing activities. Significant adverse disruptions caused by union activities or increased costs affiliated with such activities could materially and adversely affect our results of operations, financial condition and our cash flows, including our ability to service debt and make distributions to our stockholders.
The expandingincrease in the use of Internetthird-party internet travel websites by customers canintermediaries and the increase in alternative lodging channels, such as Airbnb, could adversely affect our profitability.
The increasing use
Many of Internetour managers and franchisors contract with third-party internet travel intermediaries, including, but not limited to expedia.com, priceline.com, hotels.com, orbitz.com, and travelocity.com. These internet intermediaries are generally paid commissions and transaction fees by consumers may experience fluctuations in operating performance duringour managers and franchisors for sales of our rooms through such agencies. If bookings through the year and otherwise adversely affect our profitability and cash flows. Our Sub-Property Manager and our third-party sub-property managers will rely upon Internet travelinternet intermediaries such as Travelocity.com, Expedia.com, Orbitz.com, Hotels.com and Priceline.com to generate demand for our lodging properties. As Internet bookings increase, these intermediariesthey may be able to obtainnegotiate higher commissions, reduced room rates or other significant contract concessions from our Sub-Property Managermanagers or our third-party sub-property managers. Moreover, somefranchisors. In addition, internet intermediaries use extensive marketing, which could result in hotel consumers developing brand loyalties to the internet intermediary instead of these Internet travelour franchise brands. Further, internet intermediaries are attempting to offer hotel roomsemphasize pricing and quality indicators, such as a commodity, by increasing the importance of price and general indicators of quality (such as “three-star downtown hotel”)star rating system, at the expense of brand identification. Consumers may eventually develop
In addition to competing with traditional hotels and lodging facilities, we compete with alternative lodging, including third-party providers of short-term rental properties and serviced apartments, such as Airbnb. We compete based on a number of factors, including room rates, quality of accommodations, service levels, convenience of location, reputation, reservation systems, brand loyalties to their reservations system rather than to our Sub-Property Manager or our third-party sub-property managers or our brands, which could have an adverse effect on our business because we rely heavily on brand identification. If the amountrecognition and supply and availability of sales made through Internet intermediaries increases significantly and our Sub-Property Manager or our third-party sub-property managers fail to appropriately price room inventory in a manner that maximizes the opportunity for enhanced profit margins, room revenues may flatten or decrease and our profitability may be adversely affected.alternative lodging.
Our lack of diversification in property type and hotel brands increases the risk of investment.
There is no limit on the number of properties of a particular hotel brand that we may acquire. Following the completionAs of our acquisition of the Grace Portfolio,December 31, 2016, based on the number of hotels, 47.5%46.1% of our hotels arewere franchised with Hilton Worldwide, 36.9%39.7% with Marriott International and 12.3%12.1% with Hyatt Hotels Corporation, and no other brand accounts for more
than 5.0%2.1% of our hotels. The risks of brand concentration include reductions in business following negative publicity relating to one of our licensed brands or arising from or after a dispute with a hotel brand company.
To the extent our assets are geographically concentrated, an economic downturn in one or more of the markets in which we have invested could have an adverse effect on our results of operations, financial condition and ability to pay distributions.
Our board of directors reviews our properties and investments in terms of geographic and hotel brand diversification, and any failure to remain diversified could adversely affect our results of operations.operations and increase the risk of our stockholder’s investments.
Risks Associated withRelated to Debt Financing
We have incurred
Our incurrence of substantial indebtedness limits our future operational and high levels of debt could hinder our ability to make distributions and could decrease the value of our stockholders' investment.financial flexibility.
We have incurred substantial indebtedness in acquiring the properties we currently own, and substantially all of these real properties have been pledged as security under our indebtedness. See “-Risks RelatedTo complete our Pending Acquisition, we intend to incur indebtedness and may incur additional indebtedness, subject to the Grace Acquisition - As a resultBrookfield Approval Rights, pursuant to which we are required to obtain prior approval before incurring any indebtedness, except for permitted refinancings and as set forth in the Annual Business Plan.
Our incurrence of the additionalmortgage, mezzanine and other indebtedness, incurredand any other indebtedness we may incur, and the issuance of the preferred equity interests to acquire the Grace Portfolio, we may experiencePreferred Equity Interests, which are treated as debt for accounting purposes, limit our future operational and financial flexibility in ways that could have a potential material adverse effect on our results of operations and financial condition and results of operations.”such as:
Prior
requiring us to our entry into an agreement to acquire the Grace Portfolio in May 2014,use a majoritysubstantial portion of our independent directors waived the total portfolio leverage requirement of our charter with respectcash flow from operations to the acquisition of the Grace Portfolio should such total portfolio leverage exceed 300% of our total "net assets" (as defined in our charter) upon closing of the acquisition of the Grace Portfolio. Following the acquisition of the Grace Portfolio in February 2015, our total portfolio leverage (which includesservice indebtedness and pay distributions on the Grace Preferred Equity Interests) significantly exceeded this 300% limit,Interests;
limiting our ability to obtain additional financing to fund our capital requirements;
increasing the costs of incurring additional debt as potential future lenders may charge higher interest rates if they lend to us in the future due to our current level of indebtedness;
increasing our exposure to floating interest rates;
limiting our ability to compete with other companies that are not as highly leveraged, as we may be less capable of responding to adverse economic and industry conditions;
restricting us from making strategic acquisitions, developing properties or exploiting business opportunities to the extent we expect it will continueare limited in our ability to do so for some time. Accordingly,access the financing required to pursue these opportunities;
making us less attractive to potential investors due our level of indebtedness;
restricting the way in which we intend to use substantially all available offering proceeds followingconduct our business because of financial and operating covenants in the acquisitionagreements governing our indebtedness;
consent rights the holders of the Grace Portfolio to reduce our borrowings to our intended limit, which is below the 300% maximum limit. See “-Risks RelatedPreferred Equity Interests will have over major actions by us relating to the Grace Acquisition - We intendPortfolio;
if we are unable to use substantially all available offering proceeds followingsatisfy the acquisitionredemption, distribution, or other requirements of the Grace PortfolioPreferred Equity Interests, holders of the Grace Preferred Equity Interests will have certain rights, including the ability to reduceassume control of the operations of the Grace Portfolio;
exposing us to potential events of default (if not cured or waived) under covenants contained in our borrowingsdebt instruments that could have a material adverse effect on our business, financial condition and operating results;
increasing our vulnerability to our intended limit, which may limita downturn in general economic conditions; and
limiting our ability to pay distributions or acquire additional properties for some time.”
High debt levels will cause usreact to incur higher interest charges, will result in higher debt service payments and are accompanied by restrictive covenants. These factors could limit the amount of cash we have available to distribute and could result in a decline in the value of our stockholders' investmentchanging market conditions in our common stock. If there is a shortfall between the cash flow from a property and the cash flow needed to service mortgage debt on a property, then the amount available for distributions to stockholders may be reduced. industry.
In addition, incurring mortgage debt increases the risk of loss since defaults on indebtedness secured by a property may result in lenders initiating foreclosure actions. In that case, we could lose the property or properties securing the loan that is in default, thus reducing the value of an investment in our stockholders' investment.common stock. For U.S. federal income tax purposes, a foreclosure of any of our properties would be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we would recognize taxable income on foreclosure, but would not receive any cash proceeds. In such event, we may be unable to pay the amount of distributions required in order to maintain our REIT status. We may give full or partial guarantees to lenderson behalf of mortgage debt to the entities that own our properties.properties to lenders of mortgage debt. When we provide a guaranty on behalf of an entity that owns one of our properties, we will be responsible to the lender for satisfaction of the debt if it is not paid by such entity. AllSubstantially all of our mortgages to date contain cross-collateralization or cross-default provisions, meaning that a default on a single property could affect multiple properties, , and any mortgages we enter into in the future may contain cross-collateralization or cross-default provisions. If any of our properties are foreclosed upon due to a default, our ability to pay cash distributions to our stockholders willbusiness and results of operations could be adversely affected which could result in our losing our REIT status and would result in a decrease in the value of our stockholders' investment.affected.
A portion of the Grace Indebtednessour indebtedness matures in May 20162017 and a portion Matures in May 2017. WeAugust 2018, subject to our extension rights, and we may not be able to extend the maturity date of, or refinance, the Grace Indebtedness,these debt obligations, or any of our other indebtedness, on acceptable terms.
All but one
Substantially all of our properties hashave been pledged as security for our indebtedness, and we expect we will be required to extend or refinance this indebtedness when it comes due. The Assumed Grace Indebtedness matures on May 1, 2016, subject to three (one-year) extension rights, and the Additional Grace Mortgage Loan matures on March 6, 2017, subject to onetwo (one-year) extension right.rights. The extensionsmortgage loan we used to finance a portion of the purchase price of 20 hotels during 2015 and 2016 (the "SN Term Loan") matures on the Grace IndebtednessAugust 31, 2018, subject to two (one-year) extension rights. These extensions can only occur if certain conditions are met, including in the case of the Assumed Grace Indebtedness, a condition with respect to the second and third extension terms that a minimum ratio of net operating income to debt outstanding be satisfied (the “minimum debt yield test”). We have satisfied the minimum debt yield test and inexpect to satisfy the caseother conditions for extension of the AdditionalAssumed Grace Mortgage Loan, a condition that a minimum debt service coverage ratio and maximum loan to value ratio be satisfied.Indebtedness until May 1, 2018. There can be no assurance, however, that we will be able to meet thesethe conditions and extend these loansthe Assumed Grace Indebtedness for the final extension period or the SN Term Loan pursuant to their respective terms.
As of December 31, 2016, approximately $290.2 million of liquidation value was outstanding under the Grace Preferred Equity Interests. Following our redemption of $47.3 million in liquidation value of Grace Preferred Equity Interests with a portion of the proceeds from the Initial Closing, $242.9 million of liquidation value was outstanding, and, we are required to redeem an additional $19.4 million, representing 50.0% of the aggregate amount originally issued, by February 27, 2018, and the remaining $223.5 million by February 27, 2019. Following the Initial Closing, the Brookfield Investor has agreed to purchase additional Class C Units at Subsequent Closings in an aggregate amount not to exceed $265.0 million. Generally, the proceeds from the sale of Class C Units at Subsequent Closings may be used to redeem the Grace Preferred Equity Interests required to be redeemed at or around the time they are required to be redeemed. However, the Subsequent Closings are subject to conditions, and may not be completed on their current terms, or at all.
Any refinancing may also require prior approval under the Brookfield Approval Rights if it is not as specifically set forth in the Annual Business Plan or in a principal amount not greater than the amount to be refinanced and on terms no less favorable to us. If we are not able to extend these loans or any of our other indebtedness or refinance them when they mature, we will be required to seek alternative financing to continue our operations. No assurance can be given that any extension, refinancing or alternative financing will be available when required or that we will be able to negotiate acceptable terms. Moreover, if interest rates are higher when these loans are refinanced or replaced with alternative financing, our cash flow would be reduced. This, in turn, would reduce cash available for distribution to our stockholders and may hinder our ability to raise more capital by issuing more stock or by borrowing more money.
Lenders may require us to enter into restrictive covenants relating to our operations, which could limit our ability to make distributions to our stockholders.
In connection with providing us financing, a lender could impose restrictions on us that affect our distribution and operating policies and our ability to incur additional debt. Loan documents we enter into may contain covenants that limit our ability to further mortgage the property, discontinue insurance coverage or replace our Advisor. These or other limitations, some of which are contained in the Grace Indebtedness, may adversely affect our flexibility and our ability to achieve our investment and operating objectives.
Increases in interest rates could increase the amount of our debt payments and adversely affect our ability to pay distributions to our stockholders.payments.
We have incurred substantial indebtedness, of which $1,130.9 millionapproximately $1.1 billion outstanding as of February 27, 2015, among other things, boreDecember 31, 2016 bears interest at variable interest rates. Accordingly, increases in interest rates would increase our interest costs, which could reduce
our cash flows and our ability to pay distributions to our stockholders.flows. In addition, if we need to repay existing debt during periods of rising interest rates, we could, subject to the Brookfield Approval Rights, be required to liquidate one or more of our investments in properties at times that may not permit realization of the maximum return on such investments.
We may not be able to access financing sources on attractive terms, which could adversely affect our ability to execute our
business plan.
We may finance our assets over the long-term through a variety of means, including repurchase agreements, credit facilities, issuance of commercial mortgage-backed securities, collateralized debt obligations and other structured financings. Our ability to execute this strategy will depend on various conditions in the markets for financing in this manner that are beyond our control, including lack of liquidity and greater credit spreads. We cannot be certain that these markets will remain an efficient source of long-term financing for our assets. If our strategy is not viable, we will have to find alternative forms of long-term financing for our assets, as secured revolving credit facilities and repurchase facilities may not accommodate long-term financing. This could subject us to more recourse indebtedness and the risk that debt service on less efficient forms of financing would require a larger portion of our cash flows, thereby reducing cash available for distribution to our stockholders and funds available for operations as well as for future business opportunities.
Our derivative financial instruments that we may use to hedge against interest rate fluctuations may not be successful in mitigating our risks associated with interest rates and could reduce the overall returns on our stockholders’ investments.
We may use derivative financial instruments to hedge exposures to changes in interest rates on loans secured by our assets, but no hedging strategy can protect us completely. We cannot assure our stockholders that our hedging strategy and the derivatives that we use will adequately offset the risk of interest rate volatility or that our hedging transactions will not result in losses. In addition, the use of such instruments may reduce the overall return on our investments. These instruments may also generate income that may not be treated as qualifying REIT income for purposes of the 75% gross income test or 95% gross income test.
Interest-only and adjustable rate indebtedness may increase our risk of default.
We have financed our property acquisitions using interest-only mortgage and mezzanine indebtedness and may continue to do so in the future. As of February 27, 2015,December 31, 2016, all $1.176.4 million$1.4 billion of our mortgage and mezzanine indebtedness and $64.8 million of our other indebtedness was interest-only.interest-only, including the SN Term Loan which is interest-only for the initial three-year term until August 2018. During the interest-only period, which may be the full term of the loan, the amount of each scheduled payment iswill be less than that of a traditional amortizing loan. The principal balance of the loan will not be reduced (except in the case of prepayments) because there are no scheduled monthly payments of principal during this period. After the interest-only period, we will be required either to make scheduled payments of amortized principal and interest or to make a lump-sum or “balloon” payment at maturity. These required principal or balloon payments will increase the amount of our scheduled payments and may increase our risk of default under the related loan. Our ability to make a balloon payment at maturity is uncertain and may depend upon our ability to obtain additional financing or our abilitysell assets, subject to sell the financed property.Brookfield Approval Rights. There can be no assurance the required prior approval will be obtained when requested, or at all. At the time the balloon payment is due, we may or may not be able to refinance the balloon payment on terms as favorable as the original loan or sell the propertyassets at a priceprices sufficient to make the balloon payment. The effect of a refinancing or sale could affect the rate of return to our stockholders and the projected time of disposition of our assets. In addition, payments of principal and interest made to service our debts may leave us with insufficient cash to pay the
distributions that we are required to pay to maintain our qualification as a REIT.REIT or to meet our obligations to the holders of Class C Units or Grace Preferred Equity Interests. Any of these results would have a material adverse effect on the value of an investment in our common stock.
Substantial principal or balloon maturity payments will reduce the funds available for distribution to our stockholders because cash otherwise available for distribution will be required to pay principal and interest associated with these loans.
Risks Related to Real Estate-Related Investments
Our investments in mortgage, mezzanine, bridge and other loans, as well as our investments in mortgage-backed securities, collateralized debt obligations and other debt,derivative financial instruments that we may be affected by unfavorable real estate market conditions, which could decrease the value of those assets and the return on our stockholders' investment.
If we make or invest in mortgage, mezzanine or other real estate-related loans, we will be at risk of defaults by the borrowers on those loans. These defaults may be caused by many conditions beyond our control, including interest rate levels and local and other economic conditions affecting real estate values. We will not know whether the values of the properties ultimately securing our loans will remain at the levels existing on the dates of origination of those loans. If the values of the underlying properties drop, our risk will increase because of the lower value of the security associated with such loans. Our investments in mortgage-backed securities, collateralized debt obligations and other real estate-related debt will be similarly affected by real estate market conditions.
If we make or invest in mortgage, mezzanine, bridge or other real estate-related loans, our loans will be subjectuse to hedge against interest rate fluctuations that will affect our returns as compared to market interest rates; accordingly, the value of our stockholders' investment would be subject to fluctuations in interest rates.
If we make or invest in fixed-rate, long-term loans and interest rates rise, the loans could yield a return that is lower than then-current market rates. If interest rates decrease, we will be adversely affected to the extent that loans are prepaid because we may not be able to make new loans at the higher interest rate. If we invest in variable-rate loans and interest rates decrease, our revenues will also decrease. For these reasons, if we invest in mortgage, mezzanine, bridge or other real estate-related loans, our returns on those loans and the value of our stockholders' investment will be subject to fluctuations in interest rates.
We have not established investment criteria limiting geographical concentration of our mortgage investments or requiring a minimum credit quality of borrowers.
We have not established any limit upon the geographic concentration of properties securing mortgage loans acquired or originated by us, or the credit quality of borrowers of uninsured mortgage assets acquired or originated by us. As a result, properties securing our mortgage loans may be overly concentrated in certain geographic areas and the underlying borrowers of our uninsured mortgage assets may have low credit quality. We may experience losses due to geographic concentration or low credit quality.
Mortgage investments that are not United States government insured and non-investment-grade mortgage assets involve risk of loss.
We may originate and acquire uninsured and non-investment-grade mortgage loans and mortgage assets, including mezzanine loans, as part of our investment strategy. While holding these interests, we will be subject to risks of borrower defaults, bankruptcies, fraud and losses and special hazard losses that are not covered by standard hazard insurance. Also, the costs of financing the mortgage loans could exceed the return on the mortgage loans. In the event of any default under mortgage loans held by us, we will bear the risk of loss of principal and non-payment of interest and fees to the extent of any deficiency between the value of the mortgage collateral and the principal amount of the mortgage loan. To the extent we suffer such losses with respect to our investments in mortgage loans, the value of our stockholders’ investments may be adversely affected.
We may invest in non-recourse loans, which will limit our recovery to the value of the mortgaged property.
Our mortgage loan assets may be non-recourse loans. With respect to our non-recourse mortgage loan assets, in the event of a borrower default, the specific mortgaged property and other assets, if any, pledged to secure the relevant mortgage loan, may be less than the amount owed under the mortgage loan. As to those mortgage loan assets that provide for recourse against the borrower and its assets generally, we cannot assure our stockholders that the recourse will provide a recovery in respect of a defaulted mortgage loan greater than the liquidation value of the mortgaged property securing that mortgage loan.
Interest rate fluctuations will affect the value of our mortgage assets, net income and common stock.
Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations, and other factors beyond our control. Interest rate fluctuations can adversely affect our income in many ways and present a variety of risks, including the risk of variances in the yield curve, a mismatch between asset yields and borrowing rates, and changing prepayment rates.
Variances in the yield curve may reduce our net income. The relationship between short-term and longer-term interest rates is often referred to as the “yield curve.” Short-term interest rates are ordinarily lower than longer-term interest rates. If short-term interest rates rise disproportionately relative to longer-term interest rates (a flattening of the yield curve), our borrowing costs may increase more rapidly than the interest income earned on our assets. Because our assets may bear interest based on longer-term rates than our borrowings, a flattening of the yield curve would tend to decrease our net income and the market value of our mortgage loan assets. Additionally, to the extent cash flows from investments that return scheduled and unscheduled principal are reinvested in mortgage loans, the spread between the yields of the new investments and available borrowing rates may decline, which would likely decrease our net income. It is also possible that short-term interest rates may exceed longer-term interest rates (a yield curve inversion), in which event our borrowing costs may exceed our interest income and we could incur operating losses.
Prepayment rates on our mortgage loans may adversely affect our yields.
The value of our mortgage loan assets may be affected by prepayment rates on investments. Prepayment rates are influenced by changes in current interest rates and a variety of economic, geographic and other factors beyond our control, and consequently, such prepayment rates cannot be predicted with certainty. For investments that we acquire but do not originate, we may be unable to secure protection from prepayment in the form of prepayment lock out periods or prepayment penalties. In periods of declining mortgage interest rates, prepayments on mortgages generally increase. If general interest rates decline as well, the proceeds of such prepayments received during such periods are likely to be reinvested by us in assets yielding less than the yields on the investments that were prepaid. In addition, the market value of mortgage investments may, because of the risk of prepayment, benefit less from declining interest rates than from other fixed-income securities. Conversely, in periods of rising interest rates, prepayments on mortgages generally decrease, in which case we would not have the prepayment proceeds available to invest in assets with higher yields. Under certain interest rate and prepayment scenarios, we may fail to fully recoup our cost of acquisition of certain investments.
No assurances can be given that we can make an accurate assessment of the yield to be produced by an investment. Many factors beyond our control are likely to influence the yield on the investments, including, but not limited to, competitive conditions in the local real estate market, local and general economic conditions and the quality of management of the underlying property. Our inability to accurately assess investment yields may result in our purchasing assets that do not perform as well as expected, which may adversely affect the value of our stockholders’ investments.
Volatility of values of mortgaged properties may adversely affect our mortgage loans.
Real estate property values and net operating income derived from real estate properties are subject to volatility and may be affected adversely by a number of factors, including the risk factors described in our IPO relating to general economic conditions and owning real estate investments. In the event its net operating income decreases, a borrower may have difficulty paying our mortgage loan, which could result in losses to us. In addition, decreases in property values reduce the value of the collateral and the potential proceeds available to a borrower to repay our mortgage loans, which could also cause us to suffer losses.
Mezzanine loans involve greater risks of loss than senior loans secured by income-producing properties.
We may make and acquire mezzanine loans. These types of mortgage loans are considered to involve a higher degree of risk than long-term senior mortgage lending secured by income-producing real property due to a variety of factors, including the loan being entirely unsecured or, if secured, becoming unsecured as a result of foreclosure by the senior lender. We may not recover some or all of our investment in these loans. In addition, mezzanine loans may have higher loan-to-value ratios than conventional mortgage loans resulting in less equity in the property and increasing the risk of loss of principal.
Our investments in subordinated loans and subordinated mortgage-backed securities may be subject to losses.
We may acquire or originate subordinated loans and invest in subordinated mortgage-backed securities. In the event a borrower defaults on a subordinated loan and lacks sufficient assets to satisfy our loan, we may suffer a loss of principal or interest. In the event a borrower declares bankruptcy, we may not have full recourse to the assets of the borrower, or the assets of the borrower may not be sufficient to satisfy the loan. If a borrower defaults on our loan or on debt senior to our loan, or in the event of a borrower bankruptcy, our loan will be satisfied only after the senior debt is paid in full. Where debt senior to our loan exists, the presence of inter-creditor arrangements may limit our ability to amend our loan documents, assign our loans, accept prepayments, exercise our remedies (through “standstill periods”), and control decisions made in bankruptcy proceedings relating to borrowers.
We may invest in collateralized mortgage-backed securities("CMBS"), which may increase our exposure to credit and interest rate risk.
We may invest in CMBS, which may increase our exposure to credit and interest rate risk. We have not adopted, and do not expect to adopt, any formal policies or procedures designed to manage risks associated with our investments in CMBS. In this context, credit risk is the risk that borrowers will default on the mortgages underlying the CMBS. While we may invest in
CMBS guaranteed by U.S. government agencies, such as the Government National Mortgage Association, or U.S. government sponsored enterprises, such as the Federal National Mortgage Association, or the Federal Home Loan Mortgage Corporation, there is no guarantee that such will be available or continue to be guaranteed by the U.S. government. Interest rate risk occurs as prevailing market interest rates change relative to the current yield on the CMBS. For example, when interest rates fall, borrowers are more likely to prepay their existing mortgages to take advantage of the lower cost of financing. As prepayments occur, principal is returned to the holders of the CMBS sooner than expected, thereby lowering the effective yield on the investment. On the other hand, when interest rates rise, borrowers are more likely to maintain their existing mortgages. As a result, prepayments decrease, thereby extending the average maturity of the mortgages underlying the CMBS. If we are unable to manage these risks effectively, our results of operations, financial condition and ability to pay distributions to our stockholders will be adversely affected.
Any real estate debt security that we originate or purchase is subject to the risks of delinquency and foreclosure.
We may originate and purchase real estate debt securities, which are subject to risks of delinquency and foreclosure and risks of loss. Typically, we will not have recourse to the personal assets of our borrowers. The ability of a borrower to repay a real estate debt security secured by an income-producing property depends primarily upon the successful operation of the property, rather than upon the existence of independent income or assets of the borrower. If the net operating income of the property is reduced, the borrower’s ability to repay the real estate debt security may be impaired. A property’s net operating income can be affected by, among other things:
increased costs, added costs imposed by franchisors for improvements or operating changes required, from time to time, under the franchise agreements;
property management decisions;
property location and condition;
competition from comparable types of properties;
changes in specific industry segments;
declines in regional or local real estate values, or occupancy rates; and
increases in interest rates, real estate tax rates and other operating expenses.
Any hedging strategies we utilize may not be successful in mitigating our risks.risks associated with interest rates and could reduce the overall returns on an investment in our common stock.
We may enter intouse derivative financial instruments to hedge exposures to changes in interest rates on loans secured by our assets, but no hedging transactions to managestrategy can protect us completely. We cannot assure our stockholders that our hedging strategy and the derivatives that we use will adequately offset the risk of interest rate changes, price changesvolatility or currency fluctuations with respect to borrowings made or to be made to acquire or carry real estate assets. Tothat our hedging transactions will not result in losses. In addition, the extent that we use derivative financial instruments in connection with these risks, we will be exposed to credit, basis and legal enforceability risks. Derivative financialof such instruments may include interest rate swap contracts, interest rate cap or floor contracts, futures or forward contracts, options or repurchase agreements. In this context, credit risk isreduce the failureoverall return on our investments. These instruments may also generate income that may not be treated as qualifying REIT income for purposes of the counterparty to perform under the terms of the derivative contract. If the fair value of a derivative contract is positive, the counterparty owes us, which creates credit risk for us. Basis risk occurs when the index upon which the contract is based is more75% or less variable than the index upon which the hedged asset or liability is based, thereby making the hedge less effective. Finally, legal enforceability risks encompass general contractual risks, including the risk that the counterparty will breach the terms of, or fail to perform its obligations under, the derivative contract. If we are unable to manage these risks effectively, our results of operations, financial condition and ability to make distributions to our stockholderswill be adversely affected.95% gross income tests.
U.S. Federal Income Tax Risks
Our failure to qualify or remain qualified as a REIT would subject us to U.S. federal income tax and potentially state and local tax, and would adversely affect our operations and the market price of our common stock.
We intend to electelected and qualifyqualified to be taxed as a REIT commencing with our taxable year ended December 31, 2014 and intend to operate in a manner that would allow us to continue to qualify as a REIT. However, we may terminate our REIT qualification, if our board of directors determines that not qualifying as a REIT is in our best interests, or inadvertently. Our qualification as a REIT depends upon our satisfaction of certain asset, income, organizational, distribution, stockholder ownership and other requirements on a continuing basis. The REIT qualification requirements are extremely complex and interpretation of the U.S. federal income tax laws governing qualification as a REIT is limited. Furthermore, any opinion of our counsel, including tax counsel, as to our eligibility to qualify or remain qualified as a REIT is not binding on the Internal Revenue Service (the "IRS"("IRS") and is not a guarantee that we will qualify, or continue to qualify, as a REIT. Accordingly, we cannot be certain that we will be successful in operating so we can qualify or remain qualified as a REIT. Our ability to satisfy the asset tests depends on our analysis of the characterization and fair market values of our assets, some of which are not susceptible to a precise determination, and for which we will not obtain independent appraisals. Our compliance with the REIT income or quarterly asset requirements also depends on our ability to successfully manage the composition of our income and assets on an ongoing basis. Accordingly, if certain of our operations were to be recharacterized by the IRS, such
recharacterization would jeopardize our ability to satisfy all requirements for qualification as a REIT. Furthermore, future legislative, judicial or administrative changes to the U.S. federal income tax laws could be applied retroactively, which could result in our disqualification as a REIT.
If we fail to qualify as a REIT for any taxable year, and we do not qualify for certain statutory relief provisions, we will be subject to U.S. federal income tax on our taxable income at corporate rates. In addition, we would generally be disqualified from treatment as a REIT for the four taxable years following the year of losing our REIT qualification. Losing our REIT qualification would reduce our net earnings available for investment or distribution to stockholders because of the additional tax liability. In addition, distributionsupon the occurrence of certain events related to stockholdersour failure to qualify as a REIT, subject to certain
notice and cure rights, holders of Class C Units have the right to require us to redeem any Class C Units submitted for redemption for an amount equivalent to what the holders of Class C Units would no longer qualify forhave been entitled to receive in a Fundamental Sale Transaction if the dividends paid deduction, anddate of redemption were the date of the consummation of the Fundamental Sale Transaction. These amounts are set forth under “-The amount we would no longer be required to make distributions. If this occurs, wepay holders of Class C Units in a Fundamental Sale Transaction may discourage a third party from acquiring us in a manner that might be requiredotherwise result in a premium price to borrow funds or liquidate some investments in order to pay the applicable tax.our stockholders.”
Even ifthough we qualifyhave qualified as a REIT, in certain circumstances, we may incur tax liabilities that would reduce our cash available for distribution to our stockholders.
Even if we qualify and maintain our status as a REIT, we may be subject to U.S. federal, state and local income taxes. For example, net income from the sale of properties that are “dealer” properties sold by a REIT (a “prohibited transaction” under the Code) will be subject to a 100% tax. We may not make sufficient distributions to avoid excise taxes applicable to REITs. Similarly, if we were to fail an income test (and did not lose our REIT status because such failure was due to reasonable cause and not willful neglect) we would be subject to tax on income that does not meet the income test requirements. We also may decide to retain net capital gains we earn from the sale or other disposition of our property and pay U.S. federal income tax directly on such income. In that event, our stockholders would be treated as if they earned that income and paid the tax on it directly. However, stockholders that are tax-exempt, such as charities or qualified pension plans, would have no benefit from their deemed payment of such tax liability unless they file U.S. federal income tax returns and thereon seek a refund of such tax. We also will be subject to corporate tax on any undistributed REIT taxable income. We also will be subject to corporate tax on any undistributed REIT taxable income. We also may be subject to state and local taxes on our income or property, including franchise, payroll and transfer taxes, either directly or at the level of our Operating Partnershipthe OP or at the level of the other companies through which we indirectly own our assets, such as our TRSs,taxable REIT subsidiaries, which are subject to full U.S. federal, state, local and foreign corporate-level income taxes. Any taxes we pay directly or indirectly will reduce our cash available for distribution to our stockholders.
To qualify as a REIT we must meet annual distribution requirements, which may force us to forgo otherwise attractive opportunities or borrow funds during unfavorable market conditions. This could delay or hinder our ability to meet our investment objectives and reduce our stockholders'stockholder’s overall return.
In order to qualify as a REIT, we must distribute annually to our stockholders at least 90% of our REIT taxable income (which does not equal net income as calculated in accordance with GAAP), determined without regard to the deduction for dividends paid and excluding any net capital gain. We will be subject to U.S. federal income tax on our undistributed REIT taxable income and net capital gain and to a 4% nondeductible excise tax on any amount by which distributions we pay with respect to any calendar year are less than the sum of (a) 85% of our ordinary income, (b) 95% of our capital gain net income and (c) 100% of our undistributed income from prior years. These requirements could cause us to distribute amounts that otherwise would be spent on investments in real estate assets and it is possible that we might be required to borrow funds, possibly at unfavorable rates, or sell assets to fund these distributions. Although we intend to makepay distributions sufficient to meet the annual distribution requirements and to avoid U.S. federal income and excise taxes on our earnings while we qualify as a REIT, it is possible that we might not always be able to do so.
Certain of our business activities are potentially subject to the prohibited transaction tax, which could reduce the return on our stockholders' investment.stockholder’s investments.
For so long as we qualify as a REIT, our ability to dispose of property during the first few years following acquisition may be restricted to a substantial extent as a result of our REIT qualification. Under applicable provisions of the Code regarding prohibited transactions by REITs, while we qualify as a REIT, we will be subject to a 100% penalty tax on any gain recognized on the sale or other disposition of any property (other than foreclosure property) that we own, directly or indirectly through any subsidiary entity, including our Operating Partnership,the OP, but generally excluding TRSs,taxable REIT subsidiaries, that is deemed to be inventory or property held primarily for sale to customers in the ordinary course of a trade or business. Whether property is inventory or otherwise held primarily for sale to customers in the ordinary course of a trade or business depends on the particular facts and circumstances surrounding each property. During such time as we qualify as a REIT, we intend to avoid the 100% prohibited transaction tax by (a) conducting activities that may otherwise be considered prohibited transactions through a TRStaxable REIT subsidiary (but such TRStaxable REIT subsidiary will incur corporate rate income taxes with respect to any income or gain recognized by it), (b) conducting our operations in such a manner so that no sale or other disposition of an asset we own, directly or through any subsidiary, will be treated as a prohibited transaction, or (c) structuring certain dispositions of our properties to comply with the requirements of the prohibited transaction safe harbor available under the Code for properties that, among other requirements, have been held for at least two years. No assurance can be given that any particular property we own, directly or through any subsidiary entity, including our
Operating Partnership,the OP, but generally excluding TRSs,taxable REIT subsidiaries, will not be treated as inventory or property held primarily for sale to customers in the ordinary course of a trade or business.
Our TRSstaxable REIT subsidiaries are subject to corporate-level taxes and our dealings with our TRSstaxable REIT subsidiaries may be subject to 100% excise tax.
A REIT may own up to 100% of the stock of one or more TRSs.taxable REIT subsidiaries. Both the subsidiary and the REIT must jointly elect to treat the subsidiary as a TRS.taxable REIT subsidiary. A corporation of which a TRStaxable REIT subsidiary directly or indirectly owns more than 35% of the voting power or value of the stock will automatically be treated as a TRS.taxable REIT subsidiary. Overall, no more than 25% (20% for taxable years beginning after December 31, 2017) of the gross value of a REIT’s assets may consist of stock or securities of one or more TRSs. In addition, TRS rules limit the deductibility of interest paid or accrued by a TRS to its parenttaxable REIT to assure that the TRS is subject to an appropriate level of corporate taxation. The rules, which are applicable to us as asubsidiaries. A taxable REIT also impose a 100% excise tax on certain transactions between a TRS and its parent REIT that are not conducted on an arm’s-length basis.
A TRSsubsidiary may hold assets and earn income that would not be qualifying assets or income if held or earned directly by a REIT, including gross income from operations pursuant to management contracts. We must operate our “qualified lodging facilities” through one or more TRSs that leases such properties from us. WeAccordingly, we may use our TRSstaxable REIT subsidiaries generally for other activities as well, such as to hold properties for sale in the ordinary course of a trade or business or to hold assets or conduct activities that we cannot conduct directly as a REIT.
Our
Furthermore, in order to ensure the income we receive from our hotels are leasedqualifies as “rents from real property,” generally we must lease our hotels to a TRS which istaxable REIT subsidiaries (which are owned by our OP) which must engage “eligible independent contractors” to operate the OP. Such TRShotels on their behalf. These taxable REIT subsidiaries and other TRSstaxable REIT subsidiaries that we may form will be subject to applicable U.S. federal, state, local and foreign income tax on their taxable income. While we will be monitoring the aggregate value of the securities of our TRSstaxable REIT subsidiaries and intend to conduct our affairs so that such securities will represent less than 25% (20% for taxable years beginning after December 31, 2017) of the value of our total assets, there can be no assurance that we will be able to comply with the TRStaxable REIT subsidiary limitation in all market conditions. The rules, which are applicable to us as a REIT, also impose a 100% excise tax on certain transactions between a taxable REIT subsidiary and its parent REIT that are not conducted on an arm’s-length basis to assure that the taxable REIT subsidiary is subject to an appropriate level of corporate taxation. Such transactions include, for example, intercompany loans between the parent REIT as lender and the taxable REIT subsidiary as borrower and rental arrangements between the parent REIT as landlord and the taxable REIT subsidiary as tenant.
If our leases to our TRSstaxable REIT subsidiaries are not respected as true leases for U.S. federal income tax purposes, we would fail to qualify as a REIT.
To qualify as a REIT, we must satisfy two gross income tests, under which specified percentages of our gross income must be derived from certain sources, such as "rents“rents from real property."” In order for such rent to qualify as "rents“rents from real property"property” for purposes of the REIT gross income tests, the leases must be respected as true leases for U.S. federal income tax purposes and not be treated as service contracts, joint ventures or some other type of arrangement. If our leases are not respected as true leases for U.S. federal income tax purposes, we would fail to qualify as a REIT.
If our Operating Partnershipthe OP failed to qualify as a partnership or is not otherwise disregarded for U.S. federal income tax purposes, we would cease to qualify as a REIT.
If the IRS were to successfully challenge the status of our Operating Partnershipthe OP as a partnership or disregarded entity for such purposes, it would be taxable as a corporation. In such event, this would reduce the amount of distributions that our Operating Partnershipthe operating partnership could make to us. This also would result in our failing to qualify as a REIT, and becoming subject to a corporate level tax on our income. This substantially would reduce our cash available to pay distributions and the yield on our stockholders' investment.stockholder’s investments. In addition, if any of the partnerships or limited liability companies through which our Operating Partnershipthe OP owns its properties, in whole or in part, loses its characterization as a partnership and is otherwise not disregarded for U.S. federal income tax purposes, it would be subject to taxation as a corporation, thereby reducing distributions to our Operating Partnership.the OP. Such a recharacterization of an underlying property owner could also threaten our ability to maintain our REIT qualification.
If our “qualified lodging facilities” are not properly leased to a TRStaxable REIT subsidiary or the managers of such “qualified lodging facilities” do not qualify as “eligible independent contractors,” we could fail to qualify as a REIT.
In general, we cannot operate any lodging facilities and can only indirectly participate in the operation of “qualified lodging facilities” on an after-tax basis through leases of such properties to our TRSs.taxable REIT subsidiaries. A “qualified lodging facility” is a hotel, motel, or other establishment in which more than one-half of the dwelling units are used on a transient basis at which or in connection with which wagering activities are not conducted. Rent paid by a lessee that is a “related party tenant” of ours will not be qualifying income for purposes of the two gross income tests applicable to REITs. A TRStaxable REIT subsidiary that leases lodging facilities from us will not be treated as a “related party tenant” with respect to our lodging facilities that are managed by an independent management company, so long as the independent management company qualifies as an “eligible independent contractor.”
Each of the management companies that enters into a management contract with our TRSstaxable REIT subsidiaries must qualify as an “eligible independent contractor” under the REIT rules in order for the rent paid to us by our TRSstaxable REIT subsidiaries to be qualifying income for purposes of the REIT gross income tests. An “eligible independent contractor” is an independent contractor that, at the time such contractor enters into a management or other agreement with a TRStaxable REIT subsidiary to operate a “qualified lodging facility,” is actively engaged in the trade or business of operating “qualified lodging facilities” for any person not related, as defined in the Code, to us or the TRS.taxable REIT subsidiary. Among other requirements, in order to qualify as an independent contractor a manager must not own, directly or by applying attribution provisions of the Code, more than 35% of our outstanding shares of stock (by value), and no person or group of
persons can own more than 35% of our outstanding shares and 35% of the ownership interests of the manager (taking into account only owners of more than 5% of our shares and, with respect to ownership interest in such managers that are publicly traded, only holders of more than 5% of such ownership interests). The ownership attribution rules that apply for purposes of the 35% thresholds are complex. There can be no assurance that the levels of ownership of our stock by our managers and their owners will not be exceeded.
Our investments in certain debt instruments may cause us to recognize income for U.S. federal income tax purposes even though no cash payments have been received on the debt instruments, and certain modifications of such debt by us could cause the modified debt to not qualify as a good REIT asset, thereby jeopardizing our REIT qualification.
Our taxable income may substantially exceed our net income as determined based on GAAP, or differences in timing between the recognition of taxable income and the actual receipt of cash may occur. For example, we may acquire assets, including debt securities requiring us to accrue original issue discount ("OID"), or recognize market discount income, that generate taxable income in excess of economic income or in advance of the corresponding cash flow from the assets. In addition, if a borrower with respect to a particular debt instrument encounters financial difficulty rendering it unable to pay stated interest as due, we may nonetheless be required to continue to recognize the unpaid interest as taxable income with the effect that we will recognize income but will not have a corresponding amount of cash available for distribution to our stockholders.
As a result of the foregoing, we may generate less cash flow than taxable income in a particular year and find it difficult or impossible to meet the REIT distribution requirements in certain circumstances. In such circumstances, we may be required to (a) sell assets in adverse market conditions, (b) borrow on unfavorable terms, (c) distribute amounts that would otherwise be used for future acquisitions or used to repay debt, or (d) make a taxable distribution of our shares of common stock as part of a distribution in which stockholders may elect to receive shares of common stock or (subject to a limit measured as a percentage of the total distribution) cash, in order to comply with the REIT distribution requirements.
Moreover, we may acquire distressed debt investments that require subsequent modification by agreement with the borrower. If the amendments to the outstanding debt are “significant modifications” under the applicable Treasury Regulations, the modified debt may be considered to have been reissued to us in a debt-for-debt taxable exchange with the borrower. This deemed reissuance may prevent the modified debt from qualifying as a good REIT asset if the underlying security has declined in value and would cause us to recognize income to the extent the principal amount of the modified debt exceeds our adjusted tax basis in the unmodified debt.
The failure of a mezzanine loan to qualify as a real estate asset would adversely affect our ability to qualify as a REIT.
In general, in order for a loan to be treated as a qualifying real estate asset producing qualifying income for purposes of the REIT asset and income tests, the loan must be secured by real property. We may acquire mezzanine loans that are not directly secured by real property but instead secured by equity interests in a partnership or limited liability company that directly or indirectly owns real property. In Revenue Procedure 2003-65, the IRS provided a safe harbor pursuant to which a mezzanine loan that is not secured by real estate would, if it meets each of the requirements contained in the Revenue Procedure, be treated by the IRS as a qualifying real estate asset. Although the Revenue Procedure provides a safe harbor on which taxpayers may rely, it does not prescribe rules of substantive tax law and in many cases it may not be possible for us to meet all the requirements of the safe harbor. We cannot provide assurance that any mezzanine loan in which we invest would be treated as a qualifying asset producing qualifying income for REIT qualification purposes. If any such loan fails either the REIT income or asset tests, we may be disqualified as a REIT.
We may choose to makepay distributions in our own stock to meet REIT requirements, in which case our stockholders may be required to pay U.S. federal income taxes in excess of the cash dividends they receive.
In connection with our qualification as a REIT, we are required to distribute annually to our stockholders at least 90% of our REIT taxable income (which does not equal net income as calculated in accordance with GAAP), determined without regard to the deduction for dividends paid and excluding net capital gain. In order to satisfy this requirement, we may makepay distributions that are payable in cash and/or shares of our common stock (which could account for up to 80% of the aggregate amount of such distributions) at the election of each stockholder. Taxable stockholders receiving such distributions will be required to include the full amount of such distributions as ordinary dividend income to the extent of our current or accumulated earnings and profits, as determined for U.S. federal income tax purposes. As a result, U.S. stockholders may be required to pay U.S. federal income taxes with respect to such distributions in excess of the cash portion of the distribution received. Accordingly, U.S. stockholders receiving a distribution of our shares may be required to sell stock or other assets owned by them (including, if possible, our shares received in such distribution or may be required to sell other stock or assets owned by them,distribution), at a time that may be disadvantageous, in order to obtain the cash necessary to satisfy any tax imposed on such distribution. If a U.S. stockholder sells the stock that it receives as part of the distribution in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the distribution, depending on the market price of our stock at the time of the sale. Furthermore, with respect to certain non-U.S. stockholders, we may be required to withhold U.S. tax with respect to such distribution, including in respect of all or a portion of such
distribution that is payable in stock, by withholding or disposing of part of the shares included in such distribution and using the proceeds of such disposition to satisfy the withholding tax imposed. In addition, if a significant number of our stockholders determine to sell shares of our common stock in order to pay taxes owed on dividend income, such sale may put downward pressure on the market price of our common stock.
Various tax aspects of such a taxable cash/stock distribution are uncertain and have not yet been addressed by the IRS. No assurance can be given that the IRS will not impose requirements in the future with respect to taxable cash/stock distributions, including on a retroactive basis, or assert that the requirements for such taxable cash/stock distributions have not been met.
In March 2016, our board of directors adopted a change in distribution policy pursuant to which we began, commencing with distributions payable with respect to April 2016, to pay distributions to our stockholders in shares of common stock instead of cash to all stockholders, and not at the election of each stockholder. Unlike taxable cash/stock distributions, where cash or stock is paid at the election of each stockholder, these stock distributions are treated as non-taxable distributions to the recipient stockholder for U.S. federal income tax purposes.
The taxation of distributions to our stockholders can be complex; however, distributions that we make to our stockholders generally will be taxable as ordinary income, which may reduce theirour stockholder’s anticipated return from an investment in us.
Distributions that we make to our taxable stockholders out of current and accumulated earnings and profits (and not designated as capital gain dividends or qualified dividend income) generally will be taxable as ordinary income. However, a portion of our distributions may (a)(1) be designated by us as capital gain dividends generally taxable as long-term capital gain to the extent that they are attributable to net capital gain recognized by us, (b)(2) be designated by us as qualified dividend income generally to the extent they are attributable to dividends we receive from our TRSs,taxable REIT subsidiaries, or (c)(3) constitute a return of capital generally to the extent that they exceed our accumulated earnings and profits as determined for U.S. federal income tax purposes. A return of capital is not taxable, but has the effect of reducing the basis of a stockholder’s investment in our common stock.
Our stockholders may have tax liability on distributions that they elect to reinvest in common stock, but they would not receive the cash from such distributions to pay such tax liability.
Our DRIP and our payment of cash distributions are currently suspended, and there can be no assurance if or when they will resume. If we pay distributions in cash and our stockholders participate in our DRIP, they will be deemed to have received the amount reinvested in shares of our common stock and, for U.S. federal income tax purposes, will be taxed on, the amount reinvested in shares of our common stock to the extent the amount reinvested was not a tax-free return of capital. In addition, our stockholders will be treated for tax purposes as having received an additional distribution to the extent the shares are purchased at a discount to fair market value. As a result, unless a stockholder is a tax-exempt entity, it may have to use funds from other sources to pay its tax liability on the value of the shares of common stock received.liability.
Dividends payable by REITs generally do not qualify for the reduced tax rates available for some dividends.
Currently, the maximum tax rate applicable to qualified dividend income payable to U.S. stockholders that are individuals, trusts and estates is 20%. Dividends payable by REITs, however, generally are not eligible for this reduced rate. Although this does not adversely affect the taxation of REITs or dividends payable by REITs, the more favorable rates applicable to regular corporate qualified dividends could cause investors who are individuals, trusts and estates to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the shares of REITs, including our common stock.dividends. Tax rates could be changed in future legislation.
If we were considered to actually or constructively pay a “preferential dividend” to certain of our stockholders, our status as a REIT could be adversely affected.
In order to qualify as a REIT, we must distribute annually to our stockholders at least 90% of our REIT taxable income (which does not equal net income as calculated in accordance with GAAP), determined without regard to the deduction for dividends paid and excluding net capital gain. In order for distributions to be counted as satisfying the annual distribution requirements for REITs, and to provide us with a REIT-level tax deduction, the distributions must not be “preferential dividends.” A dividend is not a preferential dividend if the distribution is pro rata among all outstanding shares of stock within a particular class, and in accordance with the preferences among different classes of stock as set forth in our organizational documents. Currently, there is uncertainty as to the IRS’s position regarding whether certain arrangements that REITs have with their stockholders could give rise to the inadvertent payment of a preferential dividend (e.g., the pricing methodology for stock purchased under a distribution reinvestment plan inadvertently causing a greater than 5% discount on the price of such stock purchased).
Initially, the per share price for our common stock pursuant to our DRIP will be $23.75, which is 95% of the primary offering price of $25.00 (which includes the maximum selling commissions and dealer manager fee). After the NAV pricing date, the per share price for our common stock pursuant to our DRIP will be equal to the per share NAV on the date that the distribution is payable, which, for U.S. federal income tax purposes, is intended to reflect the fair market value per share and does not include selling commissions or the dealer manager fee. If the IRS were to take a position contrary to our position that the per share NAV reflect the fair market value per share, it is possible that we may be treated as offering our stock under our DRIP at a discount greater than 5% of its fair market value resulting in the payment of a preferential dividend.
There is no de minimis exception with respect to preferential dividends. Therefore, if the IRS were to take the position that we inadvertently paid a preferential dividend, we may be deemed either to (a) have distributed less than 100% of our REIT taxable income and be subject to tax on the undistributed portion, or (b) have distributed less than 90% of our REIT taxable income and our status as a REIT could be terminated for the year in which such determination is made if we were unable to cure such failure.
Complying with REIT requirements may limit our ability to hedge our liabilities effectively and may cause us to incur tax liabilities.
The REIT provisions of the Code may limit our ability to hedge our liabilities. Any income from a hedging transaction we enter into to manage risk of interest rate changes, price changes or currency fluctuations with respect to borrowings made or to be made to acquire or carry real estate assets or in certain cases to hedge previously acquired hedges entered into to manage risks associated with property that has been disposed of or liabilities that have been extinguished, if properly identified under applicable Treasury Regulations, does not constitute “gross income” for purposes of the 75% or 95% gross income tests. To the extent that we enter into other types of hedging transactions, the income from those transactions will likely be treated as non-qualifying income for purposes of both of the gross income tests. As a result of these rules, we may need to limit our use of advantageous hedging techniques or implement those hedges through a TRS.taxable REIT subsidiary. This could increase the cost of our hedging activities because our TRSstaxable REIT subsidiaries would be subject to tax on gains or expose us to greater risks associated with changes in interest rates than we would otherwise want to bear. In addition, losses in a TRStaxable REIT subsidiary generally will not provide any tax benefit, except for being carried forward against future taxable income of such TRS.taxable REIT subsidiary.
Complying with REIT requirements may force us to forgo or liquidate otherwise attractive investment opportunities.
To qualify as a REIT, we must ensure that we meet the REIT gross income tests annually and that at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, government securities and qualified REIT real estate assets, including certain mortgage loans and certain kinds of mortgage-related securities. The remainder of our investment in securities (other than government securities and qualified real estate assets) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our assets (other than government securities and qualified real estate assets) can consist of the securities of any one issuer, and no more than 25% (20% for taxable years beginning after December 31, 2017) of the value of our total assets can be represented by securities of one or more TRSs.taxable REIT subsidiaries. If we fail to comply with these requirements at the end of any calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax consequences. As a result, we may be required to liquidate assets from our portfolio or not make otherwise attractive investments in order to maintain our qualification as a REIT. These actions could have the effect of reducing our income and amounts available for distribution to our stockholders.
The ability of our board of directors to revoke our REIT qualification without stockholder approval may subject us to U.S. federal income tax and reduce distributions to our stockholders.
Our charter provides that our board of directors may revoke or otherwise terminate our REIT election, without the approval of our stockholders, if it determines that it is no longer in our best interest to continue to qualify as a REIT. While we intend to elect andcontinue to qualify to be taxed as a REIT, we may not elect to be treated as a REIT or may terminate our REIT election if we determine that qualifying as a REIT is no longer in our best interests. If we cease to be a REIT, we would become subject to U.S. federal income tax on our taxable income and would no longer be required to distribute most of our taxable income to our stockholders, whichstockholders. Moreover, our failure to qualify as a REIT could give rise to holders of Class C Units having the right to require us to redeem any Class C Units submitted for redemption for an amount equivalent to what the holders of Class C Units would have been entitled to receive in a Fundamental Sale Transaction if the date of redemption were the date of the consummation of the Fundamental Sale Transaction. These amounts are set forth under “-The amount we would be required to pay holders of Class C Units in a
Fundamental Sale Transaction may have adverse consequences on our total returndiscourage a third party from acquiring us in a manner that might otherwise result in a premium price to our stockholders and on the market price of our common stock.stockholders.”
We may be subject to adverse legislative or regulatory tax changes that could increase our tax liability, reduce our operating flexibility and reduce the market price of our common stock.liability.
In recent years, numerous legislative, judicial and administrative changes have been made in the provisions of U.S. federal income tax laws applicable to investments similar to an investment in shares of our common stock. Additional changes to the tax laws are likely to continue to occur, and we cannot assure our stockholders that any such changes will not adversely affect the taxation of a stockholder. Any such changes could have an adverse effect on an investment in our shares or on the market value or the resale potential of our assets. Our stockholders are urged to consult with their tax advisoradvisors with respect to the impact of recent legislation on their investmentinvestments in our shares and the status of legislative, regulatory or administrative developments and proposals and their potential effect on an investment in our shares. Our stockholders also should note that our counsel’s tax opinion is based upon existing law, applicable as of the date of its opinion, all of which will be subject to change, either prospectively or retroactively.
Although REITs generally receive better tax treatment than entities taxed as regular corporations, it is possible that future legislation would result in a REIT having fewer tax advantages, and it could become more advantageous for a company that invests in real estate to elect to be treated for U.S. federal income tax purposes as a corporation. As a result, our charter provides our board of directors with the power, under certain circumstances, to revoke or otherwise terminate our REIT election and cause us to be taxed as a regular corporation, without the vote of our stockholders. Our board of directors has fiduciary duties to us and our stockholders and could only cause such changes in our tax treatment if it determines in good faith that such changes are in the best interest of our stockholders.
TableReform proposals have been recently put forth by members of ContentsCongress and the President which, if ultimately proposed as legislation and enacted as law, would substantially change the U.S. federal taxation of (among other things) individuals and businesses. Their proposals set forth a variety of principles to guide potential tax reform legislation. As of the date of this annual report, no legislation has been introduced in Congress. If ultimately reduced to legislation enacted by Congress and signed into law by the President in a form that is consistent with those principles, such reform could change dramatically the U.S. federal taxation applicable to us and our stockholders. No reform proposal specifically addresses the taxation of REITs, but because any tax reform is likely to significantly reduce the tax rates applicable to corporations and dividends received by stockholders, the tax benefits applicable to the REIT structure may be diminished in relation to corporations. Furthermore, proposed tax reform could limit the deductibility of net interest expense and could allow for the immediate deduction of any investment in tangible property (other than land) and intangible assets. Finally, the tax reform proposals do not include any principles regarding how to transition from our current system of taxation to a new tax system based on the principles in such proposed reform. Given how dramatic the changes could be, transition rules are crucial. While it is impossible to predict whether and to what extent any tax reform legislation (or other legislative, regulatory or administrative change to the U.S. federal tax laws) will be proposed or enacted, any such change in the U.S. federal tax laws could affect materially the value of any investment in our stock. You are encouraged to consult with your tax advisor regarding possible legislative and regulatory changes and the potential effect of such changes on an investment in our shares.
The share ownership restrictions of the Code for REITs and the 9.8%4.9% share ownership limit in our charter may inhibit market activity in our shares of stock and restrict our business combination opportunities.
In order to qualify as a REIT, five or fewer individuals, as defined in the Code, may not own, actually or constructively, more than 50% in value of our issued and outstanding shares of stock at any time during the last half of each taxable year, other than the first year for which a REIT election is made. Attribution rules in the Code determine if any individual or entity actually or constructively owns our shares of stock under this requirement. Additionally, at least 100 persons must beneficially own our shares of stock during at least 335 days of a taxable year for each taxable year, other than the first year for which a REIT election is made. To help ensure that we meet these tests, among other purposes, our charter restricts the acquisition and ownership of our shares of stock.
Our charter, with certain exceptions, authorizes our directors to take such actions as are necessary and desirable to preserve our qualification as a REIT while we so qualify. Unless exempted by our board of directors, for so long as we qualify as a REIT, our charter prohibits, among other limitations on ownership and transfer of shares of our stock, any person from beneficially or constructively owning (applying certain attribution rules under the Code) more than 9.8%4.9% in value of the aggregate of our outstanding shares of stock and more than 9.8%4.9% (in value or in number of shares, whichever is more restrictive) of any class or series of our shares of stock. Our board of directors may not grant an exemption from these restrictions to any proposed transferee whose ownership in excess of the 9.8%4.9% ownership limit would result in the termination of our qualification as a REIT. These restrictions on transferability and ownership will not apply, however, if our board of directors determines that it is no longer in our best interest to continue to qualify as a REIT or that compliance with the restrictions is no longer required in order for us to continue to so qualify as a REIT.
These ownership limits could delay or prevent a transaction or a change in control that might involve a premium price for our common stock or otherwise be in the best interest of the stockholders.
Our ability to utilize our net operating loss carryforwards to reduce our future taxable income would be limited if an ownership change (as defined in Section 382 of the Code) occurs, which could result in more taxable income and greater distribution requirements in order to maintain our REIT status in future tax years.
We have significant net operating loss (“NOL”) carryforwards for federal and state income tax purposes. Generally, NOL carryforwards can be used to reduce future taxable income. Our ability to utilize these NOL carryforwards would be severely limited if we were to experience an “ownership change,” as defined in Section 382 of the Code. In general terms, an ownership change can occur whenever one or more “5% stockholders” collectively change the ownership of a company by more than 50 percentage points within a three-year period. For these purposes, in certain circumstances options are deemed to be exercised. Moreover, in certain circumstances ownership interests that are not treated as stock or as an option may be treated as stock if treating the interest as stock would cause an ownership change.
An ownership change generally limits the amount of NOL carryforwards a company may use in a given year to the aggregate fair market value of the company’s common stock immediately prior to the ownership change, multiplied by the long-term tax-exempt interest rate in effect for the month of the ownership change. (The long-term tax-exempt interest rate for ownership changes that occur in April 2017 is 2.09%.) If we were to experience an ownership change, our ability to use our NOL carryforwards would be severely limited, and a substantial number of them could expire unused.
Our Class C Units are convertible into OP Units, subject to certain limitations. Our OP Units generally are redeemable for shares of our common stock on a one-for-one-basis or the cash value of a corresponding number of shares, at our election. Accordingly, Class C Units might be viewed as options to acquire our common stock that are treated as exercised, or alternatively might be viewed as ownership interests that, although they are not treated as stock or as an option, could be treated as non-stock interests treated as stock for purposes of Section 382.
To minimize the risk that we experience an ownership change, in connection with the Initial Closing we have lowered the ownership limit contained in our charter to 4.9% in value of the aggregate of our outstanding shares of stock or more than 4.9% (in value or in number of shares, whichever is more restrictive) of any class or series of shares of our stock. However, the Brookfield Investor and its affiliates have been granted a waiver of this ownership limit, but are not allowed to acquire or own more than 49.9% of our outstanding shares of common stock. We do not believe that we will undergo an ownership change in connection with the Initial Closing. The determination as to whether we experience an ownership change for purposes of Section 382 of the Code is complex. No assurance can be given that we will not undergo an ownership change that would have a significant impact on our ability to utilize our NOL carryforwards.
Non-U.S. stockholders will be subject to U.S. federal withholding tax and may be subject to U.S. federal income tax on distributions received from us and upon the disposition of our shares.
Subject to certain exceptions, distributions received from us will be treated as dividends of ordinary income to the extent of our current or accumulated earnings and profits. Such dividends ordinarily will be subject to U.S. withholding tax at a 30% rate, or such lower rate as may be specified by an applicable income tax treaty, unless the distributions are treated as “effectively connected” with the conduct by the non-U.S. stockholder of a U.S. trade or business. Pursuant to the Foreign Investment in Real Property Tax Act of 1980, ("FIRPTA"(“FIRPTA”), capital gain distributions attributable to sales or exchanges of “U.S. real property interests” ("USRPIs"interests,” (“USRPIs”), generally will be taxed to a non-U.S. stockholder (other than a qualified pension plan, entities wholly owned by a qualified pension plan and certain foreign publicly traded entities) as if such gain were effectively connected with a U.S. trade or business. However, a capital gain distribution will not be treated as effectively connected income if (a) the distribution is received with respect to a class of stock that is regularly traded on an established securities market located in the United States and (b) the non-U.S. stockholder does not own more than 5%10% of the class of our stock at any time during the one-year period ending on the date the distribution is received. We do not anticipate that our shares will be “regularly traded” on an established securities market for the foreseeable future, if at all, and therefore, this exception is not expected to apply.
Gain recognized by a non-U.S. stockholder upon the sale or exchange of our common stock generally will not be subject to U.S. federal income taxation unless such stock constitutes a USRPI under FIRPTA. Our common stock will not constitute a USRPI so long as we are a “domestically-controlled qualified investment entity.“domestically-controlled.” AWe will be domestically-controlled qualified investment entity includes a REIT if at all times during a specified testing period, less than 50% in value of such REIT’sour stock is held directly or indirectly by non-U.S. stockholders. We believe, but cannot assure our stockholders, that we will be a domestically-controlled qualified investment entity.
Even if we do not qualify as a domestically-controlled qualified investment entity at the time a non-U.S. stockholder sells or exchanges our common stock, gain arising from such a sale or exchange would not be subject to U.S. taxation under FIRPTA as a sale of a USRPI if: (a) our common stock is “regularly traded,” as defined by applicable Treasury regulations, on an established securities market, and (b) such non-U.S. stockholder owned, actually and constructively, 5%10% or less of our common stock at any time during the five-year period ending on the date of the sale. However, it is not anticipated that our common stock will be “regularly traded” on an established market. We encourage our stockholders to consult their tax advisoradvisors to determine the tax consequences applicable to them if theyour stockholders are a non-U.S. stockholder.stockholders.
Potential characterization of distributions or gain on sale may be treated as unrelated business taxable income to tax-exempt investors.
If (a) we are a “pension-held REIT,” (b) a tax-exempt stockholder has incurred (or is deemed to have incurred) debt to purchase or hold our common stock, or (c) a holder of common stock is a certain type of tax-exempt stockholder, dividends on, and gains recognized on the sale of, common stock by such tax-exempt stockholder may be subject to U.S. federal income tax as unrelated business taxable income under the Code.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Our Hotels
On March 21, 2014, the Company acquired the Barceló Portfolio for an aggregate purchase price of approximately $110.1 million, exclusive of closing costs. The Barceló Portfolio consists of (i) three wholly owned hotel assets (the "Portfolio Owned Assets"), the Baltimore Courtyard Inner Harbor Hotel (the "Baltimore Courtyard"), the Courtyard Providence Downtown Hotel (the "Providence Courtyard") and the Homewood Suites by Hilton Stratford (the "Stratford Homewood Suites"); (ii) one leased asset, the Georgia Tech Hotel & Conference Center (the "Georgia Tech Hotel"); and (iii) equity interests in two joint ventures (the "Joint Venture Assets") that each own one hotel, the Westin Virginia Beach and the Hilton Garden Inn Blacksburg.
The following table presents certain additional information about the properties we owned at December 31, 2014:2016:
| | | Property | Location | Number of Rooms | Contract Purchase Price (In thousands) | | Ownership Percentage of Hotel | | Purchase Price per Room (In thousands) | | Location | Number of Rooms | Ownership Percentage of Hotel |
Baltimore Courtyard | Baltimore, MD | 205 | $ | 41,000 |
| | 100 | % | | $ | 200.00 |
| | Baltimore, MD | 205 | 100% |
Providence Courtyard | Providence, RI | 216 | $ | 35,500 |
| | 100 | % | | $ | 164.35 |
| | Providence, RI | 219 | 100% |
Stratford Homewood Suites | Stratford, CT | 135 | $ | 16,500 |
| | 100 | % | | $ | 122.22 |
| | Stratford, CT | 135 | 100% |
Georgia Tech Hotel | Atlanta, GA | 252 | $ | 8,500 |
| | NA |
| (3) | $ | 33.73 |
| (1) | Atlanta, GA | 252 | N/A |
Westin Virginia Beach | Virginia Beach, VA | 236 | $ | 3,465 |
| | 30.53 | % | | $ | 14.68 |
| (2) | Virginia Beach, VA | 236 | 31% |
Hilton Garden Inn Blacksburg | Blacksburg, VA | 137 | $ | 1,535 |
| | 24.00 | % | | $ | 11.20 |
| (2) | Blacksburg, VA | 137 | 57% |
| | | 1,181 | $ | 106,500 |
| (4) | | | | | |
(1) Represents the purchase price per room for the leasehold interest in the property | |
(2) Represents the purchase price per room for the equity interest in the joint venture | |
(3) The Company owns the leasehold interest in the property and accounts for it as an operating lease | |
(4) Represents the contract purchase price for the hotels. The aggregate purchase price for the total net operating assets acquired was $110.1 million.
| |
Courtyard Asheville(4)(11) | | Asheville, NC | 78 | 100% |
Courtyard Athens Downtown(4)(11) | | Athens, GA | 105 | 100% |
Courtyard Bowling Green Convention Center(4)(9) | | Bowling Green, KY | 93 | 100% |
Courtyard Chicago Elmhurst Oakbrook Area(4)(9) | | Elmhurst, IL | 140 | 100% |
Courtyard Columbus Downtown(6)(9) | | Columbus, OH | 150 | 100% |
Courtyard Dallas Market Center(4)(9)(8) | | Dallas, TX | 184 | 100% |
Courtyard Dalton(5)(9) | | Dalton, GA | 93 | 100% |
Courtyard Flagstaff(6)(9) | | Flagstaff, AZ | 164 | 100% |
Courtyard Gainesville(4)(11) | | Gainesville, FL | 81 | 100% |
Courtyard Houston I 10 West Energy Corridor(5)(9) | | Houston, TX | 176 | 100% |
Courtyard Jacksonville Airport Northeast(4)(9) | | Jacksonville, FL | 81 | 100% |
Courtyard Knoxville Cedar Bluff(4)(11) | | Knoxville, TN | 78 | 100% |
Courtyard Lexington South Hamburg Place(4)(9) | | Lexington, KY | 90 | 100% |
Courtyard Louisville Downtown(4)(9) | | Louisville, KY | 140 | 100% |
Courtyard Mobile(4)(8)(11) | | Mobile, AL | 78 | 100% |
Courtyard Orlando Altamonte Springs Maitland(4)(11) | | Orlando, FL | 112 | 100% |
NA - not
|
| | | |
Courtyard San Diego Carlsbad(5)(9) | Carlsbad, CA | 145 | 100% |
Courtyard Sarasota Bradenton(4)(11) | Sarasota, FL | 81 | 100% |
Courtyard Tallahassee North I 10 Capital Circle(4)(11) | Tallahassee, FL | 93 | 100% |
DoubleTree Baton Rouge(6)(9) | Baton Rouge, LA | 127 | 100% |
Embassy Suites Orlando International Drive Jamaican Court(4)(9) | Orlando, FL | 246 | 100% |
Fairfield Inn & Suites Atlanta Vinings(4)(9) | Atlanta, GA | 142 | 100% |
Fairfield Inn & Suites Baton Rouge South(6)(9) | Baton Rouge, LA | 78 | 100% |
Fairfield Inn & Suites Bellevue(6)(9) | Bellevue, WA | 144 | 100% |
Fairfield Inn & Suites Dallas Market Center(4)(9) | Dallas, TX | 116 | 100% |
Fairfield Inn & Suites Denver(6)(10) | Denver, CO | 160 | 100% |
Fairfield Inn & Suites Spokane(6)(9) | Spokane, WA | 84 | 100% |
Hampton Inn & Suites Boynton Beach(4)(11) | Boynton Beach, FL | 164 | 100% |
Hampton Inn & Suites El Paso Airport(6)(10) | El Paso, TX | 139 | 100% |
Hampton Inn & Suites Nashville Franklin Cool Springs(4)(9) | Franklin, TN | 127 | 100% |
Hampton Inn Albany Wolf Road Airport(4)(11) | Albany, NY | 153 | 100% |
Hampton Inn Austin North at IH 35 & Highway 183(5)(9) | Austin, TX | 121 | 100% |
Hampton Inn Baltimore Glen Burnie(4)(8)(11) | Glen Burnie, MD | 116 | 100% |
Hampton Inn Beckley(4)(11) | Beckley, WV | 108 | 100% |
Hampton Inn Birmingham Mountain Brook(4)(8)(11) | Birmingham, AL | 129 | 100% |
Hampton Inn Boca Raton(4)(11) | Boca Raton, FL | 94 | 100% |
Hampton Inn Boca Raton Deerfield Beach(4)(11) | Deerfield Beach, FL | 106 | 100% |
Hampton Inn Boston Peabody(4)(9) | Peabody, MA | 120 | 100% |
Hampton Inn Champaign Urbana(5)(9) | Urbana, IL | 130 | 100% |
Hampton Inn Charleston Airport Coliseum(4)(11) | Charleston, SC | 124 | 100% |
Hampton Inn Charlotte Gastonia(4)(11) | Gastonia, NC | 107 | 100% |
Hampton Inn Chattanooga Airport I 75(4)(11) | Chattanooga, TN | 167 | 100% |
Hampton Inn Chicago Gurnee(4)(11) | Gurnee, IL | 134 | 100% |
Hampton Inn Chicago Naperville(5)(11) | Naperville, IL | 129 | 100% |
Hampton Inn Cleveland Westlake(4)(11) | Westlake, OH | 122 | 100% |
Hampton Inn College Station(5)(11) | College Station, TX | 133 | 100% |
Hampton Inn Colorado Springs Central Airforce Academy(4)(11) | Colorado Springs, CO | 125 | 100% |
Hampton Inn Columbia I 26 Airport(4)(11) | West Columbia, SC | 120 | 100% |
Hampton Inn Columbus Airport(4)(11) | Columbus, GA | 118 | 100% |
Hampton Inn Columbus Dublin(4)(11) | Dublin, OH | 123 | 100% |
Hampton Inn Dallas Addison(4)(11) | Addison, TX | 158 | 100% |
Hampton Inn Detroit Madison Heights South Troy(4)(11) | Madison Heights, MI | 123 | 100% |
Hampton Inn Detroit Northville(4)(11) | Northville , MI | 124 | 100% |
Hampton Inn East Lansing(5)(9) | East Lansing, MI | 86 | 100% |
Red Lion Inn & Suites Fayetteville I 95(4)(9) | Fayetteville, NC | 121 | 100% |
Hampton Inn Fort Collins(6)(10) | Ft. Collins, CO | 75 | 100% |
Hampton Inn Fort Wayne Southwest(6)(9) | Ft. Wayne, IN | 118 | 100% |
Hampton Inn Grand Rapids North(4)(9) | Grand Rapids, MI | 84 | 100% |
Hampton Inn Indianapolis Northeast Castleton(5)(11) | Indianapolis, IN | 128 | 100% |
Hampton Inn Kansas City Airport(4)(11) | Kansas City, MO | 120 | 100% |
|
| | | |
Hampton Inn Kansas City Overland Park(4)(11) | Overland Park, KS | 133 | 100% |
Hampton Inn Knoxville Airport(5)(11) | Alcoa, TN | 118 | 100% |
Hampton Inn Medford(6)(9) | Medford, OR | 75 | 100% |
Hampton Inn Memphis Poplar(4)(11) | Memphis, TN | 124 | 100% |
Hampton Inn Milford(5)(11) | Milford, CT | 148 | 100% |
Hampton Inn Morgantown(4)(11) | Morgantown, WV | 107 | 100% |
Hampton Inn Norfolk Naval Base(4)(8)(11) | Norfolk, VA | 117 | 100% |
Hampton Inn Orlando International Drive Convention Center(5)(9) | Orlando, FL | 170 | 100% |
Hampton Inn Palm Beach Gardens(4)(11) | Palm Beach Gardens, FL | 116 | 100% |
Hampton Inn Pickwick Dam at Shiloh Falls(4)(11) | Counce, TN | 50 | 100% |
Hampton Inn Scranton at Montage Mountain(4)(11) | Moosic, PA | 129 | 100% |
Hampton Inn St Louis Westport(4)(11) | Maryland Heights, MO | 122 | 100% |
Hampton Inn State College(4)(11) | State College, PA | 119 | 100% |
Hampton Inn West Palm Beach Florida Turnpike(4)(11) | West Palm Beach, FL | 110 | 100% |
Hilton Garden Inn Albuquerque North Rio Rancho(5)(9) | Rio Rancho, NM | 129 | 100% |
Hilton Garden Inn Austin Round Rock(4)(9) | Round Rock, TX | 122 | 100% |
Hilton Garden Inn Fort Collins(6)(10) | Ft. Collins, CO | 120 | 100% |
Hilton Garden Inn Louisville East(5)(9) | Louisville, KY | 112 | 100% |
Hilton Garden Inn Monterey(6)(9) | Monterey, CA | 204 | 100% |
Holiday Inn Express & Suites Kendall East Miami(4)(11) | Miami, FL | 66 | 100% |
Homewood Suites Augusta(5)(11) | Augusta, GA | 65 | 100% |
Homewood Suites Boston Peabody(4)(9) | Peabody, MA | 85 | 100% |
Homewood Suites Chicago Downtown(4)(9) | Chicago, IL | 233 | 100% |
Homewood Suites Hartford Windsor Locks(4)(11) | Windsor Locks, CT | 132 | 100% |
Homewood Suites Memphis Germantown(4)(11) | Germantown, TN | 92 | 100% |
Homewood Suites Orlando International Drive Convention Center(5)(9) | Orlando, FL | 252 | 100% |
Homewood Suites Phoenix Biltmore(4)(8)(11) | Phoenix , AZ | 124 | 100% |
Homewood Suites San Antonio Northwest(4)(11) | San Antonio, TX | 123 | 100% |
Homewood Suites Seattle Downtown(5)(11) | Seattle, WA | 161 | 100% |
Hyatt House Atlanta Cobb Galleria(6)(9) | Atlanta, GA | 149 | 100% |
Hyatt Place Albuquerque Uptown(4)(9) | Albuquerque, NM | 126 | 100% |
Hyatt Place Baltimore Washington Airport(4)(9) | Linthicum Heights, MD | 127 | 100% |
Hyatt Place Baton Rouge I 10(4)(9) | Baton Rouge, LA | 126 | 100% |
Hyatt Place Birmingham Hoover(4)(9) | Birmingham, AL | 126 | 100% |
Hyatt Place Chicago Schaumburg(6)(9) | Schaumburg, IL | 127 | 100% |
Hyatt Place Cincinnati Blue Ash(4)(9) | Blue Ash, OH | 125 | 100% |
Hyatt Place Columbus Worthington(4)(9) | Columbus, OH | 124 | 100% |
Hyatt Place Indianapolis Keystone(4)(9) | Indianapolis, IN | 124 | 100% |
Hyatt Place Kansas City Overland Park Metcalf(4)(9) | Overland Park, KS | 124 | 100% |
Hyatt Place Las Vegas(4)(9) | Las Vegas, NV | 202 | 100% |
Hyatt Place Memphis Wolfchase Galleria(4)(9) | Memphis, TN | 125 | 100% |
Hyatt Place Miami Airport West Doral(4)(9) | Miami, FL | 124 | 100% |
Hyatt Place Minneapolis Airport South(4)(9) | Bloomington, MN | 126 | 100% |
Hyatt Place Nashville Franklin Cool Springs(4)(9) | Franklin, TN | 126 | 100% |
Hyatt Place Richmond Innsbrook(4)(9) | Glen Allen, VA | 124 | 100% |
|
| | | |
Hyatt Place Tampa Airport Westshore(4)(9) | Tampa, FL | 124 | 100% |
Residence Inn Boise Downtown(4)(11) | Boise, ID | 104 | 100% |
Residence Inn Chattanooga Downtown(4)(11) | Chattanooga, TN | 76 | 100% |
Residence Inn Fort Myers(4)(11) | Fort Myers, FL | 78 | 100% |
Residence Inn Fort Wayne Southwest(6)(9) | Ft. Wayne, IN | 109 | 100% |
Residence Inn Jacksonville Airport(5)(9) | Jacksonville, FL | 78 | 100% |
Residence Inn Knoxville Cedar Bluff(4)(11) | Knoxville, TN | 78 | 100% |
Residence Inn Lexington South Hamburg Place(4)(9) | Lexington, KY | 91 | 100% |
Residence Inn Los Angeles Airport El Segundo(4)(9) | El Segundo, CA | 150 | 100% |
Residence Inn Macon(4)(11) | Macon, GA | 78 | 100% |
Residence Inn Mobile(4)(8)(11) | Mobile, AL | 66 | 100% |
Residence Inn Portland Downtown Lloyd Center(4)(11) | Portland, OR | 168 | 100% |
Residence Inn San Diego Rancho Bernardo Scripps Poway(4)(9) | San Diego, CA | 95 | 100% |
Residence Inn Sarasota Bradenton(4)(11) | Sarasota, FL | 78 | 100% |
Residence Inn Savannah Midtown(4)(11) | Savannah, GA | 66 | 100% |
Residence Inn Tallahassee North I 10 Capital Circle(4)(11) | Tallahassee, FL | 78 | 100% |
Residence Inn Tampa North I 75 Fletcher(4)(11) | Tampa, FL | 78 | 100% |
Residence Inn Tampa Sabal Park Brandon(4)(11) | Tampa, FL | 102 | 100% |
Springhill Suites Asheville(5)(11) | Asheville, NC | 88 | 100% |
Springhill Suites Austin Round Rock(4)(9) | Round Rock, TX | 104 | 100% |
SpringHill Suites Baton Rouge South(6)(9) | Baton Rouge, LA | 78 | 100% |
SpringHill Suites Denver(6)(10) | Denver, CO | 124 | 100% |
SpringHill Suites Flagstaff(6)(9) | Flagstaff, AZ | 112 | 100% |
Springhill Suites Grand Rapids North(4)(9) | Grand Rapids, MI | 76 | 100% |
Springhill Suites Houston Hobby Airport(4)(9) | Houston, TX | 122 | 100% |
Springhill Suites Lexington Near The University Of Kentucky(4)(9) | Lexington, KY | 108 | 100% |
SpringHill Suites San Antonio Medical Center Northwest(4)(9)(8) | San Antonio, TX | 112 | 100% |
Springhill Suites San Diego Rancho Bernardo Scripps Poway(4)(9) | San Diego, CA | 137 | 100% |
TownePlace Suites Baton Rouge South(6)(9) | Baton Rouge, LA | 90 | 100% |
TownePlace Suites Savannah Midtown(5)(11) | Savannah, GA | 93 | 100% |
| | | 17,193 | |
| |
| (1) | We own the leasehold interest in the property and account for it as an operating lease |
| |
| (2) | Encumbered by the Baltimore Courtyard & Providence Courtyard Loan (Barceló Portfolio) |
| |
| (3) | Encumbered by the Additional Grace Mortgage Loan, as part of the Barceló Portfolio |
| |
| (4) | Encumbered by the Assumed Grace Indebtedness as part of the Grace Portfolio |
| |
| (5) | Encumbered by the Additional Grace Mortgage Loan as part of the Grace Portfolio |
| |
| (6) | Encumbered by the SN Term Loan as part of the Summit and Noble Portfolios |
| |
| (7) | Encumbered by the Hilton Garden Inn Blacksburg Joint Venture Loan |
| |
| (8) | Subject to a ground lease. Our ground leases generally have a remaining term of at least 10 years (including renewal options). |
| |
| (9) | Sub-managed by Crestline; management transitioned directly to Crestline effective as of the Initial Closing on March 31, 2017 |
| |
| (10) | Sub-managed by Interstate; management is scheduled to be transitioned directly to Crestline on April 3, 2017 with property management terms similar to those applicable to our other hotels managed by Crestline. |
| |
| (11) | Sub-managed by a third-party sub-property manager other than Crestline or Interstate; management transitioned directly to the third party sub-property manager effective as of the Initial Closing on March 31, 2017 |
Debt
On
In March 21, 2014, the Company, through indirect wholly owned subsidiaries of our OP,we obtained a loan from German American Capital Corporation in the principal amount of $45.5 million at a fixed annual interest rate of 4.30% with a maturity date in April 2019. The loan is secured by mortgages on the Baltimore Courtyard and the Providence Courtyard.
The following table sets forth
In February 2015, we acquired the debt obligationsGrace Portfolio for a purchase price of $1.8 billion. A portion of the contract purchase price was satisfied through the assumption of existing mortgage and mezzanine indebtedness, which we refer to as the Assumed Grace Indebtedness, secured by 95 of the Baltimore Courtyardhotels in the Grace Portfolio (“Equity Inns Portfolio I”) and Providence Courtyardthrough additional mortgage financing secured by 20 of the hotels in the Grace Portfolio ("Equity Inns Portfolio II") and one hotel from the Barceló Portfolio (the Stratford Homewood Suites), which we refer to as the Additional Grace Mortgage Loan. The Additional Grace Mortgage Loan was refinanced to reduce and fix the interest rate and extend the maturity in October 2015. In addition, a portion of December 31, 2014:
|
| | | | | | |
| Use of Proceeds | Principal Balance | Debt per Room | Interest Rate | Maturity Date |
| Baltimore Courtyard & Providence Courtyard | $ | 45,500,000 |
| $108,076 | Fixed at 4.30% | April 2019 |
In May 2015, we acquired an additional equity interest in the HGI Blacksburg JV, increasing our percentage ownership to 56.5% from 24.0%. As a result of this transaction, we concluded that we are the primary beneficiary, with the power to direct activities that most significantly impact economic performance of the HGI Blacksburg JV, and therefore consolidated the entity in our consolidated/combined financial statements subsequent to the acquisition. Simultaneous with the acquisition, we obtained a loan from German American Capital Corporation in the principal amount of $10.5 million at a fixed annual interest rate of 4.31% with a maturity date in June 2020. The Company’s promissory notes payable as of December 31, 2014 are as follows:loan is secured by a mortgage on the Hilton Garden Inn Blacksburg.
In August 2015, we entered into the SN Term Loan with Deutsche Bank AG New York Branch, as administrative agent and Deutsche Bank Securities Inc., as sole lead arranger and book-running manager. We amended and restated the SN Term Loan during October 2015. On February 11, 2016, we further amended the SN Term Loan pursuant to which the lenders' total commitment was reduced from $450.0 million to $293.4 million. Proceeds from the SN Term Loan were used to fund a portion of the purchase price of the First Summit Portfolio, the First Noble and Second Noble Portfolios and the Third Summit Portfolio and these borrowings are secured by mortgages on the fee interest in the hotels acquired.
In 2016, Summit loaned us $27.5 million pursuant to the Summit Loan. Proceeds from the Summit Loan totaling $20.0 million were used to pay a portion of the purchase price of the Third Summit Portfolio and proceeds from the Summit Loan totaling $7.5 million were used as a purchase price deposit on our Pending Acquisition. In January 2017, in connection with our entry into the SPA, we entered into an amendment of the Pending Acquisition and an amendment to the Summit Loan to extend the closing date of the Pending Acquisition and the maturity date of the Summit Loan, and we also entered into a new loan agreement pursuant to which Summit agreed to loan us an additional $3.0 million, which was used as an additional purchase price deposit on our Pending Acquisition.
The following table summarizes certain information regarding our debt obligations as of December 31, 2016: |
| | | | | | |
| Use of Proceeds | Principal Balance | Debt per Room | Interest Rate | Maturity Date |
| Barceló acquisition | $ | 63,074,000 |
| $53,407 | Fixed at 6.80% | See below |
| Property improvement plan | $ | 1,775,000 |
| $1,503 | Fixed at 4.50% | March 2019 |
|
| | | | | |
| Use of Proceeds/Collateral | Principal Balance as of December 31, 2016 (In Thousands) | Number of rooms | Debt per Room | Interest Rate | Maturity Date |
| 95 properties in Grace Portfolio - Equity Inn Portfolio I (Senior Loan - Assumed Grace Indebtedness) | $793,647(1) | 11,027 | $71,973 | LIBOR plus 3.31% | 1st ext.May 1, 2017; 2nd ext.
May 1, 2018; 3rd ext. May 1, 2019 |
| 95 properties in Grace Portfolio - Equity Inn Portfolio I (Mezzanine Loan - Assumed Grace Indebtedness) | $101,794(2) | 11,027 | $9,231 | LIBOR plus 4.77% | 1st ext.May 1, 2017; 2nd ext.
May 1, 2018; 3rd ext. May 1, 2019 |
| 95 properties in Grace Portfolio - Equity Inn Portfolio I ( Grace Preferred Equity Interests) | $224,941 | 11,027 | $20,399 | (i) Until August 27, 2016 a rate equal to 7.50% per annum, and (ii) thereafter, a rate equal to 8.00% per annum | Reduced principal balance to $173.6 million by February 27, 2018 and repay in full by no later than February 27, 2019 |
| Equity Inn Portfolio II & Homewood Suites Stratford | $232,000 | 2,690 | $86,245 | 4.96% | October 6, 2020 |
| 20 properties in Grace Portfolio - Equity Inn Portfolio II ( Grace Preferred Equity Interests) | $65,247 | 2,555 | $25,537 | (i) Until August 27, 2016 a rate equal to 7.50% per annum, and (ii) thereafter, a rate equal to 8.00% per annum | Reduced principal balance to $49.9 million by February 27, 2018 and repay in full by no later than February 27, 2019 |
| Summit, Noble -20 Properties (SN Term Loan) | $235,484 | 2,427 | $97,027 | Base rate plus a spread of between 3.25% and 3.75% for Eurodollar rate Loans and between 2.25% and 2.75% for base rate Loans | August 31, 2018;
1st ext. August 31, 2019; 2nd ext. August 31, 2020 |
| Summit III - Seller Financing (Summit Loan) (3) | $23,405 | 707 | $33,105 | 13.0% per annum from the date of the loan to the initial maturity date, 14.0% per annum from the initial maturity date to the 1st ext. maturity date, 15.0% per annum from the 1st ext. maturity date to the 2nd ext. maturity date | February 11, 2017; 1st ext. February 11, 2018; 2nd ext. February 11, 2019 |
| Baltimore Courtyard & Providence Courtyard | $45,500 | 424 | $107,311 | 4.30% | April 6, 2019 |
Hilton Garden Inn
Blacksburg | $10,500 | 137 | $76,642 | 4.31% | June 6, 2020 |
The promissory notes payable for the Barceló acquisition originally consisted of the Portfolio Owned Assets and Joint Venture Assets promissory notes which had a maturity date of within ten business days after the Company raised equal to or greater than $150.0 million in common equity from the Offering. During the year ended December 31, 2014, the Company entered into an amendment to the Portfolio Owned Assets and Joint Venture Assets promissory notes whereby the promissory notes were combined into one note (the "Barceló Promissory Note") with an outstanding principal amount of $63.1 million. The Barceló Promissory Note has a maturity date of within ten business days after the Company raises $70.0 million in common equity from the Offering after the closing of the Grace Acquisition and payment of all acquisition related expenses (including payments to our Advisor and its affiliates), which has not yet occurred. There are no principal payments under the Barceló Promissory Note payable for 2015 and 2016, unless the contingent payment feature above is satisfied by raising equal to or greater than $70.0 million in common equity from the Offering after the closing of the Grace Acquisition and payment of all acquisition related expenses (including payments to our Advisor and its affiliates). An aggregate of $3.5 million of deferred consideration in connection with the acquisition of the Barceló Portfolio is due concurrently with the Barceló Promissory Note.
| |
| (1) | Represents fair value of debt assumed at December 31, 2016. As of December 31, 2016, the outstanding principal balance is $793,592 (in thousands). |
| |
| (2) | Represents fair value of debt assumed at December 31, 2016. As of December 31, 2016, the outstanding principal balance is $101,837 (in thousands). |
| |
| (3) | As described above, we amended the Summit Loan in connection with our entry into the SPA. |
Item 3. Legal Proceedings.
We are not a party to any material pending legal or regulatory proceedings.
Item 4. Mine Safety Disclosures.
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our shares of common stock are not traded on a national securities exchange. There currently is no publicestablished trading market for our shares and there may never be one. Even if a stockholder is able to find a buyer for his or her shares, the stockholder may not sell his or her shares unless the buyer meets applicable suitability and minimum purchase standards and the sale does not violate state securities laws. OurIn connection with the Initial Closing, our board of directors decreased the aggregate share ownership limit under our charter, such that our charter now also prohibits the ownership of more than 4.9% in value of the aggregate of the outstanding shares of our stock or more than 4.9% (in value or in number of shares, whichever is more restrictive) of any class or series of shares of our stock by a single investor, unless exempted by our board of directors, which may inhibit large investors from purchasing shares from stockholders. Prior to this action by our board of directors, our charter prohibited the ownership of more than 9.8% in value of the aggregate of the outstanding shares of our stock or more than 9.8% (in value or in number of shares, whichever is more restrictive) of any class or series of shares of our stock by a single investor, unless exempted by our board of directors. At the Initial Closing, as contemplated by and pursuant to the SPA, the Company and the Brookfield Investor entered into an Ownership Limit Waiver Agreement (the “Ownership Limit Waiver Agreement”), pursuant to which the Company: (i) granted the Brookfield Investor and its affiliates a waiver of the Aggregate Share Ownership Limit (as defined in the Charter); and (ii) permitted the Brookfield Investor and its affiliates to own up to 49.9% in value of the aggregate of the outstanding shares of the Company’s stock or up to 49.9% (in value or in number of shares, whichever is more restrictive) of any class or series of shares of the Company stock, subject to the terms and conditions set forth in the Ownership Limit Waiver Agreement.
On July 1, 2016, our board of directors which may inhibit large investors from desiring to purchase shares from stockholders. Pursuant toapproved an Estimated Per-Share NAV of $21.48 based on an estimated fair value of our Offering, we are sellingassets less the estimated fair value of our liabilities, divided by 36,636,016 shares of our common stock tooutstanding on a fully diluted basis as of March 31, 2016, which was published on the public at a pricesame date. This was the first time that our board of $25.00 per share and at $23.75 per share pursuant to our DRIP.directors determined an Estimated Per-Share NAV. We anticipate that we will publish an updated Estimated Per-Share NAV no less frequently than once each calendar year.
In order for FINRA members and their associated persons to participate in the offering and sale of shares of common stock pursuant to our Offering, we are required pursuant to FINRA Rule 2310(b)(5) to disclose in each annual report distributed to stockholders a per share estimated value of the shares, the method by which it was developed and the date of the data used to develop the estimated value. In addition, we prepare annual statements of estimated share values to assist fiduciaries of retirement plans subject to the annual reporting requirements of the Employee Retirement Income Security Act of 1974 in the preparation of their reports relating to an investment in our shares. During our Offering, the value of the shares is deemed to be the offering price of $25.00 per share (without regard to purchase price discounts for certain categories of purchasers), as adjusted for any special distribution of net sales proceeds. There is no public trading market for the shares at this time, and there can be no assurance that stockholders would receive $25.00 per share if such a market did exist and they sold their shares or that they will be able to receive such amount for their shares in the future. Nor does this deemed value reflect the distributions that stockholders would be entitled to receive if our properties were sold and the sale proceeds were distributed upon liquidation of our Company. Such a distribution upon liquidation may be less than $25.00 per share primarily due to the fact that the funds initially available for investment in properties were reduced from the gross offering proceeds in order to pay selling commissions and dealer manager fees, organization and offering expenses, and acquisitions and advisory fees.
Holders
As of March 15, 2015,December 31, 2016, we had 15,095,63438,493,430 shares of common stock outstanding held by a total of 8,65119,476 stockholders.
Distributions
The Company intends to electWe elected and qualifyqualified to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code commencing with the tax year ended December 31, 2014. IfAs a REIT, we are required to distribute at least 90% of our REIT taxable income, determined without regard for the Company qualifiesdeduction for taxationdividends paid and excluding net capital gains, to our stockholders annually. The amount of distributions payable to our stockholders is determined by our board of directors and is dependent on a number of factors, including funds available for distribution, financial condition, capital expenditure requirements, as applicable and annual distribution requirements needed to maintain our status as a REIT it generally will not be subject to federal corporate income tax as long as it distributes all of its REIT taxable income to its stockholders. REITs are subject to a number of other organizational and operational requirements. Even ifunder the Company qualifies for taxation as a REIT, itCode. We may be subject to certain state and local taxes on itsour income and property, and federal income and excise taxes on itsour undistributed income. The Company's hotels areEach hotel is leased to a TRStaxable REIT subsidiary which is owned by the OP. A TRStaxable REIT subsidiary is subject to federal, state and local income taxes.
On February 3, 2014, the Company'sour board of directors declared distributions payable to stockholders of record each day during the applicable month at a rate equal to $0.0000465753$0.0046575343 per day (or $0.0046448087 if a 366-day year), or $1.70 per annum, per share of common stock. The first distribution was paid in May 2014 to holders of record in April 2014.
We funded all of our cash distributions from inception in July 2013 through the suspension of cash distributions in March 2016 using proceeds from our IPO or our DRIP. Our IPO was suspended on November 15, 2015. The IPO terminated on January 7, 2017, the third anniversary of its commencement, in accordance with its terms.
In March 2016, our board of directors changed the distribution policy, such that distributions are payable bypaid with respect to April 2016 were paid in shares of common stock instead of cash to all stockholders, and not at the fifth day followingelection of each month endstockholder. Accordingly, we paid a cash distribution to stockholders of record at the close of business each day during the prior month. Additionally,quarter ended March 31, 2016, but distributions for subsequent periods have been paid in shares of common stock. Distributions for the quarter ended June 30, 2016 were paid in common stock in an amount equivalent to $1.70 per annum, divided by $23.75.
On July 1, 2016, in connection with its determination of Estimated Per-Share NAV, our organizational documents permit us to pay distributions from unlimited amountsboard of any source and we may use sources other than operating cash flows to fund distributions, including proceeds from our Offering, which may reducedirectors revised the amount of capitalthe distribution to $1.46064 per share per annum, equivalent to a 6.80% annual rate based on the Estimated Per-Share NAV, automatically adjusting if and when we ultimately invest in properties or other permitted investments and negatively impactpublish an updated Estimated Per-Share NAV. Distributions for the value of our stockholders' investment.
Cash usedperiod from July 1, 2016 to pay our distributions may be generated from funds received from property operating results, refinancings, the sale of our preferred and common stock and contributions from our Advisor. During the year ended December 31, 2014, cash used to pay our distributions was generated from proceeds from common stock and common stock issued under the DRIP. Following the Grace Acquisition, we expect that we will use funds received from operating activities to pay a greater proportion of our distributions and will be able to reduce, and2016 were paid in the future eliminate, the use of funds from the saleshares of common stock in an amount equal to pay distributions. Distribution payments are dependent on the availability of funds. Our board of directors may reduce the amount of distributions to be paid or suspend distribution payments at any time, therefore distribution payments are not assured. As of December 31, 2014 and 2013, distributions paid totaled $3.5 million and $0, respectively.0.000185792 per share
per day, or $1.46064 per annum, divided by $21.48. We anticipate that we will publish an updated Estimated Per-Share NAV no less frequently than once each calendar year.
On January 13, 2017, in connection with our entry into the SPA, we suspended paying distributions to our stockholders entirely and suspended our DRIP.
Following the Initial Closing, pursuant to the terms of the Redeemable Preferred Share, prior approval of at least one of the Redeemable Preferred Directors is required before we can declare or pay any distributions or dividends to our common stockholders, except for cash distributions equal to or less than $0.525 per annum per share, and, pursuant to the limited partnership agreement of the OP, prior approval of the majority of the then outstanding Class C Units is required before we can declare or pay any distributions or dividends with respect to OP Units (each of which correspond to one share of our common stock), except for cash distributions equal to or less than $0.525 per annum per OP Units. There can be no assurance that we will resume paying distributions in cash or shares of common stock or be able to pay distributions in cash in the future. Our ability to make future cash distributions will depend on our future cash flows and may be dependent on our ability to obtain additional liquidity, which may not be available on favorable terms, or at all.
Following the Initial Closing, commencing on March 31, 2017, holders of Class C Units are entitled to receive, with respect to each Class C Unit, fixed, quarterly cumulative cash distributions at a rate of 7.50% per annum from legally available funds. If we fail to pay these cash distributions when due, the per annum rate will increase to 10% until all accrued and unpaid distributions required to be paid in cash are reduced to zero.
Holders of Class C Units are also entitled to receive, with respect to each Class C Unit, a fixed, quarterly, cumulative distribution payable in Class C Units at a rate of 5% per annum. Upon our failure to redeem the Brookfield Investor when required to do so pursuant to the limited partnership agreement of the OP, the 5% per annum PIK Distribution rate will increase to a per annum rate of 7.50%, and would further increase by 1.25% per annum for the next four quarterly periods thereafter, up to a maximum per annum rate of 12.5%.
The number of Class C Units delivered in respect of the PIK Distributions on any distribution payment date will be equal to the number obtained by dividing the amount of PIK Distribution by the conversion price applicable with respect to the Class C Units. The initial conversion price is $14.75, subject to anti-dilution and other adjustments upon the occurrence of certain events and transactions.
Following the Initial Closing, the holders of Class C Units are also entitled to tax distributions under the certain limited circumstances described in the limited partnership agreement of the OP.
Share-based Compensation
The Company hasWe have an employee and director incentive restricted share plan (the “RSP”), which provides the Companyus with the ability to grant awards of restricted shares of our common stock ("restricted shares") and, following a special compensation committee of our board of directors approving the amendment and restatement of the RSP in connection with the Initial Closing, restricted stock units in respect of shares of our common stock ("RSUs"), to the Company’sour directors, officers and employees (if the Company ever has direct employees); employees of the Advisoremployees; and its affiliates;directors and employees of entities that provide services to the Company; directors of the Advisor or of entities that provide services to the Company; or certain consultants to the Advisor and its affiliates.us. The total number of shares of common stock granted under the RSP shallmay not exceed 5% of the Company’sour authorized shares of common stock pursuant to the offeringat any time and in any event willmay not exceed 4.0 million4,000,000 shares (as such number may be adjusted for stock splits, stock dividends, combinations and similar events).
Restricted share awards entitle the recipient to receive shares of common stock from the Companyus under terms that provide for vesting over a specified period of time or upon attainment of pre-established performance objectives. Such awards would typically be forfeited with respect to the unvested shares upon the termination of the recipient’s employment or other relationship with the Company.us. Restricted shares may not, in general, be sold or otherwise transferred until restrictions are removed and the shares have vested. Holders of restricted shares may receive cash or stock distributions when and if paid prior to the time that the restrictions on the restricted shares have lapsed. Any distributions payable in shares of common stock shall be subject to the same restrictions as the underlying restricted shares. The fair value of the restricted shares will be expensed over the vesting period of five years.
TheRSUs represent a contingent right to receive shares of our common stock (or an amount of cash having an equivalent fair market value) at a future settlement date, subject to satisfaction of applicable vesting conditions and/or other restrictions, as set forth in the RSP and an award agreement evidencing the grant of RSUs.
Prior to the amendment and restatement of the RSP in connection with the Initial Closing, the RSP also provides for the automatic grant of 1,333 restricted shares of common stock to each of the independent directors, without any further action by the Company’sour board of directors or the stockholders, on the date of initial election to theour board of directors and on the date of each annual stockholder’sstockholders meeting. Restricted stock issued to independent directors will vestvests over a five-year period following the first anniversary of the date of grant in increments of 20% per annum.
As of December 31, 2014 and 2013, the Company has2016, we had granted 6,665 and 014,852 restricted shares under the RSP. The following table sets forth information regarding securities authorized for issuance under our RSP as of common stock, respectively.December 31, 2016:
|
| | | | | | | | | |
| Plan Category | | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights | | Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights | | Number of Securities Remaining Available For Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a) |
| | (a) | | (b) | | (c) |
| Equity Compensation Plans approved by security holders | | — |
| | — |
| | 3,985,148 |
|
| Equity Compensation Plans not approved by security holders | | — |
| | — |
| | — |
|
| Total | | — |
| | — |
| | 3,985,148 |
|
Recent SaleUnregistered Sales of Unregistered Equity Securities and Use of Proceeds.
We did not sell any equity securities that were not registered under the Securities Act during the periodyear ended December 31, 2014.
Use of Proceeds from Sales of Registered Securities
2016, except with respect to which information has been included in a Quarterly Report on Form 10-Q or in a Current Report on Form 8-K. On January 7, 2014, the we commenced our IPO on a "reasonable best efforts" basis of up to 80,000,000 shares of common stock $0.01 par value per share, at a price of $25.00 per share, subject to certain volume and other discounts, pursuant to athe registration statementStatement on Form S-11 (File No. 333-190698), as amendedfiled with the SEC (the "Registration Statement"), filed with the U.S. Securities and Exchange Commission (the "SEC") under the Securities Act of 1933, as amended.. The Registration Statement also coverscovered up to 21,052,631 shares of common stock available pursuant to the DRIP under which our common stockholders maycould elect to have their cash distributions reinvested in additional shares of our common stock.
On February 3, 2014,November 15, 2015, we receivedsuspended our IPO, which was conducted by the Former Dealer Manager, as exclusive wholesale distributor, effective December 31, 2015, and, accepted subscriptions in excess ofon November 18, 2015, the minimum offering amount of $2.0 million in Offering proceeds, broke escrow and issuedFormer Dealer Manager suspended sales activities it performed pursuant to the dealer manager agreement for the IPO, effective immediately. On December 31, 2015, we entered into a termination agreement with the Former Dealer Manager to terminate the dealer manager agreement. On January 4, 2016, we registered an additional 3,656,000 shares of common stock, $0.01 par value per share, to be issued under the initial investors who were admitted as stockholders. DRIP pursuant to a registration statement on Form S-3 (File No. 333-208855).
On January 7, 2017, the third anniversary of the commencement of our IPO, it terminated in accordance with its terms.
As of December 31, 2014,2016, we had 10.2approximately 38.5 million shares of common stock outstanding and had received total gross proceeds of approximately $913.0 million from the IPO of approximately $252.9 million, includingand shares issued under the DRIP.
AtDRIP, net of repurchases. The shares outstanding include shares of common stock issued as stock distributions through December 31, 2014,2016, as a result of our change in distribution policy adopted by our board of directors in March 2016, pursuant to which we had incurred organizationbegan, commencing with distributions payable with respect to April 2016, to pay distributions to our stockholders in shares of common stock instead of cash to all stockholders, and not at the election of each stockholder. Shares are only issued pursuant to our DRIP in connection with distributions paid in cash, and no additional shares of common stock were issued under the DRIP following this change in distribution policy. In January 2017, in connection with our entry into the SPA, our board of directors suspended the DRIP. We will not issue any additional shares of common stock under the DRIP unless and until this suspension is lifted and we recommence paying distributions in cash.
The following table reflects the cumulative offering costs inassociated with the amounts set forth below (in thousands):issuance of common stock:
| | | | Year Ended December 31, | | For the Period from July 25, 2013 (date of inception) to |
| (In thousands) | 2014 | 2013 | | December 31, 2016 |
| Selling commissions and dealer manager fees | $ | 23,954 |
| $ | — |
| | $ | 85,249 |
|
| Other offering costs | 5,936 |
| 1,505 |
| | 23,559 |
|
| Total offering costs | $ | 29,890 |
| $ | 1,505 |
| | $ | 108,808 |
|
Other organization
The Former Dealer Manager was able to reallow the selling commissions and offering costs include non-recurring legala portion of the dealer manager fees to participating broker-dealers. The following table details the selling commissions incurred and due diligence feesreallowed related to the initial processsale of acquiring an effective Registration Statement. shares of common stock:
|
| | | | |
| | | For the Period from July 25, 2013 (date of inception) to |
| (In thousands) | | December 31, 2016 |
| Total commissions paid to the Former Dealer Manager | | $ | 85,249 |
|
| Less: | | |
| Commissions to participating brokers | | 58,710 |
|
| Reallowance to participating broker dealers | | 10,047 |
|
| Net to the Former Dealer Manager | | $ | 16,492 |
|
As of December 31, 2014,2016, we have incurred $108.8 million of cumulative offering costs in connection with the issuance and distribution of our registered securities. Cumulative offering proceeds from the sale of common stock exceeded cumulative offering costs by $801.9 million at December 31, 2016.
As of December 31, 2016, cumulative offering costs included $31.4$85.2 million of selling commissions and dealer manager fees and $19.6 million of offering costscost reimbursements incurred from the Advisor and Former Dealer Manager, including commission and dealer manager fees. We areManager. Under the Advisory Agreement, which terminated at the Initial Closing, we were obligated to reimburse ourthe Advisor or its affiliates, as applicable, for organization and offering costs paid by them on our behalf, provided that ourthe Advisor is obligated to reimburse us to the extent organization and offering costs (excluding selling commissions and the dealer manager fee) incurred by us in our OfferingIPO exceed 2.0% of gross offering proceeds. Sellingproceeds in the IPO. See Note 17 - Subsequent Events to our accompanying consolidated/combined financial statements included in this Annual Report on Form 10-K for additional information regarding our agreement, pursuant to the Framework Agreement, to waive the Advisor's obligation to reimburse organization and offering expenses incurred but not yet reimbursed.
Through December 31, 2016, we have received $885.5 million in gross proceeds from the IPO excluding the DRIP, which we have used as follows: (i) $85.2 million to pay selling commissions and dealer manager fees cannot exceed 10.0%to our Former Dealer Manager; (ii) $19.6 million to reimburse the Advisor for Offering expenses; (iii) $54.5 million to pay acquisition fees, acquisition cost reimbursements, and financing coordination fees to the Advisor; (iv) $29.4 million to pay cash distributions to our stockholders; (v) $221.7 million to fund part of the offering price. As a result, the cumulative offering costs paid
by us cannot exceed 12.0%purchase price of the gross proceeds determined at the endGrace Portfolio, $53.2 million to fund part of the Offering. Cumulative offering costs, netpurchase price of unpaid amounts, were less than the 12.0% threshold asFirst Summit Portfolio, and $39.3 million to fund part of December 31, 2014.the purchase price of the First Noble and Second Noble Portfolios, and $18.5 million to fund part of the purchase price of the Third Summit Portfolio; (vi) $219.7 million in repayments of debt and redemptions of Grace Preferred Equity Interests; (vii) $41.1 million in deposit write-offs related to terminated acquisitions; (viii) $95.4 million to fund capital expenditures; and (ix) $6.2 million to pay advisory and other service fees to the Former Dealer Manager and one of its affiliates, RCS Advisory and (x) $1.7 million to repurchase shares of our common stock pursuant to the SRP.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Our common stock is currently not listed on a national securities exchangeexchange. There is no regular established trading market for shares of our common stock and wethere can be no assurance one will not seekdevelop. We currently have no plans to list our stock until the time our independent directors believe that the listingshares of our common stock would be in the best interest of the Company.on a national securities exchange. In order to provide stockholders with the benefit of some interim liquidity, our board of directors has adopted our SRP which enablesthat enabled our stockholders to sell their shares back to us subject to the significant conditions and limitations in our SRP. Our Sponsor, our Advisor, our Property Manager, our Sub-Property Manager, our directors and their affiliates are prohibited from receiving a fee on any share repurchases. The terms of our SRP are more flexible in cases involving the death or disability of a stockholder.
Repurchases of shares of our common stock, when requested, are at our sole discretion and generally will be made quarterly until our Advisor begins calculating NAV. Prior to the NAV pricing date, we will limit the number of shares repurchased during any calendar year to 5% of the weighted average number of shares of common stock outstanding during the prior calendar year. In addition, funds available for our SRP may not be sufficient to accommodate all requests. Due to these limitations, we cannot guarantee that we will be able to accommodate all repurchase requests. Funding for our SRP will be derived from proceeds we maintain from the sale of shares under the DRIP and other operating funds, if any, as our board of directors, in its sole discretion, may reserve for this purpose.
Unless the shares of our common stock are being repurchased in connection with a stockholder’s death or disability, the purchase price for shares repurchased under our SRP will be as set forth below until our Advisor begins calculating NAV. We do not currently anticipate obtaining appraisals for our investments (other than investments in transactions with our Sponsor, our Advisor, our Property Manager, our Sub-Property Manager, our directors or their respective affiliates) prior to the NAV pricing date and, accordingly, the estimated value of our investments should not be viewed as an accurate reflection of the fair market value of our investments nor will they represent the amount of net proceeds that would result from an immediate sale of our assets. Commencing with the NAV pricing date, each of our properties will be appraised annually and our Advisor will be responsible for calculating our quarterly NAV at the end of the day on which we file our quarterly financial report. Our board of directors will review the NAV calculation quarterly. Once we begin calculating NAV, to the extent we repurchase shares pursuant to our SRP, such repurchases will be at the applicable per share NAV at the time of such repurchase.
Only those stockholders who purchased their shares from us or received their shares from us (directly or indirectly) through one or more non-cash transactions may be able to participate in our SRP. In other words, once our shares are transferred for value by a stockholder, the transferee and all subsequent holders of the shares are not eligible to participate in our SRP. Prior to the time our Advisor begins calculating NAV, we will repurchase shares on the last business day of each quarter (and in all events on a date other than a dividend payment date). Prior to the time our Advisor begins calculating NAV, the price per share that we will pay to repurchase shares of our common stock, in each case, as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to our common stock, will be as follows:
for stockholders who have continuouslyafter having held their shares of our common stockthem for at least one year, subject to significant conditions and limitations, including that our board of directors had the price will beright to reject any request for repurchase, in its sole discretion, and could amend, suspend or terminate our SRP upon 30 days' notice. In connection with our entry into the lowerSPA, our board of $23.13 and 92.5%directors suspended our SRP effective as of January 23, 2017. In connection with the amount paid for each such share;
for stockholders who have continuously held their sharesInitial Closing, our board of directors terminated the SRP as of April 30, 2017. We did not make any repurchases of our common stock pursuant to our SRP or otherwise during the year ended December 31, 2016 (except for the repurchases of 28,264 shares for $0.6 million at least two years,an average repurchase price per share of $23.44 with respect to repurchase requests received during the priceyear ended December 31, 2015 that were completed in January 2016) and have not, and will be the lower of $23.75 and 95.0% of the amount paid for each such share;
for stockholders who have continuously held their sharesnot, make any repurchase of our common stock for at least three years,during the price will beperiod between January 1, 2017 and the lower of $24.38 and 97.5%effectiveness of the amount paid for each such share; and
for stockholders who have held their shares of our common stock for at least four years, the price will be the lower of $25.00 and 100.0%termination of the amount that our stockholders paid for each share.SRP.
Upon the death or disability of a stockholder, upon request, we will waive the one-year holding requirement that otherwise will apply to redemption requests made prior to the NAV pricing date. Shares repurchased in connection with the death or disability of a stockholder will be repurchased at a purchase price equal to the price actually paid for the shares during the offering, or if not engaged in the offering, the per share purchase price will be based on the greater of $25.00 or the then-current NAV of the shares as determined by our board of directors (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to our common stock). In addition, we may waive the holding period in the event of a stockholder’s bankruptcy or other exigent circumstances.
After the NAV pricing date, stockholders may make daily requests that we repurchase all or a portion (but generally at least 25% of a stockholder’s shares) of their shares pursuant to our SRP. At such time, we will limit shares repurchased during any calendar year to 5% of the weighted average number of shares outstanding during the prior calendar year. In addition, our stockholders will only be able to have their shares repurchased to the extent that we have sufficient liquid assets. Most of our assets will consist of properties which cannot generally be readily liquidated without impacting our ability to realize full value upon their disposition. Therefore, we may not always have sufficient liquid resources to satisfy all repurchase requests. Following
the NAV pricing date, in order to provide liquidity for repurchases, we intend to maintain 5% of our NAV in excess of $1.0 billion in cash, cash equivalents and other short-term investments and certain types of real estate related assets that can be liquidated more readily than properties, or collectively, liquid assets. However, our stockholders should not expect that we will maintain liquid assets at or above these levels. To the extent that we maintain borrowing capacity under a line of credit, such available amount will be included in calculating our liquid assets.
Whether our Advisor has begun NAV calculations or not, our SRP immediately will terminate if our shares are listed on any national securities exchange. In addition, our board of directors may amend, suspend (in whole or in part) or terminate our SRP at any time upon 30 days’ notice. Further, our board of directors reserves the right, in its sole discretion, to reject any requests for repurchases. As of December 31, 2014, no shares were eligible to be redeemed under the SRP.
Item 6. Selected Financial Data.
The following selected financial data as of December 31, 2016, 2015, 2014, 2013, and the years ended December 31, 2014 and 2013,2012 should be read in conjunction with the accompanying consolidated/combined financial statements of American Realty Capital Hospitality Investors Trust, Inc. and the notes thereto and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" below. The Predecessor represents hospitality assets and operations owned by Barceló Crestline Corporation and its consolidated subsidiaries. The selected financial datasubsidiaries, or the Barceló Portfolio (in such capacity, the "Predecessor") are included for the consolidated financial statements of the Company as of and for the year ended December 31, 2013 is not presented as we had not broken escrow, purchased our first properties or commenced operations as of December 31, 2013.period from January 1 2014 to March 20, 2014.
| | | Balance sheet data (In thousands) | | Successor | | Predecessor | | December 31, 2016 | | December 31, 2015 | | December 31, 2014 |
| | | December 31, 2014 | | December 31, 2013 | | December 31, 2012 | |
| Total real estate investments, at cost | | $ | 98,545 |
| | $ | 147,531 |
| | $ | 144,843 |
| | $ | 2,391,407 |
| | $ | 2,211,347 |
| | 98,545 |
|
| Total assets | | 333,374 |
| | 135,242 |
| | 136,009 |
| | 2,353,411 |
| | 2,347,839 |
| | 333,374 |
|
| Mortgage notes payable | | 45,500 |
| | 41,449 |
| | 38,400 |
| |
| Mortgage notes payable, net | | | 1,410,925 |
| | 1,341,033 |
| | 45,500 |
|
| Total liabilities | | 131,579 |
| | 46,746 |
| | 43,879 |
| | 1,793,968 |
| | 1,706,630 |
| | 131,579 |
|
| Total equity | | 201,795 |
| | 88,496 |
| | 92,130 |
| | 559,443 |
| | 641,209 |
| | 201,795 |
|
| | | | | Successor | | Predecessor | | Successor | | Predecessor |
| | | For the Period from March 21 to December 31, 2014 | | For the Period from January 1 to March 20, 2014 | | Year Ended December 31, 2013 | | Year Ended December 31, 2012 | | Year Ended December 31, 2016 | | Year Ended December 31, 2015 | | For the Period from March 21 to December 31, 2014 | | For the Period from January 1 to March 20, 2014 | | Year Ended December 31, 2013 |
| Operating data (In thousands) | | | |
| Total revenues | | $ | 34,871 |
| | $ | 8,245 |
| | $ | 39,797 |
| | $ | 39,785 |
| | $ | 599,592 |
| | $ | 446,184 |
| | $ | 34,871 |
| | $ | 8,245 |
| | $ | 39,797 |
|
| | | | | | | | | | | | | | | | | | | |
| Operating expenses: | | | | | | | | | | | | | | | | | | |
| Rooms | | 5,411 |
| | 1,405 |
| | 6,340 |
| | 6,092 |
| | 139,169 |
| | 99,543 |
| | 5,411 |
| | 1,405 |
| | 6,340 |
|
| Food and beverage | | 3,785 |
| | 1,042 |
| | 4,461 |
| | 4,500 |
| | 15,986 |
| | 12,774 |
| | 3,785 |
| | 1,042 |
| | 4,461 |
|
| Management fees - related party | | 1,498 |
| | 289 |
| | 1,471 |
| | 1,419 |
| |
| Management fees | | | 42,560 |
| | 22,107 |
| | 1,498 |
| | 289 |
| | 1,471 |
|
| Other property-level operating costs | | 13,049 |
| | 3,490 |
| | 15,590 |
| | 15,437 |
| | 230,546 |
| | 171,488 |
| | 13,049 |
| | 3,490 |
| | 15,590 |
|
| Depreciation and amortization | | 2,796 |
| | 994 |
| | 5,105 |
| | 5,170 |
| | 101,007 |
| | 68,500 |
| | 2,796 |
| | 994 |
| | 5,105 |
|
| Loss on disposal of property and equipment | | — |
| | — |
| | 74 |
| | — |
| |
| Lease expense | | 3,879 |
| | 933 |
| | 4,321 |
| | 4,312 |
| |
| Impairment of long-lived assets | | | 2,399 |
| | — |
| | — |
| | — |
| | — |
|
| Gain on disposal of assets | | | — |
| | — |
| | — |
| | — |
| | 74 |
|
| Rent | | | 6,714 |
| | 6,249 |
| | 3,879 |
| | 933 |
| | 4,321 |
|
| Total operating expenses | | 30,418 |
| | 8,153 |
| | 37,362 |
| | 36,930 |
| | 538,381 |
| | 380,661 |
| | 30,418 |
| | 8,153 |
| | 37,362 |
|
| Income from operations | | 4,453 |
| | 92 |
| | 2,435 |
| | 2,855 |
| | 61,211 |
| | 65,523 |
| | 4,453 |
| | 92 |
| | 2,435 |
|
| Other income (expenses): | | | | | | | | | |
| Interest revenue | | 103 |
| | — |
| | — |
| | 1 |
| |
| Interest expense | | (5,958 | ) | | (531 | ) | | (2,265 | ) | | (2,884 | ) | | (92,264 | ) | | (80,667 | ) | | (5,958 | ) | | (531 | ) | | (2,265 | ) |
| Acquisition and transaction related costs | | (10,884 | ) | | — |
| | — |
| | — |
| | (25,270 | ) | | (64,513 | ) | | (10,884 | ) | | — |
| | — |
|
| Loss on change in fair value of interest rate swaps | | — |
| | — |
| | — |
| | (400 | ) | |
| Other income (expense) | | | 1,169 |
| | (491 | ) | | 103 |
| | — |
| | — |
|
| Equity in earnings (losses) of unconsolidated entities | | 352 |
| | (166 | ) | | (65 | ) | | (442 | ) | | 399 |
| | 238 |
| | 352 |
| | (166 | ) | | (65 | ) |
| General and administrative | | (2,316 | ) | | — |
| | — |
| | — |
| | (15,806 | ) | | (11,621 | ) | | (2,316 | ) | | — |
| | — |
|
| Total other expenses | | (18,703 | ) | | (697 | ) | | (2,330 | ) | | (3,725 | ) | |
| Net income (loss) | | $ | (14,841 | ) | | $ | (605 | ) | | $ | 105 |
| | $ | (870 | ) | |
| Total other expenses, net | | | (131,772 | ) | | (157,054 | ) | | (18,703 | ) | | (697 | ) | | (2,330 | ) |
| Net income (loss) attributable to Hospitality Investors Trust, Inc. | | | $ | (72,247 | ) | | $ | (94,826 | ) | | $ | (14,841 | ) | | $ | (605 | ) | | $ | 105 |
|
| Other data: | | | | | | | | | | | | | | | | | | |
| Cash flows provided by (used in) operations | | $ | (9,650 | ) | | $ | (556 | ) | | $ | 5,818 |
| | $ | 5,875 |
| | $ | 67,846 |
| | $ | 6,507 |
| | $ | (9,650 | ) | | $ | (556 | ) | | $ | 5,818 |
|
| Cash flows used in investing activities | | (122,082 | ) | | $ | (551 | ) | | (2,273 | ) | | (795 | ) | | $ | (111,866 | ) | | $ | (772,046 | ) | | $ | (122,082 | ) | | $ | (551 | ) | | $ | (2,273 | ) |
| Cash flows provided by (used in) financing activities | | 263,593 |
| | (937 | ) | | (677 | ) | | (3,314 | ) | | $ | 39,978 |
| | $ | 680,507 |
| | $ | 263,593 |
| | $ | (937 | ) | | $ | (677 | ) |
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read in conjunction with our accompanying consolidated/combined financial statements. The following information contains forward-looking statements, which are subject to risks and uncertainties. Should one or more of these risks or uncertainties materialize, actual results may differ materially from those expressed or implied by the forward-looking statements. Please see "Forward-Looking Statements" elsewhere in this report for a description of these risks and uncertainties.
Overview
American Realty Capital Hospitality Trust, Inc. wasWe were incorporated on July 25, 2013 as a Maryland corporation and intends to qualifyqualified as a REIT beginning with the taxable year ended December 31, 2014. We were formed primarily to acquire lodging properties in the midscale limited service, extended stay, select service, upscale select service, and upper upscale full service segments within the hospitality sector. We have no limitation as to the brand of franchise or license with which our hotels will be associated. All such properties may be acquired by us alone or jointly with another party. We may also originate or acquire first mortgage loans secured by real estate and invest in other real estate-related debt. As of December 31, 2014,2016, we havehad acquired interestsor had an interest in sixa total of 141 hotels through fee simple, leaseholdwith a total of 17,193 guestrooms located in 32 states. As of December 31, 2016, all but one of our hotels operated under a franchise or license agreement with a national brand owned by one of Hilton Worldwide, Inc., Marriott International, Inc., Hyatt Hotels Corporation, Intercontinental Hotels Group and joint venture interests, which we refer to as the Barceló Portfolio.Red Lion Hotels Corporation or one of their respective subsidiaries or affiliates.
On January 7, 2014, we commenced our IPO on a "reasonable best efforts" basis of up to 80,000,000 shares of common stock, $0.01 par value per share, at a price of $25.00 per share, subject to certain volume and other discounts, pursuant to the Registration Statement, filed with the SEC under the Securities Act. The Registration Statement also coversa registration statement on Form S-11 (File No. 333-190698), as well as up to 21,052,631 shares of common stock available pursuant to the DRIPDistribution Reinvestment Plan (the "DRIP") under which our common stockholders maycould elect to have their cash distributions reinvested in additional shares of our common stock.
Until
On November 15, 2015, we suspended our IPO, and, on November 18, 2015, Realty Capital Securities, LLC (the "Former Dealer Manager"), the NAV pricing date,dealer manager of our IPO, suspended sales activities, effective immediately. On December 31, 2015, we terminated the per share purchase priceFormer Dealer Manager as the dealer manager of our IPO.
On March 28, 2016, we announced that, because we required funds in the IPO will be up to $25.00 per share (including the maximum allowed to be charged for commissions and fees) and shares issued under the DRIP will initially be equal to $23.75 per share, which is 95% of the initial per share offering price in the IPO. Thereafter, the per share purchase price will vary quarterly and will be equaladdition to our NAV per share plus applicable commissionsoperating cash flow and feescash on hand to meet our capital requirements, beginning with distributions payable with respect to April 2016, we would pay distributions to our stockholders in the case of the primary offering and the per share purchase price in the DRIP will be equal to the NAV per share. On February 3, 2014, we received and accepted subscriptions in excess of the minimum offering amount of $2.0 million in Offering proceeds, broke escrow and issued shares of common stock instead of cash.
On July 1, 2016, our board of directors approved an estimated net asset value per share of common stock (“Estimated Per-Share NAV”) equal to $21.48 based on an estimated fair value of our assets less the initial investors who were admitted as stockholders. Asestimated fair value of December 31, 2014, we had 10.2 millionour liabilities, divided by 36,636,016 shares of stock outstanding and had received total gross proceeds from the IPO of approximately $252.9 million, including shares issued under the DRIP. As of December 31, 2014, the aggregate value of all theour common stock outstanding was $254.0 million based on a fully diluted basis as of March 31, 2016, which was published on the same date. This was the first time that our board of directors determined an Estimated Per-Share NAV. We anticipate that we will publish an updated Estimated Per-Share NAV on at least an annual basis.
On January 7, 2017, the third anniversary of the commencement of our IPO, it terminated in accordance with its terms.
On January 12, 2017, we along with our operating partnership, Hospitality Investors Trust Operating Partnership, L.P. (then known as American Realty Capital Hospitality Operating Partnership, L.P. the “OP”), entered into (i) a Securities Purchase, Voting and Standstill Agreement (the “SPA”) with Brookfield Strategic Real Estate Partners II Hospitality REIT II LLC (the “Brookfield Investor”), as well as related guarantee agreements with certain affiliates of the Brookfield Investor, and (ii) a Framework Agreement (the “Framework Agreement”) with our advisor, American Realty Capital Hospitality Advisors, LLC (the “Advisor”), our property managers, American Realty Capital Hospitality Properties, LLC and American Realty Capital Hospitality Grace Portfolio, LLC (together, the “Property Manager”), Crestline Hotels & Resorts, LLC (“Crestline”), an affiliate of the Advisor and the Property Manager, American Realty Capital Hospitality Special Limited Partnership, LLC (the “Special Limited Partner”), another affiliate of the Advisor and the Property Manager, and, for certain limited purposes, the Brookfield Investor.
In connection with our entry into the SPA, we suspended paying distributions to stockholders entirely and suspended our DRIP. Currently, under the Brookfield Approval Rights (as defined below), prior approval is required before we can declare or pay any distributions or dividends to our common stockholders, except for cash distributions equal to or less than $0.525 per annum per share.
On March 31, 2017, the initial closing under the SPA (the “Initial Closing”) occurred and various transactions and agreements contemplated by the SPA were consummated and executed, including but not limited to:
the sale by us and purchase by the Brookfield Investor of one share of a new series of preferred stock designated as the Redeemable Preferred Share, par value $0.01 per share value(the “Redeemable Preferred Share”), for a nominal purchase price; and
the sale by us and purchase by the Brookfield Investor of $25.00 (or $23.759,152,542.37 Class C Units, for shares issued undera purchase price of $14.75 per Class C Unit, or $135.0 million in the DRIP).aggregate.
Subject to the terms and conditions of the SPA, we also have the right to sell, and the Brookfield Investor has agreed to purchase, additional Class C Units in an aggregate amount of up to $265.0 million at subsequent closings (each, a "Subsequent Closing") that may occur through February 2019. The Subsequent Closings are subject to conditions, and there can be no assurance they will be completed on their current terms, or at all.
Substantially all of our business is conducted through the OP. We arePrior to the Initial Closing, we were the sole general partner and holdheld substantially all of the units of limited partner interest in the OP Units. Additionally,entitled “OP Units” ("OP Units"). Following the Special Limited Partner contributed $2,020Initial Closing, the Brookfield Investor holds all the issued and outstanding Class C Units, representing $135.0 million in liquidation preference with respect to the OP that ranks senior in exchange for 90payment of distributions and in the distribution of assets to the OP Units which represents a nominal percentageheld by us that correspond to shares of our common stock, BSREP II Hospitality II Special GP, OP LLC (the “Special General Partner”), is the special general partner of the aggregate OP, ownership. The holders ofwith certain non-economic rights that apply if we are unable to redeem the Class C Units when required to do so, as described below. Class C Units are convertible into OP Units havebased on an initial conversion price of $14.75, subject to anti-dilution and other adjustments upon the right to convertoccurrence of certain events and transactions. OP Units, in turn, are generally redeemable for shares of our common stock on a one-for-one-basis or the cash value of a corresponding number of shares, of common stock or, at the option of the OP, a corresponding number of shares of common stockour election, in accordance with the terms of the limited partnership agreement of the OP. The remainingHolders of Class C Units are also entitled to receive, with respect to each Class C Unit, fixed, quarterly, cumulative cash distributions at a rate of 7.50% per annum from legally available funds. If we fail to pay these cash distributions when due, the per annum rate will increase to 10% until all accrued and unpaid distributions required to be paid in cash are reduced to zero. Holders of Class C Units are also entitled to receive, with respect to each Class C Unit, a fixed, quarterly, cumulative distribution payable in Class C Units at a rate of 5% per annum ("PIK Distributions"). Upon our failure to redeem the Brookfield Investor when required to do so pursuant to the limited partnership agreement of the OP, the 5% per annum PIK Distribution rate would increase to a per annum rate of 7.50%, and would further increase by 1.25% per annum for the next four quarterly periods thereafter, up to a maximum per annum rate of 12.50%.
Without obtaining the prior approval of the majority of the then outstanding Class C Units, the OP is restricted from taking certain actions including equity issuances, debt incurrences, payment of dividends or other distributions, redemptions or repurchases of securities, property acquisitions and property sales and dispositions. In addition, pursuant to the terms of the Redeemable Preferred Share, in addition to the other governance and board rights, the Brookfield Investor has elected and has a continuing right to elect two directors (each, a "Redeemable Preferred Director") to our board of directors, and we are similarly restricted from taking those actions without the prior approval of at least one of the Redeemable Preferred Directors. Prior approval of at least one of the Redeemable Preferred Directors is also required to approve the annual business plan (including the annual operating and capital budget) required under the terms of the Redeemable Preferred Share (the “Annual Business Plan”), hiring and compensation decisions related to certain key personnel (including our executive officers) and various matters related to the structure and composition of our board of directors. These restrictions (collectively referred to herein as the “Brookfield Approval Rights”) are subject to certain exceptions and conditions, including that, after March 31, 2022, no prior approval will be required for equity issuances, debt incurrences and property sales if the proceeds therefrom are used to redeem the then outstanding Class C Units in full. Subject to certain limitations, the Brookfield Approval Rights are subject to temporary and permanent suspension in connection with any failure by the Brookfield Investor to purchase Class C Units at any Subsequent Closing as required pursuant to the SPA. In addition, the Brookfield Approval Rights will no longer apply if the liquidation preference applicable to all Class C Units held by the Brookfield Investor and its affiliates is reduced to $100.0 million or less due to the exercise by holders of Class C Units of their redemption rights under the limited partnership agreement of the OP.
Prior to March 31, 2022, if we consummate a liquidation, sale of all or substantially all of the assets, dissolution or winding-up, whether voluntary or involuntary, sale, merger, reorganization, reclassification or recapitalization or other similar event (a “Fundamental Sale Transaction”), we are required to redeem the Class C Units for cash at a premium based on how long the Class C Units have been outstanding. Following March 31, 2022, the holders of Class Units may require us to redeem any or all Class C Units for an amount in cash equal to the liquidation preference. We will also be required, at the option of the holders thereof, to redeem Class C Units for the same premium applicable in a Fundamental Sale Transaction, upon the occurrence of certain events related to our failure to qualify as a REIT, the occurrence of a material breach by us of certain provisions of the limited partnership agreement of the OP or, for an amount equal to the liquidation preference, the rendering of a judgment enjoining or otherwise preventing the exercise of certain rights under the limited partnership agreement of the OP. If we are unable to redeem any Class C Units when required to do so, the Brookfield Investor will be able to elect a majority of
our board of directors and may cause us, through the exercise of the rights of the limited partner interests are limited, however,Special General Partner, to commence selling our assets until the Class C Units have been fully redeemed.
At any time and do not includefrom time to time on or after March 31, 2022, we have the abilityright to replace the general partnerelect to redeem all or to approve the sale, purchase or refinancingany part of the OP's assets.issued and outstanding Class C Units for an amount in cash equal to the liquidation preference. In addition, if we list our common stock on a national securities exchange prior to that date, we will have certain rights to redeem all but $0.10 of the liquidation preference of each issued and outstanding Class C Unit for cash subject to payment of a make whole premium and certain rights of the Class C Unit holders to convert their retained liquidation preference into OP Units prior to March 31, 2024.
We haveSee Note 17 - Subsequent Events to our accompanying consolidated/combined financial statements included in this Annual Report on Form 10-K for additional information regarding the terms of the SPA and the transactions and agreements contemplated thereby that were consummated and executed at the Initial Closing, including the rights, privileges and preferences of the Class C Units.
Also at the Initial Closing, as contemplated by the SPA and the Framework Agreement, we changed our name from American Realty Capital Hospitality Trust, Inc. to Hospitality Investors Trust, Inc. and the name of the OP from American Realty Capital Hospitality Operating Partnership, L.P. to Hospitality Investors Trust Operating Partnership, L.P. and completed various other actions required to effect our transition from external management to self-management.
Prior to the Initial Closing, we had no direct employees. We have retainedemployees, and we depended on the Advisor to manage certain aspects of our affairs on a day-to-day basis. Thebasis pursuant to our advisory agreement with the Advisor ( the "Advisory Agreement"). In addition, the Property Manager servesserved as our property manager and the Property Manager hashad retained the Sub-Property Manager, an entity under common control with the parent of the SponsorCrestline to provide services, including locating investments, negotiating financing and operating certain hotel assets in our portfolio. The DealerAdvisor, the Property Manager an entityand Crestline are under common control with AR Capital, LLC ("AR Capital"), the parent of our Sponsor serves assponsor, and AR Global Investments, LLC ("AR Global"), the dealer managersuccessor to certain of AR Capital's businesses.
At the Initial Closing, the Advisory Agreement was terminated and certain employees of the offering. The Advisor Special Limited Partner, Property Manager, Sub-Property Manager and Dealer Manager are related parties and receive fees, distributions andor its affiliates (including Crestline) who had been involved in the management of our day-to-day operations, including all of our executive officers, became our employees. We also terminated all of our other compensation for services related to the Offering and the investment and management our assets.
The results of operations for the period from January 1 to March 20, 2014 for the Barceló Portfolio (the "Predecessor") and for the period from March 21 to December 31, 2014 for us are not necessarily indicativeagreements with affiliates of the resultsAdvisor except for the entire year. Certain prior period amounts have been reclassified to conform to current period presentation.
Grace Acquisition
On May 23, 2014, weour hotel-level property management agreements with Crestline and entered into a Real Estate Sale Agreementtransition services agreement with each of the Advisor and Crestline, pursuant to acquirewhich we will receive their assistance in connection with investor relations/shareholder services and support services for pending transactions in the 126case of the Advisor and accounting and tax related services in the case of Crestline until June 29, 2017 except as set forth below. The transition services agreement with Crestline for accounting and tax related services will automatically renew for successive 90-day periods unless either party elects to terminate. The transition services agreement with the Advisor with respect to the support services for pending transactions expires on April 30, 2017 unless extended for an additional 30 days by written notice delivered prior to the expiration date.
Prior to the Initial Closing, we, directly or indirectly through our taxable REIT subsidiaries, had entered into agreements with the Property Manager, which, in turn, had engaged Crestline or a third-party sub-property manager to manage our hotel properties. These agreements were intended to be coterminous, meaning that the term of our agreement with the Property Manager was the same as the term of the Property Manager’s agreement with the applicable sub-property manager for the applicable hotel properties, with certain exceptions. Following the Initial Closing, we no longer have any agreements with the Property Manager and instead contract directly or indirectly, through our taxable REIT subsidiaries, with Crestline and the third-party property management companies that previously served as sub-property managers to manage our hotel properties.
Crestline is a leading hospitality management company in the United States and, as of December 31, 2016, had 105 hotels and 15,552 rooms under management in 28 states and the District of Columbia. As of December 31, 2016, 71 of our hotels and 9,436 rooms were managed by Crestline, and 70 of our hotels and 7,757 rooms were managed by third-party property managers.
As of December 31, 2016, we had approximately 38.5 million shares of common stock outstanding and had received total proceeds of approximately $913.0 million from the sellersIPO and shares issued under the DRIP, net of repurchases. The shares outstanding include shares of common stock issued as stock distributions as a result of our change in distribution policy adopted by our board of directors in March 2016. Shares are only issued pursuant to the Grace Portfolio. On November 11, 2014,DRIP in connection with distributions paid in cash. In connection with our entry into the Real Estate Sale Agreement was amendedSPA, our board of directors suspended the payment of distributions to our stockholders in shares of common stock and restatedsuspended our DRIP. We will not issue any additional shares of common stock under the DRIP or recommence paying distributions in cash or in shares of our common stock unless and until our board of directors lifts these suspensions and subject to incorporate all amendments made to that date (the "Amended Purchase Agreement"). The Amended Purchase Agreement reduced the number of hotels to beBrookfield Approval Rights.
acquired to the 116 hotels currently comprising the Grace Portfolio for an aggregate purchase price of $1.808 billion, exclusive of closing costs and changed the scheduled close date to February 27, 2015.
As of December 31, 2014, the acquisition of the Grace Portfolio had not been completed. On February 27, 2015, we acquired the Grace Portfolio, and as anticipated pursuant to the terms of the Amended Purchase Agreement, we funded approximately $230.1 million of the purchase price with cash generated through our Offering, funding approximately $903.9 million through the assumption of the Assumed Grace Indebtedness comprising the Assumed Grace Mortgage Loan and the Assumed Grace Mezzanine Loan, and approximately $227.0 million through the Additional Grace Mortgage Loan. The Assumed Grace Mortgage Loan is approximately $801.1 million at an interest rate of London Interbank Offered Rate ("LIBOR") plus 3.11%, or 3.28% as of February 27, 2015, and the Assumed Grace Mezzanine Loan is approximately $102.8 million at an interest rate of LIBOR plus 4.77% or 4.94% as of February 27, 2015. The Assumed Grace Indebtedness is secured by 96 of the 116 hotels in the Grace Portfolio and matures on May 1, 2016, subject to three (one-year) extension rights which, if all three are exercised, result in an outside maturity date of May 1, 2019. The Additional Grace Mortgage Loan is secured by 20 of the 116 hotels in the Portfolio and an additional hotel property already owned by a subsidiary of our OP and part of the Barceló Portfolio. The Additional Grace Mortgage Loan will mature on March 6, 2017, subject to a one-year extension right, which, if exercised, would result in an outside maturity date of March 6, 2018 and has an interest rate equal to the greater of (i) a floating rate of interest equal to LIBOR plus 6.00% and (ii) 6.25%, or 6.25% as of February 27, 2015.
The remaining $447.1 million of the contract purchase price was satisfied by the issuance of the Grace Preferred Equity Interests in two newly-formed Delaware limited liability companies, each of which is an indirect subsidiary of our company and an indirect owner of the Grace Portfolio. The holders of the Grace Preferred Equity Interests are entitled to monthly distributions at a rate of 7.50% per annum for the first 18 months following closing and 8.00% per annum thereafter. On liquidation, the holders of the Grace Preferred Equity Interests will be entitled to receive their original value (as reduced by redemptions) prior to any distributions being made to us or our shareholders. After the earlier to occur of either (i) the date of repayment in full of our currently outstanding unsecured obligations in the original principal amount of approximately $63.1 million (together with the approximately $3.5 million deferred payment with respect to the March 2014 acquisition of the Georgia Tech Hotel & Conference Center, which is due concurrently), which represents the Barceló Acquisition PromissorySee Note (See Note 7 - Promissory Notes Payable), or (ii) the date the gross amount of IPO proceeds received by us following the acquisition of the Grace Portfolio and payment of all acquisition related expenses (including payments17 Subsequent Events to our accompanying consolidated/combined financial statements included in this Annual Report on Form 10-K for additional information regarding changes to our relationship with AR Capital, AR Global, the Advisor, the Property Manager and its affiliates) exceeds $100.0 million, we will be requiredtheir affiliates, and our transition to use 35.0% of any IPO proceeds to redeem the Grace Preferred Equity Interests at par, up to a maximum of $350.0 million in redemptions for any 12-month period. We will also be required, in certain circumstances, to apply debt proceeds to redeem the Grace Preferred Equity Interests at par. As of February 27, 2018, we will be required to have redeemed 50.0% of the Grace Preferred Equity Interests, and we will be required to redeem 100.0% of the Grace Preferred Equity Interests remaining outstanding at the earlier of (i) 90 days following the stated maturity date (including extension options) under the Assumed Grace Indebtedness, and (ii) February 27, 2019. In addition, we will have the right, at our option, to redeem the Grace Preferred Equity Interests, in whole or in part, at any time at par. The holders of the Grace Preferred Equity Interests will have certain consent rights over major actions by us relating to the Grace Portfolio. If we are unable to satisfy the redemption, distribution or other requirements of the Grace Preferred Equity Interests (including if there is a default under the related guarantees provided by our company, our operating partnership and the individual principals of the parent of our Sponsor), the holders of the Grace Preferred Equity Interests have certain rights, including the ability to assume control of the operations of the Grace Portfolio through the assumption of control of the two newly-formed Delaware limited liability companies. Due to the fact that the Grace Preferred Equity Interests will be mandatorily redeemable and certain of their other characteristics, the Grace Preferred Equity Interests will be treated as debt in accordance with accounting principles generally accepted in the United States of America ("GAAP").self-management.
Significant Accounting Estimates and Critical Accounting Policies
Principles of Consolidation and Basis of Presentation
The accompanying consolidated/combined financial statements include our accounts and our subsidiaries. All inter-company accounts and transactions have been eliminated in consolidation. In determining whether we have a controlling financial interest in a joint venture and the requirement to consolidate the accounts of that entity, management considers factors such as percentage ownership interest, authority to make decisions and contractual and substantive participating rights of the other partners or members as well as whether the entity is a variable interest entity for which we haveare the primary beneficiary.
The Predecessor represents hospitality assets and operations owned by Barceló Crestline Corporation and its consolidated subsidiaries ("BCC"), which historically have been maintained in various legal entities. Historically, financial statements have not been prepared for the Predecessor as a discrete stand-alone entity. The accompanying consolidated/combinedconsolidated financial statements for the Predecessor as of December 31, 2013,2014, for the period from January 1 to March 20, 2014 and for the year ended December 31, 20132014 have been derived from the historical accounting records of BCC and reflect the assets, liabilities,
equity, revenue and expenses directly attributable to the Predecessor, as well as allocations deemed reasonable by management, to present the combined financial position, results of operations, changes in equity, and cash flows of the Predecessor on a stand-alone basis. Included in
Use of Estimates
The preparation of the accompanying consolidated/combined statementfinancial statements in conformity with U.S. Generally Accepted Accounting Principles ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of operations forassets and liabilities and disclosure of contingent assets and liabilities at the perioddate of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from March 21those estimates. Management makes significant estimates regarding purchase price allocations to December 31, 2014 is $0.2 millionrecord investments in real estate, the useful lives of costs related to us for the period from January 1 to March 20, 2014.real estate and real estate taxes, as applicable.
Real Estate Investments and Below-Market Lease
We allocate the purchase price of properties acquired in real estate investments to tangible and identifiable intangible assets acquired based on their respective fair values at the date of acquisition. Tangible assets include land, land improvements, buildings and fixtures.furniture, fixtures and equipment. We utilize various estimates, processes and information to determine the property value. Estimates of value are made using customary methods, including data from appraisals, comparable sales, discounted cash flow analysis and other methods. Amounts allocated to land, land improvements, buildings and furniture, fixtures and equipment are based on purchase price allocation studies performed by independent third parties or our analysis of comparable properties in our portfolio. Identifiable intangible assets and liabilities, as applicable, are typically related to contracts, including operating lease agreements, ground lease agreements and hotel management agreements, which will be recorded at fair value.
In making estimates of fair values for purposes of allocating the purchase price, we utilize a number of sources, including independent appraisals that may be obtained in connection with the acquisition or financing of the respective property and other market data. We also consider information obtained about each property as a result of our pre-acquisition due diligence in estimating the fair value of the tangible and intangible assets acquired and intangible liabilities assumed.
Investments in real estate that are not considered to be business combinations andunder GAAP are recorded at cost. Improvements and replacements are capitalized when they extend the useful life of the asset. Costs of repairs and maintenance are expensed as incurred. Depreciation of our assets is computed using the straight-line method over the estimated useful lives of up to 40 years for buildings, 15 years for land improvements, five years for furniture, fixtures and equipment, and the shorter of the useful life or the remaining lease term for leasehold interests.
We are required to make subjective assessments as to the useful lives of our assets for purposes of determining the amount of depreciation to record on an annual basis with respect to our investments in real estate. These assessments have a direct impact on our net income because if we were to shorten the expected useful lives of our investments in real estate, we would depreciate these investments over fewer years, resulting in more depreciation expense and lower net income on an annual basis.
A disposal of one of our components or a group of our components is required to be reported in discontinued operations only if the disposal represents a strategic shift that has, or will have, a major effect on our operations and financial results. We are required to present, for each comparative period, the assets and liabilities of a disposal group that includes a discontinued operation separately in the asset and liability sections, respectively, of the statement of financial position. As a result, the operations of sold properties through the date of their disposal will be included in continuing operations, unless the sale represents a strategic shift. However, the gain or loss on the sale of a property will be reported separately below income from continuing operations.Below-Market Lease
The below-market lease intangible is based on the difference between the market rent and the contractual rent and is discounted to a present value using an interest rate reflecting our current assessment of the risk associated with the lease acquired.leases assumed at acquisition. Acquired lease intangible assets are amortized over the remaining lease term. The amortization of a
below-market lease is recorded as an increase to rent expense on the consolidated/combined statementsConsolidated/Combined Statements of operations.Operations and Comprehensive Income (Loss).
Impairment of Long Lived Assets and Investments in Unconsolidated Entities
When circumstances indicate the carrying value of a property may not be recoverable, we review the asset for impairment. This review is based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property’s use and eventual disposition. The estimates consider factors such as expected future operating income, market and other applicable trends and residual value, as well as the effects of demand, competition and other factors. If impairment exists, due to the inability to recover the carrying value of a property, an impairment loss will be recorded to the extent that the carrying value exceeds the estimated fair value of the property for properties to be held and used. For properties held for sale, the impairment loss is the adjustment to fair value less estimated cost to dispose of the asset. These assessments have a direct impact on net income because recording anproperty. An impairment loss results in an immediate negative adjustment toreflected in net income. No suchAn impairment losses wereloss of $2.4 million was recorded on one hotel during the quarter ended June 30, 2016 (See Note 14 - Impairments to our accompanying consolidated/combined financial statements included in this Annual Report on Form 10-K). We have not recorded an impairment in any other period.
Assets Held for Sale (Long-Lived Assets)
When we initiate the sale of long-lived assets, we assess whether the assets meet the criteria to be considered assets held for sale. The review is based on whether the following criteria are met:
Management has committed to a plan to sell the asset group;
The subject assets are available for immediate sale in their present condition;
We are actively locating buyers as well as other initiatives required to complete the sale;
The sale is probable and the transfer is expected to qualify for recognition as a complete sale in one year;
The long-lived asset is being actively marketed for sale at a price that is reasonable in relation to fair value; and
Actions necessary to complete the plan indicate it is unlikely significant changes will be made to the plan or the plan will be withdrawn.
If all the criteria are met, a long-lived asset held for sale is measured at the lower of its carrying amount or fair value less cost to sell, and we will cease recording depreciation. We had one hotel that qualified to be treated as an asset held for sale as of September 30, 2016, which was subsequently sold on October 14, 2016 (See Note 15 - Sale of Hotel to our accompanying consolidated/combined financial statements included in this Annual Report on Form 10-K). We had no assets that qualified to be treated as an asset held for sale as of December 31, 2016.
Cash and Cash Equivalents
Cash and cash equivalents include cash in bank accounts as well as investments in highly-liquid money market funds with original maturities of three months or less.
Restricted Cash
Restricted cash consists of amounts required under mortgage agreements for future capital improvements to owned assets, future interest and property tax payments and cash flow deposits while subject to mortgage agreement restrictions. For purposes of the statement of cash flows, changes in restricted cash caused by changes to the amount needed for future capital improvements are treated as investing activities, changes related to future debt service payments are treated as financing activities, and changes related to real estate tax payments and excess cash flow deposits are treated as operating activities.
Deferred Financing Fees
Deferred financing fees represent commitment fees, legal fees and other costs associated with obtaining commitments for financing. These fees are amortized over the terms of the respective financing agreements using the effective interest method. Unamortized deferred financing fees are expensed when the associated debt is refinanced or repaid before maturity. Costs incurred in seeking financial transactions that do not close are expensed in the periods presented.period in which it is determined that the financing will not be successful.
In April 2015, the Financial Accounting Standards Board (“FASB”) issued ASU 2015-03 Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”), which was designed to simplify the presentation of debt issuance costs. The amendments in ASU 2015-03 require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. Prior to application of this new guidance, we presented debt issuance costs as an asset on the Consolidated Balance Sheets. The recognition and
measurement guidance for debt issuance costs were not affected by the amendments in ASU 2015-03. We adopted this ASU as of January 1, 2016, on a retrospective basis. The impact to the Consolidated Balance Sheets as of December 31, 2015, was to reduce total assets by approximately $18.8 million, of which $16.0 million was mortgage notes payable, and $2.8 million was the Grace Preferred Equity Interests.
Variable Interest Entities
Accounting Standards Codification ("ASC") 810 contains the guidance surrounding the definition of variable interest entities ("VIE"), the definition of variable interests and the consolidation rules surrounding VIEs. In general, VIEs are entities in which equity investors lack the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. We have variable interests in VIEs through our investments in entities which own the Westin Virginia Beach Town Center (the "Westin Virginia Beach") and the Hilton Garden Inn Blacksburg.
Once it is determined that we hold a variable interest in an entity, GAAP requires that we perform a qualitative analysis to determine (i) which entity has the power to direct the matters that most significantly impact the VIE’s financial performance; and (ii) if we have the obligation to absorb the losses of the VIE that could potentially be significant to the VIE or the right to receive the benefits of the VIE that could potentially be significant to the VIE. The entity that has both of these characteristics is deemed to be the primary beneficiary and is required to consolidate the VIE.
In February 2015, the FASB issued Accounting Standards Update 2015-02 (“ASU 2015-02”), which amended ASC 810. The amendment modifies the evaluation of whether certain legal entities are VIEs, eliminates the presumption that a general partner should consolidate a limited partnership, and affects the consolidation analysis of reporting entities that are involved with VIEs. The revised guidance was effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. We adopted this guidance effective January 1, 2016. We have evaluated the impact of the adoption of the new guidance on its consolidated/combined financial statements and we have determined that the OP is considered a VIE. However, we meet the disclosure exemption criteria as we are the primary beneficiary of the VIE and our partnership interest is considered a majority voting interest. As such, the new guidance did not have an impact on our consolidated/combined financial statements.
We hold an interest in BSE/AH Blacksburg Hotel, LLC (the "HGI Blacksburg JV"), an entity that owns the assets of the Hilton Garden Inn Blacksburg, and an interest in TCA Block 7 Hotel, LLC (the "Westin Virginia Beach JV"), an entity that owns the assets of the Westin Virginia Beach.
During the quarter ended June 30, 2015, upon the acquisition of an additional equity interest in the HGI Blacksburg JV, we concluded that we were the primary beneficiary, with the power to direct activities that most significantly impact its economic performance, and therefore consolidated the entity in our consolidated/combined financial statements subsequent to the acquisition (See Note 3 - Business Combinations to our accompanying consolidated/combined financial statements included in this Annual Report on Form 10-K). We have concluded we are not the primary beneficiary with the power to direct activities that most significantly impact economic performance of the Westin Virginia Beach JV, and have therefore not consolidated the entity. We have accounted for the Westin Virginia Beach JV under the equity method of accounting and included it in investments in unconsolidated entities in the accompanying Consolidated Balance Sheets.
Revenue Recognition
HotelWe recognize hotel revenue is recognized as earned, which is generally defined as the date upon which a guest occupies a room or utilizes the hotel services.
Income Taxes
We intend to electelected and qualifyqualified to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code commencing with our tax year ended December 31, 2014. In order to continue to qualify as a REIT, we must annually distribute to our stockholders 90% of our REIT taxable income (which does not equal net income as calculated in accordance with GAAP), determined without regard to the deduction for dividends paid and excluding net capital gain, and must comply with various other organizational and operational requirements. If we qualify for taxation as a REIT, weWe generally will not be subject to federal corporate income tax on that portion of our REIT taxable income that we distribute to our stockholders and complies with various other organizational and operational requirements applicable to it as a REIT. Even if we qualify for taxation as a REIT, itstockholders. We may be subject to certain state and local taxes on itsour income, property tax and federal income and excise taxes on itsour undistributed income. Our hotels are leased to ataxable REIT subsidiaries which are owned by the OP. The taxable REIT subsidiary ("TRS") which is a wholly owned subsidiary of the OP. The TRS isare subject to federal, state and local income taxes.
Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and for net operating loss, capital loss, and tax credit carryovers. Deferred tax assets and liabilities are measured using enacted tax rates in
effect for the year in which such amounts are expected to be realized or settled. The effect on deferred tax assets and liabilities from a change in tax rates is recognized in earnings in the period when the new rate is enacted. However, deferred tax assets are recognized only to the extent that it is more likely than not that they will be realized based on consideration of available evidence, including future reversals of existing taxable temporary differences, future projected taxable income and tax planning strategies.
GAAP prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken in a tax return. We must determine whether it is "more-likely-than-not" that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Once it is determined that a position meets the more-likely-than-not recognition threshold, the position is measured at the largest amount of benefit that is greater than 50% likely of being realized upon settlement in order to determine the amount of benefit to recognize in the financial statements. This accounting standard applies to all tax positions related to income taxes.
Earnings/Loss per Share
We recognize accrued interest relatedcalculate basic income or loss per share by dividing net income or loss for the period by the weighted-average shares of its common stock outstanding for a respective period. Diluted income per share takes into account the effect of dilutive instruments, such as stock options and unvested stock awards, except when doing so would be anti-dilutive. Beginning with distributions payable with respect to unrecognized tax benefitsApril 2016 and through January 13, 2017, we have paid cumulative distributions of 2,047,877 shares of common stock and adjusted, retroactively for all periods presented, our computation of loss per share in order to reflect this change in capital structure (See Note 8 - Common Stock to our accompanying consolidated/combined financial statements included in this Annual Report on Form 10-K).
Fair Value Measurements
In accordance with ASC 820, Fair Value Measurement, certain assets and liabilities are recorded at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability between market participants in an orderly transaction on the measurement date. The market in which the reporting entity would sell the asset or transfer the liability with the greatest volume and level of activity for the asset or liability is known as the principal market. When no principal market exists, the most advantageous market is used. This is the market in which the reporting entity would sell the asset or transfer the liability with the price that maximizes the amount that would be received or minimizes the amount that would be paid. Fair value is based on assumptions market participants would make in pricing the asset or liability. Generally, fair value is based on observable quoted market prices or derived from observable market data when such market prices or data are available. When such prices or inputs are not available, the reporting entity should use valuation models.
Our financial instruments recorded at fair value on a recurring basis are categorized based on the priority of the inputs used to measure fair value. The inputs used in measuring fair value are categorized into three levels, as follows:
Level 1 - Inputs that are based upon quoted prices for identical instruments traded in active markets.
Level 2 - Inputs that are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar investments in markets that are not active, or models based on valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the investment.
Level 3 - Inputs that are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models, and similar techniques.
The determination of where an asset or liability falls in the hierarchy requires significant judgment and considers factors specific to the asset or liability. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety.
Advertising Costs
We expense advertising costs for hotel operations as incurred. These costs were $17.2 million for the year ended December 31, 2016, $12.2 million for the year ended December 31, 2015, and $0.4 million combined for the Company and the Predecessor for the year ended December 31, 2014.
Allowance for Doubtful Accounts
Receivables consist principally of trade receivables from customers and are generally unsecured and are due within 30 to 90 days. We record a provision for uncollectible accounts using the allowance method. Expected credit losses associated with trade receivables are recorded as an allowance for doubtful accounts. The allowance for doubtful accounts is estimated based upon historical patterns of credit losses for aged receivables as well as specific provisions for certain identifiable, potentially uncollectible balances. When internal collection efforts on accounts have been exhausted, the accounts are written off and the associated allowance for doubtful accounts is reduced.
Derivative Transactions
We at certain times enter into derivative instruments to hedge exposure to changes in interest expense and penalties in operating expenses.rates. Our derivatives as of December 31, 2016, consisted of interest rate cap agreements, which we believe will help to mitigate our exposure to increasing borrowing costs under floating rate indebtedness. We have elected not to designate our interest rate cap agreements as cash flow hedges. The impact of the interest rate caps for the year ended December 31, 2016, to the consolidated/combined financial statements was immaterial.
Reportable Segments
We have determined that we have one reportable segment, with activities related to investing in real estate. Our investments in real estate generate room revenue and other income through the operation of the properties, which comprise 100% of the total consolidated/combinedconsolidated revenues. Management evaluates the operating performance of our investments in real estate on an individual property level, none of which represent a reportable segment.
Revenue Performance Metrics
We measure hotel revenue performance by evaluating revenue metrics such as:
Occupancy percentage (“Occ”) - Occ represents the total number of hotel rooms sold in a given period divided by the total number of rooms available. Occ measures the utilization of our hotels' available capacity.
Average Daily Rate (“ADR”) - ADR represents total hotel revenues divided by the total number of rooms sold in a given period.
Revenue per Available room (“RevPAR”) - RevPAR is the product of ADR and Occ.
Occ, ADR, and RevPAR are commonly used non-GAAP, measures within the hotel industry to evaluate hotel operating performance. RevPAR is defined as the product of the ADR and Occ (and also as the quotient of room revenue and available rooms). RevPAR doesdo not include food and beverage or other revenues generated by the hotels. We evaluate individual hotel RevPAR performance on an absolute basis with comparisons to budget, to prior periods and to the competitive set in the market, as well as on a company-wide and regional basis.
Our Occ, ADR and RevPAR performance may be affected by macroeconomic factors such as regional and local employment growth, personal income and corporate earnings, office vacancy rates and business relocation decisions, airport and other business and leisure travel, new hotel property construction, and the pricing strategies of competitors. In addition, our Occ, ADR and RevPAR performance is dependent on the continued success of our franchisors and brands.
We generally expect that room revenues will make up a significant majority of our total revenues, and our revenue results will therefore be highly dependent on maintaining and improving Occ and ADR, which drive RevPAR.
Results of Operations
The resultsPrior to the suspension of operations forour IPO in November 2015, we depended, and expected to continue to depend, in substantial part on proceeds from our IPO to meet our major capital requirements. Following the accompanying consolidated/combined financial statements discussed below includesuspension of our IPO in 2015, our primary business objective has been a focus on meeting our capital requirements and on maximizing the combined results for usvalue of our existing portfolio by continuing to invest in our hotels primarily through brand-mandated property improvement plans (“PIPs”), and through intensive asset management. Because we required funds in addition to operating cash flow and cash on hand to meet our capital requirements, we undertook and evaluated a variety of transactions to generate additional liquidity to address our capital requirements, including changing our distribution policy, extending certain of our obligations under PIPs, extending obligations to pay contingent consideration, marketing and selling assets and seeking debt or equity financing transactions. In January 2017, we entered into the SPA and the Predecessor for the year ended December 31, 2014Framework Agreement, and the resultsconsummation of the Predecessor fortransactions contemplated by these agreements in March 2017 has, and is expected to continue to, generate additional liquidity through the year ended December 31, 2013.sale of Class C Units to the Brookfield Investor at the Initial Closing and at Subsequent Closings, as well as cost savings realized as part of our transition to self-management through reduced property management fees and the elimination of external asset management fees to the Advisor (offset by expenses previously borne by the Advisor that will now be incurred directly by us as a self-managed company). The cash flows forSubsequent Closings are subject to conditions, and may not be completed on their current terms, or at all, and the accompanying consolidated/combined financial statements discussedcost savings from our transition to self-management may not be realized to the extent we are anticipating, or at all.
below includeWhile receipt of all the proceeds from our sale of Class C Units at the Initial Closing and Subsequent Closings would provide the liquidity needed to satisfy certain of our liquidity and capital requirements, including our obligation to redeem the $242.9 million of the Grace Preferred Equity Interests outstanding following the Initial Closing by February 27, 2019 and certain of our PIP obligations, these amounts may not be sufficient to satisfy all of our capital requirements. We may need to seek additional debt or equity financing consisting of common stock, preferred stock or warrants, or any combination thereof to meet our capital requirements, which may not be available on favorable terms or at all, and may only be obtained subject to the Brookfield Approval Rights. Moreover, the Subsequent Closings are subject to conditions, and there can be no assurance they will be completed on their current terms, or at all.
Any transactions we undertake in the future to generate additional liquidity could continue to have an effect on our results for us for the period from March 21 to December 31, 2014of operations. Further asset sales and the deferral of PIP obligations, if completed, could adversely impact our operating results.
PIP renovation work has adversely impacted our operating results for the Predecessor for the year ended December 31, 2013.
The Barceló Portfolio consists of (i) three wholly owned hotel assets, the Baltimore Courtyard, the Providence Courtyard and the Stratford Homewood Suites; (ii) one leased asset, the Georgia Tech Hotel; and (iii) equity interests in two joint ventures that each own one hotel, the Westin Virginia Beach and the Hilton Garden Inn Blacksburg.
Comparison of the Year Ended December 31, 2014due to the Year Ended December 31, 2013
Room revenues for the portfolio were $32.2 million for the year ended December 31, 2014, compareddisruptions to room revenues of $30.5 million for the year ended December 31, 2013. RevPAR for the total portfolio increased 6.2% year-over-year for the year ended December 31, 2014. The RevPAR growth rates reflect the percentage change from the prior year’s results.
Occ, ADR and RevPAR results are presented in the following tables to reflect certain operating information for the portfolio.
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| | | | | | | | |
| | | Year Ended |
| Total Portfolio | | December 31, 2014 | | December 31, 2013 |
| Number of rooms | | 1,181 |
| | 1,181 |
|
| Occ | | 74.3 | % | | 71.3 | % |
| ADR | | $ | 140.44 |
| | $ | 137.94 |
|
| RevPAR | | $ | 104.40 |
| | $ | 98.33 |
|
| RevPAR growth rate | | 6.2 | % | | NA |
|
|
| | | | | | | | |
| | | Year Ended |
| Consolidated Assets | | December 31, 2014 | | December 31, 2013 |
| Number of rooms | | 556 |
| | 556 |
|
| Occ | | 75.7 | % | | 74.6 | % |
| ADR | | $ | 147.77 |
| | $ | 145.62 |
|
| RevPAR | | $ | 111.86 |
| | $ | 108.56 |
|
| RevPAR growth rate | | 3.0 | % | | NA |
|
|
| | | | | | | | |
| | | Year Ended |
| Unconsolidated Joint Ventures | | December 31, 2014 | | December 31, 2013 |
| Number of rooms | | 373 |
| | 373 |
|
| Occ | | 72.7 | % | | 69.5 | % |
| ADR | | $ | 129.39 |
| | $ | 125.81 |
|
| RevPAR | | $ | 94.13 |
| | $ | 87.39 |
|
| RevPAR growth rate | | 7.7 | % | | NA |
|
|
| | | | | | | | |
| | | Year Ended |
| Leasehold Interest | | December 31, 2014 | | December 31, 2013 |
| Number of rooms | | 252 |
| | 252 |
|
| Occ | | 73.7 | % | | 66.8 | % |
| ADR | | $ | 139.97 |
| | $ | 137.70 |
|
| RevPAR | | $ | 103.14 |
| | $ | 91.94 |
|
| RevPAR growth rate | | 12.2 | % | | NA |
|
The RevPAR rates for the year ended December 31, 2014 compared to the year ended December 31, 2013 is the result of the growth in the hotels’ ADR and occupancy, particularly at the Baltimore Courtyard due to now completed renovations to the lobby and improvements to the restaurant and bar and higher RevPAR growth in the greater Baltimore market. These renovations also resulted in a lower occupancy at the hotel in 2013. Also contributing to the higher RevPAR was an increase in both transient and group occupied rooms at the Georgia Tech Hotel as a result of higher occupancy overall in the Atlanta market and the efforts of the Sub-Property Manager to improve the operations of the hotelhotels being renovated. Additionally, we have significant PIP renovation work that we will be required to make during 2017 and in future years which included appointing a new hotel general manager. Occupancywill also increased atadversely impact our operating results.
Our results of operations have in the Westin Virginia Beach primarilypast, and may continue to be, impacted by our acquisition activity.
In March 2014 we closed on the acquisition of interests in six hotels through fee simple, leasehold and joint venture interests (the "Barceló Portfolio") for an aggregate purchase price of $110.1 million, exclusive of closing costs. In February 2015, we closed on the acquisition of interests in 116 hotels through fee simple and leasehold interests (the "Grace Portfolio") for an aggregate purchase price of $1.8 billion, exclusive of closing costs. In October 2015, we closed on the acquisition of interests in 10 hotels through fee simple interests (the "First Summit Portfolio") from Summit Hotel OP, LP, the operating partnership of Summit Hotel Properties, Inc., and affiliates thereof (collectively, "Summit") for an aggregate purchase price of $150.1 million, exclusive of closing costs. In November and December 2015, we closed on the acquisition of interests in four hotels through fee simple interests (the "First Noble and Second Noble Portfolios") for an aggregate purchase price of $107.6 million, exclusive of closing costs. During December 2015 and January 2016, we terminated our obligations to acquire 24 additional hotels, including obligations to Summit, and as a result forfeited an aggregate of $41.1 million in non-refundable deposits. In February 2016, we completed the acquisition of six hotels through fee simple interests from Summit (the "Third Summit Portfolio") for an increaseaggregate purchase price of $108.3 million, exclusive of closing costs, $20.0 million of which was funded with the proceeds from a loan (the "Summit Loan") from Summit.
Also in occupancyFebruary 2016, we reinstated our obligation under a previously terminated agreement with Summit, to purchase ten hotels for an aggregate purchase price of $89.1 million from Summit (the "Pending Acquisition"), and made a new purchase price deposit of $7.5 million with proceeds from the Summit Loan. Under the reinstated agreement Summit has the right to market and ultimately sell any or all of the hotels to be purchased to a bona fide third party purchaser without our consent at any time prior to the completion of our Pending Acquisition. Whether or not Summit engages, or is successful, in any efforts to market these hotels is beyond our control and, accordingly, there can be no assurance we will be able to complete our Pending Acquisition in whole or in part. In June 2016, Summit informed us that two of the ten hotels had been sold, thereby reducing the Pending Acquisition to eight hotels for an aggregate purchase price of $77.2 million. In January 2017, in connection with our entry into the SPA, we extended the scheduled closing date of the Pending Acquisition to April 27, 2017 (or October 24, 2017 in the Virginia Beach market. These increases were offset by a decrease in RevPAR at Stratford Homewood Suites which had a higher occupancy than normalcase of one hotel) and made an additional purchase price deposit of $3.0 million in the first quarterform of 2013 as a resultnew loan by Summit to us.
We intend to utilize $26.9 million of people displacedthe proceeds from their homes by Hurricane Sandy.the Initial Closing to fund a portion of the closing consideration for the seven hotels to be purchased in our Pending Acquisition on April 27, 2017. We will require additional debt or equity financing to fund the remaining $32.4 million in closing consideration for the seven hotels to be purchased in our Pending Acquisition on April 27, 2017. Summit has informed us that the hotel that is scheduled to be sold on October 24, 2017 is subject to a pending purchase and sale agreement with a third party, but we will require additional debt or equity financing to fund the remaining $10.5 million of the closing consideration for the one hotel to be purchased October 24, 2017 if Summit does not sell it to a third party and we are ultimately required to purchase it. There can be no assurance such financing will be available on favorable terms, or at all. Moreover, such financing may only be obtained subject to the Brookfield Approval Rights, and there can be no assurance this prior approval will be provided when requested. Any failure to complete our Pending Acquisition in whole or in part could cause us to default under the reinstated purchase agreement and forfeit all or a portion of the $10.5 million deposit.
The outstanding principal of the Summit Loan, which was $26.7 million following the Initial Closing, and any accrued interest thereon, will become immediately due and payable at closing if we close our Pending Acquisition before February 11, 2018, the maturity date of the Summit Loan. We intend to utilize $23.7 million of the proceeds from the Initial Closing to fund this repayment.
Although we are permitted under the Brookfield Approval Rights to complete our Pending Acquisition, we are significantly restricted in our ability to make future acquisitions, and there can be no assurance any required prior approval would be provided when requested. We also do not expect to make future acquisitions unless we can obtain equity or debt financing in addition to the additional capital available to us from the sale of the Class C Units at Subsequent Closings, which also would require prior approval.
Current market concerns regarding the potential softening of hospitality demand, and recent political and economic uncertainty have led us and many other public lodging companies to curtail revenue growth estimates. Any of these factors could adversely impact the financial performance of our properties and hence our results of operations.
Comparison of the Year Ended December 31, 2016 to the Year Ended December 31, 2015
Room revenues for the portfolio were $566.6 million for the year ended December 31, 2016, compared to room revenues of $420.6 million for the year ended December 31, 2015. The increase in room revenues was primarily due to acquisitions.
The following table presents actual operating information of the hotels in our portfolio for the periods in which we have owned them.
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| | | | | | | | |
| | | Year Ended |
| Total Portfolio | | December 31, 2016 | | December 31, 2015 |
| Number of rooms | | 17,114 |
| | 16,644 |
|
| Occ | | 75.6 | % | | 76.2 | % |
| ADR | | $ | 120.93 |
| | $ | 118.42 |
|
| RevPAR | | $ | 91.48 |
| | $ | 90.26 |
|
Our results of operations only include the results of operations of the hotels we have acquired beginning on the date of each hotel's acquisition. The following table presents pro-forma operating information of the hotels in our portfolio as if we had owned each hotel in our portfolio as of December 31, 2016, for the full periods presented. The information in the table includes the hotels that we classify as under renovation. We consider hotels to be under renovation beginning in the quarter that they start material renovations and continuing until the end of the fourth full quarter following the substantial completion of the renovations. The hotel business is capital-intensive and renovations are a regular part of the business. A large-scale capital project that would cause a hotel to be considered to be under renovation is an extensive renovation of core aspects of the hotel, such as rooms, meeting space, lobby, bars, restaurants, and other public spaces. Both quantitative and qualitative factors are taken into consideration in determining if a particular renovation would cause a hotel to be considered to be under renovation for these purposes, including unusual or exceptional circumstances such as: a reduction or increase in room count, a significant alteration of the business operations, or the closing of material portions of the hotel during the renovation.
|
| | | | | | | | |
| | | Year Ended |
| Proforma (141 hotels) | | December 31, 2016 | | December 31, 2015 |
| Number of rooms | | 17,193 |
| | 17,192 |
|
| Occ | | 75.6 | % | | 75.9 | % |
| ADR | | $ | 120.88 |
| | $ | 118.42 |
|
| RevPAR | | $ | 91.39 |
| | $ | 89.95 |
|
| RevPAR growth rate | | 1.7 | % | | |
The following table presents pro-forma operating information of the hotels in our portfolio as if we had owned each hotel in our portfolio for the full periods presented, further adjusted to exclude the impact of 42 hotels that we classify as under renovation.
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| | | | | | | | |
| | | Year Ended |
| Proforma hotels not under renovation (99 hotels) | | December 31, 2016 | | December 31, 2015 |
| Number of rooms | | 12,013 |
| | 12,012 |
|
| Occ | | 76.2 | % | | 75.7 | % |
| ADR | | $ | 119.79 |
| | $ | 117.79 |
|
| RevPAR | | $ | 91.28 |
| | $ | 89.15 |
|
| RevPAR growth rate | | 2.4 | % | |
|
The pro-forma RevPAR growth rate for the year ended December 31, 2016 compared to the year ended December 31, 2015, increased by 1.7% due to an increase in ADR. Pro-forma RevPAR for our hotels not under renovation increased 2.4% in the current period as compared to the prior year period, due to an increase in occupancy and ADR.
Other non-room operating revenues for the portfolio include food and beverage, (16.6% and 15.7% of total revenues for the year ended December 31, 2014 and 2013, respectively) and other ancillary revenues such as conference center, market, parking, telephone and cancellation fees. Total non-room operating revenues, including the results of the hotels in our portfolio as if we had owned each hotel in our portfolio for the full years ended December 31, 2016, and 2015, decreased 0.8% over the prior year period driven primarily by a decline in other ancillary revenues.
Our operating expenses include labor expenses incurred in the day-to-day operation of our hotels. Our hotels have a variety of fixed expenses, such as essential hotel staff, real estate taxes and insurance, and these expenses do not change materially even if the revenues at the hotels fluctuate. Our primary operating expenses are described below:
Rooms expense: These costs include labor (housekeeping and rooms operation), reservation systems, room supplies, linen and laundry services. Occupancy is the major driver of rooms expense, due to the cost of cleaning the rooms, with additional expenses that vary with the level of service and amenities provided.
Food and beverage expense: These expenses primarily include labor and the cost of food and beverage. Occupancy and the type of customer staying at the hotel (for example, catered functions generally are more profitable than outlet sales) are the major drivers of food and beverage expense, which correlates closely with food and beverage revenue.
Management fees: Base management fees (8.7%paid are computed as a percentage of gross revenue. Beginning as of the Initial Closing, the base management fees will be reduced from up to 4% to up to 3%. Incentive management fees may be paid when operating profit or other performance metrics exceed certain threshold levels. Asset management fees payable under the Advisory Agreement, which was terminated at the Initial Closing, are computed as a percentage of the lower of the cost or the fair market value of our assets.
Other property-level operating costs: These expenses include labor and 7.6%other costs associated with other ancillary revenue, such as conference center, parking, market and other guest services, as well as labor and other costs associated with administrative and general, sales and marketing, brand related fees, repairs, maintenance and utility costs. In addition, these expenses include real and personal property taxes and insurance, which are relatively inflexible and do not necessarily change based on changes in revenue or performance at the hotels.
Total operating expenses (excluding depreciation and amortization and impairment of total revenueslong lived assets), including the results of the hotels in our portfolio as if we had owned each hotel in our portfolio for the full years ended December 31, 2016, and 2015, increased approximately 7.9% over the prior year period primarily due to our commencing to pay asset management fees in cash beginning in the fourth quarter of 2015, and increased rooms expense partially attributable to revenue growth, and higher other property level expenses. Hotels under renovation had a higher percentage increase in operating expenses due to costs incurred as a result of the business disruption associated with the renovations.
Depreciation and amortization increased approximately $32.5 million for the year ended December 31, 2014 and 2013, respectively). The increase2016, compared to 2013 isthe prior year, due primarily driven by higher occupancyto acquisitions and group related revenue, such as group meetings and conferences, at the Georgia Tech Hotel.completed PIPs.
Hotel operating expenses increased slightlyImpairment of long-lived assets was $2.4 million for the year ended December 31, 2014 compared2016, due to the year ended December 31, 2013 mainly due torecognition of an impairment on one hotel in the third quarter of 2016.
Interest expense increased room and other property-level expenses at the Baltimore Courtyard and Georgia Tech Hotel as a result of higher occupancy.
Cash Flows for the Period from March 21 to December 31, 2014
Net cash used in operating activities for the period from March 21 to December 31, 2014 was $9.7 million. Cash outflows were primarily driven by a net loss of $14.8approximately $11.6 million which was, in turn, largely the result of the amount of transaction fees related to the acquisition of the Barceló Portfolio and the Grace Acquisition and an increase in prepaid expenses and other assets of $7.9 million as a result of prepaid acquisition expenses for the Grace Acquisition and the receivable from the Dealer Manager for the shares sold on the last day of the year of $1.6 million. These were offset by depreciation and amortization of $2.8 million, an increase in due to affiliates of $5.0 million, mainly related to services provided to us related to the Grace Acquisition and an increase in accounts payable and accrued expenses of $5.0 million related to the deferred payment and contingent consideration from the acquisition of the Barceló Portfolio.
Net cash used in investing activities for the period from March 21 to December 31, 2014 was $122.1 million. Cash outflows were primarily driven by the acquisition of the Barceló Portfolio for $41.4 million, the deposit on the Grace Acquisition of $75.0 million, an increase in restricted cash of $2.0 million related to requirements of the new mortgage note payable and $3.7 million of improvements at the properties, primarily due to renovations at the Stratford Homewood Suites.
Net cash provided by financing activities for the period from March 21 to December 31, 2014 was $263.6 million. Cash inflows were primarily driven by proceeds from the mortgage note payable of $45.5 million and proceeds from the issuance of common stock of $249.6 million. These were offset by the payment of offering costs of $28.1 million and the payment of deferred financing fees of $2.6 million. During the period from March 21 to December 31, 2014, we received proceeds of $40.5 million from an affiliate note payable to fund the deposit on the Grace Acquisition which was then repaid in full.
Cash Flows for the Predecessor for the Year Ended December 31, 2013
Net cash provided by operating activities for the year ended December 31, 2013 was $5.8 million. Cash inflows were2016, compared to the prior year, due primarily driven by depreciationto new mortgage and amortizationpromissory notes in 2016, and the full year impact of $5.1mortgage debt incurred and assumed in connection with the acquisition of the Grace Portfolio, along with the issuance of the Grace Preferred Equity Interests.
Acquisition and transaction related costs decreased approximately $39.2 million offset by a decrease in accounts payable and accrued expenses of $0.2 million and in prepaid expenses and other assets of $0.5 million.
Net cash used in investing activities for the year ended December 31, 2013 was $2.3 million. Cash outflows primarily were driven by the purchases of property and equipment related to renovations at the Baltimore Courtyard of $3.4 million and a decrease in restricted cash of $1.2 million.
Net cash used by financing activities for the year ended December 31, 2013 was $0.7 million. Cash inflows were primarily driven by contributions from the members of the Predecessor of $0.2 million and proceeds from the mortgage note payable of $3.4 million which was used to pay for the Baltimore Courtyard renovations. These were offset by distributions2016, compared to the members of the Predecessor of $3.9 million and $0.4 million of repayments of the mortgage note payable.
Liquidity and Capital Resourcesprior year, due to decreased acquisition activity in 2016.
We are offering and selling to the public in our primary offering up to 80,000,000 shares of our common stock at up to $25.00 per share (subject to certain volume discounts). We also are offering up to 21,052,631 shares of common stock under our DRIP, initially at $23.75 per share, which is 95.0% of the primary offering price. We reserve the right to reallocate the shares of common stock we are offering between our primary offering and the DRIP.
On February 3, 2014, we had raised proceeds sufficient to break escrow in connection with our Offering. We received and accepted aggregate subscriptions in excess of the $2.0 million minimum and issued shares of common stock to our initial investors who were simultaneously admitted as stockholders. We purchased our first properties and commenced our real estate operation on March 21, 2014. As of December 31, 2014, we owned the Barceló Portfolio through fee simple, leasehold and joint venture interests with an aggregate purchase price of approximately $110.1 million. As of December 31, 2014, we had 10.2 million shares of common stock outstanding, including share issued under the DRIP for total gross proceeds of $252.9 million since the date of inception.
As of December 31, 2014, we had cash of $131.9 million and our principal demands for cash were to fund the portion of the purchase price of the Grace Acquisition we expected to cover with cash generated through the Offering and to pay our operating and administrative expenses, continuing debt service obligations and distributions to our stockholders.
General and administrative expenses increased approximately $4.2 million for the year ended December 31, 2016, compared to the prior year, due primarily to the write-off of deferred financing fees of $3.0 million, expenses we are required to reimburse to the Advisor, and increased professional fees partially attributable to the strategic process we conducted to identify an external source of additional capital, which ultimately led to our entry into the SPA and the Initial Closing. We expect our general and administrative expenses to make substantial capital improvementsincrease after the Initial Closing, because of our transition to ourself-management.
Other income (expense) changed by approximately $1.7 million for the year ended December 31, 2016, compared to the prior year, due to the gain recorded on the sale of a hotel, properties, includingpartially offset by the hotelsloss recorded related to the change in the Grace Portfolio. Infair value associated with the contingent consideration payable due in connection with the acquisition of the Grace Portfolio, our franchisors required property improvements plans, or PIPs, which set forth their renovation requirements. In addition, pursuantBarceló Portfolio.
Comparison of the Year Ended December 31, 2015 to the termsYear Ended December 31, 2014
Room revenues were $420.6 million for the year ended December 31, 2015, compared to room revenues of $32.2 million for the Assumed Grace Indebtedness, we are requiredyear ended December 31, 2014, including results from the Predecessor period. The increase in room revenues was primarily due to make an aggregate of $73.5 million in periodic PIP reserve deposits during 2015 and 2016 to cover a portion of the estimated costs of the PIPs on the total 96 hotels collateralizing that debt. In addition, pursuant to a guaranty entered into in connection with the Assumed Grace Indebtedness, we are required to guarantee the difference between (i) the cost of the PIPs with respect to those 96 hotels during the 24-month periodacquisitions.
The following the acquisition of the Grace Portfolio, estimated to be $102.0 million, and (ii) the amount actually deposited into the PIP reserve with respect to the Assumed Grace Indebtedness. Pursuant to the terms of the Additional Grace Mortgage Loan, we are required to make an aggregate of $20.0 million in periodic PIP reserve deposits during 2015 and 2016 to cover a portion of the estimated costs of the PIPs on the total 21 hotels collateralizing that debt. The Grace Indebtedness also requires us to deposit 4.0% of the gross revenuetable presents operating information of the hotels into a separate accountin our portfolio for the ongoing replacement or refurbishmentperiods in which we have owned them.
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| | | | | | | | |
| | | Year Ended |
| Total Portfolio | | December 31, 2015 | | December 31, 2014 |
| Number of rooms | | 16,644 |
| | 1,181 |
|
| Occ | | 76.2 | % | | 74.3 | % |
| ADR | | $ | 118.42 |
| | $ | 140.44 |
|
| RevPAR | | $ | 90.26 |
| | $ | 104.40 |
|
Our results of furniture, fixtures and equipment atoperations only include the hotels. We expect to fund capital expenditure from proceeds fromresults of operations of the Offering and cash provided by operations. However, if liquidity from these sources is insufficient to cover our commitments, it may be necessary to obtain additional funds by borrowing, refinancing properties or liquidating our investment in one or more properties. There is no assurance that such funds will be available, or if available, that the terms will be acceptable to us or commercially reasonable.
Wehotels we have acquired and intend to continue acquiring our assets with cash and mortgage or other debt, but we also may acquire assets free and clear of permanent mortgage or other indebtedness by paying the entire purchase price for the asset in cash or in OP Units.
We use debt financing as a source of capital. Under our charter, the maximum amount of our total indebtedness may not exceed 300% of our total "net assets" (as defined in our charter) as ofbeginning on the date of any borrowing, which is generally expected to be approximately 75%each hotel's acquisition. The following table presents pro-forma operating information of the cost of our investments; however, we may exceed that limit if such excess is approved by a majority of our independent directors and disclosed to stockholdershotels in our next quarterly report following such borrowing along with justification for exceeding such limit. This charter limitation, however, does not apply to individual real estate assets or investments.
Prior to our entry into the Grace Acquisition agreement in May 2014, a majority of our independent directors waived the total portfolio leverage requirement of our charter with respect to the Grace Acquisition should such total portfolio leverage exceed 300% of our total “net assets” (as definedas if we had owned each hotel in our charter) upon closing of the Grace Acquisition.
Asportfolio as of December 31, 2014, we had a secured mortgage note payable of $45.5 million and promissory notes payable of $64.8 million. As of February 27,2016, for the full periods presented.
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| | | | | | | | |
| | | Year Ended |
| Proforma (141 hotels) | | December 31, 2015 | | December 31, 2014 |
| Number of rooms | | 17,192 |
| | 17,191 |
|
| Occ | | 75.9 | % | | 74.8 | % |
| ADR | | $ | 118.42 |
| | $ | 112.56 |
|
| RevPAR | | $ | 89.95 |
| | $ | 84.20 |
|
| RevPAR growth rate | | 6.7 | % | | |
The pro-forma RevPAR growth rate for the year ended December 31, 2015, our debt obligations had increased to $1,688.3 million (including the Grace Preferred Equity Interests, which are treated as debt for accounting purposes) duecompared to the acquisition of the Grace Portfolio. Accordingly, following the acquisition of the Grace Portfolio, our total portfolio leverage (which includes the Grace Preferred Equity Interests) significantly exceeded this 300% limit, and we expect it will continue to do so for some time. We intend to use substantially all available offering proceeds following the Grace Acquisition to reduce our borrowings to our intended limit, which is below the 300% maximum limit. Following the acquisition of the Grace Portfolio in February 2015, the principal amount of our outstanding secured financing, which excludes the Grace Preferred Equity Interests, is approximately 60% of the total value of our real estate investments and our other assets.
As ofyear ended December 31, 2014 allwas 6.7%, driven by growth in occupancy and ADR.
Other non-room operating revenues, including the results of the cash distributions paid sincehotels in our portfolio as if we had owned each hotel in our portfolio for the commencementfull years ended December 31, 2015, and 2014, increased approximately 5.5%, over the prior year period.
Total operating expenses, including the results of the Offeringhotels in our portfolio as if we had been funded from Offering proceeds including Offering proceeds which were reinvestedowned each hotel in common stock issued pursuantour portfolio for the full years ended December 31, 2015, and 2014, increased approximately 12.2%, over the prior year period. Operating expenses include certain operating costs that increase relative to increases in revenue, such as management fees and franchise fees that have a higher rate as a percentage of revenue for the full years ended December 31, 2015, and 2014, contributing to the DRIP. We anticipate that, followingoverall increase in expenses. Additionally, 2015 was negatively impacted by disruption from and transition costs associated with the completionconsolidation of the Grace Acquisition, adequate cash will be generated from operations to fund our operating and administrative expenses, continuing debt service obligations and the payment of distributions, but there is no assurancemanagement companies throughout 2015 as we will be able to do so. Our ability to finance our operations is subject to some uncertainties. Our ability to generate working capital is dependent on our ability to attract and retain hotel brands and the economic and business environments of the various markets in which our properties are located. Our ability to sell our assets is partially dependent upon the state of real estatestrategically aligned markets and management companies.
Depreciation and amortization increased approximately $64.8 million for the ability of purchasersyear ended 2015, compared to obtain financing at reasonable commercial rates, as well as our abilitythe prior year, due primarily to obtain the consent of the holders of the Grace Preferred Equity Interests with respect to some of our properties and to meet any applicable requirements of the Grace Indebtedness. In general, our policy will be to pay distributions from cash flow from operations. However, if we have not generated sufficient cash flow from our operations and other sources, such as from borrowings, advances from our Advisor, our Advisor’s deferral, suspension and/or waiver of its fees and expense reimbursements, to fund distributions, we may use and have used the Offering proceeds. Moreover, our board of directors may change this policy, in its sole discretion, at any time.acquisitions.
Potential future sources of capital include secured or unsecured financings from banks or other lenders, establishing additional lines of credit, proceeds from the sale of properties and undistributed cash flow. Note that, currently, we have not identified any additional sources of financing and there is no assurance that such sources of financings will be available on favorable terms or at all.
Acquisitions
Our Advisor evaluates potentialInterest expense increased approximately $74.2 million for the year ended 2015, compared to the prior year, due primarily to additional mortgage debt and the issuance of the Grace Preferred Equity Interests.
Acquisition and transaction related costs increased approximately $53.6 million due to costs associated with acquisitions, and forfeited deposits related to terminated acquisitions of real estateapproximately $19.1 million.
General and real estateadministrative expenses increased approximately $9.3 million, primarily attributable to our growth and certain expenses associated with our acquisitions.
Other income (expense) changed by approximately $0.6 million for the year ended 2015, compared to the prior year, due to the loss recorded in the 2015 period related assetsto the change in the fair value associated with the contingent consideration payable due in connection with the acquisition of the Barceló Portfolio.
Non-GAAP Financial Measures
This section includes non-GAAP financial measures, including funds from operations ("FFO"), modified funds from operations ("MFFO"), and engages in negotiations with sellershotel earnings before interest, taxes and borrowers on our behalf. Investors should be aware that after a purchase contractdepreciation and amortization ("Hotel EBITDA"). Descriptions of these non-GAAP measures and reconciliations to the most directly comparable GAAP measure, which is executed that contains specific terms, the property will not be purchased until the successful completion of due diligence and fully negotiated binding agreements. During this period, we may decide to temporarily invest any unused proceeds from common stock offerings in certain investments that could yield lower returns than the properties. These lower returns may affect our ability to make distributions.net income (loss), is provided below.
Funds from Operations and Modified Funds from Operations
Due to certain unique operating characteristics ofThe historical accounting convention used for real estate companies, as discussed below,assets requires straight-line depreciation of buildings and improvements, and straight-line amortization of intangibles, which implies that the value of a real estate asset diminishes predictably over time. We believe that, because real estate values historically rise and fall with market conditions, including, but not limited to, inflation, interest rates, the business cycle, unemployment and consumer spending, presentations of operating results for a REIT using the historical accounting convention for depreciation and certain other items may not be fully informative.
Because of these factors, the National Association of Real Estate Investment Trusts ("NAREIT"(“NAREIT”), an industry trade group, has promulgatedpublished a standardized measure of performance known as funds from operations ("FFO"),FFO, which we believe to be an appropriate supplemental measure to reflect the operating performance of a REIT. The use of FFO is recommended byused in the REIT industry as a supplemental performance measure. We believe FFO, which excludes certain items such as real estate-related depreciation and amortization, is an appropriate supplemental measure of a REIT’s operating performance. FFO is not equivalent to our net income or loss as determined under GAAP.
We define FFO, a non-GAAP financial measure, consistent with the standards established byset forth in the White Paper on FFO approved by the Board of Governors of NAREIT, as revised in February 2004 (the "White Paper"“White Paper”). The White Paper defines FFO as net income or loss computed in accordance with GAAP, but excluding gains or losses from sales of property and real estate and asset impairment writedowns,related impairments, plus real estate related depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures are calculated to reflect FFO. Our FFO calculation complies with NAREIT’s policy described above.
The historical accounting convention used for real estate assets requires straight-line depreciation of buildings and improvements, which implies that the value of real estate assets diminishes predictably over time, especially if such assets are not adequately maintained or repaired and renovated as required by relevant circumstances and/or expected by customers or franchisors for operational purposes in order to maintain the value disclosed. We believe that, since real estate values historically rise and fall with market conditions, including inflation, interest rates, the business cycle, unemployment and consumer spending, presentations of operating results for a REIT using historical accounting for depreciation may not be fully informative. Additionally, we believe it is appropriate to disregard impairment charges, as this is a fair value adjustment that is largely based on market fluctuations and assessments regarding general market conditions which can change over time. An asset will only be evaluated for impairment if certain impairment indicators exist and if the carrying, or book value, exceeds the total estimated undiscounted future cash flows (including operating revenues, net proceeds on the sale of the property, and any other ancillary cash flows at a property or group level under GAAP) from such asset. Determinations of whether impairment charges have been incurred are based partly on anticipated operating performance, because estimated undiscounted future cash flows from a property, including estimated future net operating revenues, net proceeds on the sale of the property, and certain other ancillary cash flows, are taken into account in determining whether an impairment charge has been incurred. While impairment charges are excluded from the calculation of FFO as described above, because impairments are based on estimated undiscounted future cash flows and the relatively limited term of our operations, it could be difficult to recover any impairment charges.
Historical accounting for real estate involves the use of GAAP. Any other method of accounting for real estate such as the fair value method cannot be construed to be any more accurate or relevant than the comparable methodologies of real estate valuation found in GAAP. Nevertheless, we believe that the use of FFO which excludes the impact of depreciation and amortization and impairments, provides a more complete understanding of our performance to investors and to management, and, when compared year over year, reflects the impact on our operations from trends in occupancy rates, ADR, operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income. However, FFO and modified funds from operations ("MFFO"), as described below, should not be construed to be more relevant or accurate than the current GAAP methodology in calculating net income or in its applicability in evaluating our operating performance. The method utilized to evaluate the value and performance of real estateloss as determined under GAAP should be construed as a more relevant measure of operational performance and considered more prominently than the non-GAAP FFO and MFFO measures and the adjustments to GAAP in calculating FFO and MFFO.GAAP.
There have been changesChanges in the accounting and reporting promulgations under GAAP that were put into effect in 2009 subsequent to the establishment of NAREIT'sNAREIT’s definition of FFO, such as the change to expense as incurred rather than capitalize and depreciate acquisition fees and expenses incurred for business combinations. Management believes thesecombinations or property acquisitions, has resulted in acquisition fees and expenses do not affect our overall long-term operating performance. Publiclybeing expensed under GAAP. These changes had a particularly significant impact on publicly registered, non-listed REITs, which typically have a significant amount of acquisition activity in the early part of their existence, particularly during the period when they are raising capital through ongoing initial public offerings and are substantially more dynamic during their initial yearstypically paying acquisition fees.
Because of investment and operation, but have a limited and defined acquisition period. Due to the abovethese factors, and other unique features of publicly registered, non-listed REITs, the Investment Program Association (the "IPA"“IPA”), an industry trade group, has published a standardized a measure of performance known as MFFO, which the IPA has recommended as a supplemental measure for publicly registered, non-listed REITs and which we believeREITs. MFFO is designed to be another appropriate supplemental measure to reflectreflective of the ongoing operating performance of publicly registered, non-listed REITs by adjusting for those costs that are more reflective of acquisitions and investment activity, along with other items the IPA believes are not indicative of the ongoing operating performance of a publicly registered, non-listed REIT havingREITs, such as straight-lining of rents as required by GAAP. We believe it is appropriate to use MFFO as a supplemental measure of operating performance because we believe that, when compared year over year, both before and after we have deployed all of our Offering proceeds and are no longer incurring a significant amount of acquisitions fees or other related costs, it reflects the characteristics described above.impact on our operations from trends in occupancy rates, ADR, operating costs, general and administrative
expenses, and interest costs, which may not be immediately apparent from net income or loss as determined under GAAP. MFFO is not equivalent to our net income or loss as determined under GAAP,
and MFFO may not be a useful measure of the impact of long-term operating performance on value if we continue to purchase a significant amount of new assets. We believe that, because MFFO excludes costs that we consider more reflective of investing activities and other non-operating items included in FFO and also excludes acquisition fees and expenses that affect operations only in periods in which properties are acquired, MFFO can provide, on a going forward basis, an indication of the sustainability (that is, the capacity to continue to be maintained) of our operating performance after the period in which we are acquiring properties and once our portfolio is stabilized. By providing MFFO, we believe we are presenting useful information that assists investors and analysts to better assess the sustainability of our operating performance after our offering has been completed and our portfolio has been stabilized. We also believe that MFFO is a recognized measure of sustainable operating performance by the non-listed REIT industry.GAAP.
We define MFFO, a non-GAAP measure, consistent with the IPA’s Guideline 2010-01, Supplemental Performance Measure for Publicly Registered, Non-Listed REITs: Modified Funds from Operations or the Practice Guideline,(the “Practice Guideline”) issued by the IPA in November 2010. The Practice Guideline defines MFFO as FFO further adjusted for the following items, as applicable, included in the determination of GAAP net income: acquisition and transaction related fees and expenses;expenses and other items. In calculating MFFO, we follow the Practice Guideline and exclude acquisition and transaction-related fees and expenses, amounts relating to deferred rent receivables and amortization of above and below market leases and liabilities (which are adjusted in order to reflect such payments from a GAAP accrual basis to a cash basis of disclosing the rent and lease payments);, accretion of discounts and amortization of premiums on debt investments;investments, mark-to-market adjustments included in net income;income, gains or losses included in net income from the extinguishment or sale of debt, hedges, foreign exchange, derivatives or securities holdings where trading of such holdings is not a fundamental attribute of the business plan, unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting, and after adjustments for consolidated and unconsolidated partnerships and joint ventures, with such adjustments calculated to reflect MFFO on the same basis. The accretion
We believe that, because MFFO excludes costs that we consider more reflective of discounts and amortization of premiums on debt investments, gains and losses on hedges, foreign exchange, derivatives or securities holdings, unrealized gains and losses resulting from consolidations, as well as other listed cash flow adjustments are adjustments made to net income in calculating the cash flows provided by operatingacquisition activities and in some cases, reflect gains or losses which are unrealized and may not ultimatelyother non-operating items, MFFO can provide, on a going-forward basis, an indication of the sustainability (that is, the capacity to continue to be realized.
Our MFFO calculation complies with the IPA’s Practice Guideline described above. In calculating MFFO, we exclude acquisition related expenses, fair value adjustmentsmaintained) of derivative financial instruments and the adjustments of such items related to noncontrolling interests. Under GAAP, acquisition fees and expenses are characterized asour operating expenses in determining operating net income duringperformance after the period in which the asset is acquired. These expenses are paid in cash by us and therefore such funds will not be available to invest in other assets, pay operating expenses or fund distributions. MFFO that excludes such costs and expenses would only be comparable to that of non-listed REITs that have completed their acquisition activities and have similar operating characteristics as us. Further, under GAAP, certain contemplated non-cash fair value and other non-cash adjustments are considered operating non-cash adjustments to net income in determining cash flow from operating activities. In addition, we view fair value adjustments of derivatives as items which are unrealized and may not ultimately be realized. We view both gains and losses from dispositions of assets and fair value adjustments of derivatives as items which are not reflective of ongoing operations and are therefore typically adjusted for when assessing operating performance. While we are responsible for managing interest rate, hedge and foreign exchange risk, we will retain an outside consultant to review all our hedging agreements. Inasmuch as interest rate hedges are not a fundamental part of our operations, we believe it is appropriate to exclude such gains and losses in calculating MFFO, as such gains and losses are not reflective of ongoing operations. The purchase ofacquiring properties and the corresponding expenses associated withonce our portfolio is stabilized. We also believe that process,MFFO is a key operational featurerecognized measure of our business plan to generate operational incomesustainable operating performance by the non-listed REIT industry and cash flows in order to make distributions to investors.
We believe that management’s useallows for an evaluation of MFFO and the adjustments used to calculate it allow us to present our performance in a manner that reflects certain characteristics that are unique to non-listed REITs, which have defined acquisition periods and targeted exit strategies, and allow us to evaluate our performance against other publicly registered, non-listed REITs. For example, acquisitions costs are funded from the proceeds
Presentation of this information is intended to provide useful information to investors as they compare the operating performance of different
Not all REITs, although it should be noted that not allincluding publicly registered, non-listed REITs, calculate FFO and MFFO the same way. Accordingly, comparisons with other REITs, including publicly registered, non-listed REITs, may not be meaningful. Furthermore, FFO and MFFO are not necessarily indicative of cash flow available to fund cash needs and should not be considered as an alternative to net income (loss) or income (loss) from continuing operations as determined under GAAP as an indication of our performance, as an alternative to cash flows from operations, as an indication of our liquidity, or indicative of funds available to fund our cash needs including our ability to make distributions to our stockholders.stockholders (although we are not currently paying cash distributions). FFO and MFFO should be reviewed in conjunction with other GAAP measurements as an indication of our performance. FFO and MFFO has limitations as ashould not be construed to be more relevant or accurate than the current GAAP methodology in calculating net income or in its applicability in evaluating our operating performance. The methods utilized to evaluate the performance measure in an ongoing offering such as our Offering where the price of a sharepublicly registered, non-listed REIT under GAAP should be construed as more relevant measures of common stock is a stated valueoperational performance and there is no NAV determination duringconsidered more prominently than the offering phase, exceptnon-GAAP measures, FFO and MFFO, and the adjustments to the extent we commenceGAAP in calculating NAV prior to the closing of our Offering.FFO and MFFO.
Neither the SEC, NAREIT, the IPA nor any other regulatory body or industry trade group has passed judgment on the acceptability of the adjustments that we use to calculate FFO or MFFO. In the future, NAREIT, the IPA or another industry trade group may publish updates to the White Paper or the Practice Guideline or the SEC NAREIT or another regulatory body may decide tocould standardize the allowable adjustments across the publicly registered, non-listed REIT industry and we would have to adjust our calculation and characterization of FFO or MFFO.MFFO accordingly.
The table below reflects the items deducted from or added to net lossincome (loss) attributable to stockholders in our calculation of FFO and MFFO for the periods indicated. In calculating our FFO and MFFO, we exclude the impact of amounts attributable to our non-controlling interests and the portion of the adjustment allocable to non-controlling interests.
|
| | | | | | | | | | | | | |
| | | | For the year ended December 31, 2016 | | For the year ended December 31, 2015 | | For the Period from March 21 2014 to December 31, 2014 |
| |
| | Net loss attributable to Hospitality Investors Trust, Inc. (in accordance with GAAP) | | $ | (72,247 | ) | | $ | (94,826 | ) | | $ | (14,841 | ) |
| | Depreciation and amortization | | 101,007 |
| | 68,500 |
| | 2,796 |
|
| | Impairment of long-lived assets | | 2,399 |
| | — |
| | — |
|
| | Adjustment to our share of depreciation and amortization for variable interest entities | | (38 | ) | | 147 |
| | 343 |
|
| | FFO attributable to stockholders | | $ | 31,121 |
| | $ | (26,179 | ) | | $ | (11,702 | ) |
| | Acquisition and transaction related costs | | 25,270 |
| | 64,513 |
| | 10,884 |
|
| | Change in fair value of contingent consideration | | 1,455 |
| | 781 |
| | — |
|
| | Change in fair value of equity interest | | — |
| | (219 | ) | | — |
|
| | Amortization of below-market lease obligation | | 398 |
| | 404 |
| | 340 |
|
| | MFFO attributable to stockholders | | $ | 58,244 |
| | $ | 39,300 |
| | $ | (478 | ) |
Hotel EBITDA
Hotel EBITDA is used by management as a performance measure and we believe it is useful to investors as a supplemental measure in evaluating our financial performance because it is a measure of hotel profitability that excludes expenses that we believe may not be indicative of the operating performance of our hotels. We believe that using Hotel EBITDA, which excludes the effect of non-operating expenses and non-cash charges, all of which are based on historical cost and may be of limited significance in evaluating current performance, facilitates comparison of hotel operating profitability between periods. For example, interest expense is not linked to the operating performance of a hotel and Hotel EBITDA is not affected by whether the financing is at the hotel level or corporate level. In addition, depreciation and amortization, because of historical cost accounting and useful life estimates, may distort operating performance at the hotel level. We believe that investors should consider our Hotel EBITDA in conjunction with net income (loss) and other required GAAP measures of our performance to improve their understanding of our operating results.
Hotel EBITDA, or similar measures, are commonly used as performance measures by other public hotel REITs. However, not all public hotel REITs calculate Hotel EBITDA, or similar measures, the same way. Hotel EBITDA should be reviewed in
conjunction with other GAAP measurements as an indication of our performance. Hotel EBITDA should not be construed to be more relevant or accurate than the current GAAP methodology in calculating net income or in its applicability in evaluating our operating performance.
The following table reconciles our net loss in accordance with GAAP to Hotel EBITDA for the years ended December 31, 2016, 2015, and 2014. (unaudited in thousands):
|
| | | | | | | | | | | | |
| | | For the Year Ended December 31, 2016 (unaudited) | | For the Year Ended December 31, 2015 (unaudited) | | For the Period from March 21 2014 to December 31, 2014 (unaudited) |
| Net loss attributable to Hospitality Investors Trust Inc. (in accordance with GAAP) | | $ | (72,247 | ) | | $ | (94,826 | ) | | $ | (14,841 | ) |
| Less: Net income attributable to non-controlling interest | | 315 |
| | 189 |
| | — |
|
| Net loss and comprehensive loss (in accordance with GAAP) | | $ | (71,932 | ) | | $ | (94,637 | ) | | $ | (14,841 | ) |
| Depreciation and amortization | | 101,007 |
| | 68,500 |
| | 2,796 |
|
| Impairment of long-lived assets | | 2,399 |
| | — |
| | — |
|
| Interest expense | | 92,264 |
| | 80,667 |
| | 5,958 |
|
| Acquisition and transaction related costs | | 25,270 |
| | 64,513 |
| | 10,884 |
|
| Other (income) expense | | (1,169 | ) | | 491 |
| | (103 | ) |
| Equity in earnings of unconsolidated entities | | (399 | ) | | (238 | ) | | (352 | ) |
| General and administrative | | 15,806 |
| | 11,621 |
| | 2,316 |
|
| Provision for income taxes | | 1,371 |
| | 3,106 |
| | 591 |
|
| Hotel EBITDA | | $ | 164,617 |
| | $ | 134,023 |
| | $ | 7,249 |
|
Cash Flows for the Year Ended December 31, 2016
Net cash provided by operating activities was $67.8 million for the year ended December 31, 2016. Cash provided by operating activities was positively impacted primarily by decreases in prepaid expenses and other assets and increases in accounts payable and accrued expenses, partially offset by decreases due to related parties.
Net cash used in investing activities was $111.9 million for the year ended December 31, 2016, primarily attributable to acquisitions and capital investments in our properties, partially offset by a decrease in restricted cash and proceeds from the sale of a hotel.
Net cash flow provided by financing activities was $40.0 million for the year ended December 31, 2016. Cash provided by financing activities was primarily impacted by proceeds from mortgage notes payable partially offset by cash distributions paid, redemptions of Grace Preferred Equity Interests and repayments of mortgage notes payable.
Cash Flows for the Year Ended December 31, 2015
Net cash provided by operating activities was $6.5 million for the year ended December 31, 2015. Cash provided by operating activities was positively impacted primarily by increases in accounts payable and accrued expenses, partially offset by acquisition and transaction related costs, increases in restricted cash, and increases in prepaids and other assets.
Net cash used in investing activities was $772.0 million for the year ended December 31, 2015, primarily attributable to acquisitions and capital investments in our properties.
Net cash flow provided by financing activities was $680.5 million for the year ended December 31, 2015. Cash provided by financing activities was primarily impacted by proceeds from the issuance of common stock and proceeds from mortgage notes payable, partially offset by redemptions of Grace Preferred Equity Interests and repayments of promissory and mortgage notes payable.
Cash Flows for the Year Ended December 31, 2014
Net cash used in operating activities for the year ended December 31, 2014 was $9.7 million. Cash outflows were primarily driven by a net loss of $14.8 million, which was, in turn, largely the result of the amount of transaction fees related to the acquisition of the Barceló Portfolio and the Grace Portfolio and an increase in prepaid expenses and other assets of $7.9 million as a result of prepaid acquisition expenses for the Grace Portfolio and the receivable from the Former Dealer Manager for the shares sold on the last day of the year of $1.6 million. These were offset by depreciation and amortization of $2.8 million, an increase in due to related parties of $5.0 million, mainly related to services provided to us related to the Grace Portfolio and an increase in accounts payable and accrued expenses of $5.0 million related to the deferred payment and contingent consideration from the acquisition of the Barceló Portfolio.
Net cash used in investing activities for the year ended December 31, 2014 was $122.1 million. Cash outflows were primarily driven by the acquisition of the Barceló Portfolio for $41.4 million, the deposit on the Grace Portfolio of $75.0 million, an increase in restricted cash of $2.0 million related to requirements of the new mortgage note payable and $3.7 million of improvements at the properties, primarily due to renovations at the Stratford Homewood Suites.
Net cash provided by financing activities for the year ended December 31, 2014 was $263.6 million. Cash inflows were primarily driven by proceeds from the mortgage note payable of $45.5 million and proceeds from the issuance of common stock of $249.6 million. These were offset by the payment of offering costs of $28.1 million and the payment of deferred financing fees of $2.6 million. During the period from March 21January 1 to December 31, 2014 (in thousands)(1):2016, we received proceeds of $40.5 million from an affiliate note payable to fund the deposit on the Grace Acquisition which was then repaid in full.
|
| | | | |
| | | For the Period from March 21 to December 31, 2014 |
| | |
| Net loss (in accordance with GAAP) | | $ | (14,841 | ) |
| Depreciation and amortization | | 2,796 |
|
| Depreciation and amortization of unconsolidated entities | | 343 |
|
| FFO | | (11,702 | ) |
| Acquisition fees and expenses | | 10,884 |
|
| Amortization of below-market lease obligation | | 340 |
|
| MFFO | | $ | (478 | ) |
(1) The resultsAs of December 31, 2016, we had cash on hand of $42.8 million. Under certain of our debt obligations, we are required to maintain minimum liquidity of $20 million to comply with financial covenants and we expect to satisfy this covenant through liquidity we maintain at individual hotels as well as through other sources.
As of December 31, 2016, we had principal outstanding of $1.4 billion under our indebtedness plus an additional $290.2 million in liquidation value of Grace Preferred Equity Interests (which are treated as indebtedness for accounting purposes), most of which was incurred in acquiring the properties we currently own. As of December 31, 2016, we were required to redeem 50.0% of the Grace Preferred Equity Interests originally issued, or an additional $66.7 million in liquidation value, by February 27, 2018, and we were required to redeem the remaining $223.5 million in liquidation value by February 27, 2019. Following our redemption of $47.3 million in liquidation value of Grace Preferred Equity Interests with a portion of the proceeds from the Initial Closing, we are required to redeem an additional $19.4 million in liquidation value by February 27, 2018, and the remaining $223.5 million in liquidation value by February 27, 2019.
As of December 31, 2016, we have $895.4 million in principal outstanding under the Assumed Grace Indebtedness that will mature in 2017, which we may extend at our option if certain conditions are met, including compliance with a minimum debt yield test. We have satisfied the minimum debt yield test and expect to satisfy the other conditions for extension of the Assumed Grace Indebtedness until May 1, 2018. There can be no assurance, however that we will be able to meet the extension conditions for the Predecessorfinal extension period. See Note 5 – Mortgage Notes Payable and Note 6 –Promissory Notes Payable to our accompanying consolidated/combined financial statements included in this Annual Report on Form 10-K for further information on this indebtedness. See also “Contractual Obligations” below for a tabular presentation of maturity dates of our debt and the Grace Preferred Equity Interests as of December 31, 2016.
We intend to utilize $26.9 million of the proceeds from the Initial Closing to fund a portion of the closing consideration for the seven hotels to be purchased in our Pending Acquisition on April 27, 2017. We will require additional debt or equity financing to fund the remaining $32.4 million in closing consideration for the seven hotels to be purchased in our Pending Acquisition on April 27, 2017. Summit has informed us that the hotel is scheduled to be sold on October 24, 2017 is subject to a pending purchase and sale agreement with a third party, but we will require additional debt or equity financing to fund the remaining $10.5 million of the closing consideration for the one hotel to be purchased October 24, 2017 if Summit does not sell it to a third party and we are ultimately required to purchase it. There can be no assurance such financing will be available on favorable terms, or at all. Moreover, such financing may only be obtained subject to the Brookfield Approval Rights, and there can be no assurance this prior approval will be provided when requested, or at all. Any failure to complete our Pending Acquisition in whole or in part could cause us to default under the reinstated purchase agreement and forfeit all or a portion of the $10.5 million deposit. The outstanding principal of the Summit Loan, which was $26.7 million following the Initial Closing, and any accrued interest thereon will become immediately due and payable at closing if we close our Pending Acquisition before February 11, 2018, the maturity date of the Summit Loan. We intend to utilize $23.7 million of the proceeds from the Initial Closing to fund this repayment.
Our major capital requirements following the Initial Closing include capital expenditures required pursuant to our PIPs and related reserve deposits, interest and principal payments under our indebtedness, distributions and mandatory redemptions
payable with respect to the Grace Preferred Equity Interests and distributions payable with respect to Class C Units. We are also required to fund up to $69.7 million in closing consideration for our Pending Acquisition (including amounts we intend to finance), and failure to do so could cause us to forfeit up to $10.5 million in non-refundable earnest money deposits previously paid.
Prior to the suspension of our IPO in November 2015, we depended, and expected to continue to depend, in substantial part on proceeds from our IPO to meet our major capital requirements. Our IPO terminated in accordance with its terms in January 2017.
Because we required funds in addition to operating cash flow and cash on hand to meet our capital requirements, we undertook and evaluated a variety of transactions to generate additional liquidity to address our capital requirements, including changing our distribution policy, extending certain of our obligations under PIPs, extending obligations to pay contingent consideration, marketing and selling assets and seeking debt or equity financing transactions. In January 2017, we entered into the SPA and the Framework Agreement, and the consummation of the transactions contemplated by these agreements in March 2017 has, and is expected to continue to, generate additional liquidity through the sale of Class C Units to the Brookfield Investor at the Initial Closing and at Subsequent Closings, as well as cost savings realized as part of our transition to self-management through reduced property management fees and the elimination of external asset management fees to the Advisor (offset by expenses previously borne by the Advisor that will now be incurred directly by us as a self-managed company).
Of the $135.0 million in gross proceeds from the sale of Class C Units at the Initial Closing, we have retained $26.9 million that may be used to pay a portion of the closing consideration for our Pending Acquisition, $23.7 million that may be used to repay the Summit Loan and $15.0 million that may be used to fund PIPs and related lender reserves. Following the Initial Closing, the Brookfield Investor has agreed to purchase additional Class C Units at Subsequent Closings in an aggregate amount not been presentedto exceed $265.0 million. Generally, the proceeds from the sale of Class C Units at Subsequent Closings may be used to redeem the Grace Preferred Equity Interests required to be redeemed at or around the time they are required to be redeemed, with the balance available to fund PIPs and related lender reserves, repay amounts then outstanding with respect to mortgage debt principal and interest and working capital. Following the Initial Closing, $242.9 million in liquidation value of Grace Preferred Equity Interests was outstanding, and, accordingly, $22.1 million in Class C Units was available to be issued at Subsequent Closings to meet these other capital requirements.
We believe these sources of additional liquidity will allow us to meet our existing capital requirements, although there can be no assurance the amounts actually generated will be sufficient for these purposes. The Subsequent Closings are subject to conditions, and may not be completed on their current terms, or at all, and the cost savings from our transition to self-management may not be realized to the extent we are anticipating, or at all. Accordingly, we may require additional liquidity to meet our capital requirements, which may not be available on favorable terms or at all. Any additional debt or equity financing consisting of common stock, preferred stock or warrants, or any combination thereof to meet our capital requirements may also only be obtained subject to the Brookfield Approval Rights, and there can be no assurance this prior approval will be provided when requested, or at all. If obtained, any additional or alternative debt or equity financing could be on terms that would not be favorable to us or our stockholders, including high interest rates, in the case of debt financing, and substantial dilution, in the case of equity issuances or convertible securities. Moreover, because we are required to use 35% of the proceeds from the issuance of interests in us or any of our subsidiaries, to redeem the Grace Preferred Equity Interests at par, up to a maximum of $350 million in redemptions for any 12-month period, it may be more difficult to obtain equity financing from an alternative source in an amount required to meet our capital requirements.
As of December 31, 2016, our loan-to-value ratio was 72% including the Grace Preferred Equity Interests, which are treated as indebtedness for accounting purposes, and our loan-to-value ratio excluding the PredecessorGrace Preferred Equity Interests was 60%.
Under our charter, the maximum amount of our total indebtedness may not exceed 300% of our total “net assets” (which is generally defined in our charter as our assets less our liabilities) as of the date of any borrowing, which is generally equal to approximately 75% of the cost of our investments; however, we may exceed that limit if such excess is approved by a REIT.majority of our independent directors and disclosed to stockholders in our next quarterly report following that borrowing, along with the justification for exceeding such limit. This charter limitation, however, does not apply to individual real estate assets or investments. In all events, we expect that our secured and unsecured borrowings will be reasonable in relation to the net value of our assets and will be reviewed by our board of directors at least quarterly.
Prior to our entry into agreements related to our acquisition and financing activities during 2014 and 2015, a majority of our independent directors waived the total portfolio leverage requirement of our charter with respect to acquisition and financing activities should such total portfolio leverage exceed 300% of our total "net assets" in connection with such acquisition and financing activities. Our total portfolio leverage (which includes the Grace Preferred Equity Interests) has significantly exceeded this 300% limit at times. As of December 31, 2016, our total portfolio leverage was 236%.
Pursuant to the Brookfield Approval Rights, prior approval of any debt incurrence is required except for as specifically set forth in the Annual Business Plan and the refinancing of existing debt in a principal amount not greater than the amount to be refinanced and on terms no less favorable to us. We are also subject to certain covenants, such as debt service coverage ratios and negative pledges, in our existing indebtedness that restrict our ability to make future borrowings.
The form of our indebtedness may be long term or short term, secured or unsecured, fixed or floating rate or in the form of a revolving credit facility, repurchase agreements or warehouse lines of credit. We will seek to obtain financing on our behalf on the most favorable terms available.
Distributions
On February 3, 2014 our board of directors declared distributions payable to stockholders of record each day during the applicable month at a rate equal to $0.00465753425$0.0046575343 per day (or $0.0046448087 if a 366-day year), or $1.70 per annum, per share of common stock. The first distribution was paid in May 2014 to holders of record holders in April 2014. The
To date, we have funded all of our cash distributions are payable bywith proceeds from our IPO, which was suspended on November 15, 2015 and terminated on January 7, 2017, the fifth day followingthird anniversary of the commencement of our IPO, it terminated in accordance with its terms.
In March 2016, our board of directors changed the distribution policy, such that distributions paid with respect to April 2016 were paid in shares of common stock instead of cash to all stockholders, and not at the election of each month endstockholder. Accordingly, we paid a cash distribution to stockholders of record at the close of business each day during the prior month.quarter ended March 31, 2016, but distributions for subsequent periods have been paid in shares of common stock. Distributions for the quarter ended June 30, 2016 were paid in common stock in an amount equivalent to $1.70 per annum, divided by $23.75.
The below table showsOn July 1, 2016, in connection with its determination of Estimated Per-Share NAV, our board of directors revised the distributions paidamount of the distribution to $1.46064 per share per annum, equivalent to a 6.80% annual rate based on shares outstanding during the year endedEstimated Per-Share NAV, automatically adjusting if and when we publish an updated Estimated Per-Share NAV. Distributions for the period from July 1, 2016 to December 31, 2014 (in thousands). |
| | | | | | | | | | | |
| Payment Date | | Weighted Average Shares Outstanding (1) | | Amount Paid in Cash | | Amount Issued under DRIP |
| January 2, 2014 | | — |
| | $ | — |
| | $ | — |
|
| February 3, 2014 | | 9 |
| | — |
| | — |
|
| March 3, 2014 | | 88 |
| | — |
| | — |
|
| April 1, 2014 | | 111 |
| | — |
| | — |
|
| May 1, 2014 | | 182 |
| | 21 |
| | 5 |
|
| June 2, 2014 | | 378 |
| | 41 |
| | 15 |
|
| July 2, 2014 | | 637 |
| | 61 |
| | 31 |
|
| August 1, 2014 | | 1,457 |
| | 141 |
| | 83 |
|
| September 2, 2014 | | 2,715 |
| | 238 |
| | 167 |
|
| October 1, 2014 | | 4,252 |
| | 342 |
| | 264 |
|
| November 3, 2014 | | 6,189 |
| | 486 |
| | 415 |
|
| December 1, 2014 | | 8,257 |
| | 620 |
| | 540 |
|
| Total | | | | $ | 1,950 |
| | $ | 1,520 |
|
(1) RepresentsOn January 13, 2017, in connection with our entry into the weighted averageSPA, we suspended paying distributions to our stockholders entirely and suspended our DRIP.
Following the Initial Closing, pursuant to the terms of the Redeemable Preferred Share, prior approval of at least one of the Redeemable Preferred Directors is required before we can declare or pay any distributions or dividends to our common stockholders, except for cash distributions equal to or less than $0.525 per annum per share, and, pursuant to the limited partnership agreement of the OP, prior approval of the majority of the then outstanding Class C Units is required before we can declare or pay any distributions or dividends with respect to OP Units (each of which correspond to one share of our common stock), except for cash distributions equal to or less than $0.525 per annum per OP Units. There can be no assurance that we will resume paying distributions in cash or shares outstandingof common stock or be able to pay distributions in cash in the future. Our ability to make future cash distributions will depend on our future cash flows and may be dependent on our ability to obtain additional liquidity, which may not be available on favorable terms, or at all.
Following the Initial Closing, commencing on March 31, 2017, holders of Class C Units are entitled to receive, with respect to each Class C Unit, fixed, quarterly cumulative cash distributions at a rate of 7.50% per annum from legally available funds. If we fail to pay these cash distributions when due, the per annum rate will increase to 10% until all accrued and unpaid distributions required to be paid in cash are reduced to zero.
Holders of Class C Units are also entitled to receive, with respect to each Class C Unit, a fixed, quarterly, cumulative distribution payable in Class C Units at a rate of 5% per annum. Upon our failure to redeem the Brookfield Investor when required to do so pursuant to the limited partnership agreement of the OP, the 5% per annum PIK Distribution rate will increase to a per annum rate of 7.50%, and would further increase by 1.25% per annum for the month relatednext four quarterly periods thereafter, up to a maximum per annum rate of 12.5%.
The number of Class C Units delivered in respect of the PIK Distributions on any distribution payment date will be equal to the respective payment date.number obtained by dividing the amount of PIK Distribution by the conversion price applicable with respect to Class C Units, which was $14.75. This conversion price is subject to anti-dilution and other adjustments upon the occurrence of certain events and transactions.
Following the Initial Closing, the holders of Class C Units are also entitled to tax distributions under the certain limited circumstances described in the limited partnership agreement of the OP.
The following table shows the sources for the payment of cash distributions to common stockholders for the years presented (in thousands)(1):
|
| | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2016 | | 2015 |
| Distributions: | | | | | | | | |
| Cash distributions paid | | $ | 11,206 |
| | | | $ | 19,153 |
| | |
| Cash distributions reinvested | | 9,468 |
| | | | 18,150 |
| | |
| Total distributions | | $ | 20,674 |
| | | | $ | 37,303 |
| | |
| Source of distribution coverage: | | | | | | | | |
| Cash flows provided by operations | | $ | — |
|
| — | % | | $ | — |
| | — | % |
| Offering Proceeds from issuance of common stock | | $ | 11,206 |
|
| 54.2 | % | | $ | 19,153 |
| | 51.3 | % |
| Offering proceeds reinvested in common stock issued under DRIP | | $ | 9,468 |
|
| 45.8 | % | | $ | 18,150 |
| | 48.7 | % |
| Total sources of distributions | | $ | 20,674 |
|
| 100.0 | % | | $ | 37,303 |
| | 100.0 | % |
| Cash flows provided by operations (GAAP) | | $ | 67,846 |
| | | | $ | 6,507 |
| | |
| Net loss (GAAP) | | $ | (71,932 | ) | | | | $ | (94,637 | ) | | |
For the period from our inception in July 2013 through May 2016 when we commenced paying distributions in common stock, we paid distributions in cash, all of which were funded with proceeds from our IPO and proceeds realized from the sale of common stock issued pursuant to our DRIP.
The below table shows the total distributions paid on shares outstanding in cash and shares of our common stock valued at either $23.75 price per share, or $21.48 price per share subsequent to establishing our Estimated Per-Share NAV, for the year ended December 31, 2016 (in thousands).
|
| | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2014 | | 2013 |
| Distributions: | | | | | | | | |
| Cash distributions paid | | $ | 1,950 |
| | | | $ | — |
| | |
| Distributions reinvested | | 1,520 |
| | | | — |
| | |
| Total distributions | | $ | 3,470 |
| | | | $ | — |
| | |
| Source of distribution coverage: | | | | | | | | |
| Cash flows provided by operations | | $ | — |
| | — | % | | $ | — |
| | — | % |
| Proceeds from issuance of common stock, including offering proceeds which were reinvested in common stock issued pursuant to the DRIP | | 3,470 |
| | 100.0 | % | | — |
| | — | % |
| Total sources of distributions | | $ | 3,470 |
| | 100.0 | % | | $ | — |
| | — | % |
| Cash flows used in operations (GAAP) | | $ | (9,650 | ) | | | | $ | — |
| | |
| Net loss (GAAP) | | $ | (14,841 | ) | | | | $ | — |
| | |
|
| | | | | | | | |
| Payment Date | | Weighted Average Shares Outstanding (1) | | Amount Paid in Cash | | Amount Reinvested under DRIP | | Issuance of Common Stock for Distributions |
| January 4, 2016 | | 36,414 | | $2,780 | | $2,448 | | — |
| February 2, 2016 | | 36,530 | | $2,855 | | $2,393 | | — |
| March 1, 2016 | | 36,627 | | $2,688 | | $2,233 | | — |
| April 1, 2016 | | 36,728 | | $2,880 | | $2,394 | | — |
| May 2, 2016 | | 36,936 | | $3 | | — | | $5,118 (2) |
| June 1, 2016 | | 37,167 | | — | | — | | $5,318 (3) |
| July 1, 2016 | | 37,392 | | — | | — | | $5,176 (4) |
| August 1, 2016 | | 37,614 | | — | | — | | $4,626 (5) |
| September 1, 2016 | | 37,834 | | — | | — | | $4,657(6) |
| October 1, 2016 | | 38,043 | | — | | — | | $4,528(7) |
| November 1, 2016 | | 38,266 | | — | | — | | $4,706(8) |
| December 1, 2016 | | 38,482 | | — | | — | | $4,585(9) |
| Total | | | | $11,206 | | $9,468 | | $38,714 |
| |
(1) Represents the weighted average shares outstanding for the period related to the respective payment date
|
(2) Represents 215,481 shares of common stock valued at $23.75 per share |
(3) Represents 223,939 shares of common stock valued at $23.75 per share |
(4) Represents 217,946 shares of common stock valued at $23.75 per share |
(5) Represents 215,323 shares of common stock valued at $21.48 per share |
(6) Represents 216,616 shares of common stock valued at $21.48 per share and 151 shares of common stock valued at $23.75 |
(7) Represents 210,824 shares of common stock valued at $21.48 per share |
(8) Represents 219,083 shares of common stock valued at $21.48 per share |
(9) Represents 213,460 shares of common stock valued at $21.48 per share |
(1) The results for the Predecessor were not included in the above table as these results would not impact the sources
The following table compares cumulative distributions paid to cumulative net income (in accordance with GAAP) for the period from July 25, 2013 (date of inception) through December 31, 20142016 (in thousands)(1):
| | | | | For the Period from July 25, 2013 (date of inception) to | | For the Period from July 25, 2013 (date of inception) to |
| | | December 31, 2014 | | December 31, 2016 |
| Distributions paid: | | | | |
| Common stockholders in cash and DRIP | | $ | 3,470 |
| |
| Common stockholders in cash (including distributions reinvested in DRIP) | | | $ | 61,447 |
|
| Issuance of common stock for distributions | | | 38,714 |
|
| Total distributions paid | | $ | 3,470 |
| | $ | 100,161 |
|
| | | |
| | |
|
| Reconciliation of net loss: | | |
| | |
|
| Revenues | | $ | 34,871 |
| | $ | 1,080,647 |
|
| Depreciation and amortization | | (2,796 | ) | | (172,303 | ) |
| Impairment of long lived Asset | |
| $ | (2,399 | ) |
| Other operating expenses | | (27,622 | ) | | (774,758 | ) |
| Acquisition and transaction related | | (10,884 | ) | | (100,667 | ) |
| Other non-operating expenses | | (7,825 | ) | | (206,862 | ) |
| Income tax | | (591 | ) | | (5,068 | ) |
| Net loss (in accordance with GAAP) | | $ | (14,847 | ) | | $ | (181,410 | ) |
| | | | | |
| Cash flows used in operations | | $ | (9,651 | ) | |
| FFO | | $ | (11,708 | ) | |
| Cash flows provided by operations | | | $ | 64,703 |
|
| FFO attributable to stockholders | | | $ | (6,766 | ) |
(1) The results for the Predecessor were not included in the above table as these results would not impact the sources of distributions.
For the period from our inception in July 2013 through December 31, 2014, we funded all of our distributions with proceeds from our IPO, including proceeds from our IPO which were reinvested in common stock issued pursuant to our DRIP. To the extent we pay distributions in excess of cash flows provided by operations, our stockholders' investment in our common stock may be adversely impacted. See "Risk Factors - Distributions paid from sources other than our cash flows from operations, particularly from proceeds of our IPO, will result in us having fewer funds available for the acquisition of properties and other real estate-related investments and may dilute our stockholders' interests in us, which may adversely affect our ability to fund future distributions with cash flows from operations and may adversely affect our stockholders' overall return." under Item 1A in this Annual Report on Form 10-K.
Contractual Obligations
We have the following contractual obligations as of December 31, 2014:2016:
Debt Obligations:
The following is a summary of our mortgage notenotes payable obligationobligations as of December 31, 20142016 (in thousands):
|
| | | | | | | | | | | | | | | | |
| | | Total | | 2015 | | 2016-2018 | | 2019 |
| Principal payments due on mortgage note payable | | $ | 45,500 |
| | $ | — |
| | $ | — |
| | $ | 45,500 |
|
| Interest payments due on mortgage note payable | | 8,598 |
| | 1,984 |
| | 5,956 |
| | 658 |
|
| Total | | $ | 54,098 |
| | $ | 1,984 |
| | $ | 5,956 |
| | $ | 46,158 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | | Total | | 2017 | | 2018-2020 | | 2021 | | Thereafter |
| Principal payments due on mortgage notes payable | | $ | 1,418,913 |
| | $ | — |
| | $ | 1,418,913 |
| | $ | — |
| | $ | — |
|
| Interest payments due on mortgage notes payable | | 176,387 |
| | 59,133 |
| | 117,254 |
| | — |
| | — |
|
| Total | | $ | 1,595,300 |
| | $ | 59,133 |
| | $ | 1,536,167 |
| | $ | — |
| | $ | — |
|
Interest payments
Mortgage notes payable due on our mortgage note payable are held in a restricted depository account at the lender during the month prior to being due to the lender.dates assume exercise of all borrower extension options.
The following is a summary of our promissory notesnote payable obligations as of December 31, 20142016 (in thousands):
|
| | | | | | | | | | | | | | | | |
| | | Total | | 2015 | | 2016-2018 | | 2019 |
Principal payments due on promissory notes payable (1) | | $ | 64,849 |
| | $ | 63,074 |
| | $ | — |
| | $ | 1,775 |
|
Interest payments due on promissory notes payable (1) | | 2,157 |
| | 1,880 |
| | 243 |
| | 34 |
|
| Total | | $ | 67,006 |
| | $ | 64,954 |
| | $ | 243 |
| | $ | 1,809 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | | Total | | 2017 | | 2018-2020 | | 2021 | | Thereafter |
| Principal payments due on promissory note payable | | $ | 26,029 |
| | $ | 1,057 |
| | $ | 24,972 |
| | $ | — |
| | $ | — |
|
| Interest payments due on promissory note payable | | 4,394 |
| | 2,070 |
| | 2,324 |
| | — |
| | — |
|
| Total | | $ | 30,423 |
| | $ | 3,127 |
| | $ | 27,296 |
| | $ | — |
| | $ | — |
|
(1) The promissory notes for the acquisition
Promissory note payable due dates assume exercise of all borrower extension options.
In January 2017, we entered into an amendment of the Barceló PortfolioPending Acquisition with Summit (the "Barceló Promissory Note"“Summit Amendment”) originally consisted of. Concurrent with our entry into the Portfolio Owned Assets and Joint Venture Assets promissory notes which had a maturity date of within ten business days upon the Company raising equal to or greater than $150.0 million in common equity from the Offering. During the year ended December 31, 2014, the CompanySummit Amendment, we entered into an amendment to the Portfolio Owned AssetsSummit Loan (the “Loan Amendment”). Pursuant to the Loan Amendment, the maturity date of the Summit Loan was extended from February 11, 2017 to February 11, 2018, and Joint Venture Assets promissory notes wherebyadditional amortization payments totaling $2.0 million were scheduled to occur in the promissory notes were combined into one note with anamount of $1.0 million each on the last day of August and September 2017. If the closing of our purchase of the seven hotels under the Pending Acquisition occurs prior to February 11, 2018, then the outstanding principal amount of $63.1 million.the Summit Loan and any accrued interest thereon will become immediately due and payable in full at closing.
Concurrent with our entry into the Summit Amendment and the Loan Amendment, we and Summit entered into a new loan agreement pursuant to which Summit agreed to loan us an additional $3.0 million (the “Additional Loan Agreement”) as consideration for the Summit Amendment. The maturity date of the Barceló Portfolio promissory notesloan under the Additional Loan Agreement (the “Additional Loan”) is within ten business days upon our company raising equalJuly 31, 2017, however if the sale of the seven hotels to or greater than $70.0be sold pursuant to the Pending Acquisition on April 27, 2017 is completed on that date, the entire principal amount of the Additional Loan will be deemed paid in full and the interest accrued thereon will become immediately due and payable at closing. We must make amortization payments in the amount of $1.0 million in gross proceeds fromon the Offering in common equity from the Offering after the closinglast day of May, June and July 2017.
The following is a summary of the Grace Acquisition, and paymentPreferred Equity Interests, our mandatorily redeemable preferred securities, as of all acquisition related expenses (including payments to our Advisor and its affiliates), which has not yet occurred. There are no principal payments under the Barceló Promissory Note payable for 2014 and 2015, unless the contingent payment feature above is satisfied by raising equal to or greater than $70.0 million in common equity from the Offering after the closing of the Grace Acquisition and payment of all acquisition related expenses (including payments to our Advisor and its affiliates). We anticipate the full principal repayment will occur by the end of the second quarter of 2015.December 31, 2016 (in thousands):
|
| | | | | | | | | | | | | | | | | | | | |
| | | Total | | 2017 | | 2018-2020 | | 2021 | | Thereafter |
| Mandatory redemptions due on mandatorily redeemable preferred securities | | $ | 290,188 |
| | $ | — |
| | $ | 290,188 |
| | $ | — |
| | $ | — |
|
| Monthly distributions due on mandatorily redeemable preferred securities | | 44,589 |
| | 23,215 |
| | 21,374 |
| | — |
| | — |
|
| Total | | $ | 334,777 |
| | $ | 23,215 |
| | $ | 311,562 |
| | $ | — |
| | $ | — |
|
Lease Obligations:
The following table reflects the minimum base rental cash payments due from us over the next five years and thereafter for our lease arrangements as of December 31, 20142016 (in thousands):
|
| | | | | | | | | | | | | | | | | | | | |
| | | Total | | 2015 | | 2016-2018 | | 2019 | | Thereafter |
| Lease payments due on Georgia Tech Hotel lease | | $ | 82,133 |
| | $ | 4,400 |
| | $ | 13,200 |
| | $ | 4,400 |
| | $ | 60,133 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | | Total | | 2017 | | 2018-2020 | | 2021 | | Thereafter |
| Lease payments due | | $ | 107,867 |
| | $ | 5,144 |
| | $ | 15,709 |
| | $ | 5,271 |
| | $ | 81,743 |
|
Property Improvement Plan Reserve Deposits:
The following table reflects estimated PIP reserve deposits that are required under our mortgage debt obligations over the next five years as of December 31, 2016 (in thousands):
|
| | | | | | | | | | | | | | | | | | | | |
| | | Total | | 2017 | | 2018-2020 | | 2021 | | Thereafter |
| PIP reserve deposits due | | $ | 34,134 |
| | $ | 24,128 |
| | $ | 10,006 |
| | $ | — |
| | $ | — |
|
Election as a REIT
We intend to electelected and qualifyqualified to be taxed as a REIT commencing with our taxable year ended December 31, 2014. In order to continue to qualify as a REIT, we must annually distribute to our stockholders 90% of our REIT taxable income (which does not equal net income as calculated in accordance with GAAP), determined without regard to the deduction for dividends paid and excluding net capital gain. If we qualify asAs a REIT, we generally will not be subject to U.S. federal income tax on that portion of our taxable income or capital gain which is distributed to our stockholders. OurEach of our hotels areis leased to a TRStaxable REIT subsidiary which is owned by the OP. A TRStaxable REIT subsidiary is subject to federal, state and local income taxes. If we fail to remain qualified for taxation purposes as a REIT in any subsequent year after electing REIT status and do not qualify for certain statutory relief
provisions, our income for that year will be taxed at regular corporate rates, and we may be precluded from qualifying for treatment as a REIT for the four-year period following our failure to qualify as a REIT. Such an event could materially and adversely affect our net income and cash available for distribution. However, we believe that we will be organized and will operate in a manner that will enable us to qualify for treatment as a REIT beginning with our taxable year ended December 31, 2014 and we intend to continue to operate so as to remain qualified as a REIT thereafter.REIT.
Inflation
We may be adversely impacted by increases in operating costs due to inflation that may not be offset by increased room rates.
Related Party Transactions and Agreements
We have entered into agreements with affiliates of our Sponsor, whereby we may pay certain fees or reimbursements to our Advisor, its affiliates and entities under common control with our Advisor in connection with acquisition and financing activities, sales and maintenance of common stock under our Offering, transfer agency services, asset and property management services and reimbursement of operating and offering related costs. See Note 1211 - Related Party Transactions and Arrangements to our accompanying consolidated/combined financial statements included in this Annual Report on Form 10-K for a discussion of the various related party transactions, agreements and fees.report.
In connection with the Grace Acquisition, we estimate we will pay approximately $46.0 million to our Advisor, its affiliates and entities under common control with our Advisor.
Also in connection with the financing of the Grace Acquisition and the acquisition of the Barceló Portfolio, certain individual principals of the parent of our Sponsor, namely Nicholas Schorsch, William Kahane, Michael Weil and Peter Budko, were required to provide certain personal guarantees and indemnities.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The market risk associated with financial instruments and derivative financial instruments is the risk of loss from adverse changes in market prices or interest rates. Our long-term debt, which consists of secured financings, bears interest at fixed and variable rates. Our interest rate risk management objectives are to limit the impact of interest rate changes in earnings and cash flows and to lower our overall borrowing costs. To achieve these objectives, from time to time, we may enter into interest rate hedge contracts such as swaps, collars and treasury lock agreements in order to mitigate our interest rate risk with respect to various debt instruments. We would not hold or issue these derivative contracts for trading or speculative purposes. We may also be exposed to foreign currency fluctuations as a result of any investments in hotels located in Canada and Mexico.
As of December 31, 2014,2016, we had not fixed the interest rate for $1.13 billion of our debt includedsecured variable-rate debt. As a fixed-rate secured mortgage financing, with a carrying value and fair valueresult, we are subject to the potential impact of $45.5 million and $44.6 million, respectively, and fixed-rate promissory note financing, with a carrying value and fair value of $64.8 million. Changes in marketrising interest rates, which could negatively impact our profitability and cash flows. In order to mitigate our exposures to changes in interest rates, we have entered into interest rate cap agreements with respect to approximately $1.13 billion of our variable-rate debt. The estimated impact on our fixed-rate debt impact the fair valueannual results of the notes, but they have no impact on interest incurred or cash flow. For instance, if interest rates riseoperations, of an increase of 100 basis points and our fixed rate debt balance remains constant, we expect the fair value of our obligation to decrease, the same way the price of a bond declines as interest rates rise. The sensitivity analysis related to our fixed–rate debt assumes an immediate 100 basis point move in interest rates, from their December 31, 2014 levels, with all other variables held constant. Awould be to increase annual interest expense by approximately $11.5 million. Decreasing interest rates by the lesser of 100 basis point increase in marketpoints or to the lowest possible rate, but to no lower than a zero percent variable rate, would decrease annual interest rates would result in a decrease in the fair value of our fixed-rate mortgage debtexpense by $1.7$7.5 million. A 100 basis point decrease in market interest rates would result in an increase in the fair value of our fixed-rate mortgage debt by $1.8 million.
These amounts were determined by considering theThe estimated impact of hypothetical interest rate changes on our borrowing costs, and, assumingassumes no other changes in our capital structure. As the information presented above includes only those exposures that existedexist as of December 31, 2014,2016, it does not consider those exposures or positions arisingthat could arise after that date. The information represented herein has limited predictive value. Future actual realized gains or losses with respect to interest rate fluctuations will depend on cumulative exposures, hedging strategies employed and the magnitude of the fluctuations.
Item 8. Financial Statements and Supplementary Data.
See our ConsolidatedConsolidated/Combined Financial Statements beginning on page F-1 of this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Disclosure Controls and Procedures
In accordance with Rules 13a-15(b)We maintain disclosure controls and 15d-15(b) ofprocedures that are designed to ensure that information required to be disclosed in our periodic reports pursuant to the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required financial disclosure.
We carried out an evaluation, under the supervision and with the participation of our Chief Executive Officermanagement, including our chief executive officer and Chief Financial Officer, has evaluatedchief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of thepursuant to Exchange Act)Act Rule 13a - 15(e) as of the end of the period covered by this Annualreport. Based upon this evaluation and as a result of the material weakness described below under “Management’s Report on Form 10-K. Based on such evaluation,Internal Control Over Financial Reporting,” our Chief Executive Officerchief executive officer and Chief Financial Officer havechief financial officer concluded as of the end of such period, that our disclosure controls and procedures were not effective as of the end of the period covered by this report.
Notwithstanding the material weakness described below, management believes that the consolidated financial statements included in this Annual Report on Form 10-K are effectivefairly presented in recording, processing, summarizingall material respects in accordance with GAAP. Our chief executive officer and reporting,chief financial officer have certified that, based on their knowledge, the consolidated financial statements included in this report fairly present in all material respects our financial condition, results of operations and cash flows for each of the periods presented in this report.
Background
We have determined that our methodology for calculating compliance with a timely basis, information requiredsingle financial covenant included in a non-recourse carve-out guarantee entered into with respect to be disclosed by us inone of our reportsmortgage loans might have been inconsistent with the terms of that guarantee. We have also determined that we file or submitwere in compliance with this covenant as of December 31, 2016, however it is reasonably possible that the use of our methodology may have prevented management from identifying certain conditions requiring material disclosures under the Exchange Act.US GAAP.
Management’s Report on Internal Control Over Financial Reporting
Management's Annual Reporting on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting as such term is defined in Rule 13a-15(f) or 15d-15(f) promulgateda process designed under the Exchange Act.supervision of our chief executive officer and our chief financial officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our consolidated financial statements for external reporting purposes in accordance with GAAP.
InOur internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures are being made only in accordance with authorizations of our management and directors; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our consolidated financial statements.
As of December 31, 2016, management conducted an assessment of the effectiveness of our internal control over financial reporting based on the framework established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992). During this assessment and in connection with the preparation of ourthis Annual Report on Form 10-K ourand the consolidated financial statements and related disclosures contained herein, management assessed the effectiveness ofidentified a material weakness in our internal control over financial reporting as of December 31, 2014. In making2016, as discussed in more detail below. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that assessment,there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected on a timely basis.
Specifically, we determined that we did not effectively operate controls over the monitoring and oversight of compliance with a single financial covenant included in a non-recourse carve-out guarantee entered into with respect to one of our mortgage loans, which resulted in us possibly misinterpreting the methodology for calculating compliance with this covenant. As a result, management usedhas determined that, to the criteria set forth by the Committeeextent we are unable to remedy this control deficiency, it is reasonably possible that an undetected failure to comply with a covenant could occur, which in turn could result in a material misstatement of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (1992).our annual and interim consolidated financial statements that would not be prevented or detected on a timely basis. Accordingly, we have determined that this control deficiency constitutes a material weakness.
Based on its assessment, our management concludedManagement has determined that as of December 31, 2014, our internal control over financial reporting as of December 31, 2016 was effective.not effective as a result of this material weakness.
The rulesRemediation of Material Weakness
Management has begun taking and intends to take a number of steps to remediate the underlying causes of the SEC do not require,material weakness described above, including the following:
Evaluating the processes surrounding the monitoring and this annual report does not include,oversight of the compliance of financial covenants to determine if new and improved processes are warranted and, if so, to identify and implement such processes;
Instituting an attestation reportadditional level of review and analysis of covenant compliance calculations and enhancing ongoing monitoring and forecasting of such compliance;
Enhancing procedures regarding the reporting by management to our independent registered public accounting firmboard of directors and audit committee regarding financial covenant calculation and compliance; and
Engaging in a thorough review of all debt agreements and providing additional tools for key personnel to track covenant compliance requirements.
Management expects that these remedial actions will strengthen our internal control over financial reporting.reporting and address the material weakness that was identified as of December 31, 2016. However, there cannot be any assurance that these remediation efforts will be successful or that our internal control over financial reporting will be effective as a result of these efforts. The material weakness will be fully remediated when, in the opinion of our management, the revised control processes have been operating for a sufficient period of time to provide reasonable assurance as to their effectiveness. The remediation and ultimate resolution of this material weaknesses will be reviewed with our audit committee.
Changes in Internal Control Over Financial Reporting
DuringOther than with respect to the fourth quarter of fiscal year ended December 31, 2014,material weakness identified above, there were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) ofduring the Exchange Act)quarter ended December 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Please see the discussion above under “Remediation of Material Weakness” regarding changes and enhancements to our internal control processes that have occurred subsequent to December 31, 2016.
Item 9B. Other Information.
None.Not applicable.
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
We have adopted a Code of Business Conduct and Ethics that applies to all of our executive officers and directors, including but not limited to, our principal executive officer and principal financial officer. A copy of our Code of Business Conduct and Ethics may be obtained, free of charge, by sending a written request to our principal executive office at 405 Park Avenue, 14th Floor, New York, NY 10022,3950 University Drive, Fairfax, VA 22030, Attention: Chief Financial Officer.
The information required by this Item is incorporated by reference to our definitive proxy statement to be filed with the SEC with respect to our 20152017 annual meeting of stockholders.
Item 11. Executive Compensation.
The information required by this Item is incorporated by reference to our definitive proxy statement to be filed with the SEC with respect to our 20152017 annual meeting of stockholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this Item is incorporated by reference to our definitive proxy statement to be filed with the SEC with respect to our 20152017 annual meeting of stockholders.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this Item is incorporated by reference to our definitive proxy statement to be filed with the SEC with respect to our 20152017 annual meeting of stockholders.
Item 14. Principal Accounting Fees and Services.
The information required by this Item is incorporated by reference to our definitive proxy statement to be filed with the SEC with respect to our 20152017 annual meeting of stockholders.
PART IV
Item 15. Exhibits and Financial Statement Schedules.
(a) Financial Statement Schedules
See the Index to Consolidated/Combined Financial Statements at page F-1 of this report.
The following financial statement schedule is included herein at page F-32 of this report:
Schedule III — Real Estate and Accumulated Depreciation
(b) Exhibits
EXHIBIT INDEX
The following exhibits are included in this Annual Report on Form 10-K for the year ended December 31, 20142016 (and are numbered in accordance with Item 601 of Regulation S-K).
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| Exhibit No. | | Description |
1.1(4)(15) | | Exclusive Dealer Manager Termination Agreement, dated as of January 7, 2014,December 31, 2015, among the Company, American Realty Capital Hospitality Advisors, LLC and Realty Capital Securities, LLC
LLC. |
3.1(3)(2) | | Articles of Amendment and Restatement of American Realty Capital Hospitality Investors Trust, Inc. |
3.2(1)(18) | | Articles of Amendment for Hospitality Investors Trust, Inc. filed with the State Department of Assessments and Taxation of Maryland on August 25, 2016. |
3.3(20) | | Articles of Amendment for Hospitality Investors Trust, Inc. filed with the State Department of Assessments and Taxation of Maryland on March 31, 2017. |
3.4(19) | | Articles Supplementary of Hospitality Investors Trust, Inc. filed with the State Department of Assessments and Taxation of Maryland on January 13, 2017. |
3.5(20) | | Articles Supplementary of Hospitality Investors Trust, Inc. filed with the State Department of Assessments and Taxation of Maryland on March 31, 2017. |
3.6(20) | | Certificate of Notice of Hospitality Investors Trust, Inc. filed with the State Department of Assessments and Taxation of Maryland on March 31, 2017. |
3.7(20) | | Amended and Restated Bylaws of American Realty Capital Hospitality Investors Trust, Inc. |
4.1(4)(20) | | Amended and Restated Agreement of Limited Partnership of American Realty Capital Hospitality Investors Trust Operating Partnership L.P., dated as of January 7, 2014March 31, 2017, by and among Hospitality Investors Trust, Inc., Brookfield Strategic Real Estate Partners II Hospitality REIT II LLC and BSREP II Hospitality II Special GP OP LLC. |
4.2(13) | | Hospitality Investors Trust, Inc. Distribution Reinvestment Plan. |
4.3(20) | | Form of Stock Certificate of the Redeemable Preferred Share. |
10.1(4) | | Advisory Agreement dated as of January 7, 2014, by and among the Company, American Realty Capital Hospitality Investors Trust Operating Partnership, L.P. and American Realty Capital Hospitality Advisors, LLC. |
10.2(7) | | Employee and Director Incentive Restricted Share Plan of the Company |
10.3 (3)(17)
| | Form of Restricted ShareStock Award Agreement Pursuant to the Employee and Director Incentive Restricted Share Plan of the Company. |
10.4 10.3(2)(1)
| | Form Operating Lease Agreement between the Company and the Company’s TRSs. |
10.5 (4)
| | Agreement of Purchase and Sale, dated January 30, 2014, by and between Barceló Crestline Corporation and ARC Hospitality TRS Holding, LLC |
10.6 (4)
| | Agreement of Purchase and Sale, dated January 30, 2014, by and between HFP Hotel Owner II, LLC, CSB Stratford, LLC, CC Technology Square, LLC, ARC Hospitality Baltimore LLC, ARC Hospitality Providence LLC, ARC Hospitality Stratford LLC and ARC Hospitality TRS GA Tech LLC. |
10.7 (4)
| | First Amendment to Agreement of Purchase and Sale, dated March 11, 2014, by and between Barceló Crestline Corporation and ARC Hospitality TRS Holding, LLC |
10.8 (4)
| | First Amendment to Agreement of Purchase and Sale, dated March 11, 2014, by and between HFP Hotel Owner II, LLC, CSB Stratford, LLC, CC Technology Square, LLC, ARC Hospitality Baltimore LLC, ARC Hospitality Providence LLC, ARC Hospitality Stratford LLC and ARC Hospitality TRS GA Tech LLC |
10.9 (4)
| | Second Amendment to Agreement of Purchase and Sale, dated March 21, 2014, by and between HFP Hotel Owner II, LLC, CSB Stratford, LLC, CC Technology Square, LLC, ARC Hospitality Baltimore LLC, ARC Hospitality Providence LLC, ARC Hospitality Stratford LLC and ARC Hospitality TRS GA Tech LLC |
10.10 (4)
| | Promissory Note, dated March 21, 2014, given by American Realty Capital Hospitality Operating Partnership L.P. in favor of Crestline Hotels & Resorts, LLC |
10.11 (4)
| | Promissory Note, dated March 21, 2014, given by American Realty Capital Hospitality Operating Partnership L.P. in favor of Barceló Crestline Corporation |
10.12 (4)
| | Promissory Note, dated March 21, 2014, given by American Realty Capital Hospitality Operating Partnership L.P. in favor of Barceló Crestline Corporation |
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Exhibit No. | | Description |
10.13 10.4(5)
| | Loan Agreement dated as of March 21, 2014 between GERMAN AMERICAN CAPITAL CORPORATION, ARC HOSPITALITYHIT BALTIMORE, LLC and ARC HOSPITALITYHIT PROVIDENCE, LLCLLC. |
10.14 10.5(5)
| | Guaranty of Recourse Obligations dated as of March 21, 2014 by AMERICAN REALTY CAPITAL HOSPITALITY INVESTORS TRUST OPERATING PARTNERSHIP, L.P., AR CAPITAL, LLC and certain individuals for the benefit of GERMAN AMERICAN CAPITAL CORPORATIONCORPORATION. |
10.15 10.6(4)(5)
| | Guaranty of Recourse Obligations dated as of April 8, 2014 by DANIEL A. HOFFLER, LOUIS S. HADDAD and AMERICAN REALTY CAPITAL HOSPITALITY INVESTORS TRUST, INC. for the benefit of GERMAN AMERICAN CAPITAL CORPORATIONCORPORATION. |
10.16 10.7(5)
| | PERMANENT LOAN CROSS INDEMNITY dated as of April 1, 2014, by TCA BLOCK 7, INC., ARMADA/HOFFLER PROPERTIES II, L.L.C., DANIEL A. HOFFLER, LOUIS S. HADDAD , CHRI VIRGINIA BEACH HOTEL (A/H) MINORITY HOLDING, LLC, AMERICAN REALTY CAPITAL HOSPITALITY INVESTORS TRUST, INC., HAMPTON W COMPANY, LLC, HAMPTON UNIVERSITY, LEGACY HOSPITALITY, LLC, and VB CITY HOTELS LLC. |
10.17 (5)
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| Exhibit No. | | Promissory Note, dated May 27, 2014, given by American Realty Capital Hospitality Trust, Inc. in favor of CARP, LLCDescription |
10.18 10.8(6)
| | First Amendment to Promissory Notes, dated August 25, 2014, between American Realty Capital Hospitality Operating Partnership, L.P. and Barceló Crestline Corporation
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10.19 (6)
| | Amended and Restated Real Estate Sale Agreement, dated November 11, 2014, by and among American Realty Capital Hospitality Portfolio Member, LLC, ARC HospitalityHIT Portfolio I Owner, LLC, ARC Hospitality Portfolio I TFGL Owner, LLC, ARC HospitalityHIT Portfolio I BHGL Owner, LLC, ARC HospitalityHIT Portfolio I PXGL Owner, LLC, ARC HospitalityHIT Portfolio I GBGL Owner, LLC, ARC HospitalityHIT Portfolio I NFGL Owner, LLC, ARC HospitalityHIT Portfolio I MBGL 1000 Owner, LLC, ARC HospitalityHIT Portfolio I MBGL 950 Owner, LLC, ARC HospitalityHIT Portfolio I NTC Owner, LP, ARC HospitalityHIT Portfolio I DLGL Owner, LP, ARC HospitalityHIT Portfolio I SAGL Owner, LP, ARC HospitalityHIT Portfolio II Owner, LLC, ARC HospitalityHIT Portfolio II NTC Owner, LP, W2007 Equity Inns Realty, LLC, W2007 Equity Inns Realty, L.P., W2007 EQI Urbana Partnership, L.P., W2007 EQI Seattle Partnership, L.P., W2007 EQI Savannah 2 Partnership, L.P., W2007 EQI Rio Rancho Partnership, L.P., W2007 EQI Orlando Partnership, L.P., W2007 EQI Orlando 2 Partnership, L.P., W2007 EQI Naperville Partnership, L.P., W2007 EQI Milford Partnership, L.P., W2007 EQI Louisville Partnership, L.P., W2007 EQI Knoxville Partnership, L.P., W2007 EQI Jacksonville Partnership I, L.P., W2007 EQI Indianapolis Partnership, L.P., W2007 EQI Houston Partnership, L.P., W2007 EQI HI Austin Partnership, L.P., W2007 EQI East Lansing Partnership, L.P., W2007 EQI Dalton Partnership, L.P., W2007 EQI College Station Partnership, L.P., W2007 EQI Carlsbad Partnership, L.P., W2007 EQI Augusta Partnership, L.P. and W2007 EQI Asheville Partnership, L.P.
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10.20 10.9(8)(7)
| | Indemnification Agreement between American Realty Capital Hospitality Investors Trust, Inc. and each of Robert H. Burns, Edward T. Hoganson, William M. Kahane, Jonathan P. Mehlman, Stanley R. Perla, Abby M. Wenzel, certain other individuals who are former directors and officers of American Realty Capital Hospitality Investors Trust, Inc., American Realty Capital Hospitality Advisors, LLC, AR Capital, LLC and RCS Capital Corporation, dated as of December 31, 20142014. |
10.21 10.10(8)(7)
| | Amended and Restated Limited Liability Company Agreement of ARC HospitalityHIT Portfolio I Holdco, LLC dated February 27, 20152015. |
10.22 10.11(8)(7)
| | Amended and Restated Limited Liability Company Agreement of ARC HospitalityHIT Portfolio II Holdco, LLC dated February 27, 20152015. |
10.23 10.12(8)(*)
| | First Amendment, dated October 6, 2015, to the Amended and Restated Limited Liability Company Agreement of HIT Portfolio II Holdco, LLC dated February 27, 2015. |
10.13(7) | | Assumption and Release Agreement (Mezzanine) dated February 27, 2015 by and among WNT MEZZ I, LLC, ARC HOSPITALITYHIT PORTFOLIO I MEZZ, LP, U.S. BANK NATIONAL ASSOCIATION, AS TRUSTEE FOR THE REGISTERED HOLDERS OF EQTY 2014-MZ MEZZANINE TRUST, COMMERCIAL MEZZANINE PASS-THROUGH CERTIFICATES, WHITEHALL STREET GLOBAL REAL ESTATE LIMITED PARTNERSHIP 2007, and WHITEHALL PARALLEL GLOBAL REAL ESTATE LIMITED PARTNERSHIP 2007, AMERICAN REALTY CAPITAL HOSPITALITY INVESTORS TRUST OPERATING PARTNERSHIP, L.P., and AMERICAN REALTY CAPITAL HOSPITALITY INVESTORS TRUST, INC. |
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Exhibit No.10.14(15) | | DescriptionGuaranty of Recourse Obligations (Mezzanine) dated February 27, 2015 by Hospitality Investors Trust Operating Partnership, L.P., Hospitality Investors Trust, Inc., Whitehall Street Global Real Estate Limited Partnership 2007 and Whitehall Parallel Global Real Estate Limited Partnership 2007 for the benefit of U.S. Bank National Association, as trustee for the registered holders of Eqty 2014-Mz Mezzanine Trust, Commercial Mezzanine Pass-Through Certificates. |
10.24 10.15(8)(15)
| | Environmental Indemnity Agreement (Mezzanine) dated February 27, 2015 made by HIT Portfolio I Mezz, LP, Hospitality Investors Trust Operating Partnership, L.P., Hospitality Investors Trust, Inc., Whitehall Street Global Real Estate Limited Partnership 2007 and Whitehall Parallel Global Real Estate Limited Partnership 2007 for the benefit of U.S. Bank National Association, as trustee for the registered holders of Eqty 2014-Mz Mezzanine Trust, Commercial Mezzanine Pass-Through Certificates. |
10.16(15) | | Agreement to Release Loan Guarantor and Reaffirmation (Mezzanine) dated December 2, 2015 among HIT Portfolio I Mezz, LP, Hospitality Investors Trust Operating Partnership, L.P., Hospitality Investors Trust, Inc., Whitehall Street Global Real Estate Limited Partnership 2007 and Whitehall Parallel Global Real Estate Limited Partnership 2007, in favor of U.S. Bank National Association, as trustee for the registered holders of Eqty 2014-Mz Mezzanine Trust, Commercial Mezzanine Pass-Through Certificates. |
10.17(7) | | Assumption and Release Agreement dated February 27, 2015 by and among W2007 EQUITY INNS REALTY, LLC, W2007 EQUITY INNS REALTY, L.P., ARC HOSPITALITYHIT PORTFOLIO I OWNER, LLC, ARC HOSPITALITYHIT PORTFOLIO I BHGL OWNER, LLC, ARC HOSPITALITYHIT PORTFOLIO I PXGL OWNER, LLC, ARC HOSPITALITYHIT PORTFOLIO I GBGL OWNER, LLC, ARC HOSPITALITYHIT PORTFOLIO I NFGL OWNER, LLC, ARC HOSPITALITYHIT PORTFOLIO I MBGL 1000 OWNER, LLC, ARC HOSPITALITYHIT PORTFOLIO I MBGL 950 OWNER, LLC, ARC HOSPITALITYHIT PORTFOLIO I NTC OWNER, LP, ARC HOSPITALITYHIT PORTFOLIO I DLGL OWNER, LP, ARC HOSPITALITYHIT PORTFOLIO I SAGL OWNER, LP, U.S. BANK NATIONAL ASSOCIATION, AS TRUSTEE FOR THE REGISTERED HOLDERS OF EQTY 2014-INNS MORTGAGE TRUST, COMMERCIAL MORTGAGE PASS-THROUGH CERTIFICATES, WHITEHALL STREET GLOBAL REAL ESTATE LIMITED PARTNERSHIP 2007, WHITEHALL PARALLEL GLOBAL REAL ESTATE LIMITED PARTNERSHIP 2007, AMERICAN REALTY CAPITAL HOSPITALITY INVESTORS TRUST OPERATING PARTNERSHIP, L.P., a Delaware limited partnership and AMERICAN REALTY CAPITAL HOSPITALITY INVESTORS TRUST, INC. |
10.25 10.18(8)(15)
| | Guaranty of Recourse Obligations dated February 27, 2015 by Hospitality Investors Trust Operating Partnership, L.P., Hospitality Investors Trust, Inc., Whitehall Street Global Real Estate Limited Partnership 2007 and Whitehall Parallel Global Real Estate Limited Partnership 2007 for the benefit of U.S. Bank National Association, as trustee for the registered holders of Eqty 2014-Inns Mortgage Trust, Commercial Mortgage Pass-Through Certificates |
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| Exhibit No. | | Description |
10.19(15) | | Environmental Indemnity Agreement dated February 27, 2015 made by the borrower entities party thereto, Hospitality Investors Trust Operating Partnership, L.P., Hospitality Investors Trust, Inc., Whitehall Street Global Real Estate Limited Partnership 2007 and Whitehall Parallel Global Real Estate Limited Partnership 2007 for the benefit of U.S. Bank National Association, as trustee for the registered holders of Eqty 2014-Inns Mortgage Trust, Commercial Mortgage Pass-Through Certificates. |
10.20(15) | | Agreement to Release Loan Guarantor and Reaffirmation dated December 2, 2015 among the borrower entities party thereto, Hospitality Investors Trust Operating Partnership, L.P., Hospitality Investors Trust, Inc., Whitehall Street Global Real Estate Limited Partnership 2007 and Whitehall Parallel Global Real Estate Limited Partnership 2007, in favor of U.S. Bank National Association, as trustee for the registered holders of Eqty 2014-Inns Mortgage Trust, Commercial Mortgage Pass-Through Certificates . |
10.21(7) | | Supplemental Agreement dated February 27, 2015, by and among American Realty Capital Hospitality Investors Trust Operating Partnership, L.P., American Realty Capital Hospitality Investors Trust, Inc., Nicholas S. Schorsch, William M. Kahane, Edward M. Weil, Jr., Peter M. Budko, Whitehall Street Global Real Estate Limited Partnership 2007, Whitehall Parallel Global Real Estate Limited Partnership 2007, among others. |
10.26 10.22(8)(7)
| | Payment Guaranty Agreement dated as of February 27, 2015 by AMERICAN REALTY CAPITAL HOSPITALITY INVESTORS TRUST, INC. to and for the benefit of U.S. BANK NATIONAL ASSOCIATION, AS TRUSTEE FOR THE REGISTERED HOLDERS OF EQTY 2014-INNS MORTGAGE TRUST, COMMERCIAL MORTGAGE PASS-THROUGH CERTIFICATES. |
10.27 10.23(8)
| | Loan Agreement dated as of February 27, 2015 between the borrowers listed on schedule II thereto, Ladder Capital Finance LLC and Deutsche Bank AG, New York Branch. |
10.28 (8)(7)
| | Guaranty (Pool I) dated as of February 27, 2015 by AMERICAN REALTY CAPITAL HOSPITALITY INVESTORS TRUST OPERATING PARTNERSHIP, L.P., AMERICAN REALTY CAPITAL HOSPITALITY INVESTORS TRUST, INC., Nicholas S. Schorsch, William M. Kahane, Edward M. Weil, Jr., Peter M. Budko for the benefit of W2007 EQUITY INNS SENIOR MEZZ, LLC. |
10.29 10.24(8)(7)
| | Guaranty (Pool II) dated as of February 27, 2015, by AMERICAN REALTY CAPITAL HOSPITALITY INVESTORS TRUST OPERATING PARTNERSHIP, L.P., AMERICAN REALTY CAPITAL HOSPITALITY INVESTORS TRUST, INC., Nicholas S. Schorsch, William M. Kahane, Edward M. Weil, Jr., Peter M. Budko for the benefit of W2007 EQUITY INNS PARTNERSHIP, L.P. and W2007 EQUITY INNS TRUST. |
10.30 10.25(8)(7)
| | Environmental Indemnity Agreement (Pool I) dated as of February 27, 2015 by AMERICAN REALTY CAPITAL HOSPITALITY INVESTORS TRUST OPERATING PARTNERSHIP, L.P., AMERICAN REALTY CAPITAL HOSPITALITY INVESTORS TRUST, INC., Nicholas S. Schorsch, William M. Kahane, Edward M. Weil, Jr., Peter M. Budko for the benefit of W2007 EQUITY INNS SENIOR MEZZ, LLCLLC. |
10.31 10.26(8)(7)
| | Environmental Indemnity Agreement (Pool II) dated as of February 27, 2015, by AMERICAN REALTY CAPITAL HOSPITALITY INVESTORS TRUST OPERATING PARTNERSHIP, L.P., AMERICAN REALTY CAPITAL HOSPITALITY INVESTORS TRUST, INC., Nicholas S. Schorsch, William M. Kahane, Edward M. Weil, Jr., Peter M. Budko for the benefit of W2007 EQUITY INNS PARTNERSHIP, L.P. and W2007 EQUITY INNS TRUST. |
10.32 10.27(8)(7)
| | Mandatory Redemption Guaranty (Pool I) dated as of February 27, 2015 by AMERICAN REALTY CAPITAL HOSPITALITY INVESTORS TRUST OPERATING PARTNERSHIP, L.P., AMERICAN REALTY CAPITAL HOSPITALITY INVESTORS TRUST, INC., Nicholas S. Schorsch, William M. Kahane, Edward M. Weil, Jr., Peter M. Budko for the benefit of W2007 EQUITY INNS SENIOR MEZZ, LLCLLC. |
10.33 10.28(8)(7)
| | Mandatory Redemption Guaranty (Pool II) dated as of February 27, 2015, by AMERICAN REALTY CAPITAL HOSPITALITY INVESTORS TRUST OPERATING PARTNERSHIP, L.P., AMERICAN REALTY CAPITAL HOSPITALITY INVESTORS TRUST, INC., Nicholas S. Schorsch, William M. Kahane, Edward M. Weil, Jr., Peter M. Budko for the benefit of W2007 EQUITY INNS PARTNERSHIP, L.P. and W2007 EQUITY INNS TRUST. |
16.1 10.29(15)
| | Release (Pool I) dated as of December 2, 2015 from W2007 Equity Inns Senior Mezz, LLC, Whitehall Street Global Real Estate Limited Partnership 2007, Whitehall Parallel Global Real Estate Limited Partnership 2007, and certain other parties thereto, in favor of Nicholas S. Schorsch, William M. Kahane, Edward M. Weil, and Peter M. Budko. |
10.30(15) | | Release (Pool II) dated as of December 2, 2015 from W2007 Equity Inns Partnership, L.P. and W2007 Equity Inns Trust, in favor of Nicholas S. Schorsch, William M. Kahane, Edward M. Weil, and Peter M. Budko. |
10.31(8) | | Agreement of Purchase and Sale, dated June 2, 2015, by and among WS CINCINNATI, LLC, WS COLLEGE STATION JV, LLC, WS-CNO JV, LLC, WS-FNO, LLC, WS SPHERICAL STONE, LLC, and AMERICAN REALTY CAPITAL HOSPITALITY PORTFOLIO WSC, LLC. |
10.32(8) | | Real Estate Purchase and Sale Agreement, dated June 2, 2015, by and among SUMMIT HOTEL OP, LP and certain related sellers and HIT PORTFOLIO SMT, LLC. |
10.33(8) | | Real Estate Purchase and Sale Agreement, dated June 2, 2015, by and among SUMMIT HOTEL OP, LP and certain related sellers and HIT PORTFOLIO SMT, LLC. |
10.34(8) | | Form of Agreement of Purchase and Sale, dated June 15, 2015, by and among certain related sellers of the NOBLE INVESTMENT GROUP and HIT PORTFOLIO NBL, LLC. |
10.35(8) | | Side Letter Agreement, dated June 15, 2015, by and among certain related sellers of the NOBLE INVESTMENT GROUP and HIT PORTFOLIO NBL, LLC. |
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| Exhibit No. | | Description |
10.36(9) | | Letter Agreement, dated July 15, 2015, by and among SUMMIT HOTEL OP, LP and certain related sellers and HIT PORTFOLIO SMT, LLC. |
10.37(9) | | Letter Agreement, dated July 15, 2015, by and among SUMMIT HOTEL OP, LP and certain related sellers and HIT PORTFOLIO SMT, LLC. |
10.38(10) | | Loan Agreement, dated as of October 6, 2015, among the borrower entities party thereto, Ladder Capital Finance LLC and German American Capital Corporation. |
10.39(10) | | Guaranty of Recourse Obligations dated as of October 6, 2015, by Hospitality Investors Trust, Inc. in favor of Ladder Capital Finance LLC and German American Capital Corporation. |
10.40(10) | | Environmental Indemnity Agreement, dated as of October 6, 2015, among the borrower entities party thereto, Hospitality Investors Trust, Inc. Ladder Capital Finance LLC and German American Capital Corporation. |
10.41(11) | | Amended and Restated Term Loan Agreement dated as of October 15, 2015, by and among Hospitality Investors Trust, Inc. and Hospitality Investors Trust Operating Partnership, L.P., as guarantors, and certain wholly-owned subsidiaries of Hospitality Investors Trust Operating Partnership, L.P., as borrowers, Deutsche Bank AG New York Branch, as administrative agent, Deutsche Bank Securities Inc. and BMO Capital Markets, as joint lead arrangers and joint book-running managers and Bank of Montreal, as syndication agent. |
10.42(12) | | First Amendment to the Agreement for Sale and Purchase dated as of July 13, 2015, by and between WS CINCINNATI, LLC, WS COLLEGE STATION JV, LLC, WS-CNO JV, LLC, WS-FNO, LLC, WS SPHERICAL STONE, LLC, and AMERICAN REALTY CAPITAL HOSPITALITY PORTFOLIO WSC, LLC. |
10.43(12) | | Second Amendment to the Agreement for Sale and Purchase dated as of July 13, 2015, by and between WS CINCINNATI, LLC, WS COLLEGE STATION JV, LLC, WS-CNO JV, LLC, WS-FNO, LLC, WS SPHERICAL STONE, LLC, and AMERICAN REALTY CAPITAL HOSPITALITY PORTFOLIO WSC, LLC. |
10.44(12) | | Third Amendment to the Agreement for Sale and Purchase dated as of August 3, 2015, by and between WS CINCINNATI, LLC, WS COLLEGE STATION JV, LLC, WS-CNO JV, LLC, WS-FNO, LLC, WS SPHERICAL STONE, LLC, and AMERICAN REALTY CAPITAL HOSPITALITY PORTFOLIO WSC, LLC. |
10.45(12) | | Fourth Amendment to the Agreement for Sale and Purchase dated as of October 8, 2015, by and between WS CINCINNATI, LLC, WS COLLEGE STATION JV, LLC, WS-CNO JV, LLC, WS-FNO, LLC, WS SPHERICAL STONE, LLC, and AMERICAN REALTY CAPITAL HOSPITALITY PORTFOLIO WSC, LLC. |
10.46(12) | | Fifth Amendment to the Agreement for Sale and Purchase dated as of October 27, 2015, by and between WS CINCINNATI, LLC, WS COLLEGE STATION JV, LLC, WS-CNO JV, LLC, WS-FNO, LLC, WS SPHERICAL STONE, LLC, and AMERICAN REALTY CAPITAL HOSPITALITY PORTFOLIO WSC, LLC. |
10.47(12) | | First Amendment to Loan Agreement, dated as of October 28, 2015, among the borrower entities party thereto, Ladder Capital Finance LLC and German American Capital Corporation. |
10.48(12) | | Amendment to Agreement of Purchase and Sale, dated October 15, 2015 by and among certain related sellers of the NOBLE INVESTMENT GROUP and HIT PORTFOLIO NBL, LLC. |
10.49(12) | | Letter Agreement, dated August 21, 2015, by and among SUMMIT HOTEL OP, LP and certain related sellers and HIT PORTFOLIO SMT, LLC. |
10.50(12) | | Letter Agreement, dated August 21, 2015, by and among SUMMIT HOTEL OP, LP and certain related sellers and HIT PORTFOLIO SMT, LLC. |
10.51(12) | | Letter Agreement, dated October 15, 2015, by and among SUMMIT HOTEL OP, LP and certain related sellers and HIT PORTFOLIO SMT, LLC. |
10.52(12) | | Letter Agreement, dated October 20, 2015, by and among SUMMIT HOTEL OP, LP and certain related sellers and HIT PORTFOLIO SMT, LLC. |
10.53(12) | | First Amendment, dated November 11, 2015, to the Advisory Agreement, dated as of January 7, 2014, among Hospitality Investors Trust, Inc., Hospitality Investors Trust Operating Partnership, L.P. and American Realty Capital Hospitality Advisors, LLC. |
10.54(14) | | Loan Agreement dated as of February 11, 2016, between American Realty Capital Hospitality Trust, as Borrower and Summit Hotel OP, LP, as Lender. |
10.55(14) | | Letter Agreement, dated February 3, 2014 from Grant Thornton11, 2016, by and among Summit Hotel OP, LP and certain related sellers and American Realty Capital Hospitality Portfolio SMT ALT, LLC. |
10.56(14) | | Amendment No. 1 dated as of February 11, 2016, to the U.S.Amended and Restated Term Loan Agreement dated as of October 15, 2015, by and among Hospitality Investors Trust, Inc. and Hospitality Investors Trust Operating Partnership, L.P., as guarantors, and certain wholly owned subsidiaries of Hospitality Investors Trust Operating Partnership, L.P., as borrowers, Deutsche Bank AG New York Branch, as administrative agent, Deutsche Bank Securities Inc. and Exchange CommissionBMO Capital Markets, as joint lead arrangers and joint book-running managers and Bank of Montreal, as syndication agent. |
10.57(3) | | Form of Management Agreement by and between Taxable REIT Subsidiary and American Realty Capital Hospitality Properties, LLC. (Crestline form). |
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| Exhibit No. | | Description |
10.58(15) | | Form of Management Agreement by and between Taxable REIT Subsidiary and American Realty Capital Hospitality Grace Portfolio, LLC (Hilton Form). |
10.59(15) | | Form of Management Agreement by and between Taxable REIT Subsidiary and American Realty Capital Hospitality Grace Portfolio, LLC (McKibbon Form). |
10.60(15) | | Form of Management Agreement by and between Taxable REIT Subsidiary and American Realty Capital Hospitality Grace Portfolio, LLC (Inn Ventures Form). |
10.61(15) | | Form of Management Agreement by and between Taxable REIT Subsidiary and American Realty Capital Hospitality Properties, LLC (Interstate Form). |
10.62(3) | | Form of Sub-Property Management Agreement among American Realty Capital Hospitality Properties, LLC and Crestline Hotels & Resorts, LLC. |
10.63(15) | | Mezzanine Loan Agreement, dated as of April 11, 2014, between GERMAN AMERICAN CAPITAL CORPORATION and WNT MEZZI, LLC. |
10.64(15) | | First Amendment to Mezzanine Loan Agreement, dated as of June 18, 2014, between GERMAN AMERICAN CAPITAL CORPORATION and WNT MEZZI, LLC. |
10.65(15) | | Mortgage Loan Agreement, dated as of April 11, 2014, between GERMAN AMERICAN CAPITAL CORPORATION, W2007 EQUITY INNS REALTY, LLC and W2007 EQUITY INNS REALTY, L.P. |
10.66(15) | | First Amendment to Mortgage Loan Agreement, dated as of June 18, 2014, between GERMAN AMERICAN CAPITAL CORPORATION, W2007 EQUITY INNS REALTY, LLC and W2007 EQUITY INNS REALTY, L.P. |
10.67(15) | | Sixth Amendment to the Agreement for Sale and Purchase dated as of December 2, 2015, by and between WS CINCINNATI, LLC, WS COLLEGE STATION JV, LLC, WS-CNO JV, LLC, WS-FNO, LLC, WS SPHERICAL STONE, LLC, and AMERICAN REALTY CAPITAL HOSPITALITY PORTFOLIO WSC, LLC. |
10.68(15) | | Seventh Amendment to the Agreement for Sale and Purchase dated as of December 8, 2015, by and between WS CINCINNATI, LLC, WS COLLEGE STATION JV, LLC, WS-CNO JV, LLC, WS-FNO, LLC, WS SPHERICAL STONE, LLC, and AMERICAN REALTY CAPITAL HOSPITALITY PORTFOLIO WSC, LLC. |
10.69(15) | | Amendment to Agreement of Purchase and Sale, dated December 23, 2015 by and among certain related sellers of the NOBLE INVESTMENT GROUP and HIT PORTFOLIO NBL, LLC. |
10.70(15) | | Letter Agreement, dated January 26, 2016, by and among certain related sellers of Noble Investment Group and HIT Portfolio NBL, LLC. |
10.71(15) | | Second Amendment dated March 24, 2016 to the Advisory Agreement, dated as of January 7, 2014, among Hospitality Investors Trust, Inc., Hospitality Investors Trust Operating Partnership, L.P. and American Realty Capital Hospitality Advisors, LLC. |
10.72(19) | | Securities Purchase, Voting and Standstill Agreement, dated as of January 12, 2017, by and among Hospitality Investors Trust, Inc., American Realty Capital Hospitality Operating Partnership, LP and Brookfield Strategic Real Estate Partners II Hospitality REIT II LLC. |
10.73(19) | | Framework Agreement, dated as of January 12, 2017, by and among American Realty Capital Hospitality Advisors, LLC, American Realty Capital Hospitality Properties, LLC, American Realty Capital Hospitality Grace Portfolio, LLC, Crestline Hotels & Resorts, LLC, Hospitality Investors Trust, Inc., American Realty Capital Hospitality Operating Partnership, LP, American Realty Capital Hospitality Special Limited Partnership, LLC, and solely in connection with Sections 7(b), 7(d), 8, 9 and 10 through 22 (inclusive) thereto, Brookfield Strategic Real Estate Partners II Hospitality REIT II LLC. |
10.74(19) | | Letter Agreement, dated as of January 12, 2017, by and among Summit Hotel OP, LP and certain related sellers and American Realty Capital Hospitality Portfolio SMT ALT, LLC. |
10.75(19) | | First Amendment, dated as of January 12, 2017, to the Loan Agreement, dated as of February 11, 2016, between Hospitality Investors Trust, Inc. as Borrower and Summit Hotel OP, LP, as Lender. |
10.76(19) | | Loan Agreement, dated as of January 12, 2017, between Hospitality Investors Trust, Inc. as Borrower and Summit Hotel OP, LP, as Lender. |
10.77(20) | | Ownership Limit Waiver Agreement, dated as of March 31, 2017, between Hospitality Investors Trust, Inc. and Brookfield Strategic Real Estate Partners II Hospitality REIT II LLC. |
10.78(20) | | Registration Rights Agreement, dated as of March 31, 2017, by and among Hospitality Investors Trust, Inc., Brookfield Strategic Real Estate Partners II Hospitality REIT II LLC, American Realty Capital Hospitality Advisors, LLC and American Realty Capital Hospitality Properties, LLC. |
10.79(20) | | Transition Services Agreement, dated as of March 31, 2017, by and among American Realty Capital Hospitality Advisors, LLC, Hospitality Investors Trust, Inc. and Hospitality Investors Trust Operating Partnership, L.P. |
10.80(20) | | Transition Services Agreement, dated as of March 31, 2017, by and among Crestline Hotels & Resorts LLC, Hospitality Investors Trust, Inc. and Hospitality Investors Trust Operating Partnership, L.P. |
|
| | |
| Exhibit No. | | Description |
10.81(20) | | Assignment and Amendment of Current Management Agreement, dated as of March 31, 2017, by and among American Realty Capital Hospitality Grace Portfolio, LLC, Crestline Hotels & Resorts, LLC, HIT Portfolio I TRS, LLC, HIT Portfolio I NTC TRS, LP and HIT Portfolio I MISC TRS, LLC. |
10.82(20) | | Assignment and Amendment of Current Management Agreement, dated as of March 31, 2017, by and among American Realty Capital Hospitality Grace Portfolio, LLC, Crestline Hotels & Resorts, LLC, HIT Portfolio II NTC TRS, LP, HIT Portfolio II TRS, LLC and HIT Portfolio II MISC TRS, LLC. |
10.83(20) | | Assignment and Amendment of Management Agreement, dated as of March 31, 2017, by and among American Realty Capital Hospitality Grace Portfolio, LLC, Crestline Hotels & Resorts, LLC, HIT Portfolio I TRS, LLC, HIT Portfolio I NTC TRS, LP, HIT Portfolio II NTC TRS, LP, HIT Portfolio I DEKS TRS, LLC and HIT Portfolio I KS TRS, LLC. |
10.84(20) | | Assignment and Amendment of Crestline SWN Management Agreement, dated as of March 31, 2017, by and among American Realty Capital Hospitality Properties, LLC, Crestline Hotels & Resorts, LLC, HIT SWN INT NTC TRS, LP, HIT SWN TRS, LLC and HIT SWN CRS NTC TRS, LP. |
10.85(20) | | Assignment and Amendment of Management Agreement, dated as of March 31, 2017, by and among American Realty Capital Hospitality Properties, LLC, Crestline Hotels & Resorts, LLC, HIT TRS Baltimore, LLC, HIT TRS Providence, LLC, HIT TRS GA Tech, LLC and HIT TRS Stratford, LLC. |
10.86(20) | | Omnibus Agreement for Termination of Sub-Management Agreements, dated as of March 31, 2017, by and among American Realty Capital Hospitality Grace Portfolio, LLC, American Realty Capital Hospitality Properties, LLC, Crestline Hotels & Resorts, LLC and Crestline Hotels Ohio BEVCO, LLC. |
10.87(20) | | Omnibus Agreement for Termination of Management Agreements, dated as of March 31, 2017, by and among HIT Portfolio I HIL TRS, LLC, HIT Portfolio I NTC HIL TRS, LP, HIT Portfolio II HIL TRS, LLC, HIT II NTC HIL TRS, LP, HIT Portfolio I MCK TRS, LLC, HIT Portfolio I NTC TRS, LP, HIT Portfolio II MISC TRS, LLC, HIT Portfolio II NTC TRS, LP, HIT Portfolio I MISC TRS, LLC, HIT SWN INT NTC TRS, LP, HIT SWN TRS, LLC, American Realty Capital Hospitality Grace Portfolio, LLC and American Realty Capital Hospitality Properties, LLC. |
10.88(20) | | Omnibus Assignment and Amendment of Management Agreement, dated as of March 31, 2017, by and among American Realty Capital Hospitality Grace Portfolio, LLC, HIT Portfolio I HIL TRS, LLC, HIT Portfolio I NTC HIL TRS, LP, HIT Portfolio II HIL TRS, LLC, HIT Portfolio II NTC HIL TRS, LP, Hampton Inns Management LLC and Homewood Suites Management LLC. |
10.89(20) | | Assignment and Amendment of Management Agreements, dated as of March 31, 2017, by and among American Realty Capital Hospitality Grace Portfolio, LLC, HIT Portfolio I MCK TRS, LLC, HIT Portfolio I NTC TRS, LP, HIT Portfolio II NTC TRS, LP, HIT Portfolio II MISC TRS, LLC and McKibbon Hotel Management, Inc. |
10.90(20) | | Assignment and Amendment of Management Agreements, dated March 31, 2017, by and among American Realty Capital Hospitality Grace Portfolio, LLC, HIT Portfolio I MISC TRS, LLC and Innventures IVI, LP. |
10.91(20) | | Assignment and Assumption Agreement, dated March 31, 2017, by and among American Realty Capital Hospitality Advisors, LLC, AR Global Investment, LLC and Hospitality Investors Trust Operating Partnership, L.P. |
10.92(20) | | Mutual Waiver and Release, dated as of March 31, 2017 by and among American Realty Capital Hospitality Advisors, LLC, American Realty Capital Hospitality Properties, LLC, American Realty Capital Hospitality Grace Portfolio, LLC, Crestline Hotels & Resorts, LLC, Hospitality Investors Trust, Inc., Hospitality Investors Trust Operating Partnership, L.P., American Realty Capital Hospitality Special Limited Partnership, LLC and Brookfield Strategic Real Estate Partners II Hospitality REIT II LLC. |
10.93(20) | | Trademark License Agreement, dated as of March 31, 2017, by and between (i) AR Capital, LLC and American Realty Capital Hospitality Advisors, LLC and (ii) Hospitality Investors Trust, Inc. and Hospitality Investors Trust Operating Partnership, L.P. |
10.94(20) | | First Amendment, dated as of March 31, 2017, to the Amended and Restated Limited Liability Company Agreement of HIT Portfolio I Holdco, LLC, dated as of February 27, 2015. |
10.95(20) | | Second Amendment, dated as of March 31, 2017, to the Amended and Restated Limited Liability Company Agreement of HIT Portfolio II Holdco, LLC, dated as of February 27, 2015. |
10.96(20) | | Amended and Restated Employee and Director Incentive Restricted Share Plan of Hospitality Investors Trust, Inc. |
10.97(20) | | Form of Restricted Share Unit Award Agreement (officers). |
10.98(20) | | Employment Agreement, dated as of March 31, 2017, by and between Jonathan P. Mehlman and Hospitality Investors Trust, Inc. |
10.99(20) | | Employment Agreement, dated as of March 31, 2017, by and between Edward Hoganson and Hospitality Investors Trust, Inc. |
|
| | |
| Exhibit No. | | Description |
10.100(20) | | Employment Agreement, dated as of March 31, 2017, by and between Paul C. Hughes and Hospitality Investors Trust, Inc. |
10.101(20) | | Compensation Payment Agreement, dated as of March 31, 2017, by and among Hospitality Investors Trust, Inc., Lowell G. Baron, Bruce G. Wiles and BSREP II Hospitality II Board LLC |
10.102(20) | | Form of Indemnification Agreement. |
21.1(8)(*) | | List of Subsidiaries |
31.1 23.1(8)(*)
| | Consent of KPMG LLP |
31.1(*) | | Certification of the Principal Executive Officer of the Company pursuant to Securities Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
31.2(8)(*) | | Certification of the Principal Financial Officer of the Company pursuant to Securities Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
| | |
Exhibit No. | | Description |
32(8)(*) | | Written statements of the Principal Executive Officer and Principal Financial Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
101 99.1(8)(16)
| | Amended and Restated Share Repurchase Program effective as of February 28, 2016 |
101(*) | | XBRL (eXtensible Business Reporting Language). The following materials from American Realty Capital Hospitality Investors Trust, Inc.'s QuarterlyAnnual Report on Form 10-K for the year ended December 31, 2014,2016, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations and Comprehensive Loss, (iii) the Consolidated Statements of Changes in Stockholders' Equity, (iv) the Consolidated Statements of Cash Flows and (v) the Notes to the Consolidated Financial Statements. |
* Filed herewith
| |
| 1. | Filed as an exhibit to Pre-Effective Amendment No. 1 to the Company's Registration Statement on From S-11/A with the SEC on October 4, 2013. |
| |
2. | Filed as an exhibit to Pre-Effective Amendment No. 2 to the Company's Registration Statement on Form S-11/A with the SEC on November 14, 2013. |
| |
3.2. | Filed as an exhibit to Pre-Effective Amendment No. 3 to the Company’s Registration Statement on Form S-11/A with the SEC on December 9, 2013. |
| |
| 3. | Filed as an exhibit to Pre-Effective Amendment No. 4 to the Company’s Registration Statement on Form S-11/A with the SEC on December 13, 2013. |
| |
| 4. | Filed as an exhibit to the Company’s Form 10-K filed with the SEC on April 7, 2014. |
| |
| 5. | Filed as an exhibit to the Company’s Form 10-Q filed with the SEC on August 14, 2014. |
| |
| 6. | Filed as an exhibit to the Company’s Form 10-Q filed with the SEC on November 14, 2014. |
| |
| 7. | Filed as an exhibit to the Company’s Form 8-A10-K filed with the SEC on March 4,31, 2015. |
| |
| 8. | Filed herewith.as an exhibit to the Company’s Pre-Effective Amendment No. 1 to Post-Effective Amendment No. 6 to the Registration Statement on Form S-11 filed with the Securities and Exchange Commission on July 17, 2015. |
| |
| 9. | Filed as an exhibit to ourthe Company’s Form 10-Q filed with the SEC on August 12, 2015. |
| |
| 10. | Filed as an exhibit to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 13, 2015. |
| |
| 11. | Filed as an exhibit to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 20, 2015. |
| |
| 12. | Filed as an exhibit to the Company’s Form 10-Q filed with the SEC on November 16, 2015. |
| |
| 13. | Filed as Appendix A to the Company's Registration Statement on Form S-3 filed with the SEC on January 4, 2016. |
| |
| 14. | Filed as an exhibit to the Company’s Current Report on Form 8-K filed with the SEC on February 4, 2014.16, 2016. |
| |
| 15. | Filed as an exhibit to the Company’s Form 10-K filed with the SEC on March 28, 2016. |
| |
| 16. | Filed as an exhibit to the Company’s Form 10-Q filed with the SEC on May 11, 2016. |
| |
| 17. | Filed as an exhibit to the Company’s Form 10-Q filed with the SEC on August 12, 2016. |
| |
| 18. | Filed as an exhibit to the Company's Form 10-Q filed with the SEC on November 10, 2016. |
| |
| 19. | Filed as an exhibit to the Company’s Current Report on Form 8-K filed with the SEC on January 13, 2017. |
| |
| 20. | Filed as an exhibit to the Company’s Current Report on Form 8-K filed with the SEC on March 31, 2017. |
Item 16. Form 10-K Summary.
Not applicable.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized this 31st day of March 2015.31, 2017.
|
| | |
| | AMERICAN REALTY CAPITAL HOSPITALITY TRUST, INC.Hospitality Investors Trust, Inc. |
| | By | /s/ Jonathan P. Mehlman |
| | | Jonathan P. Mehlman |
| | | CHIEF EXECUTIVE OFFICER AND PRESIDENT |
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
| | | | |
| Name | | Capacity | | Date |
| /s/ Jonathan P. Mehlman | | Director, Chief Executive Officer and President (Principal Executive Officer) | | March 31, 20152017 |
| Jonathan P. Mehlman | | | |
| | | | | |
| /s/ Edward T. Hoganson | | Chief Financial Officer Treasurer and SecretaryTreasurer (Principal Financial Officer and Principal Accounting Officer) | | March 31, 20152017 |
| Edward T. Hoganson | | | |
| | | | | |
/s/ William M. Kahane | | Executive Chairman of the Board of Directors | | March 31, 2015 |
William M. KahaneBruce G. Wiles | | | |
| | | | | |
| /s/ Stanley R. Perla | | Lead Independent Director | | March 31, 20152017 |
| Stanley R. Perla | | | | |
| | | | | |
| /s/ Abby M. Wenzel | | Independent Director | | March 31, 20152017 |
| Abby M. Wenzel | | | | |
| | | | | |
/s/ Robert H. Burns | | Independent Director | | March 31, 2015 |
Robert H. BurnsLowell G. Baron | | | | |
AMERICAN REALTY CAPITAL HOSPITALITY INVESTORS TRUST, INC.
INDEX TO FINANCIAL STATEMENTS
|
| | |
American Realty Capital Hospitality Investors Trust, Inc. | | |
| Audited Consolidated/Combined Financial Statements: | | |
| | |
| | |
| | |
| | |
| | |
| | |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
American Realty Capital Hospitality Investors Trust, Inc.:
We have audited the accompanying consolidated balance sheetsheets as of December 31, 2014 (successor)2016 and the combined balance sheet as of December 31, 2013 (predecessor)2015 of Hospitality Investors Trust, Inc. and subsidiaries, (formerly American Realty Capital Hospitality Trust, Inc. and subsidiaries,) and the related consolidated statementstatements of operations and comprehensive income (loss), changes in equity, and cash flows for the years ended December 31, 2016 and 2015 and the period from March 21, 2014 to December 31, 2014 (successor) and the combined statements of operations and comprehensive income (loss), changes in equity, and cash flows for the period from January 1, 2014 to March 20, 2014 and the year ended December 31, 2013 (predecessor). In connection with the audits of the consolidated and combined financial statements, we have also audited the financial statement schedule III. These consolidated and combined financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated and combined financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated and combined financial statements referred to above present fairly, in all material respects, the financial position of American Realty Capital Hospitality Investors Trust, Inc. and subsidiaries as of December 31, 20142016 and 2013,2015, and the results of their operations and their cash flows for the years ended December 31, 2016 and 2015 and the period from March 20, 2014 to December 31, 2014 (successor), and the period from January 1, 2014 to March 21, 2014 and the year ended December 31, 2013(predecessor) in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered within relation to the basic consolidated and combined financial statements taken as a whole, presents fairly, with all material respects, the information set forth therein.
/s/ KPMG LLP
McLean, Virginia
March 31, 20152017
AMERICAN REALTY CAPITAL HOSPITALITY INVESTORS TRUST, INC.
CONSOLIDATED/COMBINEDCONSOLIDATED BALANCE SHEETS
(In thousands, except for share and per share data)
| | | | Successor | | | Predecessor | | | | | | | |
| | December 31, 2014 | | | December 31, 2013 | December 31, 2016 | | December 31, 2015 |
| ASSETS | | | | | | | |
| Real estate investments: | | | | | | | |
| Land | $ | 12,061 |
| | | $ | 15,878 |
| $ | 339,819 |
| | $ | 317,871 |
|
| Buildings and improvements | 81,176 |
| | | 118,356 |
| 1,838,594 |
| | 1,729,960 |
|
| Furniture, fixtures and equipment | 5,308 |
| | | 13,297 |
| 212,994 |
| | 163,516 |
|
| Total real estate investments | 98,545 |
| | | 147,531 |
| 2,391,407 |
| | 2,211,347 |
|
| Less: accumulated depreciation and amortization | (2,796 | ) | | | (31,390 | ) | (169,486 | ) | | (70,648 | ) |
| Total real estate investments, net | 95,749 |
| | | 116,141 |
| 2,221,921 |
| | 2,140,699 |
|
| Cash and cash equivalents | 131,861 |
| | | 10,520 |
| 42,787 |
| | 46,829 |
|
| Acquisition deposit | 75,000 |
| | | — |
| |
| Acquisition deposits | | 7,500 |
| | 40,504 |
|
| Restricted cash | 3,437 |
| | | 1,522 |
| 35,050 |
| | 71,288 |
|
| Investments in unconsolidated entities | 5,475 |
| | | 4,381 |
| 3,490 |
| | 3,458 |
|
| Below-market lease asset, net | 8,060 |
| | | — |
| 9,827 |
| | 10,225 |
|
| Prepaid expenses and other assets | 11,801 |
| | | 1,830 |
| 32,836 |
| | 34,836 |
|
| Deferred financing fees, net | 1,991 |
| | | 848 |
| |
| Total Assets | $ | 333,374 |
| | | $ | 135,242 |
| $ | 2,353,411 |
| | $ | 2,347,839 |
|
| | | | | | | | |
| LIABILITIES AND EQUITY | | | | | |
| Mortgage note payable | $ | 45,500 |
| | | $ | 41,449 |
| |
| Promissory notes payable | 64,849 |
| | | — |
| |
| LIABILITIES, NON-CONTROLLING INTEREST AND EQUITY | | | | |
| Mortgage notes payable, net | | $ | 1,410,925 |
| | $ | 1,341,033 |
|
| Promissory notes payable, net | | 23,380 |
| | — |
|
| Mandatorily redeemable preferred securities, net | | 288,265 |
| | 291,796 |
|
| Accounts payable and accrued expenses | 14,219 |
| | | 5,297 |
| 68,519 |
| | 67,255 |
|
| Due to affiliates | 7,011 |
| | | — |
| |
| Total liabilities | 131,579 |
| | | 46,746 |
| |
| Due to Related Parties | | 2,879 |
| | 6,546 |
|
| Total Liabilities | | $ | 1,793,968 |
| | $ | 1,706,630 |
|
| Equity | | | | | | | |
| Preferred stock, $0.01 par value, 50,000,000 shares authorized, none issued and outstanding | — |
| | | — |
| — |
| | — |
|
| Common stock, $0.01 par value, 300,000,000 shares authorized, 10,163,206 and 8,888 shares issued and outstanding, respectively | 102 |
| | | — |
| |
| Common stock, $0.01 par value, 300,000,000 shares authorized, 38,493,430 and 36,300,777 shares issued and outstanding as of December 31, 2016, and December 31, 2015, respectively | | 385 |
| | 363 |
|
| Additional paid-in capital | 221,379 |
| | | — |
| 843,149 |
| | 793,786 |
|
| Deficit | (19,686 | ) | | | — |
| (286,852 | ) | | (155,680 | ) |
| Members' equity | — |
| | | 88,496 |
| |
| Total equity | 201,795 |
| | | 88,496 |
| |
| Total Liabilities and Equity | $ | 333,374 |
| | | $ | 135,242 |
| |
| Total equity of Hospitality Investors Trust, Inc. stockholders | | 556,682 |
| | 638,469 |
|
| Non-controlling interest - consolidated variable interest entity | | 2,761 |
| | $ | 2,740 |
|
| Total Equity | | $ | 559,443 |
| | $ | 641,209 |
|
| Total Liabilities, Non-controlling Interest and Equity | | $ | 2,353,411 |
| | $ | 2,347,839 |
|
The accompanying notes are an integral part of these statements.
AMERICAN REALTY CAPITAL HOSPITALITY INVESTORS TRUST, INC.
CONSOLIDATED/COMBINED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)LOSS
(In thousands, except for share and per share data)
| | | | Successor | | | Predecessor | Successor | | | Predecessor |
| | For the Period from March 21 to December 31, 2014 | | | For the Period from January 1 to March 20, 2014 | | Year Ended December 31, 2013 | Year Ended December 31, 2016 | | Year Ended December 31, 2015 | | For the Period from March 21, 2014 to December 31, 2014 | | | For the Period from January 1, 2014 to March 20, 2014 |
| Revenues | | | | | | | | | | | | | | |
| Rooms | $ | 26,163 |
| | | $ | 6,026 |
| | $ | 30,489 |
| $ | 566,633 |
| | $ | 420,617 |
| | $ | 26,163 |
| | | $ | 6,026 |
|
| Food and beverage | 5,612 |
| | | 1,543 |
| | 6,267 |
| 20,039 |
| | 15,908 |
| | 5,612 |
| | | 1,543 |
|
| Other | 3,096 |
| | | 676 |
| | 3,041 |
| 12,920 |
| | 9,659 |
| | 3,096 |
| | | 676 |
|
| Total revenue | 34,871 |
| | | 8,245 |
| | 39,797 |
| $ | 599,592 |
| | $ | 446,184 |
| | $ | 34,871 |
| | | $ | 8,245 |
|
| Operating expenses | | | | | | | | | | | | | | |
| Rooms | 5,411 |
| | | 1,405 |
| | 6,340 |
| 139,169 |
| | 99,543 |
| | 5,411 |
| | | 1,405 |
|
| Food and beverage | 3,785 |
| | | 1,042 |
| | 4,461 |
| 15,986 |
| | 12,774 |
| | 3,785 |
| | | 1,042 |
|
| Management fees - related party | 1,498 |
| | | 289 |
| | 1,471 |
| |
| Management fees | | 42,560 |
| | 22,107 |
| | 1,498 |
| | | 289 |
|
| Other property-level operating expenses | 13,049 |
| | | 3,490 |
| | 15,590 |
| 230,546 |
| | 171,488 |
| | 13,049 |
| | | 3,490 |
|
| Depreciation and amortization | 2,796 |
| | | 994 |
| | 5,105 |
| 101,007 |
| | 68,500 |
| | 2,796 |
| | | 994 |
|
| Gain on disposal of assets | — |
| | | — |
| | 74 |
| |
| Impairment of real estate investments | | 2,399 |
| | — |
| | — |
| | | — |
|
| Rent | 3,879 |
| | | 933 |
| | 4,321 |
| 6,714 |
| | 6,249 |
| | 3,879 |
| | | 933 |
|
| Total operating expenses | 30,418 |
| | | 8,153 |
| | 37,362 |
| $ | 538,381 |
| | $ | 380,661 |
| | $ | 30,418 |
| | | $ | 8,153 |
|
| Income from operations | 4,453 |
| | | 92 |
| | 2,435 |
| $ | 61,211 |
| | $ | 65,523 |
| | $ | 4,453 |
| | | $ | 92 |
|
| Other income (expenses) | | | | | | | |
| Interest income | 103 |
| | | — |
| | — |
| |
| Interest expense | (5,958 | ) | | | (531 | ) | | (2,265 | ) | (92,264 | ) | | (80,667 | ) | | (5,958 | ) | | | (531 | ) |
| Acquisition and transaction related costs | (10,884 | ) | | | — |
| | — |
| (25,270 | ) | | (64,513 | ) | | (10,884 | ) | | | — |
|
| Other income (expense) | | 1,169 |
| | (491 | ) | | 103 |
| | | — |
|
| Equity in earnings (losses) of unconsolidated entities | 352 |
| | | (166 | ) | | (65 | ) | 399 |
| | 238 |
| | 352 |
| | | (166 | ) |
| General and administrative | (2,316 | ) | | | — |
| | — |
| (15,806 | ) | | (11,621 | ) | | (2,316 | ) | | | — |
|
| Total other income (expenses) | (18,703 | ) | | | (697 | ) | | (2,330 | ) | |
| Net income (loss) before taxes | (14,250 | ) | | | (605 | ) | | 105 |
| |
| Total other expenses, net | | $ | (131,772 | ) | | $ | (157,054 | ) | | $ | (18,703 | ) | | | $ | (697 | ) |
| Net loss before taxes | | $ | (70,561 | ) | | $ | (91,531 | ) | | $ | (14,250 | ) | | | $ | (605 | ) |
| Provision for income taxes | 591 |
| | | — |
| | — |
| 1,371 |
| | 3,106 |
| | 591 |
| | | — |
|
| Net income (loss) and comprehensive income (loss) | $ | (14,841 | ) | | | $ | (605 | ) | | $ | 105 |
| |
| | | | | | | | |
| Net loss and comprehensive loss | | $ | (71,932 | ) | | $ | (94,637 | ) | | $ | (14,841 | ) | | | $ | (605 | ) |
| Less: Net income attributable to non-controlling interests | | 315 |
| | 189 |
| | — |
| | | — |
|
| Net loss attributable to Hospitality Investors Trust, Inc. | | $ | (72,247 | ) | | $ | (94,826 | ) | | $ | (14,841 | ) | | | $ | (605 | ) |
| Basic and diluted net loss per share | $ | (5.25 | ) | | | NA | | NA | $ | (1.86 | ) | | $ | (3.61 | ) | | $ | (3.04 | ) | | | N/A |
| Basic and diluted weighted average shares outstanding | 2,826,352 |
| | | NA | | NA | 38,732,949 |
| | 26,247,563 |
| | 4,874,229 |
| | | N/A |
NA - not applicable
The accompanying notes are an integral part of these statements.
AMERICAN REALTY CAPITAL HOSPITALITY INVESTORS TRUST, INC.
CONSOLIDATED/COMBINED STATEMENT OF CHANGES IN EQUITY
(In thousands, except for share data)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | | | | | | | | | | | |
| | Number of
Shares | | Par Value | | Additional Paid-in Capital | | Deficit | | Total Equity of American Realty Capital Hospitality Trust, Inc. Stockholders | | Non-controlling Interest | | Members' Equity | | Total Non-controlling Interest and Equity |
| Balance, December 31, 2013 | 8,888 |
| | $ | — |
| | $ | 200 |
| | $ | (6 | ) | | $ | 194 |
| | $ | — |
| | $ | 88,496 |
| | $ | 194 |
|
| Issuance of common stock, net | 105,609 |
| | 1 |
| | 2,417 |
| | — |
| | 2,418 |
| | — |
| | — |
| | 2,418 |
|
Net loss attributable to Hospitality Investors Trust, Inc.
| — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (605 | ) | | — |
|
| Distributions | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (800 | ) | | — |
|
| Common stock offering costs, commissions and dealer manager fees | — |
| | — |
| | (1,529 | ) | | — |
| | (1,529 | ) | | — |
| | — |
| | (1,529 | ) |
| Balance, March 20, 2014 | 114,497 |
| | $ | 1 |
| | $ | 1,088 |
| | $ | (6 | ) | | $ | 1,083 |
| | $ | — |
| | $ | 87,091 |
| | $ | 1,083 |
|
| Proceeds received from Successor for the assets of Predecessor | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (87,091 | ) | | — |
|
Issuance of common stock, net
| 9,984,711 |
| | 100 |
| | 248,615 |
| | — |
| | 248,715 |
| | — |
| | — |
| | 248,715 |
|
Net loss attributable to Hospitality Investors Trust, Inc.
| — |
| | — |
| | — |
| | (14,841 | ) | | (14,841 | ) | | — |
| | — |
| | (14,841 | ) |
| Dividends paid or declared | — |
| | — |
| | — |
| | (4,839 | ) | | (4,839 | ) | | — |
| | — |
| | (4,839 | ) |
| Common stock issued through Distribution Reinvestment Plan | 63,998 |
| | 1 |
| | 1,520 |
| | — |
| | 1,521 |
| | — |
| | — |
| | 1,521 |
|
| Share-based payments | — |
| | — |
| | 22 |
| | — |
| | 22 |
| | — |
| | — |
| | 22 |
|
| Common stock offering costs, commissions and dealer manager fees | — |
| | — |
| | (29,866 | ) | | — |
| | (29,866 | ) | | — |
| | — |
| | (29,866 | ) |
| Balance, December 31, 2014 | 10,163,206 |
| | $ | 102 |
| | $ | 221,379 |
| | $ | (19,686 | ) | | $ | 201,795 |
| | $ | — |
| | $ | — |
| | $ | 201,795 |
|
| Issuance of common stock, net | 25,373,352 |
| | 253 |
| | 631,526 |
| | — |
| | 631,779 |
| | — |
| | — |
| | 631,779 |
|
Net loss attributable to Hospitality Investors Trust, Inc.
| — |
| | — |
| | — |
| | (94,826 | ) | | (94,826 | ) | | — |
| | — |
| | (94,826 | ) |
Net income attributable to non-controlling interest
| — |
| | — |
| | — |
| | — |
| | — |
| | 189 |
| | — |
| | 189 |
|
| Non-controlling interest - consolidated variable interest entity | — |
| | — |
| | — |
| | — |
| | — |
| | 2,551 |
| | — |
| | 2,551 |
|
| Dividends paid or declared | — |
| | — |
| | — |
| | (41,168 | ) | | (41,168 | ) | | — |
| | — |
| | (41,168 | ) |
| Common stock issued through Distribution Reinvestment Plan | 764,219 |
| | 8 |
| | 18,150 |
| | — |
| | 18,158 |
| | — |
| | — |
| | 18,158 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | | | | | | | | | |
| | Number of
Shares | | Par Value | | Additional Paid-in Capital | Deficit | | Total Stockholders' Equity | | Members' Equity | | Total |
| Balance, December 31, 2013 | 8,888 |
| | $ | — |
| | $ | 200 |
| | $ | (6 | ) | | $ | 194 |
| | $ | 88,496 |
| | $ | 88,690 |
|
| Issuance of common stock | 105,609 |
| | 1 |
| | 2,417 |
| | — |
| | 2,418 |
| | — |
| | 2,418 |
|
| Net loss | — |
| | — |
| | — |
| | — |
| | — |
| | (605 | ) | | (605 | ) |
| Distributions | — |
| | — |
| | — |
| | — |
| | — |
| | (800 | ) | | (800 | ) |
| Common stock offering costs, commissions and dealer manager fees | — |
| | — |
| | (1,529 | ) | | — |
| | (1,529 | ) | | — |
| | (1,529 | ) |
| Balance, March 20, 2014 | 114,497 |
| | 1 |
| | 1,088 |
| | (6 | ) | | 1,083 |
| | 87,091 |
| | 88,174 |
|
| Proceeds received from Successor for the assets of Predecessor | — |
| | — |
| | — |
| | — |
| | — |
| | (87,091 | ) | | (87,091 | ) |
| Issuance of common stock | 9,984,711 |
| | 100 |
| | 248,615 |
| | — |
| | 248,715 |
| | — |
| | 248,715 |
|
| Net loss | — |
| | — |
| | — |
| | (14,841 | ) | | (14,841 | ) | | — |
| | (14,841 | ) |
| Dividends paid or declared | — |
| | — |
| | — |
| | (4,839 | ) | | (4,839 | ) | | — |
| | (4,839 | ) |
| Common stock issued through Distribution Reinvestment Plan | 63,998 |
| | 1 |
| | 1,520 |
| | — |
| | 1,521 |
| | — |
| | 1,521 |
|
| Share-based payments | — |
| | — |
| | 22 |
| | — |
| | 22 |
| | — |
| | 22 |
|
| Common stock offering costs, commissions and dealer manager fees | — |
| | — |
| | (29,866 | ) | | — |
| | (29,866 | ) | | — |
| | (29,866 | ) |
| Balance, December 31, 2014 | 10,163,206 |
| | $ | 102 |
| | $ | 221,379 |
| | $ | (19,686 | ) | | $ | 201,795 |
| | $ | — |
| | $ | 201,795 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Share-based payments | — |
| | — |
| | 74 |
| | — |
| | 74 |
| | — |
| | — |
| | 74 |
|
| Common stock offering costs, commissions and dealer manager fees | — |
| | — |
| | (77,343 | ) | | — |
| | (77,343 | ) | | — |
| | — |
| | (77,343 | ) |
| Balance, December 31, 2015 | 36,300,777 |
| | $ | 363 |
| | $ | 793,786 |
| | $ | (155,680 | ) | | $ | 638,469 |
| | $ | 2,740 |
| | $ | — |
| | $ | 641,209 |
|
| Issuance of common stock, net | 61,181 |
| | 1 | | 1,146 |
| | — |
| | 1,147 |
| | — |
| | — |
| | 1,147 |
|
| Net loss attributable to Hospitality Investors Trust, Inc. | — |
| | — |
| | — |
| | (72,247 | ) | | (72,247 | ) | | — |
| | — |
| | (72,247 | ) |
| Net income attributable to non-controlling interest | — |
| | — |
| | — |
| | — |
| | — |
| | 315 |
| | — |
| | 315 |
|
| Dividends paid or declared | 1,732,822 |
| | 17 | | 38,697 |
| | (58,925 | ) | | (20,211 | ) | | (294 | ) | | — |
| | (20,505 | ) |
| Common stock issued through Distribution Reinvestment Plan | 398,650 |
| | 4 | | 9,464 |
| | — |
| | 9,468 |
| | — |
| | — |
| | 9,468 |
|
| Share-based payments | — |
| | — |
| | 66 |
| | — |
| | 66 |
| | — |
| | — |
| | 66 |
|
| Common stock offering costs, commissions and dealer manager fees | — |
| | — |
| | (10 | ) | | — |
| | (10 | ) | | — |
| | — |
| | (10 | ) |
| Balance, December 31, 2016 | 38,493,430 |
| | $ | 385 |
| | $ | 843,149 |
| | $ | (286,852 | ) | | $ | 556,682 |
| | $ | 2,761 |
| | $ | — |
| | $ | 559,443 |
|
The accompanying notes are an integral part of these statements.
AMERICAN REALTY CAPITAL HOSPITALITY INVESTORS TRUST, INC.
CONSOLIDATED/COMBINED STATEMENTS OF CASH FLOWS
(In thousands)
|
| | | | | | | | | | | | | |
| | | Successor | | | Predecessor |
| | | For the Period from March 21 to December 31, 2014 | | | For the Period from January 1 to March 20, 2014 | | Year Ended December 31, 2013 |
| Cash flows from operating activities: | | | | | | | |
| Net income (loss) | | $ | (14,841 | ) | | | $ | (605 | ) | | $ | 105 |
|
| Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: | | | | | | | |
| Depreciation and amortization | | 2,796 |
| | | 994 |
| | 5,105 |
|
| Amortization of deferred financing costs | | 595 |
| | | 75 |
| | 196 |
|
| Amortization of below-market lease obligation | | 340 |
| | | — |
| | — |
|
| Accretion of deferred consideration | | 71 |
| | | — |
| | — |
|
| Accretion of contingent consideration | | 116 |
| | | — |
| | — |
|
| Loss on disposal of property and equipment | | — |
| | | — |
| | 74 |
|
| Equity in (earnings) losses of unconsolidated entities | | (352 | ) | | | 166 |
| | 65 |
|
| Distribution from unconsolidated affiliates | | 257 |
| | | — |
| | — |
|
| Share-based payments | | 22 |
| | | — |
| | — |
|
| Changes in assets and liabilities: | | | | | | | |
| Prepaid expenses and other assets | | (7,923 | ) | | | (581 | ) | | 455 |
|
| Restricted cash | | (783 | ) | | | — |
| | — |
|
| Due to affiliates | | 5,042 |
| | | — |
| | — |
|
| Accounts payable and accrued expenses | | 5,010 |
| | | (605 | ) | | (182 | ) |
| Net cash (used in) provided by operating activities | | (9,650 | ) | | | (556 | ) | | 5,818 |
|
| | | | | | | | |
| Cash flows from investing activities: | | | | | | | |
| Acquisition of hotel assets of the Predecessor | | (41,388 | ) | | | — |
| | — |
|
| Real estate investment improvements and purchases of property and equipment | | (3,659 | ) | | | (83 | ) | | (3,436 | ) |
| Acquisition deposit | | (75,000 | ) | | | — |
| | — |
|
| (Increase) decrease in restricted cash | | (2,035 | ) | | | (468 | ) | | 1,163 |
|
| Net cash used in investing activities | | (122,082 | ) | | | (551 | ) | | (2,273 | ) |
| | | | | | | | |
| Cash flows from financing activities: | | | | | | | |
| Proceeds from issuance of common stock, net | | 249,569 |
| | | — |
| | — |
|
| Payments of offering costs | | (28,071 | ) | | | — |
| | — |
|
| Dividends paid | | (1,950 | ) | | | — |
| | — |
|
| Contributions from members | | — |
| | | — |
| | 227 |
|
| Distribution to members | | — |
| | | (800 | ) | | (3,922 | ) |
| Affiliate financing advancement | | 2,570 |
| | | — |
| | — |
|
| Affiliate financing repayment | | (3,214 | ) | | | — |
| | — |
|
| Proceeds from affiliate note payable used to fund acquisition deposit | | 40,500 |
| | | — |
| | — |
|
| Repayment of affiliate note payable used to fund acquisition deposit | | (40,500 | ) | | | — |
| | — |
|
| Payments of mortgage note payable | | — |
| | | (137 | ) | | (391 | ) |
| Proceeds from mortgage note payable | | 45,500 |
| | | — |
| | 3,440 |
|
| Proceeds from promissory note payable | | 1,775 |
| | | — |
| | — |
|
| Deferred financing fees | | (2,586 | ) | | | — |
| | (31 | ) |
| Net cash provided by (used in) financing activities | | 263,593 |
| | | (937 | ) | | (677 | ) |
| Net change in cash | | 131,861 |
| | | (2,044 | ) | | 2,868 |
|
| Cash and cash equivalents, beginning of period | | — |
| | | 10,520 |
| | 7,652 |
|
| Cash and cash equivalents, end of period | | $ | 131,861 |
| | | $ | 8,476 |
| | $ | 10,520 |
|
|
| | | | | | | | | | | | | | | | | |
| | | Successor | | | Predecessor |
| | | Year Ended December 31, 2016 | | Year Ended December 31, 2015 | | For the Period from March 21, 2014 to December 31, 2014 | | | For the Period from January 1, 2014 to March 20, 2014 |
| Cash flows from operating activities: | | | | | | | | | |
| Net loss | | $ | (71,932 | ) | | $ | (94,637 | ) | | $ | (14,841 | ) | | | $ | (605 | ) |
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | | | | | | | | | |
| Depreciation and amortization | | 101,007 |
| | 68,500 |
| | 2,796 |
| | | 994 |
|
| Impairment of long-lived assets | | 2,399 |
| | — |
| | — |
| | | — |
|
| Gain on sale of hotel | | (2,539 | ) | | — |
| | — |
| | | — |
|
| Amortization and write-off of deferred financing costs | | 9,547 |
| | 11,161 |
| | 595 |
| | | 75 |
|
| Change in fair value of contingent consideration | | 1,455 |
| | 780 |
| | — |
| | | — |
|
| Loss of acquisition deposits | | 22,000 |
| | — |
| | — |
| | | — |
|
| Other adjustments, net | | 363 |
| | 768 |
| | 454 |
| | | 166 |
|
| Changes in assets and liabilities: | | | |
| |
| | |
|
| Prepaid expenses and other assets | | 2,982 |
| | (15,175 | ) | | (7,923 | ) | | | (581 | ) |
| Restricted cash | | (389 | ) | | (11,602 | ) | | (783 | ) | | | — |
|
| Due to Related Parties | | (3,399 | ) | | 1,259 |
| | 5,042 |
| | | — |
|
| Accounts payable and accrued expenses | | 6,352 |
| | 45,453 |
| | 5,010 |
| | | (605 | ) |
| Net cash provided by (used in) operating activities | | $ | 67,846 |
| | $ | 6,507 |
| | $ | (9,650 | ) | | | $ | (556 | ) |
| | | | | | | | | | |
| Cash flows from investing activities: | | | | | | | | | |
| Acquisition of hotel assets, net of cash acquired | | (69,892 | ) | | (629,760 | ) | | (41,388 | ) | | | — |
|
| Proceeds from sale of hotel, net | | 12,710 |
| | — |
| | — |
| | | — |
|
| Real estate investment improvements and purchases of property and equipment | | (91,311 | ) | | (46,523 | ) | | (3,659 | ) | | | (83 | ) |
| Acquisition deposits | | — |
| | (40,504 | ) | | (75,000 | ) | | | — |
|
| Change in restricted cash related to real estate improvements | | 36,627 |
| | (55,259 | ) | | (2,035 | ) | | | (468 | ) |
| Net cash used in investing activities | | $ | (111,866 | ) | | $ | (772,046 | ) | | $ | (122,082 | ) | | | $ | (551 | ) |
| | | | | | | | | | |
| Cash flows from financing activities: | | | | | | | | | |
| Proceeds from issuance of common stock, net | | 678 |
| | 631,698 |
| | 249,569 |
| | | — |
|
| Payments of offering costs and fees related to equity issuances | | (1,055 | ) | | (79,280 | ) | | (28,071 | ) | | | — |
|
| Dividends/Distributions paid | | (11,500 | ) | | (19,153 | ) | | (1,950 | ) | | | (800 | ) |
| Affiliate financing advancement | | — |
| | — |
| | 2,570 |
| | | — |
|
| Repayments of promissory and mortgage notes payable | | (13,473 | ) | | (291,849 | ) | | — |
| | | (137 | ) |
| Payment of deferred consideration payable | | — |
| | (3,500 | ) | | — |
| | | — |
|
AMERICAN REALTY CAPITAL HOSPITALITY INVESTORS TRUST, INC.
CONSOLIDATED/COMBINED STATEMENTS OF CASH FLOWS
(In thousands)
|
| | | | | | | | | | | | | |
| | | Successor | | | Predecessor |
| | | For the Period from March 21 to December 31, 2014 | | | For the Period from January 1 to March 20, 2014 | | Year Ended December 31, 2013 |
| Supplemental disclosure of cash flow information: | | | | | | | |
| Interest paid | | $ | 4,645 |
| | | $ | 458 |
| | $ | 1,548 |
|
| Taxes paid | | $ | 760 |
| | | — |
| | — |
|
| Non-cash investing and financing activities: | | | | | | | |
| Reclassification of deferred offering costs to additional paid-in capital | | $ | 1,505 |
| | | $ | — |
| | $ | — |
|
| Offering costs in due to affiliates | | $ | 1,969 |
| | | $ | — |
| | $ | — |
|
| Offering costs in accounts payable and accrued expenses | | $ | 512 |
| | | $ | — |
| | $ | — |
|
| Real estate investment improvements and purchases of property and equipment in accounts payable and accrued expenses | | $ | 1,033 |
| | | $ | — |
| | $ | — |
|
Proceeds receivable from share sales (1) | | $ | 1,564 |
| | | $ | — |
| | $ | — |
|
| Seller financing of real estate investments | | $ | 58,074 |
| | | $ | — |
| | $ | — |
|
| Seller financing of investment in unconsolidated entities | | $ | 5,000 |
| | | $ | — |
| | $ | — |
|
| Contingent consideration on acquisition | | $ | 2,268 |
| | | $ | — |
| | $ | — |
|
| Deferred consideration on acquisition | | $ | 3,400 |
| | | $ | — |
| | $ | — |
|
| Dividends declared but not paid | | $ | 1,368 |
| | | $ | — |
| | $ | — |
|
| Common stock issued through distribution reinvestment plan | | $ | 1,520 |
| | | $ | — |
| | $ | — |
|
|
| | | | | | | | | | | | | | | | | |
| Affiliate financing repayment | | — |
| | — |
| | (3,214 | ) | | | — |
|
| Proceeds from affiliate note payable used to fund acquisition deposit | | — |
| | — |
| | 40,500 |
| | | — |
|
| Repayment of affiliate note payable used to fund acquisition deposit | | — |
| | — |
| | (40,500 | ) | | | — |
|
| Mandatorily redeemable preferred securities redemptions | | (4,335 | ) | | (152,574 | ) | | — |
| | | — |
|
| Proceeds from mortgage notes payable | | 70,384 |
| | 624,100 |
| | 45,500 |
| | | — |
|
| Proceeds from promissory note payable | | — |
| | — |
| | 1,775 |
| | | — |
|
| Deferred financing fees | | (721 | ) | | (27,944 | ) | | (2,586 | ) | | | — |
|
| Restricted cash for debt service | | | | (991 | ) | | — |
| | | — |
|
| Net cash provided by (used in) financing activities | | $ | 39,978 |
| | $ | 680,507 |
| | $ | 263,593 |
| | | $ | (937 | ) |
| Net change in cash and cash equivalents | | (4,042 | ) | | (85,032 | ) | | 131,861 |
| | | (2,044 | ) |
| Cash and cash equivalents, beginning of period | | 46,829 |
| | 131,861 |
| | — |
| | | 10,520 |
|
| Cash and cash equivalents, end of period | | $ | 42,787 |
| | $ | 46,829 |
| | $ | 131,861 |
| | | $ | 8,476 |
|
| |
(1) | | | | | | | | | | | | | | | | | | | | | | | | | Successor | | | | | Predecessor | | | | Year Ended December 31, 2016 | | Year Ended December 31, 2015 | | For the Period from March 21, 2014 to December 31, 2014 | | | For the Period from January 1, 2014 to March 20, 2014 | | | Supplemental disclosure of cash flow information: | | | | | | | | | | | | Interest paid | | $ | 84,683 |
| | $ | 68,108 |
| | $ | 4,645 |
| | | $ | 458 |
| | | Income taxes paid | | $ | 763 |
| | $ | 6,408 |
| | $ | 760 |
| | | — |
| | | Non-cash investing and financing activities: | | | | | | | | | | | | Reclassification of deferred offering costs to additional paid-in capital | | — |
| | — |
| | $ | 1,505 |
| | | — |
| | | Offering costs payable | | — |
| | $ | 308 |
| | $ | 2,481 |
| | | — |
| | | Real estate investment improvements and purchases of property and equipment in accounts payable and accrued expenses | | $ | 12,478 |
| | $ | 17,518 |
| | $ | 1,033 |
| | | — |
| | | Proceeds receivable from stock sales | | $ | — |
| | $ | 90 |
| | $ | 1,564 |
| | | — |
| | | Seller financed acquisition | | $ | 20,000 |
| | — |
| | $ | 58,074 |
| | | — |
| | | Seller financed acquisition deposit | | $ | 7,500 |
| | — |
| | — |
| | | — |
| | | Seller financing of investment in unconsolidated entities | | — |
| | — |
| | $ | 5,000 |
| | | — |
| | | Mortgage and mezzanine debt assumed on real estate investments | | — |
| | $ | 904,185 |
| | — |
| | | — |
| | | Mandatorily redeemable preferred securities issued in acquisition of property and equipment | | — |
| | $ | 447,097 |
| | — |
| | | — |
| | | Contingent consideration on acquisition | | — |
| | — |
| | $ | 2,268 |
| | | — |
| | | Deferred consideration on acquisition | | — |
| | — |
| | $ | 3,400 |
| | | — |
| | | Dividends declared but not paid | | $ | 4,765 |
| | $ | 4,936 |
| | $ | 1,368 |
| | | — |
| | | Common stock issued through distribution reinvestment plan | | $ | 9,468 |
| | $ | 18,150 |
| | $ | 1,520 |
| | | — |
| |
| The proceeds receivable from the sale of shares of common equity was received by the Company prior to the filing date of this Annual Report on Form 10-K. |
HOSPITALITY INVESTORS TRUST, INC.
CONSOLIDATED/COMBINED STATEMENTS OF CASH FLOWS
(In thousands)
The accompanying notes are an integral part of these statements.
AMERICAN REALTY CAPITAL HOSPITALITY INVESTORS TRUST, INC.
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
Note 1 - Organization
American Realty Capital Hospitality Investors Trust, Inc. (the "Company") was incorporated on July 25, 2013 as a Maryland corporation and intends to qualifyqualified as a real estate investment trust for U.S. federal income tax purposes ("REIT")REIT beginning with the taxable year ended December 31, 2014. The Company was formed primarily to acquire lodging properties in the midscale limited service, extended stay, select service, upscale select service, and upper upscale full service segments within the hospitality sector. The Company has no limitation as to the brand of franchise or license with which the Company's hotels will be associated. All such properties may be acquired by the Company alone or jointly with another party. The Company may also originate or acquire first mortgage loans secured by real estate and invest in other real estate-related debt. As of December 31, 2014,2016, the Company hashad acquired interestsor had an interest in sixa total of 141 hotels through fee simple, leaseholdwith a total of 17,193 guestrooms located in 32 states. As of December 31, 2016, all but one of these hotels operated under a franchise or license agreement with a national brand owned by one of Hilton Worldwide, Inc., Marriott International, Inc., Hyatt Hotels Corporation, Intercontinental Hotels Group and joint venture interests (the "Barceló Portfolio").Red Lion Hotels Corporation or one of their respective subsidiaries or affiliates.
On January 7, 2014, the Company commenced its primary initial public offering ("IPO"(the "IPO" or the "Offering") on a "reasonable best efforts" basis of up to 80,000,000 shares of common stock, $0.01 par value per share, at a price of $25.00 per share, subject to certain volume and other discounts, pursuant to a registration statement on Form S-11 (File No. 333-190698), as amended (the "Registration Statement"), filed with the U.S. Securities and Exchange Commission (the "SEC") under the Securities Act of 1933,well as amended. The Registration Statement also covers up to 21,052,631 shares of common stock available pursuant to the Distribution Reinvestment Plan (the "DRIP") under which the Company's common stockholders maycould elect to have their cash distributions reinvested in additional shares of the Company's common stock.
UntilOn November 15, 2015, the filingCompany suspended its IPO, and, on November 18, 2015, Realty Capital Securities, LLC (the "Former Dealer Manager"), the dealer manager of the Company's second quarterly financial filing withIPO, suspended sales activities, effective immediately. On December 31, 2015, the SEC, pursuant toCompany terminated the Securities Exchange ActFormer Dealer Manager as the dealer manager of 1934, as amended, following the earlier to occur of (i) the Company's acquisition of at least $2.0 billion in total investment portfolio assets or (ii) January 7,our IPO.
On March 28, 2016, the per share purchase priceCompany announced that, because it required funds in the IPO will be upaddition to $25.00 per share (including the maximum allowedoperating cash flow and cash on hand to be charged for commissions and fees) and shares issued under the DRIP will initially be equalmeet its capital requirements, beginning with distributions payable with respect to $23.75 per share, which is 95% of the initial per share offering price in the IPO. Thereafter, the per share purchase price will vary quarterly and will be equal to the Company's net asset value ("NAV") per share plus applicable commissions and fees in the case of the primary offering, and the per share purchase price in the DRIP will be equal to the NAV per share. On February 3, 2014,April 2016 the Company received and accepted subscriptionswould pay distributions to its stockholders in excess of the minimum offering amount of $2.0 million in Offering proceeds, broke escrow and issued shares of common stock instead of cash.
On July 1, 2016, the Company's board of directors approved an estimated net asset value per share of common stock (“Estimated Per-Share NAV”) equal to $21.48 based on an estimated fair value of the initial investors who were admitted as stockholders. AsCompany's assets less the estimated fair value of December 31, 2014, the Company had 10.2 millionour liabilities, divided by 36,636,016 shares of common stock outstanding and had received total gross proceeds fromon a fully diluted basis as of March 31, 2016, which was published on the same date. This was the first time that the Company's board of directors determined an Estimated Per- Share NAV.. It is currently anticipated that the Company will publish an updated Estimated Per-Share NAV on at least an annual basis.
On January 7, 2017, the third anniversary of the commencement of the IPO, of approximately $252.9 million, including shares issued underit terminated in accordance with its terms.
On January 12, 2017, the DRIP. As of December 31, 2014, the aggregate value of all the common stock outstanding was $254.0 million based on a per share value of $25.00 (or $23.75 for shares issued under the DRIP).
Substantially all of the Company's business is conducted throughCompany along with its operating partnership, Hospitality Investors Trust Operating Partnership, L.P. (then known as American Realty Capital Hospitality Operating Partnership, L.P. (the "OP"the “OP”), entered into (i) a DelawareSecurities Purchase, Voting and Standstill Agreement (the “SPA”) with Brookfield Strategic Real Estate Partners II Hospitality REIT II LLC (the “Brookfield Investor”), as well as related guarantee agreements with certain affiliates of the Brookfield Investor, and (ii) a Framework Agreement (the “Framework Agreement”) with the Company’s advisor, American Realty Capital Hospitality Advisors, LLC (the “Advisor”), the Company’s property managers, American Realty Capital Hospitality Properties, LLC and American Realty Capital Hospitality Grace Portfolio, LLC (together, the “Property Manager”), Crestline Hotels & Resorts, LLC (“Crestline”), an affiliate of the Advisor and the Property Manager, American Realty Capital Hospitality Special Limited Partnership, LLC (the “Special Limited Partner”), another affiliate of the Advisor and the Property Manager, and, for certain limited partnership.purposes, the Brookfield Investor.
In connection with the Company’s entry into the SPA, the Company suspended paying distributions to stockholders entirely and suspended the DRIP. Currently, under the Brookfield Approval Rights (as defined below), prior approval is required before the Company can declare or pay any distributions or dividends to its common stockholders, except for cash distributions equal to or less than $0.525 per annum per share.
On March 31, 2017, the initial closing under the SPA (the “Initial Closing”) occurred and various transactions and agreements contemplated by the SPA were consummated and executed, including but not limited to:
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NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
the sale by the Company and purchase by the Brookfield Investor of one share of a new series of preferred stock designated as the Redeemable Preferred Share, par value $0.01 per share (the “Redeemable Preferred Share”), for a nominal purchase price; and
the sale by the Company and purchase by the Brookfield Investor of 9,152,542.37 Class C Units, for a purchase price of $14.75 per Class C Unit, or $135.0 million in the aggregate.
Subject to the terms and conditions of the SPA, the Company also has the right to sell, and the Brookfield Investor has agreed to purchase, additional Class C Units in an aggregate amount of up to $265.0 million at subsequent closings (each, a "Subsequent Closing") that may occur through February 2019. The Subsequent Closings are subject to conditions, and there can be no assurance they will be completed on their current terms, or at all.
Substantially all of the Company’s business is conducted through the OP. Prior to the Initial Closing, the Company iswas the sole general partner and holdsheld substantially all of the units of limited partner interestsinterest in the OP entitled “OP Units” ("OP Units"). Additionally, American Realty Capital Hospitality Special Limited Partner, LLC (the "Special Limited Partner") contributed $2,020Following the Initial Closing, the Brookfield Investor holds all the issued and outstanding Class C Units, representing $135.0 million in liquidation preference with respect to the OP that ranks senior in exchange for 90payment of distributions and in the distribution of assets to the OP Units which represents a nominal percentageheld by us that correspond to shares of our common stock, BSREP II Hospitality II Special GP, OP LLC (the “Special General Partner”), is the special general partner of the aggregate OP, ownership. The holders ofwith certain non-economic rights that apply if the OP is unable to redeem the Class C Units when required to do so, as described below. Class C Units are convertible into OP Units havebased on an initial conversion price of $14.75, subject to anti-dilution and other adjustments upon the right to convertoccurrence of certain events and transactions. OP Units, in turn, are generally redeemable for shares of our common stock on a one-for-one-basis or the cash value of a corresponding number of shares, of common stock or, at the option of the OP, a corresponding number of shares of common stock of the CompanyCompany’s election, in accordance with the terms of the limited partnership agreement of the OP. Holders of Class C Units are also entitled to receive, with respect to each Class C Unit, a fixed, quarterly, cumulative cash distributions at a rate of 7.50% per annum from legally available funds. If the Company fails to pay these cash distributions when due, the per annum rate will increase to 10% until all accrued and unpaid distributions required to be paid in cash are reduced to zero. Holders of Class C Units are also entitled to receive, with respect to each Class C Unit, a fixed, quarterly, cumulative distribution payable in Class C Units at a rate of 5% per annum ("PIK Distributions"). Upon our failure to redeem the Brookfield Investor when required to do so pursuant to the limited partnership agreement of the OP, the 5% per annum PIK Distribution rate will increase to a per annum rate of 7.50% and would further increase by 1.25% per annum for the next four quarterly periods thereafter, up to a maximum per annum rate of 12.50%
Without obtaining the prior approval of the majority of the then outstanding Class C Units, the OP is restricted from taking certain actions including equity issuances, debt incurrences, payment of dividends or other distributions, redemptions or repurchases of securities, property acquisitions and property sales and dispositions. In addition, pursuant to the terms of the Redeemable Preferred Share, in addition to other governance and board rights, the Brookfield Investor has elected and has a continuing right to elect two directors (each, a “Redeemable Preferred Director”) to the Company’s board of directors and the Company is similarly restricted from taking those actions without the prior approval of at least one of the Redeemable Preferred Directors. Prior approval of at least one of the Redeemable Preferred Directors is also required to approve the annual business plan (including the annual operating and capital budget) required under the terms of the Redeemable Preferred Share (the "Annual Business Plan"), hiring and compensation decisions related to certain key personnel (including our executive officers) and various matters related to the structure and composition of the Company’s board of directors. These restrictions (collectively referred to herein as the “Brookfield Approval Rights”) are subject to certain exceptions and conditions, including that, after March 31, 2022, no prior approval will be required for equity issuances, debt incurrences and property sales if the proceeds therefrom are used to redeem the then outstanding Class C Units in full. Subject to certain limitations, the Brookfield Approval Rights are subject to temporary and permanent suspension in connection with any failure by the Brookfield Investor to purchase Class C Units at any Subsequent Closing as required pursuant to the SPA. In addition, the Brookfield Approval Rights will no longer apply if the liquidation preference applicable to all Class C Units held by the Brookfield Investor and its affiliates is reduced to $100.0 million or less due to the exercise by holders of Class C Units of their redemption rights under the limited partnership agreement of the OP.
Prior to March 31, 2022, if the OP consummates a liquidation, sells of all or substantially all of its assets, dissolves or winds-up, whether voluntary or involuntary, sells, merges, reorganizes, reclassifies or recapitalizes or other similar event (a “Fundamental Sale Transaction”), it is required to redeem the Class C Units for cash at a premium based on how long the Class C Units have been outstanding. Following March 31, 2022, the holders of Class Units may require the OP to redeem any or all
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NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
Class C Units for an amount in cash equal to the liquidation preference. The remainingOP will also be required, at the option of the holders thereof, to redeem Class C Units, for the same premium applicable in a Fundamental Sale Transaction, upon the occurrence of certain events related to its failure to qualify as a REIT, the occurrence of a material breach by the OP of certain provisions of the limited partnership agreement of the OP or, for an amount equal to the liquidation preference, the rendering of a judgment enjoining or otherwise preventing the exercise of certain rights under the limited partnership agreement of the OP. If the OP is unable to redeem any Class C Units when required to do so, the Brookfield Investor will be able to elect a majority of our board of directors and may cause the OP, through the exercise of the rights of the limited partner interests are limited, however,Special General Partner, to commence selling its assets until the Class C Units have been fully redeemed.
At any time and do not includefrom time to time on or after March 31, 2022, the abilityOP has the right to replace the general partnerelect to redeem all or to approve the sale, purchase or refinancingany part of the OP's assets.issued and outstanding Class C Units for an amount in cash equal to the liquidation preference. In addition, if the Company lists its common stock on a national securities exchange prior to that date, it will have certain rights to redeem all but $0.10 of the liquidation preference of each issued and outstanding Class C Units for cash subject to payment of a make whole premium and certain rights of their Class C Unit holders to convert their retained liquidation preference into OP Units prior to March 31, 2024.
TheSee Note 17 - Subsequent Events for additional information regarding the terms of the SPA and the transactions and agreements contemplated thereby that were consummated and executed at the Initial Closing, including the rights, privileges and preferences of the Class C Units.
Also at the Initial Closing, as contemplated by the SPA and the Framework Agreement, the Company has no direct employees. The Company has retainedchanged its name from American Realty Capital Hospitality Advisors, LLC (the "Advisor")Trust, Inc. to Hospitality Investors Trust, Inc. and the name of the OP from American Realty Capital Hospitality Operating Partnership, L.P. to Hospitality Investors Trust Operating Partnership, L.P. and completed various other actions required to effect the Company’s transition from external management to self-management.
Prior to the Initial Closing, the Company had no employees, and the Company depended on the Advisor to manage certain aspects of its affairs on a day-to-day basis. American Realty Capital Hospitality Properties, LLCbasis pursuant to the advisory agreement with the Advisor (the "Property Manager""Advisory Agreement") serves. In addition, the Property Manager served as the Company's property manager and the Property Manager hashad retained Crestline Hotels & Resorts, LLC (the "Sub-Property Manager"), an entity under common control with the parent of American Realty Capital IX, LLC, (the "Sponsor") to provide services, including locating investments, negotiating financing and operating certain hotel assets in the Company's portfolio. Realty Capital Securities, LLC (the "Dealer Manager"), an entity
The Advisor, the Property Manager and Crestline are under common control with AR Capital, LLC (“AR Capital”), the parent of the Sponsor servesCompany’s sponsor, and AR Global Investments, LLC ("AR Global"), the successor to certain of AR Capital's businesses.
At the Initial Closing, the Advisory Agreement was terminated and certain employees of the Advisor or its affiliates (including Crestline) who had been involved in the management of the Company’s day-to-day operations, including all of its executive officers, became employees of the Company. The Company also terminated all of its other agreements with affiliates of the Advisor except for its hotel-level property management agreements with Crestline and entered into a transition services agreement with each of the Advisor and Crestline, pursuant to which the Company will receive their assistance in connection with investor relations/shareholder services and support services for pending transactions in the case of the Advisor and accounting and tax related services in the case of Crestline until June 29, 2017. The transition services agreement with Crestline for accounting and tax related services will automatically renew for successive 90-day periods unless either party elects to terminate. The transition services agreement with the Advisor may be extended with respect to the support services for pending transactions for an additional 30 days by written notice delivered prior to the expiration date.
Prior to the Initial Closing, the Company, directly or indirectly through its taxable REIT subsidiaries had entered into agreements with the Property Manager, which, in turn, had engaged Crestline or a third-party sub-property manager to manage the Company’s hotel properties. These agreements were intended to be coterminous, meaning that the term of the agreement with the Company’s Property Manager was the same as the dealer managerterm of the offering. The Advisor, Special Limited Partner,Property Manager’s agreement with the applicable sub-property manager for the applicable hotel properties, with certain exceptions. Following the Initial Closing, the Company no longer has any agreements with the Property Manager and instead contracts directly or indirectly, through its taxable REIT subsidiaries, with Crestline and the third-party property management companies that previously served as sub-property managers to manage the Company’s hotel properties.
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NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
Property Manager, Sub-Property ManagerCrestline is a leading hospitality management company in the United States, and Dealer Manager are related partiesas of December 31, 2016, had 105 hotels and receive fees, distributions and other compensation for services related to the Offering15,552 rooms under management in 28 states and the investment and managementDistrict of Columbia. As of December 31, 2016, 71 of the Company's assets.hotels and 9,436 rooms were managed by Crestline, and 70 of the Company's hotels and 7,757 rooms were managed by third-party sub-property managers.
Grace Acquisition
On May 23, 2014, the Company entered into a Real Estate Sale Agreement to acquire (the "Grace Acquisition") the fee simple or leasehold interests in 126 hotels (the "Grace Portfolio") from W2007 Equity Inns Realty, LLC, W2007 Equity Inns Realty, L.P., W2007 EQI Urbana Partnership, L.P., W2007 EQI Seattle Partnership, L.P., W2007 EQI Savannah 2 Partnership, L.P., W2007 EQI Rio Rancho Partnership, L.P., W2007 EQI Orlando Partnership, L.P., W2007 EQI Orlando 2 Partnership, L.P., W2007 EQI Naperville Partnership, L.P., W2007 EQI Milford Partnership, L.P., W2007 EQI Louisville Partnership, L.P., W2007 EQI Knoxville Partnership, L.P., W2007 EQI Jacksonville Partnership I, L.P., W2007 EQI Indianapolis Partnership, L.P., W2007 EQI Houston Partnership, L.P., W2007 EQI HI Austin Partnership, L.P., W2007 EQI East Lansing Partnership, L.P., W2007 EQI Dalton Partnership, L.P., W2007 EQI College Station Partnership, L.P., W2007 EQI Carlsbad Partnership, L.P., W2007 EQI Augusta Partnership, L.P. and W2007 EQI Asheville Partnership, L.P. (collectively, the “Sellers”) which are indirectly owned by one or more Whitehall Real Estate Funds, an investment arm controlled by The Goldman Sachs Group, Inc.
On November 11, 2014, the Real Estate Sale Agreement was amended and restated to incorporate all amendments made to that date (the "Amended Purchase Agreement"). The Amended Purchase Agreement reduced the number of hotels to be acquired to the 116 hotels currently comprising the Grace Portfolio for an aggregate purchase price of $1.808 billion, exclusive of closing costs and subject to certain adjustments at closing and changed the scheduled close date to February 27, 2015.
As of December 31, 2014,2016, the acquisitionCompany had approximately 38.5 million shares of common stock outstanding and had received total proceeds of approximately $913.0 million from the IPO and shares issued under the DRIP, net of repurchases. The shares outstanding include shares of common stock issued as stock distributions as a result of the Grace Portfolio had not been completed. On such datechange in distribution policy adopted by the Company anticipated funding,Company’s board of directors in March 2016. Shares are only issued pursuant to the terms of the Amended Purchase Agreement, approximately $230.1 million of the purchase priceDRIP in connection with cash generated through the Offering, funding approximately $903.9 million through the assumption of existing mortgage and mezzanine indebtedness (comprising the "Assumed Grace Mortgage Loan" and the "Assumed Grace Mezzanine Loan" and, collectively, the "Assumed Grace Indebtedness") and funding approximately $227.0 million through additional mortgage financing (the "Additional Grace Mortgage Loan" and, togetherdistributions paid in cash. In connection with the Assumed Grace Indebtedness,Company’s entry into the "Grace Indebtedness"). The Assumed Grace Mortgage Loan thatSPA, the Company expected to assume is for $801.1 million at an interest rateCompany’s board of London Interbank Offered Rate ("LIBOR") plus 3.11% anddirectors suspended the Assumed Grace Mezzanine Loan that the Company expected to assume is for $102.8 million at an interest rate of LIBOR plus 4.77%. The Assumed Grace Indebtedness will be secured by 96 of the 116 hotels in the Grace Portfolio and mature on May 1, 2016, subject to three (one-year) extension rights which, if all three are exercised, result in an outside maturity date of May 1, 2019. The Additional Grace Mortgage Loan will be secured by 20 of the 116 hotels in the Grace Portfolio and an additional hotel property already owned by a subsidiary of the OP and part of the Barceló Portfolio. The Additional Grace Mortgage Loan will mature on March 6, 2017, subject to a one-year extension right, which, if exercised, would result in an outside maturity date of March 6, 2018 and will have an interest rate equal to the greater of (i) a floating rate of interest equal to LIBOR plus 6.00% and (ii) 6.25%.
In addition, we anticipated that the remaining $447.1 million of the contract purchase price would be satisfied by the issuance of the preferred equity interests (the "Grace Preferred Equity Interests") in two newly-formed Delaware limited liability companies, ARC Hospitality Portfolio I Holdco, LLC and ARC Hospitality Portfolio II Holdco, LLC, each of which will be an indirect subsidiary of the Company and an indirect owner of the Grace Portfolio. The holders of the Grace Preferred Equity Interests will be entitled to monthly distributions at a rate of 7.50% per annum for the first 18 months following closing and 8.00% per annum thereafter. On liquidation, the holders of the Grace Preferred Equity Interests will be entitled to receive their original value (as reduced by redemptions) prior to any distributions being made to the Company or the Company's shareholders. After the earlier to occur of either (i) the date of repayment in full of the Company's currently outstanding unsecured obligations in the original principal amount of approximately $63.1 million (together with the approximately $3.5 million deferred payment with respect to the March 2014 acquisition of the Georgia Tech Hotel & Conference Center, which is due concurrently), which represents the Barceló Acquisition Promissory Note (See Note 7 - Promissory Notes Payable), or (ii) the date the gross amount of IPO proceeds received by the Company following the acquisition of the Grace Portfolio and payment of all acquisition related expenses (including paymentsdistributions to its stockholders in shares of common stock and suspended the Advisor and its affiliates) exceeds $100.0 million, the Company will be required to use 35.0% of any IPO proceeds to redeem the Grace Preferred Equity Interests at par, up to a maximum of $350.0 million in redemptions for any 12-month period.DRIP. The Company will also be required, in certain circumstances, to apply debt proceeds to redeem the Grace Preferred Equity Interests at par. Asnot issue any additional shares of February 27, 2018, the Company will be required to have redeemed 50.0% of the Grace Preferred Equity Interests, and the Company will be required to redeem 100.0% of the Grace Preferred Equity Interests remaining outstanding at the earlier of (i) 90 days following the stated
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NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
maturity date (including extension options)common stock under the Grace Indebtedness, and (ii) February 27, 2019. In addition, the Company will have the right, at its option, to redeem the Grace Preferred Equity Interests,DRIP or recommence paying distributions in wholecash or in part, at any time at par. The holdersshares of the Grace Preferred Equity Interests will have certain consent rights over major actions by the Company relatingits common stock unless and until its board of directors lifts these suspensions and subject to the Grace Portfolio. If the Company is unable to satisfy the redemption, distribution or other requirements of the Grace Preferred Equity Interests (including if there is a default under the related guarantees provided by the Company, the OP and the individual principals of the parent of the Sponsor), the holders of the Grace Preferred Equity Interests have certain rights, including the ability to assume control of the operations of the Grace Portfolio through the assumption of control of the two newly-formed Delaware limited liability companies. DueBrookfield Approval Rights.
See Note 17 - Subsequent Events for information regarding changes to the fact thatCompany's relationship with AR Capital, AR Global, the Grace Preferred Equity Interests will be mandatorily redeemableAdvisor, the Property Manager and certain of their other characteristics, the Grace Preferred Equity Interests will be treated as debt in accordance with accounting principles generally accepted in the United States of America ("GAAP").affiliates, and our transition to self-management.
The transaction closed as planned on February 27, 2015, see Note 16 - Subsequent Events.
Note 2 - Summary of Significant Accounting Policies
The resultsaccompanying consolidated/combined financial statements of operations for the period from January 1 to March 20, 2014 for the Barceló Portfolio (the "Predecessor") and for the period from March 21 to December 31, 2014 for the Company (the "Successor"included herein were prepared in accordance with United States Generally Accepted Accounting Principles ("GAAP") are not necessarily indicative of the results for the entire year because of the impact of seasonal or short-term variations related to the hotel industry.. Certain immaterial amounts in prior period amountsperiods have been reclassified in order to conform to current period presentation.
Basis of Accounting
The accompanying consolidated financial statements of the Company are prepared on the accrual basis of accounting in accordance with GAAP.
Development Stage Company
On February 3, 2014, the Company raised proceeds sufficient to break escrow in connection with its IPO. The Company received and accepted aggregate subscriptions in excess of the minimum $2.0 million and issued shares of common stock to its initial investors who were admitted as stockholders. The Company acquired the Barceló Portfolio through fee simple, leasehold and joint venture interests and commenced operations on March 21, 2014, and as of such date was no longer considered to be a development stage company.
Principles of Consolidation/CombinationConsolidation and Basis of Presentation
The accompanying consolidated/combined financial statements include the accounts of the Company and its subsidiaries. All inter-company accounts and transactions have been eliminated in consolidation. In determining whether the Company has a controlling financial interest in a joint venture and the requirement to consolidate the accounts of that entity, management considers factors such as percentage ownership interest, authority to make decisions and contractual and substantive participating rights of the other partners or members as well as whether the entity is a variable interest entity for which the Company is the primary beneficiary.
The Predecessor representsconsists of the Barceló Portfolio, which consists of hospitality assets and operations owned by Barceló Crestline Corporation and itscertain consolidated subsidiaries ("BCC"), which historically have that had been maintained in various legal entities.entities until the Company acquired them from BCC on March 21, 2014. Historically, financial statements havehad not been prepared for the Predecessor as a discrete stand-alone entity. The accompanying consolidated/combinedconsolidated financial statements for the Predecessor, as of December 31, 2013, for the period from January 1 to March 20, 2014 and for the year ended December 31, 2013 have been derived from the historical accounting records of BCC and reflect the assets, liabilities, equity, revenue and expenses and cash flows directly attributable to the Predecessor, as well as allocations deemed reasonable by management, to present the combined financial position, results of operations, changes in equity, and cash flows of the Predecessor on a stand-alone basis. Included in the accompanying consolidated/combined statement of operations for the period from March 21 to December 31, 2014 is $0.2 million of costs related to the Company for the period from January 1 to March 20, 2014.
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NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
Use of Estimates
The preparation of the accompanying consolidated/combined financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Management makes significant estimates regarding purchase price allocations to record investments in real estate, the useful lives of real estate and real estate taxes, as applicable.
Real Estate Investments and Below-Market Lease
The Company allocates the purchase price of properties acquired in real estate investments to tangible and identifiable intangible assets acquired based on their respective fair values at the date of acquisition. Tangible assets include land, land improvements, buildings and fixtures.furniture, fixtures and equipment. The Company utilizes various estimates, processes and information to determine the property value. Estimates of value are made using customary methods, including data from
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NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
appraisals, comparable sales, discounted cash flow analysis and other methods. Amounts allocated to land, land improvements, buildings and furniture, fixtures and equipment are based on purchase price allocation studies performed by independent third parties or on the Company’s analysis of comparable properties in the Company’s portfolio. Identifiable intangible assets and liabilities, as applicable, are typically related to contracts, including operating lease agreements, ground lease agreements and hotel management agreements, which will be recorded at fair value.
In making estimates of fair values for purposes of allocating the purchase price, the Company utilizes a number of sources, including independent appraisals that may be obtained in connection with the acquisition or financing of the respective property and other market data. The Company also considers information obtained about each property as a result of the Company’s pre-acquisition due diligence in estimating the fair value of the tangible and intangible assets acquired and intangible liabilities assumed.
Investments in real estate that are not considered to be business combinations under GAAP are recorded at cost. Improvements and replacements are capitalized when they extend the useful life of the asset. Costs of repairs and maintenance are expensed as incurred. Depreciation of the Company's long-lived assets is computed using the straight-line method over the estimated useful lives of up to 40 years for buildings, 15 years for land improvements, five years for furniture, fixtures and equipment, and the shorter of the useful life or the remaining lease term for leasehold interests.
The Company is required to make subjective assessments as to the useful lives of the Company’s assets for purposes of determining the amount of depreciation to record on an annual basis with respect to the Company’s investments in real estate. These assessments have a direct impact on the Company’s net income because if the Company were to shorten the expected useful lives of the Company’s investments in real estate, the Company would depreciate these investments over fewer years, resulting in more depreciation expense and lower net income on an annual basis.
A disposal of a component of the Company or a group of components of the Company is required to be reported in discontinued operations only if the disposal represents a strategic shift that has, or will have, a major effect on the Company's operations and financial results. The Company is required to present, for each comparative period, the assets and liabilities of a disposal group that includes a discontinued operation separately in the asset and liability sections, respectively, of the statement of financial position. As a result, the operations of sold properties through the date of their disposal will be included in continuing operations, unless the sale represents a strategic shift. However, the gain or loss on the sale of a property will be reported separately below income from continuing operations.Below-Market Lease
The below-market lease intangible is based on the difference between the market rent and the contractual rent and is discounted to a present value using an interest rate reflecting the Company's current assessment of the risk associated with the lease acquired. Seeleases acquired (See Note 5.4 - Leases). Acquired lease intangible assets are amortized over the remaining lease term. The amortization of a below-market lease is recorded as an increase to rent expense on the consolidated/combined statementsConsolidated/Combined Statements of operations.Operations and Comprehensive Income (Loss).
Impairment of Long Lived Assets and Investments in Unconsolidated Entities
When circumstances indicate the carrying value of a property may not be recoverable, the Company reviews the asset for impairment. This review is based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to
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NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
result from the property’s use and eventual disposition. The estimates consider factors such as expected future operating income, market and other applicable trends and residual value, as well as the effects of demand, competition and other factors. If impairment exists, due to the inability to recover the carrying value of a property, an impairment loss will be recorded to the extent that the carrying value exceeds the estimated fair value of the property for properties to be held and used. For properties held for sale, the impairment loss is the adjustment to fair value less the estimated cost to dispose of the asset. These assessments have a direct impact on net income because recording anproperty. An impairment loss results in an immediate negative adjustment toreflected in net income. No suchAn impairment losses wereloss of $2.4 million was recorded on one hotel during the year ended December 31, 2016 (See Note 14 - Impairments). The Company has not recorded an impairment in any other periods.
Assets Held for Sale (Long Lived-Assets)
When the periods presented.Company initiates the sale of long-lived assets, it assesses whether the assets meet the criteria to be considered assets held for sale. The review is based on whether the following criteria are met:
Management has committed to a plan to sell the asset group;
The subject assets are available for immediate sale in their present condition;
The Company is actively locating buyers as well as other initiatives required to complete the sale;
The sale is probable and the transfer is expected to qualify for recognition as a complete sale in one year;
The long-lived asset is being actively marketed for sale at a price that is reasonable in relation to fair value; and
Actions necessary to complete the plan indicate it is unlikely significant changes will be made to the plan or the plan will be withdrawn.
If all the criteria are met, a long-lived asset held for sale is measured at the lower of its carrying amount or fair value less cost to sell, and the Company will cease recording depreciation.
HOSPITALITY INVESTORS TRUST, INC.
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
Cash and Cash Equivalents
Cash and cash equivalents includesinclude cash in bank accounts as well as investments in highly-liquid money market funds with original maturities of three months or less. The Federal Deposit Insurance Corporation ("FDIC"), only insures amounts up to $250,000 per depositor per insured bank. The Company expects to have cash and cash equivalents and restricted cash deposited in certain financial institutions in excess of federally insured levels.
Restricted Cash
Restricted cash consists of amounts required under mortgage agreements for future capital improvements to owned assets, future interest and property tax payments and excess cash flow deposits duewhile subject to mortgage agreement restrictions. For purposes of the statement of cash flows, changes in restricted cash caused by changes to the amount needed for future capital improvements are treated as investing activities, and changes related to future interestdebt service payments are treated as financing activities, and changes related to real estate tax payments and excess cash flow deposits are treated as operating activities.
Deferred Financing Fees
Deferred financing fees represent commitment fees, legal fees and other costs associated with obtaining commitments for financing. These fees are amortized over the terms of the respective financing agreements using the effective interest method. Unamortized deferred financing fees are expensed in full when the associated debt is refinanced or repaid before maturity. Costs incurred in seeking financial transactions that do not close are expensed in the period in which it is determined that the financing will not be successful.
In April 2015, the Financial Accounting Standards Board (“FASB”) issued ASU 2015-03 Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”), which was designed to simplify the presentation of debt issuance costs. The amendments in ASU 2015-03 require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. Prior to application of this new guidance, the Company presented debt issuance costs as an asset on the Consolidated Balance Sheets. The recognition and measurement guidance for debt issuance costs were not affected by the amendments in ASU 2015-03. The Company adopted this ASU as of January 1, 2016, on a retrospective basis. The impact to the Consolidated Balance Sheets as of December 31, 2015, was to reduce total assets by approximately $18.8 million, of which $16.0 million was mortgage notes payable, and $2.8 million was the Grace Preferred Equity Interests, the Company's mandatorily redeemable preferred securities.
Variable Interest Entities
Accounting Standards Codification ("ASC") 810Consolidation contains the guidance surrounding the definition of variable interest entities ("VIE"), the definition of variable interests and the consolidation rules surrounding VIEs. In general, VIEs are entities in which equity investors lack the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. The Company has variable interests in VIEs through its investments in entities which own the Westin Virginia Beach Town Center (the "Westin Virginia Beach") and the Hilton Garden Inn Blacksburg.
Once it is determined that the Company holds a variable interest in an entity, GAAP requires that the Company perform a qualitative analysis to determine (i) which entity has the power to direct the matters that most significantly impact the VIE’s financial performance; and (ii) if the Company has the obligation to absorb the losses of the VIE that could potentially be significant to the VIE or the right to receive the benefits of the VIE that could potentially be significant to the VIE. The entity that has both of these characteristics is deemed to be the primary beneficiary and is required to consolidate the VIE.
In February 2015, the FASB issued Accounting Standards Update 2015-02 (“ASU 2015-02”), which amended ASC 810. The amendment modifies the evaluation of whether certain legal entities are VIEs, eliminates the presumption that a general partner should consolidate a limited partnership, and affects the consolidation analysis of reporting entities that are involved with VIEs. The revised guidance was effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. The Company adopted this guidance effective January 1, 2016. The Company has evaluated the impact of the adoption of the new guidance on its consolidated/combined financial statements and has determined the OP is considered a VIE. However, the Company meets the disclosure exemption criteria as the Company is the primary beneficiary of the VIE and the Company’s partnership interest in the OP representing the OP Units held by the Company corresponding to shares of the Company's common stock is considered a majority voting interest. As such, the new guidance did not have an impact on the Company’s consolidated/combined financial statements.
The Company also has variable interests in VIEs through its investments in BSE/AH Blacksburg Hotel, LLC (the "HGI Blacksburg JV"), an entity that owns the assets of the Hilton Garden Inn Blacksburg, and an interest in TCA Block 7 Hotel,
HOSPITALITY INVESTORS TRUST, INC.
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
LLC (the "Westin Virginia Beach JV"), an entity that owns the assets of the Westin Virginia Beach Town Center (the "Westin Virginia Beach").
During the quarter ended June 30, 2015, upon the acquisition of an additional equity interest in the HGI Blacksburg JV, the Company concluded that it was the primary beneficiary, with the power to direct activities that most significantly impact its economic performance, and therefore consolidated the entity in its consolidated/combined financial statements subsequent to the acquisition (See Note 43 - Variable Interest EntitiesBusiness Combinations). The Company has concluded it is not the primary beneficiary with the power to direct activities that most significantly impact economic performance of the Westin Virginia Beach JV, and Investmentshas therefore not consolidated the entity. The Company has accounted for the entity under the equity method of accounting and included it in Unconsolidated Entities).investments in unconsolidated entities in the accompanying Consolidated Balance Sheets.
The Company classifies the distributions from its investments in unconsolidated entities in the consolidated/combined statementConsolidated Statement of cash flowsCash Flows based upon an evaluation of the specific facts and circumstances of each distribution. For example, distributions of cash generated by property operations are classified as cash flows from operating activities. However, distributions received as a result of property sales are classified as cash flows from investing activities.
Revenue Recognition
HotelThe Company recognizes hotel revenue is recognized as earned, which is generally defined as the date upon which a guest occupies a room or utilizes the hotel services.
AMERICAN REALTY CAPITAL HOSPITALITY TRUST, INC.
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
Income Taxes
The Company intends to elect and qualifyqualified to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code") commencing with its tax year ended December 31, 2014. In order to continue to qualify as a REIT, the Company must annually distribute to its stockholders 90% of its REIT taxable income (which does not equal net income as calculated in accordance with GAAP), determined without regard to the deduction for dividends paid and excluding net capital gain, and must comply with various other organizational and operational requirements. If theThe Company qualifies for taxation as a REIT, it generally will not be subject to federal corporate income tax on that portion of its REIT taxable income that it distributes to its stockholders. Even if theThe Company qualifies for taxation as a REIT, it may be subject to certain state and local taxes on its income, property tax and federal income and excise taxes on its undistributed income. The Company's hotels are leased to a taxable REIT subsidiary ("TRS")subsidiaries, which is a whollyare owned subsidiary ofby the OP. The TRS istaxable REIT subsidiaries are subject to federal, state and local income taxes.
Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and for net operating loss, capital loss, and tax credit carryovers. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which such amounts are expected to be realized or settled. The effect on deferred tax assets and liabilities from a change in tax rates is recognized in earnings in the period when the new rate is enacted. However, deferred tax assets are recognized only to the extent that it is more likely than not that they will be realized based on consideration of available evidence, including future reversals of existing taxable temporary differences, future projected taxable income and tax planning strategies.
GAAP prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken in a tax return. The Company must determine whether it is "more-likely-than-not" that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Once it is determined that a position meets the more-likely-than-not recognition threshold, the position is measured at the largest amount of benefit that is greater than 50% likely of being realized upon settlement in order to determine the amount of benefit to recognize in the financial statements. This accounting standard applies to all tax positions related to income taxes. The Company recognizes accrued interest related to unrecognized tax benefits in interest expense and penalties in operating expenses.
Earnings/Loss per Share
The Company calculates basic income or loss per share by dividing net income or loss for the period by the weighted-average shares of its common stock outstanding for a respective period. Diluted income per share takes into account the effect of dilutive instruments, such as stock options and unvested stock awards, except when doing so would be anti-dilutive. Beginning with distributions payable with respect to April 2016 and through the period from January 1, 2017 to January 13,
HOSPITALITY INVESTORS TRUST, INC.
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
2017, the date these distributions were suspended, the Company has paid cumulative distributions of 2,047,877 shares of common stock and adjusted, retroactively for all periods presented, its computation of loss per share in order to reflect this change in capital structure (See Note 8 - Common Stock).
Fair Value Measurements
In accordance with ASC 820, Fair Value Measurement, certain assets and liabilities are recorded at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability between market participants in an orderly transaction on the measurement date. The market in which the reporting entity would sell the asset or transfer the liability with the greatest volume and level of activity for the asset or liability is known as the principal market. When no principal market exists, the most advantageous market is used. This is the market in which the reporting entity would sell the asset or transfer the liability with the price that maximizes the amount that would be received or minimizes the amount that would be paid. Fair value is based on assumptions market participants would make in pricing the asset or liability. Generally, fair value is based on observable quoted market prices or derived from observable market data when such market prices or data are available. When such prices or inputs are not available, the reporting entity should use valuation models.
The Company’s financial instruments recorded at fair value on a recurring basis are categorized based on the priority of the inputs used to measure fair value. The inputs used in measuring fair value are categorized into three levels, as follows:
Level 1 - Inputs that are based upon quoted prices for identical instruments traded in active markets.
Level 2 - Inputs that are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar investments in markets that are not active, or models based on valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the investment.
Level 3 - Inputs that are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models, and similar techniques.
The determination of where an asset or liability falls in the hierarchy requires significant judgment and considers factors specific to the asset or liability. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety.
Advertising Costs
The Company expenses advertising costs for hotel operations as incurred. These costs were $0.4$17.2 million combined between the Predecessor and the Company for the year ended December 31, 20142016, $12.2 million for the year ended December 31, 2015, and $0.4 million combined for the Company and the Predecessor for the year ended December 31, 2013.2014.
Allowance for Doubtful Accounts
Receivables consist principally of trade receivables from customers and are generally unsecured and are due within 30 to 90 days. The Company records a provision for uncollectible accounts using the allowance method. Expected credit losses associated with trade receivables are recorded as an allowance for doubtful accounts. The allowance for doubtful accounts is estimated based upon historical patterns of credit losses for aged receivables as well as specific provisions for certain identifiable, potentially uncollectible balances. When internal collection efforts on accounts have been exhausted, the accounts are written off and the associated allowance for doubtful accounts is reduced. Trade receivable balances, net of the allowance for doubtful accounts, are included in prepaid expenses and other assets in the accompanying consolidated/combined balance sheets,Consolidated Balance Sheets, and are as follows (in thousands):
AMERICAN REALTY CAPITAL HOSPITALITY INVESTORS TRUST, INC.
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
| | | | Successor | | | Predecessor | | | | | | | |
| | December 31, 2014 | | | December 31, 2013 | December 31, 2016 | | December 31, 2015 |
| Trade receivables | $ | 1,388 |
| | | $ | 788 |
| $ | 6,238 |
| | $ | 5,848 |
|
| Allowance for doubtful accounts | (45 | ) | | | (26 | ) | (434 | ) | | (697 | ) |
| Trade receivables, net of allowance | $ | 1,343 |
| | | $ | 762 |
| $ | 5,804 |
| | $ | 5,151 |
|
Derivative Transactions
The Company at certain times enters into derivative instruments to hedge exposure to changes in interest rates. The Company’s derivatives as of December 31, 2016, consist of interest rate cap agreements which it believes will help to mitigate its exposure to increasing borrowing costs under floating rate indebtedness. The Company has elected not to designate its interest rate cap agreements as cash flow hedges. The impact of the interest rate caps for the year ended December 31, 2016, was immaterial to the consolidated/combined financial statements.
Reportable Segments
The Company has determined that it has one reportable segment, with activities related to investing in real estate. The Company’s investments in real estate generate room revenue and other income through the operation of the properties, which comprise 100% of the total consolidated/combinedconsolidated revenues. Management evaluates the operating performance of the Company’s investments in real estate on an individual property level, none of which represent a reportable segment.
Recently Issued Accounting Pronouncements
In April 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-08 Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360) - Reporting Discontinued Operations and Disclosure of Disposal of Components of an Entity. Under this standard, a disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations only if the disposal represents a strategic shift that has, or will have, a major effect on an entity’s operations and financial results. In addition, it requires an entity to present, for each comparative period, the assets and liabilities of a disposal group that includes a discontinued operation separately in the asset and liability sections, respectively, of the statement of financial position. As a result, the operations of sold properties through the date of their disposal will be included in continuing operations, unless the sale represents a strategic shift. However, the gain or loss on the sale of a property will be reported separately below income from continuing operations. The Company adopted this ASU as of January 1, 2014. No prior year restatements are permitted for this change in policy. For purposes of earnings per share calculation, beginning in 2014 gains and losses on property sales will be included in continuing operations.
On May 28, 2014, the FASB issued ASU 2014-09 Revenue from Contracts with Customers ("ASU 2014-09"), which requires an entity to recognize the amount of revenue to which it expects to be entitled to for the transfer of promised goods or services to customers. ASU 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, 2017. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. In April 2015, the FASB proposed an accounting standards update for ASU 2014-09 for the deferral of the effective date of ASU 2014-09. This proposal defers the effective date of ASU 2014-09 from annual reporting periods beginning after December 15, 2016, back one year, to annual reporting periods beginning after December 15, 2017 for all public business entities, certain not-for-profit entities, and certain employee benefit plans. Early application of ASU 2014-09 is permitted as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. In April and May 2016, two amendments ("ASU 2016-10" and "ASU 2016-12") were made in which guidance related to accounting for revenue from contracts with customers was clarified further. ASU 2016-10 provides clarity around identifying performance obligations and licensing implementation guidance. ASU 2016-12 addresses topics such as collectability criterion, presentation of sales tax, non-cash consideration, completed contracts at transition and technical corrections. There have been no adjustments to the effective date of ASU 2014-09. The Company is evaluating the effect that ASU 2014-09, ASU 2016-10 and ASU 2016-12 will have on its consolidatedconsolidated/combined financial statements and related disclosures. The Company has not yet selected a transition method norand has itnot determined the effect of the standard on its ongoing financial reporting. The adoption of this ASU is not expected to have a material effect on the Company's consolidated/combined financial statements.
In August 2014, the FASB issued ASU 2014-15 Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”), which describes how an entity should assess its ability to meet obligations and sets rules for how this information should be disclosed in the financial statements. The standard provides accounting guidance that will be used along with existing auditing standards. The adoption of ASU 2014-15 becomes effective for the Company on its fiscal year ending December 31, 2016, and all subsequent annual periods. Early adoption is permitted. The adoption of ASU 2014-15 did not have a material effect on the Company's consolidated/combined financial statements.
In January, 2015, the FASB issued ASU 2015-01 Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items (“ASU 2015-01”), which eliminates from GAAP the concept of extraordinary items. Subtopic 225-20, Income Statement-Extraordinary and Unusual Items, required that an entity separately classify, present, and disclose extraordinary events and transactions. The adoption of ASU 2015-01 becomes effective for the Company on its fiscal year ending December 31, 2016, and all subsequent annual and interim periods. Early adoption is permitted. The adoption of ASU 2015-01 did not have a material effect on the Company’s consolidated/combined financial statements.
HOSPITALITY INVESTORS TRUST, INC.
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
In September 2015, the FASB issued ASU 2015-16 Business Combinations ("ASU 2015-16"), which require that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. ASU 2015-16 also requires the acquirer to record in the same period's financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects as a result of the change to the acquisition date. Finally, this ASU requires an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. The new standard is effective for the Company on January 1, 2016, including interim periods within that fiscal year. Early application is permitted. The adoption of ASU 2015-16 did not have a material effect on the Company’s consolidated/combined financial statements.
In February 2016, the FASB issued ASU 2016-02 Leases ("ASU 2016-02"), which requires an entity to separate lease components from nonlease components in a contract. ASU 2016-02 provides more guidance on how to identify and separate components than did previous GAAP. ASU 2016-02 requires lessees to recognize assets and liabilities arising from operating leases on the balance sheet. This amendment has not fundamentally changed lessor accounting, however some changes have been made to align and conform to the lessee guidance. The adoption of ASU 2016-02 becomes effective for the Company for the fiscal year beginning after December 15, 2018, and all subsequent annual and interim periods. Upon adoption, the Company will be required to recognize its operating leases, which are primarily comprised of one operating lease with respect to the Georgia Tech Hotel & Conference Center and nine ground leases, as liabilities on the Consolidated Balance Sheets. Early adoption is permitted.
In March 2016, the FASB issued ASU 2016-07 Investments—Equity Method and Joint Ventures ("ASU 2016-07"), which requires that an equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor's previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required. The adoption of ASU 2016-07 becomes effective for the Company for the fiscal year beginning after December 15, 2016, and all subsequent annual and interim periods. Early adoption is permitted. The adoption of ASU 2016-07 is not expected to have a material effect on the Company’s consolidated/combined financial statements.
In March 2016, the FASB issued ASU 2016-09 Compensation—Stock Compensation ("ASU 2016-09"), which requires that all excess tax benefits and all tax deficiencies should be recognized as income tax expense or benefits in the income statement. These benefits and deficiencies are discrete items in the reporting period in which they occur. An entity should not consider these benefits or deficiencies in determining the annual estimated tax rate. The adoption of ASU 2016-09 becomes effective for the Company for the fiscal year beginning after December 15, 2016, and all subsequent annual and interim periods. Early adoption is permitted. The adoption of ASU 2016-09 is not expected to have a material effect on the Company’s consolidated/combined financial statements.
In August 2016, the FASB issued ASU 2016-15 Statement of Cash Flows—Classification of Certain Cash Receipts and Cash Payments ("ASU 2016-15"), which addresses the presentation and classification of certain cash flow receipts and payments. The adoption of ASU 2016-15 becomes effective for the Company for the fiscal year beginning after December 15, 2017, and all subsequent annual and interim periods. The adoption of ASU 2016-15 is not expected to have a material effect on the Company's consolidatedconsolidated/combined financial statements.
Note 3 - Business CombinationCombinations
Barceló Portfolio: On March 21, 2014, the Company acquired the Barceló Portfoliocompleted an acquisition comprising investments in six hotels (the "Barceló Portfolio") through fee simple, leasehold and joint venture interests. The aggregate purchase price of the Barceló Portfolio was approximately $110.1 million, exclusive of closing costs. The Barceló Portfolio consists of (i) three wholly owned hotel assets, (the "Portfolio Owned Assets"), the Baltimore Courtyard Inner Harbor Hotel (the "Baltimore Courtyard"), the Courtyard Providence Downtown Hotel (the "Providence Courtyard") and the Homewood Suites by Hilton Stratford (the "Stratford Homewood Suites"); (ii) one leased asset, the Georgia Tech Hotel & Conference Center (the "Georgia Tech Hotel"); and (iii) equity interests in two joint ventures (the "Joint Venture Assets") that each own one hotel,the HGI Blacksburg JV and the Westin Virginia Beach and the Hilton Garden Inn Blacksburg.JV.
Grace Acquisition:On February 27, 2015, the Company acquired a portfolio of 116 hotels (the "Grace Portfolio") through fee simple or leasehold interests from certain subsidiaries of Whitehall Real Estate Funds, an investment arm controlled by The Goldman Sachs Group, Inc.
The aggregate purchase price under the purchase agreement was $1.808 billion, exclusive of closing costs and subject to certain adjustments at closing. After adjustments, the net purchase price was $1.800 billion. Approximately $221.7 million of the purchase price was satisfied with cash on hand, approximately $904.2 million (fair value on the acquisition date) through the assumption of existing mortgage and mezzanine indebtedness (comprising the "Assumed Grace Mortgage Loan" and the "Assumed Grace Mezzanine Loan", collectively, the "Assumed Grace Indebtedness") and approximately $227.0 million through additional mortgage financing (the "Original Additional Grace Mortgage Loan"). The Original Additional Grace Mortgage Loan was refinanced during October 2015 (the “Refinanced Additional Grace Mortgage Loan” and, together with the Assumed Grace Indebtedness, the "Grace Indebtedness") (See Note 5 - Mortgage Notes Payable).
In addition, the remaining $447.1 million of the contract purchase price was satisfied by the issuance of the preferred equity interests (the "Grace Preferred Equity Interests") in two newly-formed Delaware limited liability companies, ARC Hospitality Portfolio I Holdco, LLC and ARC Hospitality Portfolio II Holdco, LLC, (the "Holdco entities") each of which is an indirect subsidiary of the Company and an indirect owner of the Grace Portfolio. The holders of the Grace Preferred Equity Interests were entitled to monthly distributions at a rate of 7.50% per annum for the first 18 months following closing, through August 2016, and 8.00% per annum thereafter. On liquidation of the Holdco entities, the holders of the Grace Preferred Equity Interests are entitled to receive their original value (as reduced by redemptions) prior to any distributions being made to the Company or the Company's stockholders. Beginning in April 2015, the Company became obligated to use 35% of any IPO proceeds to redeem the Grace Preferred Equity Interests at par, up to a maximum of $350.0 million in redemptions for any 12-month period. As of December 31, 2016, the Company has redeemed $156.9 million of the Grace Preferred Equity Interests, resulting in $290.2 million of liquidation value remaining outstanding under the Grace Preferred Equity Interests.
As of December 31, 2016, the Company is required to redeem 50.0% of the Grace Preferred Equity Interests originally issued, or an additional $66.7 million by February 27, 2018, and is required to redeem the remaining $223.5 million by February 27, 2019. Following the redemption of $47.3 million of the Grace Preferred Equity Interests with a portion of the proceeds from the Initial Closing, resulting in $242.9 million of liquidation value remaining outstanding under the Grace Preferred Equity Interests, the Company is required to redeem an additional $19.4 million by February 27, 2018 and the remaining $223.5 million by February 27, 2019. (See Note 17- Subsequent Events).Prior to the suspension of the IPO in November 2015, the Company depended, and expected to continue to depend, in substantial part on proceeds from the IPO to meet its major capital requirements. The IPO terminated in accordance with its terms in January 2017. Because the Company required funds in addition to operating cash flow and cash on hand to meet its capital requirements, the Company undertook and evaluated a variety of transactions to generate additional liquidity to address its capital requirements, including changing the distribution policy, extending certain of the obligations under PIPs, extending obligations to pay contingent consideration, marketing and selling assets and seeking debt or equity financing transactions. In January 2017, the Company entered into the SPA and the Framework Agreement, and the consummation of the transactions contemplated by these agreements in March 2017 has, and is expected to continue to, generate additional liquidity through the sale of Class C Units to the Brookfield Investor at the Initial Closing and at Subsequent Closings, as well as cost savings realized as part of the Company's transition to self-management through reduced property management fees and the elimination of external asset management fees to the Advisor (offset by expenses previously borne by the Advisor that will now be incurred directly by the Company as a self-managed Company). The Company believes these sources of additional liquidity will allow it to meet its existing capital requirements, although there can be no assurance the amounts actually generated will be sufficient for these purposes. The Subsequent Closings are subject to conditions, and may not be completed on their current terms, or at all.
The Company is also required, in certain circumstances, to apply debt proceeds to redeem the Grace Preferred Equity Interests at par. In addition, the Company has the right, at its option, to redeem the Grace Preferred Equity Interests, in whole or in part, at any time at par. The holders of the Grace Preferred Equity Interests have certain consent rights over major actions by the Company relating to the Grace Portfolio. In connection with the issuance of the Grace Preferred Equity Interests, the Company and the OP have made certain guarantees and indemnities to the sellers and their affiliates or indemnifying the sellers and their affiliates related to the Grace Portfolio. If the Company is unable to satisfy the redemption, distribution or other requirements of the Grace Preferred Equity Interests (including if there is a default under the related guarantees provided by the Company and the OP), the holders of the Grace Preferred Equity Interests have certain rights, including the ability to assume control of the operations of the Grace Portfolio through the assumption of control of the Holdco entities. Due to the fact that the Grace Preferred Equity Interests are mandatorily redeemable and certain of their other characteristics, the Grace Preferred Equity Interests are treated as debt in accordance with GAAP.
The following table presents the allocation of the assets acquired and liabilities assumed by the Company as of March 21, 2014on February 27, 2015 (in thousands):
| | | | | Successor | | | | |
| Assets acquired and liabilities assumed | | As of March 21, 2014 | | February 27, 2015 |
|
| Land | | $ | 12,061 |
| | $ | 274,512 |
|
| Buildings and improvements | | 77,605 |
| | 1,391,695 |
|
| Below-market lease obligation | | 8,400 |
| |
| Below-market lease obligation, net | | | 2,605 |
|
| Furniture, fixtures and equipment | | 5,220 |
| | 127,954 |
|
| Restricted cash | | 619 |
| |
| Investment in unconsolidated entities | | 5,380 |
| |
| Prepaid expenses and other assets | | 2,314 |
| | 8,247 |
|
| Accounts payable and accrued expenses | | (1,469 | ) | | (5,002 | ) |
| Total operating assets acquired, net | | 110,130 |
| | 1,800,011 |
|
| Contingent consideration on acquisition | | (2,268 | ) | |
| Seller financing of real estate investments | | (58,074 | ) | | (1,351,282 | ) |
| Seller financing of investment in unconsolidated entities | | (5,000 | ) | |
| Deferred consideration | | (3,400 | ) | |
| Total assets acquired, net | | $ | 41,388 |
| | $ | 448,729 |
|
The Company is finalizing the fair value of certain tangible and intangible assets acquired and adjustments may be made to the preliminary purchase price allocation shown above. Pro forma information as if the above acquisitions during the year ended December 31, 2014 had been consummated on January 1, 2013HGI Blacksburg JV: have not been presented as the results for the Predecessor for the period from January 1 to MarchOn May 20, 2014 and the year ended December 31, 2013 representing substantially all of the Company's operations are included in the consolidated/combined statements of operations.
Contingent consideration included as part of the acquisition is payable to BCC in 2016 based on the operating results of the Baltimore Courtyard, Providence Courtyard and Stratford Homewood Suites. Additionally, deferred consideration payable to BCC of $3.0 million and $0.5 million is payable within ten business days after the date2015, the Company raises $70.0 million in commonacquired an additional equity from the Offering excluding any common equity raised on or prior to the closing of the Grace Acquisition and payment of all acquisition related expenses (including payments to the Advisor and its affiliates) (See Note 11 - Commitments and Contingencies for further information on the preceding). The fair value of the contingent consideration on acquisition of $2.3 million and the deferred consideration of $3.4 million are included in accounts payable and accrued expenses (See Note 8) and the seller financing of real estate investments and seller financing of investment in unconsolidated entities are included in promissory notes payable (See Note 7) on the accompanying consolidated/combined balance sheets.
Note 4 - Variable Interest Entities and Investments in Unconsolidated Entities
The Company's accompanying consolidated/combined financial statements and the Predecessor's combined financial statements include investments in (i) an entity that owns the Westin Virginia Beach and (ii) an entity that owns the Hilton Garden Inn Blacksburg.
The Company as of December 31, 2014 and the Predecessor as of December 31, 2013 have a 24.00% non-controlling interest (but with certain veto and approval rights) in BSE/AH Blacksburg Hotel, LLC (the "HGI Blacksburg JV"), an entity that owns the assets of the Hilton Garden Inn Blacksburg. The HGI Blacksburg JV has a loan with an original principal balance of $13.0 million (the "Blacksburg Loan"). In addition, BCC is a party to the First Amended and Restated Guaranty of Payment dated April 17, 2011 (the "Blacksburg Payment Guaranty") in connection with the Blacksburg Loan, which is partially supported by a Construction Loan Indemnity from the other partners in the HGI Blacksburg JV dated March 10, 2008 (the "Blacksburg Cross Indemnity"). In connection with the acquisition of its non-controlling interest in the HGI Blacksburg JV, on March 21, 2014,increasing its percentage ownership to 56.5% from 24.0%. As a result of this transaction, the Company entered into an Indemnity Agreement (the "BCC Indemnity") pursuant to which the Company agreed to indemnify BCC against liabilities arising under the Blacksburg Payment Guaranty and/or the Blacksburg Cross Indemnity. The outstanding balance of the Blacksburg Loan was $10.1 million and $10.7 million as of December 31, 2014 and December 31, 2013, respectively.
Under the Blacksburg Payment Guaranty, BCC is jointly liable to the lender, along with four other parties, for payment of any Blacksburg Loan deficiencies. The Blacksburg Payment Guaranty remains in effect until the Blacksburg Loan is repaid.
AMERICAN REALTY CAPITAL HOSPITALITY TRUST, INC.
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
Under the Blacksburg Cross Indemnity, each of the joint venture owners of the hotel agrees to be responsible for its pro rata share of any liabilities under the Blacksburg Payment Guaranty, and to be 100% responsible for any liabilities caused by it. Thus, so long as each of the other parties to the Blacksburg Cross Indemnity remains solvent, the Company, through the BCC Indemnity, should never be liable for anything more than the Company’s pro rata share of losses, or 100% of the losses the Company caused.
The Company as of December 31, 2014 and the Predecessor as of December 31, 2013 have a 30.53% non-controlling interest (but with certain veto and approval rights) in TCA Block 7 Hotel, LLC (the "Westin Virginia Beach JV"), an entityconcluded that owns the assets of the Westin Virginia Beach. On April 8, 2014, a loan in connection with the hotel was refinanced and Notes A and B of that loan were paid off. Upon payment in full of Notes A and B, Note C for $7.0 million and related accrued interest of $0.5 million were forgiven. On April 8, 2014, Westin Virginia Beach JV entered into a $20.7 million loan (the "Westin Virginia Beach Loan") with an unaffiliated lender. In addition, the Company is a party to a Guaranty of Recourse Obligations dated April 8, 2014 (the "Westin Virginia Beach Non-Recourse Carve-out Guaranty") in connection with the Westin Virginia Beach Loan, which is partially supported by a permanent loan cross indemnity from the other partners in the Westin Virginia Beach JV dated April 1, 2014 (the "Westin Virginia Beach Cross Indemnity"). The outstanding balance of the prior loans was $26.6 million as of December 31, 2013, and the outstanding balance of the Westin Virginia Beach Loan was $20.5 million as of December 31, 2014.
Under the Westin Virginia Beach Non-Recourse Carve-out Guaranty, the Company, along with two other parties, would be liable to the lender for repayment for part or all of the loan upon occurrence of events triggering non-recourse carve-out liability. Pursuant to the Westin Virginia Beach Cross Indemnity, each of the joint venture partners is obligated to pay its pro rata share of any losses incurred by the parties to the Westin Virginia Beach Non-Recourse Carve-out Guaranty, except to the extent that any such loss is caused by one of those parties, in which case that party is responsible for 100% of the losses. Therefore, so long as each of the other parties remains solvent, the Company should never be liable for anything more than its pro rata share of losses, or 100% of the losses it caused. The Westin Virginia Beach Non-Recourse Carve-out Guaranty remains in place until the Westin Virginia Beach Loan is repaid.
The Company considers these entities to be VIEs. The Company has concluded it is not the primary beneficiary, with the power to direct activities that most significantly impact economic performance of the entities,HGI Blacksburg JV, and accordingly, has nottherefore consolidated the entities.entity in its consolidated/combined financial statements subsequent to the acquisition. The purchase price of the additional equity interest was approximately $2.2 million, exclusive of closing costs. The joint venture asset holds one hotel, the Hilton Garden Inn Blacksburg.
Summit Acquisition
On June 2, 2015, the Company has accountedentered into agreements with affiliates of Summit Hotel Properties, Inc. (the "Summit Sellers"), as amended from time to time thereafter, to purchase fee simple interests in a portfolio of 26 hotels in three separate closings for a total purchase price of approximately $347.4 million, subject to closing prorations and other adjustments.
On October 15, 2015, the entitiesCompany completed the acquisition of ten hotels (the "First Summit Closing") for $150.1 million, which was funded with $7.6 million previously paid as an earnest money deposit, $45.6 million from the Company’s ongoing initial public offering and $96.9 million from an advance, secured by a mortgage on the hotels in the First Summit Closing, under the equity method of accounting and included them in investments in unconsolidated entities inSN Term Loan (See Note 5 - Mortgage Notes Payable).
The following table presents the accompanying consolidated/combined balance sheets.
The Company’s and Predecessor's investments in unconsolidated entities as of December 31, 2014 and December 31, 2013, respectively, consistallocation of the followingassets acquired and liabilities assumed by the Company on October 15, 2015 (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Investment in Partnership | | |
| | | Successor | | | Predecessor | | Successor | | | Predecessor |
| Partnership | Ownership Interest | December 31, 2014 | | | December 31, 2013 | | For the Period from March 21 to December 31, 2014 | | | For the Period from January 1 to March 20, 2014 | | Year Ended December 31, 2013 |
| HGI Blacksburg JV | 24.00 | % | $ | 1,631 |
| | | $ | 893 |
| | $ | 110 |
| | | $ | (35 | ) | | $ | 79 |
|
| Westin Virginia Beach JV | 30.53 | % | 3,844 |
| | | 3,488 |
| | 242 |
| | | (131 | ) | | (144 | ) |
| Total | | $ | 5,475 |
| | | $ | 4,381 |
| | $ | 352 |
| | | $ | (166 | ) | | $ | (65 | ) |
|
| | | | |
| Assets acquired and liabilities assumed | | October 15, 2015 |
|
| Land | | $ | 16,949 |
|
| Buildings and improvements | | 120,414 |
|
| Furniture, fixtures and equipment | | 12,706 |
|
| Accounts payable and accrued expenses | | (1,042 | ) |
| Total operating assets acquired, net | | 149,027 |
|
| SN Term Loan | | (96,850 | ) |
| Total assets acquired, net | | $ | 52,177 |
|
The
On December 29, 2015, the Company receivedand the Summit Sellers agreed to terminate the purchase agreement pursuant to which the Company had the right to acquire a capital distributionfee simple interest in ten hotels (the "Second Summit Closing") for a total purchase price of $0.24$89.1 million. As a result of this termination, the Company forfeited $9.1 million in non-refundable earnest money deposits.
On February 11, 2016, the Company completed the acquisition of six hotels (the "Third Summit Closing") from the Westin Virginia Beach JVSummit Sellers for an aggregate purchase price of $108.3 million which together with certain closing costs, was funded with $18.5 million previously paid as an earnest money deposit, $20.0 million in proceeds from a loan from the Summit Sellers (the "Summit Loan") described in Note 6 - Promissory Note Payable, and $70.4 million from an advance, secured by a mortgage on the hotels in the Third Summit Closing, under the SN Term Loan. The acquisition was immaterial to the consolidated/combined financial statements.
Also on February 11, 2016, the Company entered into an agreement with the Summit Sellers to reinstate, with certain changes, the purchase agreement (the "Reinstatement Agreement") related to the hotels in the Second Summit Closing, pursuant to which the Company had been scheduled to acquire from the Summit Sellers ten hotels for an aggregate purchase price of $89.1 million.
Pursuant to the Reinstatement Agreement, the Second Summit Closing was re-scheduled to occur on December 30, 2016 and $7.5 million (the “New Deposit”) borrowed by the Company from the Summit Sellers was used as a new earnest money deposit.
Under the Reinstatement Agreement, the Summit Sellers have the right to market and ultimately sell any or all of the hotels in the Second Summit Closing to a bona fide third party purchaser without the consent of the Company at any time prior to the Company completing its acquisition of the Second Summit Closing. If any hotel is sold in this manner, the Reinstatement Agreement will terminate with respect to such hotel and the purchase price will be reduced by the amount allocated to such hotel. If all (but not less than all) of the hotels in the Second Summit Closing are sold in this manner, or if the Reinstatement Agreement is terminated with respect to all (but not less than all) of the hotels in the Second Summit Closing under certain other circumstances (including if there are title issues or material casualties or condemnations involving a particular hotel), then the New Deposit will be automatically applied towards any then outstanding principal balance of the Summit Loan, and any remaining balance of the New Deposit will be remitted to the Company. In June 2016, the Summit Sellers informed the Company that two of the ten hotels had been sold, thereby reducing the Second Summit Closing to eight hotels for an aggregate purchase price of $77.2 million.
On January 12, 2017, the Company, through a wholly owned subsidiary of the OP, entered into an amendment (the “Summit Amendment”) to the Reinstatement Agreement. Under the Summit Amendment, the closing date for the year endedpurchase of seven of the hotels remaining to be purchased under the Reinstatement Agreement for an aggregate purchase price of $66.8 million was extended from January 12, 2017 to April 27, 2017, following an amendment entered into on December 31, 2014. No distributions were recorded during30, 2016 to extend the year endedclosing date from December 31, 2013.
During30, 2016 to January 10, 2017, and an amendment entered into on January 10, 2017 to extend the periodclosing date from March 21January 10, 2017 to December 31, 2014,January 12, 2017. The closing date for the purchase of an eighth hotel to be purchased under the Reinstatement Agreement for an aggregate purchase price of $10.5 million was extended from January 12, 2017 to October 24, 2017. The Summit Sellers have informed the Company receivedthat this eighth hotel is subject to a capital distributionpending purchase and sale agreement with a third party, and, if this sale is completed, the Company’s right and obligation to purchase this hotel will terminate in accordance with the terms of $0.01the Reinstatement Agreement. Concurrent with the Company’s entry into the Summit Amendment, the Company entered into an amendment to the Summit Loan (the “Loan Amendment”) and Summit agreed to loan the Company an additional $3.0 million (the "Additional Loan Agreement") as consideration for the Summit Amendment. For additional discussion see Note 6 - Promissory Notes Payable and Note 17 - Subsequent Events.
Noble Acquisitions:
On June 15, 2015, the Company entered into agreements with affiliates of Noble Investment Group, LLC (the "Noble Sellers"), as amended from time to time thereafter, to purchase fee simple interests in a portfolio of 13 hotels in four separate closing for a total purchase price of $300.0 million.
On November 2, 2015, the Company completed the acquisition of two hotels (the "First Noble Closing") from the Noble Sellers for $48.6 million, which was funded with $3.6 million previously paid as an earnest money deposit, $19.0 million from the HGI Blacksburg JV. No distributionsIPO and $26.0 million from an advance, secured by a mortgage on the hotels in the First Noble Closing, under the SN Term Loan (See Note 5 - Mortgage Notes Payable).
On December 2, 2015, the Company completed the acquisition of two hotels (the “Second Noble Closing”) from the Noble Sellers for an aggregate purchase price of $59.0 million, which was funded with $4.4 million previously paid as an earnest money deposit, $12.3 million in proceeds from the IPO and $42.3 million from an advance, secured by a mortgage on the hotels in the Second Noble Closing, under the SN Term Loan.
On January 25, 2016, the hotel purchase agreements related to third and fourth closing of the Noble acquisition comprising nine hotels in total were recorded during the year ended December 31, 2013.
The maximum exposure to lossterminated, as a result of which the Company’sCompany forfeited $22.0 million in non-refundable earnest money deposits.
Note 4 - Leases
In connection with its acquisitions the Company has assumed various lease agreements. These lease agreements primarily comprise one operating lease with respect to the Georgia Tech Hotel & Conference Center and Predecessor's investments in unconsolidated entitiesnine ground leases which are also classified as of December 31, 2014 and December 31, 2013, respectively, is as follows (in thousands)(1):operating leases. The following table summarizes the Company's future minimum rental commitments under
AMERICAN REALTY CAPITAL HOSPITALITY INVESTORS TRUST, INC.
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Partnership Loan Balance | | Investment in Partnership | | Partnership Maximum Exposure to Loss |
| | Successor | | | Predecessor | | Successor | | | Predecessor | | Successor | | | Predecessor |
| Partnership | December 31, 2014 | | | December 31, 2013 | | December 31, 2014 | | | December 31, 2013 | | December 31, 2014 | | | December 31, 2013 |
| HGI Blacksburg JV | $ | 10,063 |
| | | $ | 10,663 |
| | $ | 1,631 |
| | | $ | 893 |
| | $ | 11,694 |
| | | $ | 11,556 |
|
| Westin Virginia Beach JV | 20,540 |
| | | 26,576 |
| | 3,844 |
| | | 3,488 |
| | 24,384 |
| | | 30,064 |
|
| Total | $ | 30,603 |
| | | $ | 37,239 |
| | $ | 5,475 |
| | | $ | 4,381 |
| | $ | 36,078 |
| | | $ | 41,620 |
|
(1) Represents the Company's maximum exposure to loss at each unconsolidated entity should the loss be caused by the Company. As a result of the Blacksburg Payment Guaranty, the Blacksburg Cross Indemnity, the Westin Virginia Beach Non-Recourse Carve-out Guaranty and the Westin Virginia Beach Cross Indemnity, the Company and Predecessor have a maximum exposure to loss of the outstanding loan balance at the entity as well as their investment in the entity.
Below is the summarized financial information for the HGI Blacksburg JV as of December 31, 2014 and December 31, 2013 and for the period from January 1 to March 20, 2014, for the period from March 21 to December 31, 2014 and for the year ended December 31, 2013these leases (in thousands): |
| | | | | | | | |
| | | Minimum Rental Commitments | | Amortization of Below Market Lease Intangible to Rent Expense |
Year ended December 31, 2017
| | $ | 5,210 |
| | $ | 398 |
|
Year ended December 31, 2018
| | 5,217 |
| | 398 |
|
Year ended December 31, 2019
| | 5,227 |
| | 398 |
|
| Year ended December 31, 2020 | | 5,265 |
| | 398 |
|
| Year ended December 31, 2021 | | 5,271 |
| | 398 |
|
| Thereafter | | 81,743 |
| | 7,836 |
|
| Total | | $ | 107,933 |
| | $ | 9,826 |
|
|
| | | | | | | |
| | Successor | | Predecessor |
| (in thousands) | December 31, 2014 | | December 31, 2013 |
| Total Assets | $ | 14,659 |
| | $ | 14,835 |
|
| Total Liabilities | 10,482 |
| | 11,113 |
|
|
| | | | | | | | | | | | |
| | Successor | | | Predecessor |
| | For the Period from March 21 to December 31, 2014 | | | For the period from January 1 to March 20, 2014 | | Year Ended December 31, 2013 |
| Hotel revenue | $ | 3,981 |
| | | $ | 687 |
| | $ | 4,440 |
|
| Operating income (loss) | 887 |
| | | (47 | ) | | 794 |
|
| Interest expense | (340 | ) | | | (97 | ) | | (465 | ) |
| Net income (loss) | $ | 547 |
| | | $ | (144 | ) | | $ | 329 |
|
| Company's share of net income (loss) | 132 |
| | | (35 | ) | | 79 |
|
Additional amortization expense (1) | (22 | ) | | | — |
| | — |
|
| Company's share of net income (loss) | $ | 110 |
| | | $ | (35 | ) | | $ | 79 |
|
(1) Amortization of the purchase price of the Company’s original interest in the HGI Blacksburg JV, less the Company's share of the JV's deficit, which resulted in a basis difference of $0.6 million.
Below is the summarized financial information for the Westin Virginia Beach JV as of December 31, 2014 and December 31, 2013 and for the period from January 1 to March 20, 2014, for the period from March 21 to December 31, 2014 and for the year ended December 31, 2013 (in thousands):
|
| | | | | | | |
| | Successor | | Predecessor |
| (in thousands) | December 31, 2014 | �� | December 31, 2013 |
| Total Assets | $ | 30,816 |
| | $ | 31,035 |
|
| Total Liabilities | 22,168 |
| | 28,991 |
|
AMERICAN REALTY CAPITAL HOSPITALITY TRUST, INC.
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
|
| | | | | | | | | | | | |
| | Successor | | | Predecessor |
| | For the Period from March 21 to December 31, 2014 | | | For the Period from January 1 to March 20, 2014 | | Year Ended December 31, 2013 |
| Hotel revenue | $ | 10,146 |
| | | $ | 2,070 |
| | $ | 11,232 |
|
| Operating income (loss) | 2,150 |
| | | (67 | ) | | 1,228 |
|
| Interest income | — |
| | | — |
| | 2 |
|
| Interest expense | (994 | ) | | | (304 | ) | | (1,429 | ) |
| Forgiveness of debt | 7,522 |
| | | — |
| | — |
|
| Net income (loss) | $ | 8,678 |
| | | $ | (371 | ) | | $ | (199 | ) |
| Company's share of net income (loss) | 2,650 |
| | | (113 | ) | | (61 | ) |
Additional amortization expense (1) | (111 | ) | | | (18 | ) | | (83 | ) |
Unrecognized gain by JV (2) | (2,297 | ) | | | — |
| | — |
|
| Company's share of net income (loss) | $ | 242 |
| | | $ | (131 | ) | | $ | (144 | ) |
(1) Amortization of the purchase price of the Predecessor’s original interest in the Westin Virginia Beach JV, less the Predecessor’s share of the partnership’s deficit, which resulted in a basis difference of $3.4 million and the Company’s original interest in the Westin Virginia Beach JV, less the Company's share of the JV's deficit, which resulted in a basis difference of $3.6 million.
(2) Represents gain recorded by the JV for the forgiveness of debt which is not recognized by the Company.
Note 5 - Leases
In October 2001, the Predecessor, through a wholly owned subsidiary, entered into an operating lease agreement to lease the Georgia Tech Hotel, which opened in August 2003. On March 21, 2014, the Company acquired the Predecessor's interest in the lease. The lease has an initial term of 30 years from the opening date, with a 10-year extension option. The lease requires the Company to pay rent equal to (i) a fixed minimum rent plus (ii) an additional rent based upon a specified percentage of revenues to the extent they exceed a specified threshold. The Company is responsible for paying all of the hotel operating expenses including all personnel costs, impositions, utility charges, insurance premiums, and payments for funding furniture, fixtures and equipment reserves. Rent expense for the Georgia Tech Hotel attributable to the Successor for the period from March 21 to December 31, 2014 was $3.9 million. In connection with the acquisition of the Georgia Tech Hotel lease, the Company has allocated a valuevalues to thecertain above and below-market lease intangibleintangibles based on the difference between market rents and rental commitments under the marketleases. During the years ended December 31, 2016, December 31, 2015 and December 31, 2014, amortization of below-market lease intangibles, net, to rent expense was $0.4 million, $0.4 million and $0.3 million, respectively. Rent expense for the rental commitments. Duringyears ended December 31, 2016, December 31, 2015 and December 31, 2014 was $6.3 million, $5.8 million and $4.8 million, respectively. Included in the year ended December 31, 2014 $0.3 million has been amortized tois rent expense. Rent expense attributable torecognized by the Predecessor for the period from January 1 to March 20, 2014 and the year ended December 31, 2013 was $0.9 million and $4.3 million, respectively.Predecessor. The Company recognizes rent expense on a straight line basis.
The future minimum rental commitments for the Georgia Tech Hotel are as follows (in thousands):
|
| | | | | | | | |
| | | Minimum Rental Commitments | | Amortization of Lease Intangible to Rent Expense |
| Year ended December 31, 2015 | | $ | 4,400 |
| | $ | 433 |
|
Year ended December 31, 2016
| | 4,400 |
| | 433 |
|
Year ended December 31, 2017
| | 4,400 |
| | 433 |
|
Year ended December 31, 2018
| | 4,400 |
| | 433 |
|
| Year ended December 31, 2019 | | 4,400 |
| | 433 |
|
| Thereafter | | 60,133 |
| | 5,895 |
|
| Total | | $ | 82,133 |
| | $ | 8,060 |
|
AMERICAN REALTY CAPITAL HOSPITALITY TRUST, INC.
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
Note 65 - Mortgage NoteNotes Payable
The Company’s and the Predecessor's mortgage notenotes payable as of December 31, 20142016 and December 31, 20132015 consist of the following, respectively (in thousands):
HOSPITALITY INVESTORS TRUST, INC.
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
|
| | | | | | | | | | |
| Successor |
| | | Outstanding Mortgage Note Payable |
| Encumbered Properties | | December 31, 2014 | | Interest Rate | | Payment | | Maturity |
| Baltimore Courtyard & Providence Courtyard | | $ | 45,500 |
| | 4.3% | | Interest Only, Principal paid at Maturity | | April 2019 |
| | | Predecessor | |
| | | Outstanding Mortgage Note Payable | | Outstanding Mortgage Notes Payable | |
| Encumbered Properties | | December 31, 2013 | | Interest Rate | | Payment | | Maturity | | December 31, 2016 | | December 31, 2015 | | Interest Rate | | Payment | | Maturity |
| Baltimore Courtyard & Providence Courtyard | | $ | 41,449 |
| | 4.55% plus the greater
of (i) three-month
LIBOR or (ii) a
LIBOR floor of
0.50%(1) | | Principal
and
Interest | | January
2016 | | $ | 45,500 |
| | $ | 45,500 |
| | 4.30% | | Interest Only, Principal paid at Maturity | | April 2019 |
| Hilton Garden Inn Blacksburg Joint Venture | | | 10,500 |
| | 10,500 |
| | 4.31% | | Interest Only, Principal paid at Maturity | | June 2020 |
| Assumed Grace Mortgage Loan - 95 properties in Grace Portfolio | | | 793,647 |
| | 801,430 |
| | LIBOR plus 3.31% | | Interest Only, Principal paid at Maturity | | May 2017, subject to two, one year extension rights |
| Assumed Grace Mezzanine Loan - 95 properties in Grace Portfolio | | | 101,794 |
| | 102,550 |
| | LIBOR plus 4.77% | | Interest Only, Principal paid at Maturity | | May 2017, subject to two, one year extension rights |
| Refinanced Additional Grace Mortgage Loan - 20 properties in Grace Portfolio and one additional property | | | 232,000 |
| | 232,000 |
| | 4.96% | | Interest Only, Principal paid at Maturity | | October 2020 |
| SN Term Loan -20 properties in Summit and Noble Portfolios (1) | | | 235,484 |
| | 165,100 |
| | LIBOR plus between 3.25% and 3.75% | | Interest Only, Principal paid at Maturity | | August 2018, subject to two, one year extension rights |
| Total Mortgage Notes Payable | | | $ | 1,418,925 |
| | $ | 1,357,080 |
| |
| Less: Deferred Financing Fees | | | $ | 8,000 |
| | $ | 16,047 |
| |
| Total Mortgage Notes Payable, Net | | | $ | 1,410,925 |
| | $ | 1,341,033 |
| |
(1) 5.05% at December 31, 2013On January 12, 2017, the Company amended this loan and entered into a related additional loan with Summit. See Note17 - Subsequent Events.
The Predecessor's mortgage note payable was paid off concurrently with the acquisition of the Barceló Portfolio by the Company. Interest expense related to the Company's mortgage notenotes payable attributable to the Successor for the period from March 21 to December 31, 2014 was $1.6 million. Interest expense attributable to the Predecessor for the period from January 1 to March 20, 2014 and the year ended December 31, 20132016, for the year ended December 31, 2015, and for the combined year ended December 31, 2014 was $0.5$60.1 million, $43.1 million, and $2.1 million, respectively.
Baltimore Courtyard and Providence Courtyard
The Baltimore Courtyard and Providence Courtyard Loan matures on April 6, 2019. On May 6, 2014 and each month thereafter, the Company is required to make an interest only payment based on the outstanding principal and a fixed annual interest rate of 4.30%. The entire principal amount is due at maturity.
Hilton Garden Inn Blacksburg Joint Venture
The Hilton Garden Inn Blacksburg Joint Venture Loan matures June 6, 2020. On July 6, 2015 and each month thereafter, the Company is required to make an interest only payment based on the outstanding principal and a fixed annual interest rate of 4.31%. The entire principal amount is due at maturity.
Assumed Grace Indebtedness
The Assumed Grace Mortgage Loan and the Assumed Grace Mezzanine Loan mature on May 1, 2017, subject to two (one-year) extension rights which, if both are exercised, would result in an outside maturity date of May 1, 2019. The extensions on the Assumed Grace Mortgage Loan and the Assumed Grace Mezzanine Loan can only occur if certain conditions are met, including a condition that a minimum ratio of net operating income to debt outstanding be satisfied (the "minimum debt yield test"). The Company has satisfied the minimum debt yield test and expects to satisfy the other conditions for extension of the Assumed Grace Indebtedness until May 1, 2018. There can be no assurance that the Company will be able to meet the
HOSPITALITY INVESTORS TRUST, INC.
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
conditions to extend these loans pursuant to their respective terms for the final extension period. The Assumed Grace Mortgage Loan carries an interest rate of London Interbank Offered Rate ("LIBOR") plus 3.31%, and the Assumed Grace Mezzanine Loan carries an interest rate of LIBOR plus 4.77%, for a combined weighted average interest rate of LIBOR plus 3.47%. Pursuant to the Assumed Grace Indebtedness, the Company has agreed to make periodic payments into an escrow account for the property improvement plans required by the franchisors. The Assumed Grace Indebtedness includes the following financial covenants: minimum consolidated net worth, and minimum consolidated liquidity. As of December 31, 2016, the Company was in compliance with these financial covenants.
Refinanced Additional Grace Mortgage Loan
The Refinanced Additional Grace Mortgage Loan carries a fixed annual interest rate of 4.96% per annum with a maturity date on October 6, 2020. Pursuant to the Refinanced Additional Grace Mortgage Loan, the Company agreed to make periodic payments into an escrow account for the property improvement plans required by the franchisors. The Refinanced Additional Grace Mortgage Loan includes the following financial covenants: minimum consolidated net worth, and minimum consolidated liquidity. As of December 31, 2016, the Company was in compliance with these financial covenants.
SN Term Loan
On August 21, 2015, the Company entered into a Term Loan Agreement with Deutsche Bank AG New York Branch, as administrative agent and Deutsche Bank Securities Inc., as sole lead arranger and book-running manager (as amended, the "SN Term Loan"). On October 15, 2015, the Company amended and restated the SN Term Loan and made the initial draw down of borrowings of $96.9 million in connection with the First Summit Closing. On November 2, 2015, the Company drew down borrowings of $26.0 million in connection with the First Noble Closing. On December 2, 2015 the Company drew down borrowings of $42.3 million in connection with the Second Noble Closing. On February 11, 2016, the Company drew down borrowings of $70.4 million in connection with the Third Summit Closing, and amended the SN Term Loan to reduce the lenders’ total commitment from $450.0 million to $293.4 million. On July 1, 2016, the period in which the Company had the ability to further draw down on the SN Term Loan expired, reducing the lenders' total commitment to $235.5 million. No additional amounts are available to be drawn under the SN Term Loan. Due to the amendment and the expiration, the Company recorded a reduction to its deferred financing fees associated with the SN Term Loan. The reduction of $3.0 million was reflected as a general and administrative expense in the Consolidated/Combined Statements of Operations and Comprehensive Loss.
The SN Term Loan provided for financing (the “Loans”) at a rate equal to a base rate plus a spread of between 3.25% and 3.75% for Eurodollar rate Loans and between 2.25% and 2.75% for base rate Loans, depending on the aggregate debt yield and aggregate loan-to-value of the properties securing the Loans measured periodically. Prior to November 1, 2015, all spreads were 0.5% less than they will be during the rest of the term. The SN Term Loan has a term of three years, with two one-year extension options, and is secured by the fee interest in the hotels as and when they are acquired. The extensions on the SN Term Loan can only occur if certain conditions are met, including a condition that a minimum ratio of net operating income to debt outstanding be satisfied. If the Company exercises the extension options the Loans will amortize in an amount of 2.5% per annum payable quarterly. There can be no assurance that we will be able to meet these conditions and extend the Loans pursuant to its terms.
Pursuant to the SN Term Loan, the Company agreed to make periodic payments into an escrow account for the property improvement plans required by the franchisors. The SN Term Loan includes the following financial covenants: minimum debt service coverage ratio, minimum consolidated net worth and minimum consolidated liquidity. As of December 31, 2016, the Company was in compliance with these financial covenants.
Note 76 - Promissory Notes Payable
The Company’s promissory notes payable as of December 31, 2014 are2016 and December 31, 2015 were as follows (in thousands):
|
| | | | | | | | | | | |
| | | Outstanding Promissory Notes Payable |
| Use of Proceeds | | December 31, 2014 | | Interest Rate | | Payment | | Maturity |
| Barceló acquisition | | $ | 63,074 |
| | 6.8 | % | | Interest Only | | See below |
| Property improvement plan | | 1,775 |
| | 4.5 | % | | Interest Only | | March 2019 |
| Grace Acquisition deposit | | — |
| | 6.0 | % | | Interest Only | | May 2015 |
The promissory notes payable for the Barceló acquisition originally consisted of the Portfolio Owned Assets and Joint Venture Assets promissory notes which had a maturity date of within ten business days upon the Company raising equal to or greater than $150.0 million in common equity from the Offering. During the year ended December 31, 2014, the Company entered into an amendment to the Portfolio Owned Assets and Joint Venture Assets promissory notes whereby the promissory notes were combined into one note (the "Barceló Promissory Note") with an outstanding principal amount of $63.1 million. The Barceló Promissory Note has a maturity date of within ten business days after the Company raises $70.0 million in common equity from the Offering after the closing of the Grace Acquisition and payment of all acquisition related expenses (including
payments to the Advisor and its affiliates). There are no principal payments under the Barceló Promissory Note payable for 2015 and 2016, unless the contingent payment feature above is satisfied by raising equal to or greater than $70.0 million in common equity from the Offering after the closing of the Grace Acquisition and payment of all acquisition related expenses
(including payments to the Advisor and its affiliates).
AMERICAN REALTY CAPITAL HOSPITALITY INVESTORS TRUST, INC.
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
The Barceló Promissory Note |
| | | | | | | | | | | |
| | | Outstanding Promissory Notes Payable |
| Note Payable | | December 31, 2016 | | December 31, 2015 | | Interest Rate |
| Summit Loan Promissory Note | | $ | 23,405 |
| | $ | — |
| | 13.0 | % |
| Less: Deferred Financing Fees, Net | | $ | 25 |
| | $ | — |
| |
|
|
| Promissory Notes Payable, Net | | $ | 23,380 |
| | $ | — |
| | |
On February 11, 2016, the Summit Sellers loaned the Company $27.5 million under the Summit Loan. Proceeds from the Summit Loan totaling $20.0 million were used to pay a portion of the purchase price of the Third Summit Closing and proceeds from the Summit Loan totaling $7.5 million were used as a new purchase price deposit on the reinstated Second Summit Closing.
As of December 31, 2016, the Summit Loan bore interest at a rate of 13.0% per annum, of which 9.0% is payable to BCCpaid in cash monthly and the property improvement plan promissory notean additional 4% (the “Added Rate”) accrues and is payablecompounded monthly and added to the Sub-Property Manager.
In connection with entering intooutstanding principal balance at maturity unless otherwise paid in cash by the Grace Acquisition,Company. As of December 31, 2016, the Company paid a $50.0 million customary earnest money deposit on May 27, 2014 which was partially funded by a $40.5 million draw on a $45.0 million promissory note with CARP, LLC, an entity under common control with the Sponsor (the "Affiliate Promissory Note"), whichSummit Loan had a maturity date of May 27, 2015.February 11, 2017, and the Seller Loan Agreement provides for two one-year extensions at the Company’s option. Upon each extension, the Added Rate will be increased by 1%. As required pursuant to the Summit Loan, the Company paid principal in the amount of $5.0 million during the year ended December 31, 2014,2016. The Company may pre-pay the Affiliate Promissory Note had been repaidSummit Loan in full.whole or in part without penalty at any time.
Interest expense related to the Company's promissory notes payable attributable to the Company for the period from March 21 to December 31, 2014 was $3.6 million. No interest expense related to promissory notes payable was incurred by the Predecessor for the year ended December 31, 2013 as2016, the Predecessor did not have any promissory notes.year ended December 31, 2015, and the year ended December 31, 2014 were $2.9 million, $1.4 million, and $3.6 million, respectively.
On January 12, 2017, concurrent with the Company’s entry into the Summit Amendment, the Company entered into the Loan Amendment which amended the Summit Loan Promissory Note and the Additional Loan Agreement (See Note 17 - Subsequent Events).
Note 87 - Accounts Payable and Accrued Expenses
The following is a summary of the components of accounts payable and accrued expenses (in thousands):
|
| | | | | | | | |
| | Successor | | | Predecessor |
| | December 31, 2014 | | | December 31, 2013 |
| Trade accounts payable and accrued expenses | $ | 7,412 |
| | | $ | 2,745 |
|
| Contingent consideration from Barceló Acquisition (see Note 11) | 2,384 |
| | | — |
|
| Deferred payment for Barceló Acquisition (see Note 11) | 3,471 |
| | | — |
|
| Accrued salaries and related liabilities | 952 |
| | | 819 |
|
| Georgia Tech Hotel lease obligation | — |
| | | 1,733 |
|
| Total | $ | 14,219 |
| | | $ | 5,297 |
|
|
| | | | | | | |
| | December 31, 2016 | | December 31, 2015 |
| Trade accounts payable and accrued expenses | $ | 55,489 |
| | $ | 57,472 |
|
| Contingent consideration from Barceló Portfolio (See Note 10 - Commitments and Contingencies) | 4,619 |
| | 3,164 |
|
| Hotel accrued salaries and related liabilities | 8,411 |
| | 6,619 |
|
| Total | $ | 68,519 |
| | $ | 67,255 |
|
Note 98 - Common Stock
The Company had 10,163,20638,493,430 shares and 8,88836,300,777 shares of common stock outstanding and had received total proceeds therefrom of $252.9$913.0 million and $0.2$902.9 million as of December 31, 20142016 and December 31, 20132015, respectively. The shares of common stock outstanding include shares issued as distributions through December 31, 2016, as a result of the Company's change in distribution policy adopted by the Company's board of directors in March 2016 as described below. Subsequent to the year ended December 31, 2016 and through March 15, 2017 , the Company issued 315,383 shares of common stock as stock distributions with respect to December 2016 and the period from January 1, 2017 through January 13, 2017, the date these distributions were suspended (See Note 17 - Subsequent Events).
Distributions
HOSPITALITY INVESTORS TRUST, INC.
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
On February 3, 2014, the Company's board of directors declared distributions payable to stockholders of record each day during the applicable month at a rate equal to $0.0000465753$0.0046575343 per day (or $0.0046448087 if a 366-day year), or $1.70 per annum, per share of common stock. The first distribution was paid in May 2014 to holders of record in April 2014. The
To date, the Company has funded all of its cash distributions are payable bywith proceeds from the fifth day followingOffering, which has been suspended as of December 31, 2015.
In March 2016 the Company’s board of directors changed the distribution policy, such that distributions paid with respect to April 2016 were paid in shares of common stock instead of cash to all stockholders, and not at the election of each month endstockholder. Accordingly, the Company paid a cash distribution to stockholders of record each day during the quarter ended March 31, 2016, but distributions for subsequent periods have been paid in shares of common stock. Distributions for the quarter ended June 30, 2016 were paid in common stock in an amount equivalent to $1.70 per annum, divided by $23.75.
On July 1, 2016, the Company's board of directors approved an Estimated Per-Share NAV, which was published on the same date. This was the first time that the Company’s board of directors determined an Estimated Per-Share NAV. In connection with its determination of Estimated Per-Share NAV, the Company’s board of directors revised the amount of the distribution to $1.46064 per share per annum, equivalent to a 6.80% annual rate based on Estimated Per-Share NAV, automatically adjusting if and when the Company publishes an updated Estimated Per-Share NAV. The Company anticipates it will publish an updated Estimated Per-Share NAV no less frequently than once each calendar year. The Company’s board of directors authorized distributions, payable in shares of common stock, at a rate of 0.068 multiplied by the Estimated Per-Share NAV in effect as of the close of business on the applicable date. Therefore, beginning with distributions payable with respect to July 2016, the Company has paid distributions to its stockholders in shares of common stock on a monthly basis to stockholders of record each day during the prior month.month in an amount equal to 0.000185792 per share per day, or $1.46064 per annum, divided by $21.48.
On January 13, 2017, in connection with the Company's entry into the SPA, the Company suspended paying distributions to its stockholders entirely (See Note 17 - Subsequent Events). Currently, under the Brookfield Approval Rights, prior approval is required before the Company can declare or pay any distributions or dividends to its common stockholders, except for cash distributions equal to or less than $0.525 per annum per share.
Share Repurchase Program
The Company hasIn order to provide stockholders with interim liquidity, the Company’s board of directors adopted a Share Repurchase Program (the "SRP"share repurchase program (“SRP”) that enablesenabled the Company’s stockholders to sell their shares back to the Company after having held them for at least one year, subject to significant conditions and limitations, including that the Company's board of directors had the right to reject any request for repurchase, in its sole discretion, and could amend, suspend or terminate the SRP upon 30 days' notice. In connection with the Company’s entry into the SPA, the Company's board of directors suspended the SRP effective as of January 23, 2017. In connection with the Initial Closing, the Company's board of directors terminated the SRP as of April 30, 2017. The Company did not make any repurchases of common stock originally purchased from the Companypursuant to the Company. UnderSRP or otherwise during the SRP, stockholders may request thatyear ended December 31, 2016 (except for the Company redeem all or any portion, subject to certain minimum conditions described below, if such repurchase does not impair the Company’s capital or operations.
Except in connection with a stockholder’s death, disability, bankruptcy or other involuntary exigent circumstance, prior to the time that therepurchases of 28,264 shares of common stock are listed on a national securities exchange and until the Company begins to calculate its NAV, thefor $0.6 million at an average repurchase price per share will depend on the length of time investors have held such shares as follows: after one year from the purchase date — the lower of $23.13 or 92.5% of the amount they actually paid for each share; after two years from the purchase date — the lower of $23.75 or 95.0% of the amount they actually paid for each share; after three years from the purchase date — the lower of $24.38 or 97.5% of the amount they actually paid for each share; and after four years from the purchase date — the lower of $25.00 or 100.0% of the amount they actually paid for each share (in each case, as adjusted for any stock distributions, combinations, splits and recapitalizations).
Once the Company begins to calculate its NAV, the price per share that the Company will pay$23.44 with respect to repurchase requests received during the Company’s sharesyear ended December 31, 2015 that were completed in January 2016) and has not, and will not, make any repurchase of common stock onduring the last day of each quarter, will beperiod between January 1, 2017 and the Company’s per share NAV of common stock for the quarter, calculated after the close of business on each day the Company makes its quarterly financial filing. Subject to limited
AMERICAN REALTY CAPITAL HOSPITALITY TRUST, INC.
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
exceptions, stockholders whose shares of common stock are repurchased within the first four months from the date of purchase will be subject to a short-term trading fee of 2.0%effectiveness of the aggregate per share NAVtermination of the shares of common stock repurchased.
The board of directors may reject a request for repurchase, at any time. Purchases under the SRP by the Company will be limited in any calendar year to 5.0% of the weighted average number of shares outstanding during the prior calendar year. In addition, funds available for the Company's SRP are limited and may not be sufficient to accommodate all requests. Due to these limitations, we cannot guarantee that we will be able to accommodate all repurchase requests.
When a stockholder requests a repurchase and the repurchase is approved, the Company will reclassify such obligation from equity to a liability based on the settlement value of the obligation. Shares purchased under the SRP will have the status of authorized but unissued shares. As of December 31, 2014 and December 31, 2013, no shares had been repurchased or requested to be repurchased.SRP.
Distribution Reinvestment Plan
Pursuant to the DRIP, to the extent the Company pays distributions in cash, stockholders may elect to reinvest distributions by purchasing shares of common stock in lieu of receiving cash.stock. No dealer manager fees or selling commissions are paid with respect to shares purchased pursuant to the DRIP. Participants purchasingThe shares purchased pursuant to the DRIP have the same rights and are treated in the same manner as if suchall other shares were issued pursuant toof the primary Offering.Company's common stock. The Company's board of directors may designate that certain cash or other distributions be excluded from the DRIP. The Company has the right to amend or suspend any aspect of the DRIP or terminate the DRIP with ten days’ notice to participants. Shares issued under the DRIP are recorded to equity in the accompanying balance sheetsConsolidated Balance Sheets in the period distributions are paid. There were 63,9981,226,867 shares issued under the DRIP as of December 31, 2014. No2016. There were 828,217 shares were issued under the DRIP as of December 31, 2013.2015. Commencing with distributions paid with respect to April 2016, the Company has paid distributions in shares of common stock instead of cash. Shares are only issued pursuant to our DRIP in connection with distributions paid in cash. All shares issued under the DRIP were purchased at $23.75 per share. If and when the Company issues any additional shares of common stock under the DRIP, distributions reinvested in common stock will be at a price equal to the Estimated Per-Share NAV.
HOSPITALITY INVESTORS TRUST, INC.
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
On January 13, 2017, the Company's board of directors suspended the DRIP (See Note 17 - Subsequent Events).
Note 109 - Fair Value Measurements
In accordance with ASC 820, certain assets and liabilities are recorded at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability between market participants in an orderly transaction on the measurement date. The market in which the reporting entity would sell the asset or transfer the liability with the greatest volume and level of activity for the asset or liability is known as the principal market. When no principal market exists, the most advantageous market is used. This is the market in which the reporting entity would sell the asset or transfer the liability with the price that maximizes the amount that would be received or minimizes the amount that would be paid. Fair value is based on assumptions market participants would make in pricing the asset or liability. Generally, fair value is based on observable quoted market prices or derived from observable market data when such market prices or data are available. When such prices or inputs are not available, the reporting entity should use valuation models.
The Company’s financial instruments recorded at fair value on a recurring basis are categorized based on the priority of the inputs used to measure fair value. The inputs used in measuring fair value are categorized into three levels, as follows:
Level 1 - Inputs that are based upon quoted prices for identical instruments traded in active markets.
Level 2 - Inputs that are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar investments in markets that are not active, or models based on valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the investment.
Level 3 - Inputs that are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models, and similar techniques.
The determination of where an asset or liability falls in the hierarchy requires significant judgment and considers factors specific to the asset or liability. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety.
AMERICAN REALTY CAPITAL HOSPITALITY TRUST, INC.
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
The Company is required to disclose the fair value of financial instruments which it is practicable to estimate. The fair value of cash and cash equivalents, accounts receivable and accounts payable and accrued expenses approximate their carrying amounts due to the relatively short maturity of these items. The following table shows the carrying values and the fair values of material non-current liabilities that qualify as financial instruments determined in accordance with the authoritative guidance for disclosures about fair value of financial instruments (in thousands):
|
| | | | | | | | | | | | | | | | |
| | Successor | | | Predecessor |
| | December 31, 2014 | | | December 31, 2013 |
| | Carrying Amount | | Fair Value | | | Carrying Amount | | Fair Value |
| Mortgage note payable | $ | 45,500 |
| | $ | 44,582 |
| | | $ | 41,449 |
| | $ | 38,921 |
|
| Promissory notes payable | 64,849 |
| | 64,849 |
| | | — |
| | — |
|
| Contingent consideration on acquisition | 2,384 |
| | 2,384 |
| | | — |
| | — |
|
| Deferred consideration | 3,471 |
| | 3,471 |
| | | — |
| | — |
|
| Total | $ | 116,204 |
| | $ | 115,286 |
| | | $ | 41,449 |
| | $ | 38,921 |
|
|
| | | | | | | |
| | December 31, 2016 |
| | Carrying Amount | | Fair Value |
Mortgage notes payable(1) | $ | 1,442,330 |
| | $ | 1,439,990 |
|
(1) Carrying amount does not include that associated deferred financing fees as of December 31, 2016. |
The fair value of the mortgage notenotes payable waswere determined using the discounted cash flow method and applying current market rates and is classified as level 3 under the fair value hierarchy. The fair values ofAs described in Note 10 - Commitments and Contingencies, the promissory notes payable were determined to equal their carrying amounts as these amounts are expected to be repaid within a year. The fair valueamount of the contingent consideration onrelated to the Barceló Portfolio acquisition and deferred considerationwas remeasured to fair value as of December 31, 2016.
As described in Note 14 - Impairments, the Company recorded an impairment charge of $2.4 million during the quarter ended June 30, 2016, to reflect one hotel asset at its fair value of $6.2 million. This value was determined to equal their carrying amounts using one or more unobservable inputs representing a nonrecurring level 3 inputs, as these amounts are accreted using current market rates.fair value measurement.
Note 1110 - Commitments and Contingencies
Litigation
In the ordinary course of business, the Company may become subject to litigation, or claims.claims and regulatory matters. There are no material legal or regulatory proceedings pending or known to be contemplated against the Company at the date of this filing.
Environmental Matters
In connection with the ownership and operation of real estate, the Company may potentially be liable for costs and damages related to environmental matters. The Company has acquired the Barceló Portfolio through fee simple, leasehold and joint venture interests and as of December 31, 2014, has not been notified by any governmental authority of any non-compliance, liability or other claim and is not aware of any other environmental condition that it believes will have a material adverse effect on the results of operations.
Contingent Consideration
Included as part of the acquisition of the Barceló Portfolio is a contingent consideration payable to BCC based on the operating results of the Baltimore Courtyard, Providence Courtyard and Stratford Homewood Suites. During August 2016, the Company and BCC entered into an agreement extending and modifying the payment terms of the contingent consideration. The amount payable is calculated by applying a contractual capitalization rate of 8.4% to the excess earnings before interest, taxes, and depreciation and amortization, ("EBITDA") earned in the secondthird year after the acquisition over an agreed upon target. If this target, EBITDA isprovided the contingent consideration generally will not met, no amount will be due to BCC, but ifless than $4.1 million or exceed $4.6 million. During the EBITDA earned is higher than forecasted,year ended December 31, 2016, the amount due to BCC could be higher than the liability recordedCompany revised its forecast resulting in an increase in the consolidated/combined balance sheetscontingent consideration payable of $1.5 million. The change in the contingent consideration payable is reflected in other income (expense) in the Consolidated/Combined Statements of Operations and Comprehensive Income (Loss) for the year ended December 31, 2016. The contingent consideration payable as of December 31, 2014.2016 is $4.6 million. The Company anticipates paying the contingent consideration on July 3, 2017.
Deferred Consideration
Included as part of the acquisition of the Barceló Portfolio is deferred consideration payable to BCC of $3.0 million and $0.5 million which was payable on March 21, 2015 and March 21, 2016, respectively. As part of the amendment to the Portfolio Owned Assets and Joint Venture Assets promissory notes, the full amount of $3.5 million is now payable within ten business days after the date the Company raises $70.0 million in common equity from the Offering after the closing of the Grace Acquisition and payment of all acquisition related expenses (including payments to the Advisor and its affiliates). The deferred consideration does not bear interest.
AMERICAN REALTY CAPITAL HOSPITALITY TRUST, INC.
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
Note 1211 - Related Party Transactions and Arrangements
As of December 31, 2014, the2016, American Realty Capital Hospitality Special Limited Partner, LLC (the "Special Limited Partner"), which is wholly owned 8,888by AR Capital, owned 9,308 shares of the Company’s outstanding common stock. Additionally, as of December 31, 2016, AR Capital, the parent of the Company's sponsor, owned 23,270 shares of the
HOSPITALITY INVESTORS TRUST, INC.
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
Company's outstanding common stock, and AR Global owned 6,699 shares of the Company's outstanding common stock. Crestline is also under common control with AR Capital and AR Global.
See Note 17 - Subsequent Events for additional information regarding the Company’s issuance of additional shares of the Company’s common stock to the Property Manager and the Advisor at the Initial Closing pursuant to the Framework Agreement.
The Company's Former Dealer Manager served as the dealer manager of the IPO. SK Research, LLC and American National Stock Transfer, LLC ("ANST"), both subsidiaries of the parent company of the Former Dealer Manager, provided other general professional services through December 2015 and January 2016, respectively. RCS Capital Corporation ("RCAP"), the parent company of the Former Dealer Manager and certain of its affiliates that provided services to the Company, filed for Chapter 11 bankruptcy protection in January 2016, prior to which it was also under common control with AR Capital, the parent of the Company's sponsor, and AR Global. In May 2016, RCAP and its affiliated debtors emerged from bankruptcy under the new name, Aretec Group, Inc.
Prior to the Initial Closing, the Advisor and its affiliates arewere entitled to a variety of fees, and may incur and pay costs and fees on behalf of the Company for which they arewere entitled to reimbursement. The Company had a payable due to affiliatesrelated parties related to operating, acquisition, financing and Offeringoffering costs of $7.0$2.9 million and $0.6$6.5 million as of December 31, 20142016 and December 31, 2013,2015, respectively.
At the Initial Closing, the Advisory Agreement was terminated and certain employees of the Advisor or its affiliates (including Crestline) who had been involved in the management of the Company’s day-to-day operations, including all of its executive officers, became employees of the Company. The Company also terminated all of its other agreements with affiliates of the Advisor except for its hotel-level property management agreements with Crestline and entered into a transition services agreement with each of the Advisor and Crestline, pursuant to which the Company will receive their assistance in connection with investor relations/shareholder services and support services for pending transactions in the case of the Advisor and accounting and tax related services in the case of Crestline until June 29, 2017. The transition services agreement with Crestline for accounting and tax related services will automatically renew for successive 90-day periods unless either party elects to terminate. The transition services agreement with the Advisor may be extended with respect to the support services for pending transactions for an additional 30 days by written notice delivered prior to the expiration date.
See Note 17 - Subsequent Events for additional information regarding other payments made to the Advisor and the Property Manager at the Initial Closing, as well as other terms of the transactions contemplated by the Framework Agreement.
Fees Paid in Connection with the Offering
The Former Dealer Manager iswas paid fees and compensation in connection with the sale of the Company's common stock in the Offering.Offering prior to its suspension. The Former Dealer Manager iswas paid a selling commission of up to 7.0% of the per share purchase price of the Company’s offeringOffering proceeds before reallowance of commissions earned by participating broker-dealers. In addition, the Former Dealer Manager iswas paid up to 3.0% of the gross proceeds from the sale of shares, before reallowance to participating broker-dealers, as a dealer-manager fee. The Former Dealer Manager maywas entitled to reallow its dealer-manager fee to participating broker-dealers. Alternatively, aA participating broker dealer maywas entitled to elect to receive a fee equal to 7.5% of the gross proceeds from the sale of shares by such participating broker dealer, with 2.5% thereof paid at the time of such sale and 1.0% thereof paid on each anniversary of the closing of such sale up to and including the fifth anniversary of the closing of such sale. If this option iswas elected, the dealer manager fee will behas been reduced to 2.5% of gross proceeds.
On December 31, 2015, the Company, the Advisor and the Former Dealer Manager mutually agreed, pursuant to a termination agreement dated December 31, 2015, to terminate the Exclusive Dealer Manager Agreement dated January 7, 2014 among the Company, the Advisor and the Former Dealer Manager.
No dealer manager fees or selling commissions are paid with respect to shares purchased pursuant to the DRIP.
The table below shows the commissions and fees incurred from and payable to the Former Dealer Manager for the Offering during the year ended December 31, 2016, 2015, 2014 and 2013, respectively, and the associated payable as of December 31, 20142016 and December 31, 2013,2015, which is recorded in due to affiliatesrelated parties on the Company's consolidated/combined balance sheetsConsolidated Balance Sheets (in thousands):
HOSPITALITY INVESTORS TRUST, INC.
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
|
| | | | | | | | | | | | | | | | |
| | | Year Ended
December 31, | | Payable as of |
| | | 2014 | | 2013 | | December 31, 2014 | | December 31, 2013 |
| Total commissions and fees incurred from the Dealer Manager | | $ | 24,099 |
| | $ | — |
| | $ | 153 |
| | $ | — |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31 | | Payable as of |
| | | 2016 | | 2015 | | 2014 | | December 31, 2016 | | December 31, 2015 |
| Total commissions and fees incurred from the Former Dealer Manager | | $ | 71 |
| | $ | 61,079 |
| | $ | 24,099 |
| | $ | — |
| | $ | 1 |
|
The Company had a receivable from the Dealer Manager for proceeds from the IPO of $1.6 million as of December 31, 2014 which is recorded in prepaid expenses and other assets on the Company's consolidated/combined balance sheets. No amount were receivable as of December 31, 2013.
The Advisor and its affiliates arewere paid compensation and/or receivereceived reimbursement for services relating to the Offering, including transfer agency services provided by ANST, an affiliate of the Former Dealer Manager. The Company is responsible for the Offering and related costs (excluding selling commissions and dealer manager fees) up to a maximum of 2.0% of gross proceeds received from the Offering, measured at the end of the Offering. Offering costs in excess of the 2.0% cap as of the end of the Offering are the Advisor’s responsibility. As of December 31, 2014 and December 31, 2013,2016, Offering and related costs (excluding selling commissions and dealer manager fees) exceeded 2.0% of gross proceeds received from the Offering by $2.4 million and $1.5 million, respectively, due$5.9 million. At the Initial Closing, pursuant to the ongoing nature ofFramework Agreement, the Offering.Company waived the Advisor's obligations to reimburse the Company for these Offering and related costs (See Note 17 - Subsequent Events).
All Offering costs incurred by the CompanyAdvisor or its affiliated entities on behalf of the Company have generally been chargedrecorded as a reduction to additional paid-in capitalpaid-in-capital on the accompanying consolidated/combined balance sheets. Offering costs were reclassified from deferred costs to stockholders’ equity when the Company commenced its Offering, and included all expenses incurred by the Company in connection with its Offering as of such date. As of December 31, 2013, such costs totaled $1.5 million.Consolidated Balance Sheets. The table below shows compensation and reimbursements incurred and payable to the Advisor and its affiliates for services relating to the Offering during the year ended December 31, 20142016, the year ended December 31, 2015, and 2013, respectively,the year ended December 31, 2014, and the associated amounts payable as of December 31, 20142016 and December 31, 2013,2015, which is recorded in due to affiliatesrelated parties on the Company's consolidated/combined balance sheetsCompany’s Consolidated Balance Sheets (in thousands):.
AMERICAN REALTY CAPITAL HOSPITALITY TRUST, INC.
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
|
| | | | | | | | | | | | | | | | |
| | | Year Ended
December 31, | | Payable as of |
| | | 2014 | | 2013 | | December 31, 2014 | | December 31, 2013 |
| Total compensation and reimbursement for services provided by the Advisor and its affiliates relating to the Offering | | $ | 3,915 |
| | $ | 644 |
| | $ | 1,885 |
| | $ | 644 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31 | | Payable as of |
| | | 2016 | | 2015 | | 2014 | | December 31, 2016 | | December 31, 2015 |
Total compensation and reimbursement for services provided by the Advisor and its affiliates related to the Offering (1) | | $ | — |
| | $ | 15,007 |
| | $ | 3,915 |
| | $ | 447 |
| | $ | 787 |
|
In addition to(1) Included in the table above for the Company incurred Offering related expenses at the Georgia Tech Hotel, in which the Company owns the leasehold interest. The table below shows the fees incurred from and payable to Georgia Tech Hotel during the year ended December 31, 20142015, were certain reimbursements incurred and 2013, respectively,payable to the Advisor and the associated payable asits affiliates for services of December 31, 2014approximately $0.8 million that were reflected in general and December 31, 2013, which is recorded in due to affiliatesadministrative expenses on the Company'saccompanying consolidated/combined balance sheets (in thousands):statements of operations and comprehensive income (loss).
AR Capital was a party to a services agreement with RCS Advisory Services, LLC ("RCS Advisory"), an affiliate of the Former Dealer Manager, pursuant to which RCS Advisory and its affiliates provided the Company and certain other companies sponsored by AR Global with services (including, without limitation, transaction management, compliance, due diligence, event coordination and marketing services, among others) on a time and expenses incurred basis or at a flat rate based on services performed. AR Capital instructed RCS Advisory to stop providing such services in November 2015 and no services have since been provided by RCS Advisory. |
| | | | | | | | | | | | | | | | |
| | | Year Ended
December 31, | | Payable as of |
| | | 2014 | | 2013 | | December 31, 2014 | | December 31, 2013 |
| Total offering related costs incurred to leased hotel | | $ | 60 |
| | $ | — |
| | $ | 60 |
| | $ | — |
|
Fees Paid in Connection With the Operations of the Company
HOSPITALITY INVESTORS TRUST, INC.
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
Fees Paid to the Advisor
ThePrior to the Initial Closing, the Advisor receives an acquisition fee of 1.5% of (A) the contract purchase price of each acquired property and 1.5% of(B) the amount advanced for anya loan or other investment. The Advisor maywas also be reimbursed for expenses incurred in the process of acquiring properties, in addition to third-party costs the Company may paypaid directly to, or reimbursereimbursed the Advisor for. Additionally, the Company may reimbursereimbursed the Advisor for legal expenses it or its affiliates directly incurincurred in the process of acquiring properties in an amount not to exceed 0.1% of the contract purchase price of the Company’s assets acquired. OnceFees paid to the proceeds fromAdvisor related to acquisitions are reported as a component of net income (loss) in the Offering have been fully invested, theperiod incurred. The aggregate amountamounts of acquisition fees, acquisition expenses and financing coordination fees (as described below) may not exceed 1.9%were also subject to certain other limitation that never became applicable during the term of the contract purchase price, for any new investments, including reinvested proceeds, andAdvisory Agreement.
Prior to the amount advanced for any loan or other investment, for all assets acquired. In no event will the total of all acquisition fees, acquisition expenses and any financing coordination fees (as described below) payable with respect the Company's portfolio exceed 4.5% of the contract purchase price or 4.5% of the amount advanced for a loan or other investment, in the aggregate for all Company investments.
IfInitial Closing, if the Advisor providesprovided services in connection with the origination or refinancing of any debt that the Company obtainsobtained and usesused to acquire properties or to make other permitted investments, or that iswas assumed, directly or indirectly, in connection with the acquisition of properties, the Company will paypaid the Advisor or its assignees a financing coordination fee equal to 0.75% of the amount available and/or outstanding under such financing, subject to certain limitations. Fees paid to the Advisor related to debt financings are deferred and amortized over the term of the related debt instrument.
The table below depicts
Prior to the acquisition and financing coordination fees chargedInitial Closing, the Advisor received a subordinated participation for asset management services it provides to the Company. For asset management services provided by the Advisor prior to October 1, 2015, the subordinated participation was issued quarterly in connection with the operationsform of the Company for the year ended December 31, 2014 and 2013, respectively, and the associated payable as of December 31, 2014 and December 31, 2013, which is recorded in due to affiliates on the Company's consolidated/combined balance sheets (in thousands):
AMERICAN REALTY CAPITAL HOSPITALITY TRUST, INC.
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
|
| | | | | | | | | | | | | | | | |
| | | Year Ended
December 31, | | Payable as of |
| | | 2014 | | 2013 | | December 31, 2014 | | December 31, 2013 |
| Acquisition fees | | $ | 1,598 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Financing coordination fees | | 815 |
| | — |
| | — |
| | — |
|
| | | $ | 2,413 |
| | $ | — |
| | $ | — |
| | $ | — |
|
For its asset management services, the Company causes the OP to issue (subject to periodic approval by the board of directors) to the Advisor performance-based restricted, forfeitable partnership units of the OP designated as “Class B Units” ("Class B Units").
On November 11, 2015, the Company, the OP and the Advisor agreed to an amendment to the advisory agreement (as amended, the "Advisory Agreement"), pursuant to which, effective October 1, 2015, the Company became required to pay asset management fees in cash (subject to certain coverage limitations during the pendency of the Offering), or shares of the Company's common stock, or a combination of both, at the Advisor’s election, and the asset management fee is paid on a monthly basis. The monthly fees were equal to:
The cost of the Company’s assets, (until July 1, 2016, then the lower of the cost of the Company's assets or the fair market value of the Company's assets), multiplied by
0.0625%.
For asset management services provided by the Advisor prior to October 1, 2015, the Company issued Class B Units on a quarterly basis in an amount equal to:
• the
The cost of the Company’s assets or the lower of the cost of assets and the applicable quarterly NAV, once the Company begins calculating NAV, multiplied by
•0.1875%, divided by
•theThe value of one share of common stock as of the last day of such calendar quarter, which iswas equal initially to $22.50 (the Offering price prior to its suspension minus selling commissions and dealer manager fees) and, at such time as.
In March 2016, the Company calculates NAV,amended its agreement with the Advisor to give the Company the right, for a period commencing on June 1, 2016 and ending on June 1, 2017, subject to certain conditions, to pay up to $500,000 per share NAV.month of asset management fees payable to the Advisor under the Company's agreement with the Advisor in shares of common stock. These conditions were never met and no asset management fees were paid in shares of common stock during the term of the Advisory Agreement, which terminated at the Initial Closing.
The Advisor iswas entitled to receive distributions on the vested and unvested Class B Units it receiveshad received in connection with its asset management subordinated participation at the same rate as distributions received on the Company’s common stock. Such distributions are in addition to the incentive fees and other distributions the Advisor and its affiliates maywere entitled to receive from the Company and the OP, including without limitation, the annual subordinated performance fee and the subordinated participation in net sales proceeds, the subordinated incentive listing distribution or the subordinated distribution upon termination of the advisory agreement, each as described below.
HOSPITALITY INVESTORS TRUST, INC.
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
The restricted Class B Units dowere not scheduled to become unrestricted Class B Units until certain performance conditions are satisfied, including until the adjusted market value of the OP’s assets plus applicable distributions equals or exceeds the aggregate capital contributed by investors plus an amount equal to a 6.0% cumulative, pre-tax, non-compounded annual return to investors. Asset management services were performed byinvestors, and the Advisor foroccurrence of a sale of all or substantially all of the year ended December 31, 2014, and 27,821OP’s assets, a listing of the Company’s common stock, or a termination of the advisory agreement without cause. A total of 524,956 Class B Units have been issued as of December 31, 2014.
Fees Paid to2016 for asset management services performed by the Sponsor
In connection with entering into the Grace Acquisition, the Company paidAdvisor and a $50.0 million customary earnest money deposit on May 27, 2014 which was partially funded by a $40.5 million draw on a $45.0 million promissory note with CARP, LLC, an entity undertotal of 21,187 shares of common control with the Sponsor (the "Affiliate Promissory Note"), which had a maturity date of May 27, 2015. Asstock have been issued as of December 31, 2014,2016 to the Affiliate Promissory Note had been repaid in full.Advisor for distributions payable on the Class B Units. At the Initial Closing, pursuant to the Framework Agreement, all 524,956 Class B Units held by the Advisor were converted into 524,956 OP Units, and, immediately following such conversion, those 524,956 OP Units were redeemed for 524,956 shares of the Company's common stock. See Note 7.17 - Subsequent Events.
The issuance of Class B Units did not result in any expense on the Company’s Consolidated/Combined Statements of Operations and Comprehensive Income (Loss), except for distributions paid on the Class B Units. The distributions payable on Class B Units for periods through March 31, 2016 were paid in cash. Beginning in the second quarter ended June 30, 2016, the Company began paying distributions on the Class B Units in shares of common stock on the same terms paid to the Company’s stockholders.
The table below showspresents the interestClass B Units distribution expense paid by the Company duringfor the year ended December 31, 2016, December 31, 2015, and December 31, 2014 respectively and the associated payable as of December 31, 2014,2016 and December 31, 2015, which is recorded in due to affiliatesrelated parties on the Company's consolidated/combined balance sheets, and the interest expense paid by the Predecessor for the year ended December 31, 2013 and the associated payable as of December 31, 2013Consolidated Balance Sheets (in thousands):
|
| | | | | | | | | | | | | | | | |
| | | Year Ended
December 31, | | Payable as of |
| | | 2014 | | 2013 | | December 31, 2014 | | December 31, 2013 |
| Interest payment related to the Grace deposit promissory note | | $ | 151 |
| | $ | — |
| | $ | — |
| | $ | — |
|
Table of Contents |
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31 | | Payable as of |
| | | 2016 | | 2015 | | 2014 | | December 31, 2016 | | December 31, 2015 |
| Class B Units distribution expense | | $ | 830 |
| | $ | 419 |
| | $ | 18 |
| | $ | 65 |
| | $ | 92 |
|
AMERICAN REALTY CAPITAL HOSPITALITY TRUST, INC.
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
Fees Paid to the Property Manager
The Company pays a property management fee of up to 4.0% of the monthly gross receipts from the Company's properties to the Property Manager. The Property Manager, in turn, pays a portion of the property management fees to the Sub-Property Manager or a third-party sub-property manager, as applicable. The Company also reimburses the Sub-Property Manager or a third-party sub-property manager, as applicable, for property level expenses, as well as fees and expenses of such sub-property manager. However, the Company will not reimburse such sub-property managers for general overhead costs or for the wages and salaries and other employee-related expenses of employees of such sub-property managers, other than employees or subcontractors who are engaged in the on-site operation, management, maintenance or access control of the Company’s properties.
The Company also will pay to the Sub-Property Manager an annual incentive fee equal to 15% of the amount by which the operating profit from the properties managed by the Sub-Property Manager for such fiscal year (or partial fiscal year) exceeds 8.5% of the total investment of such properties. The Company may, in the future, pay similar fees to third-party sub-property managers. No incentive fee was payable by the Company during the year ended December 31, 2014.
For these purposes, “total investment” means the sum of (i) the price paid to acquire the property, including closing costs, conversion costs, and transaction costs; (ii) additional invested capital; and (iii) any other costs paid in connection with the acquisition of the property, whether incurred pre- or post-acquisition.
The Predecessor paid the Sub-Property Manager a similar property management fee and incentive fee.
The table below showspresents the asset management fees, acquisition fees, acquisition cost reimbursements and reimbursable expenses incurred by the Company during the year ended December 31, 2014 and the associated payable as of December 31, 2014, which is recorded in due to affiliates on the Company's consolidated/combined balance sheets, and the managementfinancing coordination fees and reimbursable expenses incurred by the Predecessor for the year ended December 31, 2013 and the associated payable as of December 31, 2013, which is recorded in accounts payable and accrued expenses on the Predecessor's consolidated/combined balance sheets (in thousands):
|
| | | | | | | | | | | | | | | | |
| | | Year Ended
December 31, | | Payable as of |
| | | 2014 | | 2013 | | December 31, 2014 | | December 31, 2013 |
| Total management fees and reimbursable expenses incurred from Sub-Property Manager | | $ | 2,579 |
| | $ | 2,445 |
| | $ | 228 |
| | $ | 158 |
|
| Total management fees incurred from Property Manager | | 262 |
| | — |
| | 20 |
| | — |
|
| | | $ | 2,841 |
| | $ | 2,445 |
| | $ | 248 |
| | $ | 158 |
|
The Company pays the Sub-Property Manager interest on the promissory notes payable for the property improvement plan relating to the Barceló Portfolio. See Note 7. The table below shows the interest expense paid by the Company during the year ended December 31, 2014, and the associated payable as of December 31, 2014, which is recorded in due to affiliates on the Company's consolidated/combined balance sheets, and the interest expense paid by the Predecessor during the year ended December 31, 2013 and the associated payable as of December 31, 2013, which is recorded in accounts payable and accrued expenses on the Predecessor's consolidated/combined balance sheets (in thousands):
|
| | | | | | | | | | | | | | | | |
| | | Year Ended
December 31, | | Payable as of |
| | | 2014 | | 2013 | | December 31, 2014 | | December 31, 2013 |
| Interest related to the Property improvement plan promissory note | | $ | 63 |
| | $ | — |
| | $ | 20 |
| | $ | — |
|
Fees Paid to Other Affiliates
The Company entered into an agreement with RCS Capital, the investment banking and capital markets division of the Dealer Manager ("RCS Capital") to provide strategic advisory services and investment banking services required in the
AMERICAN REALTY CAPITAL HOSPITALITY TRUST, INC.
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
ordinary course of the Company's business, such as performing financial analysis, evaluating publicly traded comparable companies and assisting in developing a portfolio composition strategy, a capitalization structure to optimize future liquidity options and structuring operations. The Company has recorded the payment of the costs associated with this agreement of $0.9 million in prepaid expenses and other assets on the Company's consolidated/combined balance sheets and amortizes the costs associated with this agreement over the estimated remaining life of the Offering.
RCS Advisory Services, LLC ("RCS Advisory") is paid compensation for services provided to the Company on behalf of the Advisor based on time and expenses incurred. Additionally, the Company entered into a $1.0 million agreement with RCS Advisory to provide transaction management services in connection with the Grace Acquisition. As of December 31, 2014, the Company had paid $0.6 million on account of this agreement. The Company will pay an additional $0.1 million under this agreement, after which no further amounts will become due.
The Company entered into an agreement with RCS Capital to provide strategic and financial advice and assistance in connection with the Grace Acquisition, such as performing financial advisory and analysis services, due diligence and negotiation of the financial aspects of the acquisition. The Company will be charged 0.25% of the total transaction value for these services and has accrued $4.5 million associated with this agreement for the year ended December 31, 2014 and the associated payable, which is recorded in due to affiliates on the Company's consolidated/combined balance sheets.
The table below depicts related party fees and reimbursements charged by the Dealer Manager and RCS AdvisoryAdvisor in connection with the operations of the Company for the yearyears ended December 31, 20142016, 2015, and 2013, respectively,2014 and the associated payable as of December 31, 20142016 and December 31, 20132015, which is recorded in due to related parties on the Company's Consolidated Balance Sheets (in thousands):
|
| | | | | | | | | | | | | | | | |
| | | Year Ended
December 31, | | Payable as of |
| | | 2014 | | 2013 | | December 31, 2014 | | December 31, 2013 |
| Transaction fees and expenses | | $ | 5,270 |
| | $ | — |
| | $ | 4,645 |
| | $ | — |
|
| Advisory and investment banking fee | | 460 |
| | — |
| | — |
| | — |
|
| Total related party fees and reimbursements | | $ | 5,730 |
| | $ | — |
| | $ | 4,645 |
|
| $ | — |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31 | | Payable as of |
| | | 2016 | | 2015 | | 2014 | | December 31, 2016 | | December 31, 2015 |
| Asset management fees | | $ | 18,004 |
| | $ | 4,097 |
| | $ | — |
| | $ | 8 |
| | $ | 1,190 |
|
| Acquisition fees | | $ | 1,624 |
| | $ | 31,068 |
| | $ | 1,598 |
| | $ | — |
| | $ | — |
|
| Acquisition cost reimbursements | | $ | 108 |
| | $ | 2,066 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Financing coordination fees | | $ | 206 |
| | $ | 16,994 |
| | $ | 815 |
| | $ | — |
| | $ | — |
|
| | | $ | 19,942 |
| | $ | 54,225 |
| | $ | 2,413 |
| | $ | 8 |
| | $ | 1,190 |
|
In order to increase operating cash flows and the ability to pay distributions from operating cash flows, the Advisor may elect to waive certain fees. Because the Advisor may waive certain fees, cash flow from operations that would have been paidPrior to the Advisor may be available to pay distributions to stockholders. The fees that may be forgiven are not deferrals and accordingly, will not be paid toInitial Closing, the Advisor. In certain instances, to improve the Company’s working capital, the Advisor may elect to absorb a portion of the Company’s general and administrative costs. No expenses were absorbed by the Advisor for the year ended December 31, 2014.
The Company reimbursesreimbursed the Advisor’s costs offor providing administrative services, subject to the limitation that the Company will not reimburse the Advisor for any amount by which the Company’s operating expenses at the end of the four preceding fiscal quarters exceeds the greater of (a) 2.0% of average invested assets and (b) 25.0% of net income other than any additions to reserves for depreciation, bad debt, impairment or other similar non-cash reserves and excluding any gain from the sale of assets for that period.period, unless the Company’s independent directors determine that such excess was justified based on unusual and nonrecurring factors which they deem sufficient, in which case the excess amount may be reimbursed to the Advisor in subsequent periods. Additionally, the Company reimbursesreimbursed the Advisor for personnel costs in connection with other services; however, the Company willhas not reimbursereimbursed the Advisor for personnel costs, including executive salaries, in connection with services for which the Advisor receivesreceived acquisition fees, acquisition expenses or real estate commissions. These expense reimbursements are included in the amount reported under total compensation and
The
HOSPITALITY INVESTORS TRUST, INC.
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
reimbursement for services provided by the Advisor atand its election may also contribute capital to enhance the Company’s cash position for working capital and distribution purposes. Any contributed capital amounts are not reimbursableaffiliates related to the Advisor. Further, any capital contributions are made without any corresponding issuance of common or preferred shares. There were no contributionsOffering described above under "Fees Paid in Connection with the Offering."
The table below represents reimbursements to capital from the Advisor for the year ended December 31, 2016, the year ended December 31, 2015, and the year ended December 31, 2014, and 2013.the associated payable as of December 31, 2016 and December 31, 2015, which is recorded in due to related parties on the Company's Consolidated Balance Sheets (in thousands):
|
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31 | | Payable as of |
| | | 2016 | | 2015 | | 2014 | | December 31, 2016 | | December 31, 2015 |
| Total general and administrative expense reimbursement for services provided by the Advisor | | $ | 2,442 |
| | $ | — |
| | $ | — |
| | $ | 522 |
| | $ | 72 |
|
Following the Initial Closing, all of the above fees and reimbursements are no longer payable to the Advisor as the Advisory Agreement has been terminated (See Note 17 - Subsequent Events).
Fees Paid to the Property Manager and Crestline
Prior to the Initial Closing, the Company paid a property management fee of up to 4.0% of the monthly gross receipts from the Company's properties to the Property Manager. The Property Manager, in turn, paid a portion of the property management fees to Crestline or a third-party sub-property manager, as applicable. The Company also reimbursed Crestline or a third-party sub-property manager, as applicable, for property level expenses, as well as fees and expenses of such sub-property manager. The Company did not, however, reimburse Crestline or any third-party sub-property manager for general overhead costs or for the wages and salaries and other employee-related expenses of employees of such sub-property managers, other than employees or subcontractors who are engaged in the on-site operation, management, maintenance or access control of the Company’s properties, and, in certain circumstances, who are engaged in off-site activities.
Prior to the Initial Closing, the Company also paid its Property Manager (which payment was assigned to Crestline) an annual incentive fee equal to 15% of the amount by which the operating profit from the properties sub-managed by Crestline for such fiscal year (or partial fiscal year) exceeds 8.5% of the total investment of such properties. Incentive fees incurred by the Company were approximately $0.4 million and $0.1 million for the years ended December 31, 2016 and December 31, 2015, respectively. Incentive fees incurred by the Company were less than $0.1 million for the year ended December 31, 2014.
The table below shows the management fees (including incentive fees described above) and reimbursable expenses incurred by the Company from Crestline or the Property Manager (and not payable to a third party sub-property manager) during the year ended December 31, 2016, the year ended December 31, 2015, and the year ended December 31, 2014 respectively, and the associated payable as of December 31, 2016 and December 31, 2015 (in thousands):
|
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31 | | Payable as of |
| | | 2016 | | 2015 | | 2014 | | December 31, 2016 | | December 31, 2015 |
| Total management fees and reimbursable expenses incurred from Crestline | | $ | 16,181 |
| | $ | 9,898 |
| | $ | 2,579 |
| | $ | 1,306 |
| | $ | 1,106 |
|
| Total management fees incurred from Property Manager | | $ | 8,459 |
| | $ | 6,816 |
| | $ | 262 |
| | $ | 532 |
| | $ | 3,553 |
|
| Total | | $ | 24,640 |
| | $ | 16,714 |
| | $ | 2,841 |
| | $ | 1,838 |
| | $ | 4,659 |
|
The Company paid Crestline interest on the Property Improvement Plan Promissory Note of $1.8 million (see Note 6 - Promissory Notes Payable). In the second quarter ended June 30, 2015, the Company repaid in full the Property Improvement Plan Promissory Note. The table below shows the interest expense incurred by the Company during the year ended
HOSPITALITY INVESTORS TRUST, INC.
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
December 31, 2016, December 31, 2015 and the year ended December 31, 2014, respectively, and the associated payable as of December 31, 2016 and December 31, 2015, which is recorded in due to affiliates on the consolidated balances sheets (in thousands):
|
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31 | | Payable as of |
| | | 2016 | | 2015 | | 2014 | | December 31, 2016 | | December 31, 2015 |
| Interest payment related to the Property improvement plan promissory note | | $ | — |
| | $ | 21 |
| | $ | 63 |
| | $ | — |
| | $ | — |
|
Following the Initial Closing, the Company no longer has any agreements with the Property Manager and instead contracts directly or indirectly, through its taxable REIT subsidiaries, with Crestline and the third-party property management companies that previously served as sub-property managers to manage the Company’s hotel properties pursuant to terms amended in connection with the consummation of the transactions contemplated by the Framework Agreement (See Note 17 - Subsequent Events).
Fees Paid in Connection with the Liquidation or Listing of
Prior to the Company’s Real Estate Assets
TheInitial Closing, the Company maywas required to pay the Advisor an annual subordinated performance fee calculated on the basis of the Company’s total return to stockholders, payable monthly in arrears, such that for any year in which the Company’s total return on stockholders’ capital exceeds 6.0% per annum, the Advisor will bewas entitled to 15.0% of the excess total return but not to exceed 10.0% of the
AMERICAN REALTY CAPITAL HOSPITALITY TRUST, INC.
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
aggregate total return for such year. This fee will bewas payable only upon the sale of assets, other disposition or refinancing of such assets, which results in the return on stockholders’ capital exceeding 6.0% per annum. No subordinated performance fees were incurred during the yearyears ended December 31, 2016, December 31, 2015, and December 31, 2014. respectively, and no such fee was payable in connection with the Initial Closing.
ThePrior to the Initial Closing, the Company maycould pay a brokerage commission to the Advisor on the sale of property, not to exceed the lesser of 2.0% of the contract sale price of the property and 50.0% of the total brokerage commission paid if a third-party broker is also involved; provided, however, that in no event maycould the real estate commissions paid to the Advisor, its affiliates and unaffiliated third parties exceed the lesser of 6.0% of the contract sales price and a reasonable, customary and competitive real estate commission, in each case, payable to the Advisor if the Advisor or its affiliates, as determined by a majority of the independent directors, provided a substantial amount of services in connection with the sale. In connection with the sale of a hotel on October 14, 2016, the Company paid the Advisor a brokerage commission of approximately $0.3 million (See Note 15 - Sale of Hotel). No such feescommissions were incurred during the yearyears ended December 31, 2015 or December 31, 2014,. respectively, and no commissions were payable in connection with the Initial Closing.
The Company will payPrior to the Initial Closing, the Special Limited Partner was entitled to receive a subordinated participation in the net sales proceeds of the sale of real estate assets of 15.0% of the remaining net sale proceeds after return of capital contributions to investors plus payment to investors of a 6.0% cumulative, pre-tax, non-compounded annual return on the capital contributed by investors. The Special Limited Partner willwas not be entitled to the subordinated participation in net sale proceeds unless the Company’s investors have received a 6.0% cumulative non-compounded return on their capital contributions plus the return of their capital. No such participation became due and payable during the year endedas of December 31, 20142016, and no such participation was payable in connection with the Initial Closing .
IfPrior to the Initial Closing, if the common stock of the Company iswas listed on a national exchange, the Company will pay the Special Limited Partner would have been entitled to receive a subordinated incentive listing distribution of 15.0% of the amount by which the Company’s market value plus distributions exceeds the aggregate capital contributed by investors plus an amount equal to a 6.0% cumulative, pre-tax, non-compounded annual return to investors.on their capital contributions. The Special Limited Partner willwould not behave been entitled to the subordinated incentive listing feedistribution unless investors have received a 6.0% cumulative, pre-tax non-compounded annual return on their capital contributions plus the return of their capital.contributions. No such distributions werehave been incurred during the year endedas of December 31, 2014. Neither2016, and no such distributions were payable in connection with the Special Limited Partner nor anyInitial Closing.
HOSPITALITY INVESTORS TRUST, INC.
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
Prior to the subordination participationInitial Closing, in the net sale proceeds and the subordinated incentive listing distribution.
Uponevent of a termination or non-renewal of the Advisoryadvisory agreement with the Advisor, with or without cause, the Special Limited Partner, will bethrough its controlling interest in the Advisor, was entitled to receive distributions from the OP equal to 15.0% of the amount by which the sum of the Company’s market value plus distributions exceeds the sum of the aggregate capital contributed by investors plus an amount equal to a 6.0% cumulative, pre-tax, non-compounded annual return to investors. No such distributions have been incurred as of December 31, 2016, and no such distributions were payable in connection with the Initial Closing.
The Special Limited Partner may elect to defer itsPartner’s right to receive a subordinated distribution upon termination until either a listing on a national securities exchangethese distributions and participations was automatically forfeited and redeemed by the OP without the payment of any consideration to the Special Limited Partner or other liquidity event occurs. No such distributions were incurred during the year ended December 31, 2014any of its affiliates. (See Note 17 - Subsequent Events).
Note 1312 - Economic Dependency
UnderAs of December 31, 2016, under various agreements, the Company has engaged or will engage the Advisor and its affiliates to provide certain services that are essential to the Company, including asset management services, supervision of the management, asset acquisition and disposition decisions, the sale of shares of common stock available for issue, transfer agency services, as well as other administrative responsibilities for the Company including accounting services and investor relations.
Asrelations.As a result of these relationships, the Company iswas dependent upon the Advisor and its affiliates. In
At the event that these companies are unable to provideInitial Closing, the Advisory Agreement was terminated and certain employees of the Advisor or its affiliates (including Crestline) who had been involved in the management of the Company’s day-to-day operations, including all of its executive officers, became employees of the Company. As a result of the Company becoming self-managed, the Company now will lease office space, have its own communications and information systems and directly employ a staff. The Company also terminated all of its other agreements with affiliates of the respectiveAdvisor except for hotel-level property management agreements with Crestline and entered into a transition services agreement with each of the Advisor and Crestline, pursuant to which the Company will receive their assistance in connection with investor relations/shareholder services and support services for pending transactions in the case of the Advisor and accounting and tax related services in the case of Crestline until June 29, 2017. The transition services agreement with Crestline for accounting and tax related services will automatically renew for successive 90-day periods unless either party elects to terminate. The transition services agreement with the Advisor may be requiredextended with respect to find alternative providers of these services.the support services for pending transactions for an additional 30 days by written notice delivered prior to the expiration date.
Until the Initial Closing, the Advisor and its affiliates used their respective commercially reasonable efforts to assist the Company and its subsidiaries to take such actions as the Company and its subsidiaries reasonably deem necessary to transition to self-management, including, but not limited to providing books and records, accounting systems, software and office equipment. Pursuant to the Framework Agreement, the Company also entered into certain other agreements at the Initial Closing to facilitate the transition to self-management.
See Note 17 - Subsequent Events for additional information.
Note 1413 - Income Taxes
We intend to electThe Company elected and qualifyqualified to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code commencing with ourits tax year ended December 31, 2014.2014. In order to continue to qualify as a REIT, wethe Company must annually distribute to ourits stockholders 90% of ourits REIT taxable income (which does not equal net income as calculated in accordance with GAAP), determined without regard to the deduction for dividends paid and excluding net capital gain, and must comply with various other organizational and operational requirements. Distributions to stockholders for the tax year ended December 31, 20142016 were all deemed to be return of capital.
The components of income tax expense for the years ended December 31, 2016, December 31, 2015 and December 31,
AMERICAN REALTY CAPITAL HOSPITALITY INVESTORS TRUST, INC.
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
The components of income tax expense for the year ended December 31, 2014 are presented in the following table, in thousands. There was no income tax expense for the year ended December 31, 2013.
| | | | Year Ended December 31, | Year Ended December 31, |
| | 2014 | | 2013 | 2016 | | 2015 | | 2014 |
| Current: | | | | | | | | |
| Federal | $ | 633 |
| | $ | — |
| $ | 994 |
| | $ | 2,664 |
| | $ | 633 |
|
| State | 91 |
| | — |
| 48 |
| | 549 |
| | 91 |
|
| Total | | $ | 1,042 |
| | $ | 3,213 |
| | $ | 724 |
|
| | 724 |
| | — |
| | | | | |
| Deferred: | | | | | | | | |
| Federal | (116 | ) | | — |
| $ | 308 |
| | $ | (98 | ) | | $ | (116 | ) |
| State | (17 | ) | | — |
| 21 |
| | (9 | ) | | (17 | ) |
| | (133 | ) | | — |
| |
| Total | | 329 |
| | (107 | ) | | (133 | ) |
| Income tax expense | $ | 591 |
| | $ | — |
| $ | 1,371 |
| | $ | 3,106 |
| | $ | 591 |
|
A reconciliation of the statutory federal income tax benefit of the Company's income tax expense is presented in the following table, in thousands. There was no income tax expense for the year ended December 31, 2013.
| | | | Year Ended December 31, | Year Ended December 31, |
| | 2014 | | 2013 | 2016 | | 2015 | | 2014 |
| Statutory federal income tax benefit | $ | (4,845 | ) | | $ | — |
| $ | (23,991 | ) | | $ | (31,121 | ) | | $ | (4,845 | ) |
| Effect of non-taxable REIT loss | 5,361 |
| | — |
| 25,266 |
| | 33,720 |
| | 5,361 |
|
| State income tax expense, net of federal tax benefit | 73 |
| | — |
| 96 |
| | 507 |
| | 73 |
|
| Other | 2 |
| | — |
| — |
| | — |
| | 2 |
|
| Income tax expense | $ | 591 |
| | $ | — |
| $ | 1,371 |
| | $ | 3,106 |
| | $ | 591 |
|
The tax effect of each type of temporary difference and carryforward, that gives rise to the deferred tax assets and liabilities as of for the year ended December 31, 2016, December 31, 2015 and December 31, 2014 are presented in the following table, in thousands. There were no temporary differences or carryforwards for the year ended December 31, 2013.
| | | | Year Ended December 31, | Year Ended December 31, |
| | 2014 | | 2013 | 2016 | | 2015 | | 2014 |
| Deferred tax asset: | | | | | | | | |
| Employee-related compensation | $ | 152 |
| | $ | — |
| $ | — |
| | $ | — |
| | $ | — |
|
| Other | 11 |
| | — |
| — |
| | 86 |
| | 11 |
|
| Net operating losses | | — |
| | 186 |
| | — |
|
| Total Deferred Tax Assets | | $ | — |
| | $ | 272 |
| | $ | 11 |
|
| | 163 |
| | — |
| | | | | |
| Deferred tax liability | | | | |
| Deferred tax liability: | | | | | | |
| Investments in unconsolidated joint ventures | (30 | ) | | — |
| $ | (59 | ) | | $ | (32 | ) | | $ | (30 | ) |
| Other | | (30 | ) | | — |
| | — |
|
| Total deferred tax liability | (30 | ) | | — |
| (89 | ) | | (32 | ) | | (30 | ) |
| Net deferred tax asset | $ | 133 |
| | $ | — |
| $ | (89 | ) | | $ | 240 |
| | $ | (19 | ) |
As of December 31, 2014,2016, the Company had a net deferred tax assetliability of $0.1 million. The Company believes that it is more likely than not that the TRS will generate sufficient taxable income to realize in full this deferred tax asset. Accordingly, no valuation allowance has been recorded as
HOSPITALITY INVESTORS TRUST, INC.
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
As of December 31, 2014.
As of December 31, 2014,2016, the tax years that remain subject to examination by major tax jurisdictions include 2013, 2014 and 2014.2015.
Note 14 - Impairment of Long Lived Assets
In the quarter ended June 30, 2016, the Company identified an indicator of impairment at one of its hotels, primarily due to decreased operating performance. As required by Accounting Standards Codification section 360 (ASC 360), once an indicator of impairment is identified, the Company is required to perform a test for recoverability. This test compares the sum of the estimated undiscounted future cash flows attributable to the hotel to its carrying amount. The Company determined that the estimated undiscounted future cash flows attributable to the hotel did not exceed its carrying amount and an impairment existed.
The Company then determined the fair value of the hotel using the discounted cash flow method to be $6.2 million, approximately $2.4 million less than the carrying amount of the hotel at June 30, 2016 of $8.6 million, and recorded the impairment loss in the Consolidated/Combined Statements of Operations and Comprehensive Income (Loss). The Company has not recorded an impairment in any other periods.
Note 15 - Sale of Hotel
On October 14, 2016, the Company completed the sale of one hotel for a sales price of $13.0 million, resulting in a net gain of approximately $2.5 million, which is reflected in other income (expense) on the Company’s Consolidated/Combined Statement of Operations and Comprehensive Income (Loss). The Company used the proceeds from the sale to reduce the Assumed Grace Indebtedness by $8.5 million, redeem $2.1 million in Grace Preferred Equity Interests, the Company's mandatorily redeemable preferred securities, and for other general corporate purposes.
The net carrying value of the sold hotel consisted of the following (in thousands):
|
| | | |
| | December 31, 2016 |
| Land | $ | 2,675 |
|
| Buildings and improvements | 7,069 |
|
| Furniture, fixtures and equipment | 1,450 |
|
| Carrying Value | 11,194 |
|
| Less: Accumulated Depreciation | (1,023 | ) |
| Net Carrying Value | $ | 10,171 |
|
AMERICAN REALTY CAPITAL HOSPITALITY INVESTORS TRUST, INC.
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
Note 1516 – Quarterly Results (Unaudited)
Presented below is a summary of the unaudited quarterly financial information for the years ended December 31, 2014 2013:
|
| | | | | | | | | | | | | | | | | | | | |
| | | Quarters Ended |
| | | Predecessor | | Successor |
| (In thousands, except for share amounts) | | Period from January 1 to March 20, 2014 | | Period from March 21 to March 31, 2014 | | June 30, 2014 | | September 30, 2014 | | December 31, 2014 |
| Total revenues | | $ | 8,245 |
| | $ | 1,320 |
| | $ | 11,460 |
| | $ | 11,387 |
| | $ | 10,704 |
|
| Net loss attributable to stockholders | | $ | (605 | ) | | $ | (5,282 | ) | | $ | (82 | ) | | $ | (3,549 | ) | | $ | (5,928 | ) |
| Basic and diluted weighted average common shares outstanding | | NA |
| | 68,622 |
| | 398,796 |
| | 2,792,350 |
| | 7,959,303 |
|
| Basic and diluted net loss per share attributable to stockholders | | NA |
| | $ | (76.97 | ) | | $ | (0.21 | ) | | $ | (1.27 | ) | | $ | (0.74 | ) |
|
| | | | | | | | | | | | | | | | |
| | | Quarters Ended |
| | | Predecessor |
| (In thousands, except for share amounts) | | March 31, 2013 | | June 30, 2013 | | September 30, 2013 | | December 31, 2013 |
| Total revenues | | $ | 8,776 |
| | $ | 10,988 |
| | $ | 10,413 |
| | $ | 9,620 |
|
| Net income (loss) attributable to stockholders | | $ | (971 | ) | | $ | 978 |
| | $ | 468 |
| | $ | (370 | ) |
| Basic and diluted weighted average common shares outstanding | | NA |
| | NA |
| | NA |
| | NA |
|
| Basic and diluted net loss per share attributable to stockholders | | NA |
| | NA |
| | NA |
| | NA |
|
NA - not applicable |
| | | | | | | | | | | | | | | | | |
| | | | Quarters Ended |
| (In thousands, except for share amounts) | | | March 31, 2016 | | June 30, 2016 | | September 30, 2016 | | December 31, 2016 |
| Total revenues | | | $ | 135,153 |
| | $ | 163,230 |
| | $ | 161,458 |
| | $ | 139,751 |
|
| Net income (loss) attributable to stockholders | | | $ | (43,957 | ) | | $ | (7,024 | ) | | $ | (6,684 | ) | | $ | (14,582 | ) |
| Basic and Diluted weighted average shares outstanding | | | 38,571,410 |
| | 38,776,850 |
| | 38,788,041 |
| | 38,794,215 |
|
| Basic and Diluted net income (loss) per share | | | $ | (1.14 | ) | | $ | (0.18 | ) | | $ | (0.17 | ) | | $ | (0.38 | ) |
|
| | | | | | | | | | | | | | | | | |
| | | Quarters Ended |
| (In thousands, except for share amounts) | | | March 31, 2015 | | June 30, 2015 | | September 30, 2015 | | December 31, 2015 |
| Total revenues | | | $ | 54,826 |
| | $ | 133,490 |
| | $ | 132,852 |
| | 125,016 |
|
| Net income (loss) attributable to stockholders | | | $ | (39,976 | ) | | $ | 438 |
| | $ | (5,082 | ) | | $ | (50,206 | ) |
| Basic weighted average shares outstanding | | | 15,059,550 |
| | 19,038,201 |
| | 27,124,227 |
| | 32,775,258 |
|
| Diluted weighted average shares outstanding | | | 15,059,550 |
| | 19,072,777 |
| | 27,124,227 |
| | 32,775,258 |
|
| Basic and Diluted net income (loss) per share | | | $ | (2.65 | ) | | $ | 0.02 |
| | $ | (0.18 | ) | | $ | (1.53 | ) |
Note 1617 - Subsequent Events
The Company has evaluated subsequent events through the filing of this Annual Report on Form 10-K, and determined that there have not been any events that have occurred that would require adjustments to disclosures in the accompanying consolidatedconsolidated/combined financial statements except for the following transactions:
Sales of Common StockSecurities Purchase, Voting and Standstill Agreement
As of March 15, 2015,On January 12, 2017, the Company had 15.1and the OP entered into the SPA with the Brookfield Investor, as well as related guarantee agreements with certain affiliates of the Brookfield Investor.
Initial Closing
Pursuant to the terms of the SPA, at the Initial Closing, the Brookfield Investor agreed to purchase (i) the Redeemable Preferred Share, for a nominal purchase price, and (ii) 9,152,542.37 Class C Units, for a purchase price of $14.75 per Class C Unit, or $135.0 million sharesin the aggregate.
The Initial Closing occurred on March 31, 2017.
At the Initial Closing, (i) the Company filed Articles Supplementary setting forth the terms, rights, obligations and preferences of common stock outstanding, including unvested restricted sharesthe Redeemable Preferred Share (the “Articles Supplementary”) with the State Department of Assessments and shares issued underTaxation of Maryland (the “SDAT”), which became effective upon filing and (ii) the DRIP. Total gross proceeds, net of repurchases, from these issuances were $375.1 million, including proceeds from shares issued underBrookfield Investor, the DRIP. As of March 15, 2015, the aggregate value of all share issuances was $377.2 million based on a per share value of $25.00 (or $23.75 per share for shares issued under the DRIP).Special General
Total capital raised to date, including shares issued under the DRIP, is as follows (in thousands):
|
| | | | | | | | | | | | |
| Source of Capital | | Inception to December 31, 2014 | | January 1, 2015 to March 15, 2015 | | Total |
| Common stock | | $ | 252,854 |
| | $ | 122,233 |
| | $ | 375,087 |
|
Distributions Paid
AMERICAN REALTY CAPITAL HOSPITALITY INVESTORS TRUST, INC.
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
Partner and the Company, in its capacity as general partner of the OP, entered into an amendment and restatement (the “A&R LPA”) of the OP’s existing agreement of limited partnership (the “Existing LPA”).
Pursuant to the SPA, the gross proceeds from the sale of the Class C Units at the Initial Closing was, and will be used as follows: (i) $47.3 million to redeem outstanding Grace Preferred Equity Interests; (ii) $26.9 million to pay a portion of the purchase price for the hotels to be purchased in the Second Summit Closing; (iii) $15.0 million to fund PIPs and related lender reserves; (iv) $23.7 million to pay in full the Summit Loan; (v) $10.0 million to pay cash amounts due to the Property Manager under the Framework Agreement; (vi) $4.0 million to pay the commitment fee payable to the Brookfield Investor (which was deemed earned at the signing of the SPA) (the “Commitment Fee”); and (vii) the remainder to pay transaction costs related to the SPA, including $2.0 million reimbursements to the Brookfield Investor for its reasonable and documented out-of-pocket costs and expenses, and for working capital.
Consummation of the Initial Closing was subject to the satisfaction of certain conditions, including, among other things, (i) the concurrent consummation of the transactions contemplated by the Framework Agreement, (ii) the Company having obtained certain specified consents from the holders of the Grace Preferred Equity Interests and certain lenders, franchisors and ground lessors of the Company and any other consents that, if not obtained, would reasonably be expected to be materially adverse to the Company and its subsidiaries, taken as a whole, (iii) the expansion of the Company’s board of directors to seven members, two of whom (including the chairperson of the Company’s board of directors) are Redeemable Preferred Directors elected by the Brookfield Investor and two of whom are independent directors recommended and nominated by the Company’s board of directors and approved by the Brookfield Investor (such approval not to be unreasonably withheld, conditioned or delayed) (each, an “Additional Independent”) pursuant to its rights as the holder of the Redeemable Preferred Share, and (iv) the Company and the Brookfield Investor, having entered into the Ownership Limit Waiver Agreement (as defined below).
Follow-On Fundings
Following the Initial Closing, subject to the terms and conditions of the SPA, the Company also has the right to sell, and the Brookfield Investor has agreed to purchase, additional Class C Units at the same price per unit as at the Initial Closing upon 15 business days’ prior written notice and in an aggregate amount not to exceed $265.0 million as follows (each such issuance, a “Follow-On Funding”):
On or prior to February 27, 2018, but no earlier than January 3, 2018, up to an amount that would be sufficient to reduce the outstanding amount of the Grace Preferred Equity Interests to approximately $223.5 million (the “First Follow-On Funding”). Proceeds from the First Follow-On Funding must be used by the OP exclusively to, concurrently with the closing of the First Follow-On Funding, redeem then outstanding Grace Preferred Equity Interests.
On or prior to February 27, 2019, but no earlier than January 3, 2019, up to the then outstanding amount of the Grace Preferred Equity Interests (the “Second Follow-On Funding”). Proceeds from the Second Follow-On Funding must be used by the OP exclusively to, concurrently with the closing of the Second Follow-On Funding, redeem all then outstanding Grace Preferred Equity Interests.
On or prior to February 27, 2019, in one or more transactions, up to an amount equal to the difference between the then unfunded portion of the Brookfield Investor’s $400.0 million funding commitment and the outstanding amount of the Grace Preferred Equity Interests. Proceeds from these Follow-On Fundings must be used by the OP exclusively to fund PIPs and related lender reserves, repay amounts then outstanding with respect to mortgage debt principal and interest and working capital.
Consummation of any Follow-On Funding is subject to the satisfaction of certain conditions, including, among others, (i) with the exception of the First Follow-On Funding, the satisfaction of a debt yield test, (ii) the Company having obtained any consents that, if not obtained, would reasonably be expected to be materially adverse to the Company and its subsidiaries, taken as a whole, (iii) no continuing event of default having occurred under certain of the Company’s material loan agreements, (iv) the accuracy of certain of each party’s representations and warranties (subject to certain materiality qualifications), including, among other things, the absence of certain actions that would be material and adverse to the Company and its subsidiaries, taken as a whole, (v) each party’s material compliance with its covenants contained in the SPA, (vi) no Material Adverse Effect
HOSPITALITY INVESTORS TRUST, INC.
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
(as defined in the SPA) having occurred, and (vii) no Material Breach (as defined and more fully described in the A&R LPA, generally a breach by the Company of certain material obligations under the A&R LPA, subject to notice and cure provisions) or REIT Event (as defined and more fully described in the A&R LPA, the Company’s failure to satisfy any of the requirements for qualification and taxation as a REIT under certain circumstances, subject to notice and cure provisions) having occurred.
In addition, from February 27, 2018 through February 27, 2019, the Brookfield Investor will have the right to purchase, and the OP has agreed to sell, in one or more transactions, the then unfunded portion of the Brookfield Investor’s $400.0 million funding commitment in transactions of no less than $25.0 million each.
Termination and Guarantees
Under the SPA, either the Company or the Brookfield Investor had the right to terminate the SPA if the Initial Closing has not occurred on or before June 30, 2017. The SPA also provides that the Company would have the right to seek specific performance of the Brookfield Investor’s obligations under the SPA. In connection with entering into the SPA, certain affiliates of the Brookfield Investor delivered a limited guarantee and a funding guarantee pursuant to which such affiliates have agreed, on a several and not joint basis, to guarantee certain obligations of the Brookfield Investor.
Funding Failure
If all conditions to a Follow-On Funding are met and the Brookfield Investor does not purchase Class C Units as required pursuant to the SPA, then, subject to the notice and cure provisions set forth in the SPA, a Funding Failure (as defined in the SPA) will be deemed to have occurred and, subject to certain limitations, certain of the Brookfield Investor’s approval rights under the Articles Supplementary and the A&R LPA (as described below under “- Approval Rights”), the rights of Class C Units to receive PIK Distributions, the convertibility of Class C Units into OP Units and the preemptive rights of holders of Class C Units under the A&R LPA would be suspended, subject to reinstatement (including payment of any PIK Distributions and related cash distributions to the extent not made) if (i) the Brookfield Investor or any other holder of Class C Units obtains a declaratory judgment or injunctive relief preventing the suspension of these rights, (ii) the parties otherwise agree that the conditions to the applicable Follow-On Funding were not met, or (iii) the Brookfield Investor consummates the applicable Follow-On Funding.
If the Company or the OP obtains a final, non-appealable judgment of a court of competent jurisdiction finding that a Funding Failure has occurred at the time of the Subsequent Closing (a “Funding Failure Final Determination”), and the Brookfield Investor does not then consummate such Subsequent Closing and pay any damages required in connection with the judgment within ten business days, then (i) all of the suspended rights under the A&R LPA and the Articles Supplementary (including approval rights under the A&R LPA that had not previously been suspended) would be permanently terminated, (ii) the Company would be entitled to redeem the Redeemable Preferred Share at its par value of $0.01, (iii) the OP would be entitled to redeem all or any portion of the then outstanding Class C Units in cash for their liquidation preference, (iv) all Class C Units received in respect of all PIK Distributions accrued from the date of the Initial Closing would be forfeited, and (v) the Brookfield Investor would be required to cause each of the Redeemable Preferred Directors to resign from the Company’s board of directors.
Representations and Warranties and Indemnification
The SPA contains certain representations and warranties made by the Company and the OP, on the one hand, and certain representations and warranties made by the Brookfield Investor, on the other hand. The representations and warranties were made by the parties as of the date of the SPA. Certain of these representations and warranties are subject to specified exceptions and qualifications contained in the SPA and are qualified by information the parties provided to each other in disclosure letters delivered in connection with the SPA.
As a general matter, the Company’s representations and warranties survive the Initial Closing and any applicable Subsequent Closing under the SPA for 18 months. The Company is required to indemnify the Brookfield Investor and its affiliates in respect of any losses incurred by them arising out of any breach of the Company’s representations and warranties and covenants, and in connection with certain actions. Except in the case of certain fundamental representations, the Company’s
HOSPITALITY INVESTORS TRUST, INC.
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
obligation to indemnify the Brookfield Investor in respect of breaches of representations and warranties is subject to a $6.0 million deductible and a $25,000 per claim deductible. Other than with respect to claims in respect of breaches of certain fundamental representations and certain other representations, the Company’s indemnification obligations in respect of representation and warranty breaches is capped at $60.0 million, and the Company’s overall liability cap (outside of fraud or intentional misrepresentation) is the sum of (i) the Brookfield Investor’s aggregate investment in Class C Units purchased under the SPA through such time assuming compounding at a rate of 5% per annum and (ii) the amount of accrued and unpaid cash distributions payable on Class C Units held by the Brookfield Investor at the time payment is made.
Standstill and Voting
Pursuant to the SPA, from the Initial Closing until the 63-month anniversary of the Initial Closing (or, if earlier, the date that is six months after the date on which the Brookfield Investor and its affiliates own 5% or less of the Company’s common stock on an as-converted basis), the Brookfield Investor, together with its affiliates, other than certain specified affiliates of the Brookfield Investor (the Brookfield Investor together with such included affiliates, the “Covered Brookfield Entities”), will be subject to customary standstill restrictions related to, among other things, acquisition proposals, proxy solicitations, attempts to elect or remove members of the Company’s board of directors and other methods of seeking to control or influence the management or the policies of the Company. In addition, from the Initial Closing until the earlier of (i) the second anniversary of the Initial Closing, and (ii) the completion of all Follow-On Fundings, the Covered Brookfield Entities will not be permitted to acquire more than 15% of the Company’s common stock then outstanding on an as-converted basis in addition to shares of the Company’s common stock on an as-converted basis acquired pursuant to the SPA or A&R LPA. These standstill restrictions will terminate 90 days following any failure by the OP to redeem Class C Units that the Brookfield Investor or its affiliates have elected to be redeemed in accordance with the A&R LPA.
Pursuant to the SPA, the Covered Brookfield Entities are also subject to a standstill on voting that requires the Covered Brookfield Entities to vote any shares of the Company’s common stock owned by Covered Brookfield Entities in excess of 35% of the total number of shares of the Company’s common stock entitled to vote in accordance with the recommendations of the Company’s board of directors from the Initial Closing until the earliest to occur of: (i) a Material Breach, (ii) a REIT Event, (iii) the 63-month anniversary of the Initial Closing, (iv) the date on which the Covered Brookfield Entities, after having purchased Class C Units under the SPA resulting in the Covered Brookfield Entities owning at least 35% of the outstanding shares of the Company’s common stock on an as-converted basis, cease to own at least 35% of the outstanding shares of the Company’s common stock on an as-converted basis and (v) if the Covered Brookfield Entities have not purchased Class C Units under the SPA resulting in ownership of at least 35% of the outstanding shares of the Company’s common stock on an as-converted basis, February 27, 2019.
Framework Agreement
On January 2, 2015,12, 2017, the Company and the OP, entered into the Framework Agreement with the Advisor, the Property Manager, Crestline, the Special Limited Partner, and, for certain limited purposes, the Brookfield Investor.
The Framework Agreement provides for the Company transitioning from an externally managed company with no employees of its own that is dependent on the Advisor and its affiliates to manage its day-to-day operations to a self-managed company and would have terminated automatically upon the termination of the SPA in accordance with its terms prior to the Initial Closing. The transactions contemplated by the Framework Agreement generally were consummated at, and as a condition to, the Initial Closing.
At the Initial Closing, pursuant to the Framework Agreement, the Advisory Agreement was terminated. The Framework Agreement also provided that, on or prior to March 1, 2017, the Company’s independent directors had the right to provide written notice to the Advisor that such independent directors desired to extend the term of the Advisory Agreement, in which case, the Advisory Agreement would have been amended (the “Advisory Amendment”) such that it terminated on May 31, 2017. The Advisory Amendment would also have provided the Company the option to extend the Advisory Agreement for one additional two-calendar month period upon written notice to the Advisor by the Company’s independent directors given no later than May 1, 2017.
HOSPITALITY INVESTORS TRUST, INC.
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
The Advisory Amendment also would have terminated certain fees payable to the Advisor in respect of any event or transaction consummated on or after the effective date of the Advisory Amendment, including acquisition fees, real estate commissions, annual subordinated performance fees and financing coordination fees. On and after the effective date of the Advisory Amendment, only asset management fees and expense reimbursements would have been payable to the Advisor by the Company and its subsidiaries, net of employee costs directly paid by the Company and its subsidiaries.
Pursuant to the Framework Agreement, if the SPA had been terminated in accordance with its terms prior to the Initial Closing or the Initial Closing had not occurred on or prior to June 1, 2017, then, instead, the Advisory Agreement would have been automatically amended with the sole modification being that the term of the Advisory Agreement would have extended into 2018 with slightly modified renewal and termination provisions.
Until the expiration without renewal or termination of the Advisory Agreement, the Advisor and its affiliates agreed to use their respective commercially reasonable efforts to assist the Company and its subsidiaries to take such actions as the Company and its subsidiaries reasonably deem necessary to transition to self-management, including, but not limited to providing books and records, accounting systems, software and office equipment. In addition, the Advisor also granted the Company the right to hire certain of employees of the Advisor or its affiliates who were then involved in the management of the Company’s day-to-day operations, including all of the Company’s current executive officers, and made other agreements in order to promote retention of these individuals which relate to the compensation payable to them and other terms of their employment by the Advisor and its affiliates prior to the Initial Closing.
The Framework Agreement also includes a right of first refusal for each of the Company and the Brookfield Investor in connection with (i) any proposed transfer, directly or indirectly, of all or substantially all of the 60% equity interest in Crestline held by the Advisor or its affiliates to any person other than to one of their affiliates or Barceló Crestline Corporation or its affiliates (“Permitted Acquirors”), the owner of the other 40% equity interest in Crestline, or (ii) any proposed transfer of all or a substantial portion of the assets of Crestline to any person other than to Permitted Acquirors.
Summit Agreements
On January 12, 2017, the Company, through a wholly owned subsidiary of the OP, entered into the Summit Amendment to the Reinstatement Agreement.
Under the Summit Amendment, the closing date for the purchase of seven of the hotels remaining to be purchased under the Reinstatement Agreement for an aggregate purchase price of $66.8 million was extended from January 12, 2017 to April 27, 2017, following an amendment entered into on January 10, 2017 to extend the closing date from January 10, 2017 to January 12. 2017. The closing date for the purchase of an eighth hotel to be purchased under the Reinstatement Agreement for an aggregate purchase price of $10.5 million was extended from January 12, 2017 to October 24, 2017. Summit has informed the Company that this eighth hotel is subject to a pending purchase and sale agreement with a third party, and, if this sale is completed, the Company’s right and obligation to purchase this hotel will terminate in accordance with the terms of the Reinstatement Agreement.
Concurrent with the Company’s entry into the Summit Amendment, the Company entered into the Loan Amendment with respect to the Summit Loan.
Pursuant to the Loan Amendment, the maturity date of the loan under the Summit Loan was extended from February 11, 2017 to February 11, 2018, and additional amortization payments totaling $2.0 million were scheduled to occur in the amount of $1.0 million each on the last day of August and September 2017. As of December 31, 2016, $23.4 million was outstanding under the Summit Loan. If the closing of the Company’s purchase of the seven hotels under the Reinstatement Agreement occurs prior to February 11, 2018, then the outstanding principal of the Summit Loan and any accrued interest thereon shall become immediately due and payable in full.
Concurrent with the Company’s entry into the Summit Amendment and the Loan Amendment, the Company and Summit entered into the Additional Loan Agreement pursuant to which Summit agreed to loan the Company an additional $3.0
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million as consideration for the Summit Amendment. The maturity date of the Additional Loan under the Additional Loan Agreement is July 31, 2017, however, if the sale of the seven hotels to be sold pursuant to the Reinstatement Agreement on April 27, 2017 is completed on that date, the entire principal amount of the Additional Loan will be deemed paid in full and the interest accrued thereon shall become immediately due and payable. The Additional Loan initially bears interest at a rate of 13.0% per annum, of which 9.0% is paid in cash monthly and an additional 4% (the “Additional Loan Added Rate”) will accrue and be compounded monthly and added to the outstanding principal balance at maturity unless otherwise paid in cash by the Company. On February 11, 2017, the Additional Loan Added Rate will be increased by 1%. The Company must make amortization payments in the amount of $1.0 million on the last day of May, June and July 2017. The Additional Loan may be prepaid in whole or in part at any time, without payment of any penalty or premium.
Initial Articles
On January 13, 2017, pursuant to the SPA, the Company filed the Articles Supplementary of the Company (the “Initial Articles Supplementary”) with the SDAT, which became effective upon acceptance for record.
The Initial Articles Supplementary elected to cause the Company to be subject to Section 3-804(c) of the MGCL that would require any vacancy on the Company’s board of directors, with respect to any member of the Company’s board of directors elected by holders of shares of the Company’s common stock, to be filled only by the majority vote of the remaining directors and for the remainder of the full term in which the vacancy occurred and until a successor is elected and qualifies notwithstanding anything to the contrary in the Company’s charter or bylaws. The Company’s bylaws in effect at the time the Initial Articles Supplementary were filed provided that: any vacancy on the Company’s board of directors for any cause other than an increase in the number of directors may be filled by a majority of the remaining directors, even if such majority is less than a quorum; any vacancy in the number of directors created by an increase in the number of directors may be filled by a majority vote of the entire board of directors; and any individual so elected as director will serve until the next annual meeting of stockholders and until his or her successor is elected and qualifies.
Suspension of Distributions
On January 13, 2017, as authorized by the Company’s board of directors, and in connection with its approval of the Company’s entry into the SPA, the Company’s board of directors suspended the distributions entirely that were payable to the Company’s stockholders of $1.4 millionrecord in shares of the Company’s common stock each day during January 2017 in an amount equal to 0.000186301 per share per day. These distributions were payable on a monthly basis by the fifth day following each month-end to stockholders of record at the close of business each day during the prior month of December 2014. Approximately $0.7 million of such distributions were paid in cash, while $0.7 million was reinvested to purchase 27,223 shares under the DRIP. On February 2, 2015, the Company paid distributions of $1.6 millionand will be payable to stockholders of record on each day during the monthperiod from January 1, 2017 to January 13, 2017.
Suspension of SRP
On January 13, 2017, as authorized by the Company’s board of directors, the SRP was suspended effective as of January 2015. Approximately $0.823, 2017.
Suspension of DRIP
On January 13, 2017, as authorized by the Company’s board of directors, the DRIP was suspended effective as of February 12, 2017.
Issuances of Common Stock
Subsequent to the year ended December 31, 2016 and through March 15, 2017 , the Company issued 315,383 shares of common stock as stock distributions with respect to December 2016 and the period from January 1, 2017 through January 13, 2017.
Articles Supplementary
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In connection with the Initial Closing, the Articles Supplementary became effective. The Redeemable Preferred Share ranks on parity with the Company’s common stock, with the same rights with respect to preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends and other distributions, qualifications, terms and conditions of redemption and other terms and conditions as the Company’s common stock, except as provided therein.
At its election and subject to notice requirements, the Company may redeem the Redeemable Preferred Share for a cash amount equal to par value upon the occurrence of any of the following: (i) the first date on which no Class C Units remain outstanding; (ii) the date the liquidation preference applicable to all Class C Units held by the Brookfield Investor and its affiliates is reduced to $100.0 million or less due to the exercise by holders of Class C Units of their redemption rights under the A&R LPA; or (iii) the 11th business day after the date of a Funding Failure Final Determination if the Brookfield Investor does not consummate the applicable purchase of Class C Units at any Subsequent Closing.
For so long as the Brookfield Investor holds the Redeemable Preferred Share, (i) the Brookfield Investor has the right to elect two Redeemable Preferred Directors (neither of whom may be subject to an event that would require disclosure pursuant to Item 401(f) of Regulation S-K in the Company’s definitive proxy statement), as well as to approve (such approval not to be unreasonably withheld, conditioned or delayed) two Additional Independents to be recommended and nominated by the Company’s board of directors for election by the Company’s stockholders at each annual meeting, (ii) each committee of the Company’s board of directors, except any committee formed with authority and jurisdiction over the review and approval of conflicts of interest involving the Brookfield Investor and its affiliates, on the one hand, and the Company, on the other hand (a “Conflicts Committee”), is required to include at least one of the Redeemable Preferred Directors as selected by the holder of the Redeemable Preferred Share (or, if neither the Redeemable Preferred Directors satisfies all requirements applicable to such committee, with respect to independence and otherwise, of the Company’s charter, the SEC and any national securities exchange on which any shares of the Company’s stock are then listed, at least one of the Additional Independents as selected by the Company’s board of directors), and (iii) the Company will not make a general delegation of the powers of the Company’s board of directors to any committee thereof which does not include as a member a Redeemable Preferred Director, other than to a Conflicts Committee.
Beginning three months after the failure of the OP to redeem Class C Units when required to do so, until all Class C Units requested to be redeemed have been redeemed, the holder of the Redeemable Preferred Share will have the right to increase the size of the Company’s board of directors by a number of directors that would result in the holder of the Redeemable Preferred Share being entitled to nominate and elect a majority of the Company’s board of directors and fill the vacancies created by the expansion of the Company’s board of directors, subject to compliance with the provisions of the Company’s charter requiring at least a majority of the Company’s directors to be “Independent Directors.”
The Brookfield Investor is not permitted to transfer the Redeemable Preferred Share, except to an affiliate of the Brookfield Investor.
The holder of the Redeemable Preferred Share generally votes together as a single class with the holders of the Company’s common stock at any annual or special meeting of stockholders of the Company. However, any action that would alter the terms of the Redeemable Preferred Share or the rights of its holder (including any amendment to the Company's charter, including the Articles Supplementary) is subject to a separate class vote of the Redeemable Preferred Share.
In addition, the Redeemable Preferred Directors have the approval rights set forth below under “Approval Rights” pursuant to the Articles Supplementary.
A&R LPA
At the Initial Closing, the Brookfield Investor, the Special General Partner and the Company, in its capacity as general partner of the OP, entered into the A&R LPA. In addition to establishing the terms, rights, obligations and preferences of the Class C Units, which are set forth in more detail below, and effecting revisions and amendments related thereto, the A&R LPA also effected amendments to the Existing LPA in certain other respects, including: (i) reflecting the change in name of the OP from American Realty Capital Hospitality Operating Partnership, L.P. to Hospitality Investors Trust Operating Partnership, L.P.;
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(ii) removing all provisions related to Class B Units, which the Advisor received for asset management services pursuant to the Advisory Agreement prior to October 1, 2015; and (iii) removing all provisions related to the special limited partnership interest in the OP held by the Special Limited Partner (the “SLP Interest”), pursuant to which the Special Limited Partner was entitled to receive the subordinated participation in net sales proceeds, a subordinated listing distribution and a subordinated distribution upon termination of the Advisory Agreement.
At the Initial Closing, pursuant to the Framework Agreement: (i) all 524,956 issued and outstanding Class B Units held by the Advisor were converted into 524,956 OP Units, and, immediately following such conversion, those 524,956 OP Units were redeemed for 524,956 shares of the Company’s common stock; (ii) all 90 OP Units held by the Advisor were redeemed for 90 shares of the Company’s common stock, which represented all the OP Units issued and outstanding prior to the Initial Closing other than the OP Units held by the Company in its capacity as the general partner of the OP corresponding to the issued and outstanding shares of the Company’s common stock; and (iii) the SLP Interest was automatically forfeited and redeemed by the OP without the payment of any consideration to the Special Limited Partner or any of its affiliates.
Rank
The Class C Units rank senior to the OP Units and all other equity interests in the OP with respect to priority in payment of distributions wereand in the distribution of assets in the event of the liquidation, dissolution or winding-up of the OP, whether voluntary or involuntary, or any other distribution of the assets of the OP among its equity holders for the purpose of winding up its affairs.
Distributions
Holders of Class C Units are entitled to receive, with respect to each Class C Unit, fixed, quarterly cumulative cash distributions at a rate of 7.50% per annum from legally available funds. If the Company fails to pay these cash distributions when due, the per annum rate will increase to 10% until all accrued and unpaid distributions required to be paid in cash while $0.8are reduced to zero.
Holders of Class C Units are also entitled to receive, with respect to each Class C Unit, a fixed, quarterly, cumulative PIK Distributions at a rate of 5% per annum payable in Class C Units. Upon the Company’s failure to redeem the Brookfield Investor when required to do so pursuant to the A&R LPA, the 5% per annum PIK Distribution rate will increase to a per annum rate of 7.50%, and would further increase by 1.25% per annum for the next four quarterly periods thereafter, up to a maximum per annum rate of 12.5%.
The number of Class C Units delivered in respect of the PIK Distributions on any distribution payment date will be equal to the number obtained by dividing the amount of PIK Distribution by the Conversion Price (as defined below).
The Brookfield Investor will receive tax distributions to the extent that the cash distributions are less than the tax (at the 35% rate) payable with respect to cash distributions, PIK Distributions, and any accrued but unpaid cash distributions. The Brookfield Investor will also receive tax distributions in certain limited situations in which it is allocated income as a result of converting Class C Units into OP Units but is unable to convert those OP Units into shares of the Company’s common stock. To the extent that the OP is required to pay tax distributions, the tax distributions will be advances of amounts the OP would otherwise pay the Brookfield Investor (e.g., if tax distributions are made with respect to PIK Distributions, then cash distributions with respect to PIK Distributions will be adjusted downward to reflect the tax distributions).
Liquidation Preference
The liquidation preference with respect to each Class C Unit as of a particular date is the original purchase price paid under the SPA or the value upon issuance of any Class C Unit received as a PIK Distribution, plus, with respect to such Class C Unit up to but not including such date, (i) any accrued and unpaid cash distributions and (ii) any accrued and unpaid PIK Distributions.
Conversion Rights
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The Class C Units are convertible into OP Units at any time at the option of the holder thereof at an initial conversion price of $14.75 (the “Conversion Price”). The Conversion Price is subject to anti-dilution and other adjustments upon the occurrence of certain events and transactions.
Notwithstanding the foregoing, the convertibility of certain Class C Units may be restricted in certain circumstances described in the A&R LPA, and, to the extent any Class C Units submitted for conversion are not converted as a result of these restrictions, the holder will instead be entitled to receive an amount in cash equal to two times the liquidation preference of any unconverted Class C Units.
OP Units, in turn, are generally redeemable for shares of the Company’s common stock on a one-for-one-basis or the cash value of a corresponding number of shares, at the election of the Company, in accordance with the terms of the A&R LPA. Notwithstanding the foregoing, with respect to any redemptions in exchange for shares of the Company’s common stock that would result in the converting holder owning 49.9% or more of the shares of the Company’s common stock then outstanding after giving effect to the redemption, for the number of shares of the Company’s common stock exceeding the 49.9% threshold, the redeeming holder may elect to retain OP Units or to request delivery in cash of the cash value of a corresponding number of shares.
Mandatory Redemption
Upon the consummation of any Fundamental Sale Transaction prior to March 31, 2022, the fifth anniversary of the Initial Closing, the holders of Class C Units are entitled to receive, prior to and in preference to any distribution of any of the assets or surplus funds of the Company to the holders of any other limited partnership interests in the OP:
in the case of a Fundamental Sale Transaction consummated on or prior to February 27, 2019, an amount per Class C Unit in cash equal to such Class C Unit’s pro rata share (determined based on the respective liquidation preferences of all Class C Units) of an amount equal to (I) $800.0 million less (II) the sum of (i) the difference between (A) $400.0 million and (B) the aggregate purchase price paid under the SPA of all outstanding Class C Units (with the purchase price for Class C Units issued as PIK Distributions being zero for these purposes) and (ii) all cash distributions actually paid to date;
in the case of a Fundamental Sale Transaction consummated after February 27, 2019 and prior to January 1, 2022, the date that is 57 months and one day after the date of the Initial Closing, an amount per Class C Unit in cash equal to (x) two times the purchase price under the SPA of such Class C Unit (with the purchase price for Class C Units issued as PIK Distributions being zero for these purposes), less (y) all cash distributions actually paid to date; and
in the case of a Fundamental Sale Transaction consummated on or after January 1, 2022, an amount per Class C Unit in cash equal to the liquidation preference of such Class C Unit plus a make whole premium for such Class C Unit calculated based on a discount rate of 5% and the assumption that such Class C Unit had not been redeemed until March 31, 2022, the fifth anniversary of the Initial Closing (the “Make Whole Premium”).
Holder Redemptions
Upon the occurrence of a REIT Event or a Material Breach, in each case, subject to certain notice and cure rights, holders of Class C Units have the right to require the Company to redeem any Class C Units submitted for redemption for an amount equivalent to what the holders of Class C Units would have been entitled to receive in a Fundamental Sale Transaction if the date of redemption were the date of the consummation of the Fundamental Sale Transaction.
From time to time on or after March 31, 2022, the fifth anniversary of the Initial Closing, and at any time following the rendering of a judgment enjoining or otherwise preventing the holders of Class C Units, the Brookfield Investor or the Special General Partner from exercising their respective rights under the A&R LPA or the Articles Supplementary, any holder of Class C Units may, at its election, require the Company to redeem any or all of its Class C Units for an amount in cash equal to the liquidation preference.
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NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
The OP is not required to make any redemption of less than all of the Class C Units held by any holder requiring a payment of less than $15.0 million. If any redemption request would result in the total liquidation preference of Class C Units remaining outstanding being equal to less than $35.0 million, the OP has the right to redeem all then outstanding Class C Units in full.
Remedies Upon Failure to Redeem
Three months after the failure of the OP to redeem Class C Units when required to do so, the Special General Partner has the exclusive right, power and authority to sell the assets or properties of the OP for cash at such time or times as the Special General Partner may determine, upon engaging a reputable, national third party sales broker or investment bank reasonably acceptable to holders of a majority of the then outstanding Class C Units to conduct an auction or similar process designed to maximize the sales price. The Special General Partner is not permitted to make sales to the Special General Partner, any other holder of a majority or more of the then outstanding Class C Units or any of their respective affiliates. The proceeds from sales of assets or properties by the Special General Partner must be used first to make any and all payments or distributions due or past due with respect to the Class C Units, regardless of the impact of such payments or distributions on the Company or the OP. The Special General Partner is not permitted to take any action without first obtaining any approval, including the approval of the Company’s stockholders, required by applicable Maryland law, as determined in good faith by the Company’s board of directors upon the advice of counsel.
In addition and as described elsewhere herein, three months after the failure of the OP to redeem Class C Units when required to do so:
the holder of the Redeemable Preferred Share would have the right to increase the size of the Company’s board of directors by a number of directors that would result in the holder of the Redeemable Preferred Share being entitled to nominate and elect a majority of the Company’s board of directors and fill the vacancies created by the expansion of the Company’s board of directors, subject to compliance with the provisions of the Company's charter requiring at least a majority of the Company’s directors to be Independent Directors (as defined in the Company's charter);
the 5% per annum PIK Distribution rate will increase to a per annum rate of 7.50%, and would further increase by 1.25% per annum for the next four quarterly periods thereafter, up to a maximum per annum rate of 12.5%; and
the standstill (but not the standstill on voting) provisions otherwise applicable to the Brookfield Investor and certain of its affiliates would terminate.
Company Liquidation Preference Reduction Upon Listing
In the event a listing of the Company’s common stock on a national stock exchange occurs prior to March 31, 2022, the fifth anniversary of the Initial Closing, the OP would have the right to elect to reduce the liquidation preference of any Class C Units outstanding to $0.10 per unit by paying an amount equal to the amount of such reduction (the “Reduction Amount”) plus a pro rata share of a Make Whole Premium attributable to such Class C Units calculated based on, for these purposes only, (a) in the case of a reduction payment prior to February 27, 2019, a number of Class C Units reflecting a funded amount of $400.0 million, whether or not such amount was reinvestedentirely funded, and (b) in the case of a reduction payment after February 27, 2019, the number of Class C Units subject to reduction. Following any such reduction and until March 31, 2024, the seven-year anniversary of the Initial Closing, the Class C Units that were subject to the reduction are convertible into a number of OP Units (the “Deferred Distribution Amount”) that, if positive, equals the Reduction Amount divided by the then current Conversion Price, less the Reduction Amount divided by the current market price for the Company’s common stock, less any excess tax distributions received divided by the current market price for the Company’s common stock. Notwithstanding the foregoing, the delivery of OP Units comprising the Deferred Distribution Amount may be restricted in certain circumstances as described in the A&R LPA, and, to the extent any OP Units are not delivered as a result of these restrictions, the holder is instead entitled to receive an amount in cash equal to the corresponding portion of the Reduction Amount associated with the Class C Units underlying any undelivered OP Units.
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NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
Company Redemption After Five Years
At any time and from time to time on or after March 31, 2022, the fifth anniversary of the Initial Closing, the Company has the right to elect to redeem all or any part of the issued and outstanding Class C Units for an amount in cash equal to the liquidation preference.
Transfer Restrictions
Subject to certain exceptions, the Brookfield Investor is generally permitted to make transfers of Class C Units without the prior consent of the Company, provided that any transferee must customarily invest in these types of securities or real estate investments of any type or have in excess of $100.0 million of assets. In addition, to the extent a transferee would hold in excess of (i) 20% of the outstanding shares of the Company’s common stock on an as-converted basis, the transferee is required to execute a joinder with respect to the standstill provisions contained in the SPA, and (ii) 35% of the outstanding shares of the Company’s common stock on an as-converted basis, the transferee is required to execute a joinder with respect to the standstill on voting provisions contained in the SPA.
Preemptive Rights
For so long as no Funding Failure has occurred, if the Company or the OP proposes to issue additional equity securities, subject to certain exceptions and in accordance with the procedures in the A&R LPA, any holder of Class C Units that owns Class C Units representing more than 5% of the outstanding shares of the Company’s common stock on an as-converted basis has certain preemptive rights.
Approval Rights
The Articles Supplementary restrict the Company from taking certain actions without the prior approval of at least one of the Redeemable Preferred Directors, and the A&R LPA restricts the OP from taking certain actions without the prior approval of the majority of the then outstanding Class C Units. Subject to certain limitations, both sets of rights are subject to temporary and permanent suspension in connection with any Funding Failure and no longer apply if the liquidation preference applicable to all Class C Units held by the Brookfield Investor and its affiliates is reduced to $100.0 million or less due to the exercise by holders of Class C Units of their redemption rights under the A&R LPA.
In general, subject to certain exceptions, prior approval is required before the Company or its subsidiaries are permitted to take any of the following actions: equity issuances; organizational document amendments; debt incurrences; affiliate transactions; sale of all or substantially all assets; bankruptcy or insolvency declarations; declarations or payments of dividends or other distributions; redemptions or repurchases of securities; adoption of, and amendments to, the annual business plan required to be prepared by the Company (including the annual operating and capital budget); hiring and compensation decisions related to certain key personnel (including executive officers); property acquisitions; property sales and dispositions; entry into new lines of business; settlement of material litigation; changes to material agreements; increasing or decreasing the number of directors on the Company’s board of directors; nominating or appointing a director who is not independent; nominating or appointing the chairperson of the Company’s board of directors; and certain other matters.
After December 31, 2021, the 57-month anniversary of the Initial Closing, no prior approval will be required for debt incurrences, equity issuances and asset sales if the proceeds therefrom are used to redeem the then outstanding Class C Units in full.
In addition, notwithstanding these prior approval rights, the Company’s board of directors is permitted to take such actions as it deems necessary, upon advice of counsel, to maintain the Company’s status as a REIT and to avoid having to register as an investment company under the Investment Company Act of 1940, as amended.
If all conditions to a Subsequent Closing are met and the Brookfield Investor does not purchase Class C Units as required pursuant to the SPA, then, subject to the notice and cure provisions set forth in the SPA, a Funding Failure (as defined in the SPA) will be deemed to have occurred and, subject to certain limitations, certain of the Brookfield Investor’s approval
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NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
rights under the Articles Supplementary and the A&R LPA, the rights of Class C Units to receive PIK Distributions, the convertibility of Class C Units into OP Units and the preemptive rights of holders of Class C Units under the A&R LPA would be suspended, subject to reinstatement (including payment of any PIK Distributions and related cash distributions to the extent not made) if (i) the Brookfield Investor or any other holder of Class C Units obtains a declaratory judgment or injunctive relief preventing the suspension of these rights, (ii) the parties otherwise agree that the conditions to the applicable Subsequent Closing were not met, or (iii) the Brookfield Investor consummates the applicable purchase of Class C Units at the applicable Subsequent Closing.
If a Funding Failure Final Determination occurs, and the Brookfield Investor does not then consummate such Subsequent Closing and pay any damages required in connection with the judgment within ten business days, then (i) all of the suspended rights under the A&R LPA and the Articles Supplementary (including approval rights under the A&R LPA that had not previously been suspended) will be permanently terminated, (ii) the Company would be entitled to redeem the Redeemable Preferred Share at its par value of $0.01, (iii) the OP would be entitled to redeem all or any portion of the then outstanding Class C Units in cash for their liquidation preference, (iv) all Class C Units received in respect of all PIK Distributions accrued from the date of the Initial Closing would be forfeited, and (v) the Brookfield Investor would be required to cause each of the Redeemable Preferred Directors to resign from the Company’s board of directors.
Ownership Limit Waiver Agreement
At the Initial Closing, as contemplated by and pursuant to the SPA, the Company and the Brookfield Investor entered into an Ownership Limit Waiver Agreement (the “Ownership Limit Waiver Agreement”), pursuant to which the Company (i) granted the Brookfield Investor and its affiliates a waiver of the Aggregate Share Ownership Limit (as defined in the Charter), and (ii) permitted the Brookfield Investor and its affiliates to own up to 49.9% in value of the aggregate of the outstanding shares of the Company’s stock or up to 49.9% (in value or in number of shares, whichever is more restrictive) of any class or series of shares of the Company stock, subject to the terms and conditions set forth in the Ownership Limit Waiver Agreement.
Property Management Transactions
Prior to the Initial Closing, the Company, directly or indirectly through its taxable REIT subsidiaries, entered into agreements with the Property Manager, which, in turn, engaged Crestline or a third-party sub-property manager to manage the Company’s hotel properties. These agreements were intended to be coterminous, meaning that the term of the agreement with the Property Manager was the same as the term of the Property Manager’s agreement with the applicable sub-property manager for the applicable hotel properties, with certain exceptions.
At the Initial Closing, as contemplated by and pursuant to the Framework Agreement, the Company, through its taxable REIT subsidiaries, the Property Manager, Crestline and the Company’s third-party sub-property managers entered into a series of amendments, assignments and terminations with respect to the then existing property management arrangements (collectively, the “Property Management Transactions”) pursuant to the various omnibus assignment, amendment and termination agreements entered into pursuant to the Framework Agreement.
At the consummation of the Property Management Transactions, among other things:
property management agreements for a total of 69 hotels sub-managed by Crestline (collectively, the “Crestline Agreements”) were assigned by the Property Manager to Crestline;
property management agreements for a total of five additional hotels (together with the Crestline Agreements, the “Long-Term Agreements”) are being transitioned to Crestline and the sub-property management agreements with Interstate Management Company, LLC related to these properties will be terminated effective April 3, 2017;
in connection with the assignment of the Long-Term Agreements to Crestline, they were amended as follows:
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| ◦ | the total property management fee of up to 4.0% of the monthly gross receipts from the properties was reduced to 3.0%; |
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| ◦ | no change to the remaining term (generally 18 to 19 years), which will renew automatically for three five year terms unless either party provides advance notice of non-renewal; |
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| ◦ | the termination provisions were changed from being generally only terminable by the Company prior to expiration for cause and not in connection with a sale such that, beginning on April 1, 2021, the first day of the 49th month following the Initial Closing, the Company will have an “on-sale” termination right upon payment of a fee in an amount equal to two and one half times the property management fee in the trailing 12 months, subject to customary adjustments; and |
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| ◦ | if, prior to March 31, 2023, the six years immediately following the Initial Closing, the Company sells a hotel managed pursuant to a Long-Term Agreement, the Company has the right to terminate the applicable Long-Term Agreement with respect to any property that is being sold and concurrently replace it with a comparable hotel owned by the Company and managed pursuant to a short-term agreement, by terminating that hotel’s existing property manager and retaining Crestline on the same terms as the Long-Term Agreement being replaced; |
the property management agreements with the Property Manager for the Company’s 65 other hotels have been terminated and the sub-property managers managing these hotels prior to the Initial Closing will continue to do so following the Initial Closing in accordance with property management agreements with the Company’s taxable REIT subsidiaries under the property management terms in effect prior to the Initial Closing.
As consideration for the Property Management Transactions, the Company and the OP:
◦Paid a one-time cash amount equal to $10.0 million to the property manager;
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| ◦ | will make a monthly cash payment in the amount of $333,333.33 to the Property Manager on the 15th day of each month for the 12 months following the Initial Closing; |
| |
| ◦ | Issued 279,329 shares of the Company’s common stock, subject to certain adjustments, to the Property Manager; |
| |
| ◦ | waived any and all obligations of the Advisor to refund or otherwise repay any Organization or Offering Expenses (as defined in the Advisory Agreement) to the Company in an amount acknowledged to be $5,821,988; and |
| |
| ◦ | converted all 524,956 Class B Units held by the Advisor into 524,956 OP Units, and, immediately following such conversion, redeemed such 524,956 OP Units for 524,956 shares of the Company’s common stock. |
Assignment and Assumption Agreement
At the Initial Closing, as contemplated by the Framework Agreement, the Company, the Advisor and AR Global entered into an assignment and assumption agreement, pursuant to which the Advisor and AR Global assigned to the Company all rights, titles in interests in the following assets that are relevant to the Company and the OP: (i) accounting systems, (ii) IT equipment and (iii) certain office furniture and equipment.
Mutual Release
At the Initial Closing, as contemplated by and pursuant to the Framework Agreement, the Advisor, the Special Limited Partner, the Property Manager and Crestline (on behalf of themselves and each of their respective affiliates), on the one hand, and the Company and the OP, on the other hand, entered into a general mutual waiver and release, which generally provides for releases of all claims arising prior to the Initial Closing (whether known or unknown), except for claims under the Framework Agreement and related transaction documents. In addition, pursuant to the Framework Agreement, the parties have agreed that existing indemnification rights under the Company’s and the OP’s organizational documents, the Advisory Agreement, certain property management agreements and the existing indemnification agreement between the Company, its directors and officers, and the Advisor and certain of its affiliates survive the Initial Closing solely with respect to claims from third parties.
HOSPITALITY INVESTORS TRUST, INC.
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
Transition Services Agreements
At the Initial Closing, as contemplated by and pursuant to the Framework Agreement, the Company entered into a transition services agreement with each of the Advisor and Crestline, pursuant to which it will receive their assistance in connection with investor relations/shareholder services and support services for pending transactions in the case of the Advisor and accounting and tax related services in the case of Crestline until June 29, 2017 except as set forth below. As compensation for the foregoing services, the Advisor will receive a one-time fee of $225,000 (payable $150,000 at the Initial Closing and $75,000 on May 15, 2017) and Crestline will receive a fee of $25,000 per month. The Advisor and Crestline are also entitled to reimbursement of out-of-pocket fees, costs and expenses. The transition services agreement with Crestline for accounting and tax related services will automatically renew for successive 90-day periods unless either party elects to terminate upon 40 days' written notice to the other party and the monthly fee of $25,000 will continue to be payable. The transition services agreement with the Advisor with respect to the support services for pending transactions expires on April 30, 2017 unless extended for an additional 30 days by written notice delivered prior to the expiration date, upon payment of an additional $75,000.
Trademark License Agreement
At the Initial Closing, as contemplated by and pursuant to the Framework Agreement, AR Capital, the Advisor, the Company and the OP entered into a trademark license agreement, pursuant to which the Advisor granted the Company and its affiliates, solely for 90 days following the Initial Closing, a limited, nonexclusive, non-transferable, non-sublicensable, royalty-free, fully paid-up, right and license to use certain trademarks and service marks currently used by the Company in connection with its existing business in order for the Company and its affiliates to transition to the use of new trademarks.
Amendments to Grace Agreements
At the Initial Closing, the Company, through a wholly owned subsidiary, entered into substantially identical amendments (together, the “Grace Amendments”) to the Amended and Restated Limited Liability Company Agreements (the “Grace Agreements”) of HIT Portfolio I Holdco, LLC and HIT Portfolio II Holdco, LLC (formerly known as ARC Hospitality Portfolio I Holdco, LLC and ARC Hospitality Portfolio II Holdco, LLC, respectively, and, together, the “Grace Holdcos”), each of which is an indirect subsidiary of the Company and an issuer of Grace Preferred Equity Interests. The material terms of the Grace Preferred Equity Interests are described in the Company’s Current Report on Form 8-K filed with the SEC on March 5, 2015 and in subsequent periodic filings made by the Company with the SEC.
The Grace Amendments were entered into in connection with the Company obtaining the consent of the holders of the Grace Preferred Equity Interests, W2007 Equity Inns Senior Mezz, LLC, W2007 Equity Inns Partnership, L.P. and W2007 Equity Inns Trust (collectively, the “Grace Holders”), the receipt of which was a condition to the Brookfield Investor’s obligation to consummate the Initial Closing under the SPA. Consistent with the Company’s obligation under the Grace Agreements to use 35% of the proceeds from any issuances of interests in the Company or any of its subsidiaries to redeem the Grace Preferred Equity Interests and the terms of the SPA, the Company redeemed $47.3 million in liquidation value of Grace Preferred Equity Interests with a portion of the proceeds from the Initial Closing. Pursuant to the terms of the Grace Agreements, the Company is also required to redeem an additional $19.4 million in liquidation value, representing 50.0% of the aggregate amount originally issued, by February 27, 2018, and the remaining $223.5 million in liquidation value by February 27, 2019. The Company also has other redemption obligations to the Grace Holders, including with respect to the proceeds from any sale or other liquidations of any of the Company’s properties or certain refinancings. Following the Initial Closing, the Brookfield Investor has agreed to purchase 31,525 sharesadditional Class C Units at Subsequent Closings in an aggregate amount not to exceed $265.0 million. Generally, the proceeds from the sale of Class C Units at Subsequent Closings may be used to redeem the Grace Preferred Equity Interests required to be redeemed at or around the time they are required to be redeemed, and with respect to the Subsequent Closings, the Company will also have an obligation under the DRIP. Grace Agreements to use 35% of the proceeds from any issuances of interests in the Company or any of its subsidiaries to redeem the Grace Preferred Equity Interests. However, the Subsequent Closings are subject to conditions, and may not be completed on their current terms, or at all.
HOSPITALITY INVESTORS TRUST, INC.
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
The Grace Amendments provide for certain changes to provisions related to transfer restrictions on membership interests in the Grace Holdcos and the events that would constitute a change in control of the Company under the Grace Agreements. These changes reflect both the Company’s termination of its external management relationship with the Advisor as well as the significance of the investment made by the Brookfield Investor in its capacity as the holder of Class C Units. The Grace Amendments also amend the Grace Agreements to reflect that, in connection with the Grace Holders consenting to the consummation of the Initial Closing, the Brookfield Investor entered into the following agreements with the Grace Holders: (i) a payover guarantee, pursuant to which the Brookfield Investor and the Special General Partner agreed that, if either of them receives any proceeds required under the Grace Agreements to be used to redeem Grace Preferred Equity Interests, those proceeds will be paid to the Grace Holders; and (ii) a standstill agreement pursuant to which the Brookfield Investor and certain of its affiliates agreed that, unless the Grace Preferred Equity Interests were simultaneously being, or have previously been, fully redeemed, certain affiliates of the Brookfield Investor will not be permitted to purchase any interest in the Company’s mortgage and mezzanine loans encumbering the hotels directly owned by the Grace Holdcos or in any other indebtedness of the Grace Holdcos or encumbering those hotels.
Registration Rights Agreement
At the Initial Closing, as contemplated by and pursuant to the SPA and the Framework Agreement, the Company, the Brookfield Investor, the Advisor and the Property Manager entered into a Registration Rights Agreement (the “Registration Rights Agreement”). Pursuant to the Registration Rights Agreement, holders of Class C Units have certain shelf, demand and piggyback rights with respect to the registration of the resale under the Securities Act of 1933, as amended (the “Securities Act”) of the shares of Company’s common stock issuable upon redemption of OP Units issuable upon conversion of Class C Units, and the Advisor and the Property Manager have similar rights with respect to the 525,046 and 279,329 shares of the Company’s common stock issued to them, respectively, pursuant to the Framework Agreement. For so long as registrable securities remain outstanding, the Brookfield Investor and the holders of a majority of the registrable securities have the right to make up to three requests such in any 12-month period with respect to the registration of registrable securities under the Securities Act. The Advisor and the Property Manager have the right, collectively, to make one such request.
Board Matters
On March 2, 2015,January 12, 2017, as required by the SPA, William M. Kahane, executive chairman of the Company’s board of directors, resigned from the Company’s board of directors and as executive chairman effective upon, and subject to, the occurrence of the Initial Closing.
On January 12, 2017, Robert H. Burns resigned from the Company’s board of directors effective upon, and subject to, the occurrence of the Initial Closing and any request by the Company’s board of directors for him to be nominated as one of the Additional Independents.
Messrs. Kahane and Burns did not resign pursuant to any disagreement with the Company. Messrs. Burns and Kahane have advised the Company they will no longer be responsible for any part of any registration statement filed by the Company pursuant to and consistent with 15 U.S.C. § 77k(b)(1).
At the initial closing, Jonathan P. Mehlman, Bruce G. Wiles and Lowell B. Baron were elected to the Company's board of directors effective immediately following the resignation of Messrs. Kahane and Burns, in connection with which the Company's board of directors was expanded from four to five members. Mr. Wiles was appointed Chairman of the Company’s board of directors in connection with his election. In addition, at the Initial Closing, Stephen P. Joyce and Edward A. Glickman were elected as members of the Company's board of directors effective upon the filing with the SEC of this Annual Report on Form 10-K in connection with which the Company's board of directors will be expanded from five to seven members.
Mr. Mehlman is and has been the Company’s chief executive officer and president. Messrs. Wiles and Baron were elected as the Redeemable Preferred Directors pursuant to the Brookfield Investor’s rights as the holder of the Redeemable Preferred Share and pursuant to the SPA. Messrs. Wiles and Baron are both managing partners of Brookfield Asset Management Inc., and affiliate of the Brookfield Investor, and Mr. Wiles is also president and chief operating officer of another affiliate of the Brookfield Investor. Prior to their election by the Company’s board of directors as independent directors,
HOSPITALITY INVESTORS TRUST, INC.
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
Messrs. Joyce and Glickman were approved by the Brookfield Investor as the Additional Independents pursuant to its rights as the holder of the Redeemable Preferred Share and pursuant to the SPA.
Amendment and Restatement of Employee and Director Incentive Restricted Share Plan
In connection with the Initial Closing, a special compensation committee established by the Company’s board of directors (the "Special Compensation Committee") approved and adopted an amendment and restatement of the RSP (the “A&R RSP”), which currently provides for grants of restricted shares but not other forms of awards. The amendments effected by the A&R RSP will enable the Company to grant awards to employees, officers and directors of the Company and its affiliates of restricted stock units in respect of shares of the Company’s common stock (“RSUs”), which represent a contingent right to receive shares of the Company’s common stock (or an amount of cash having an equivalent fair market value) at a future settlement date, subject to satisfaction of applicable vesting conditions and/or other restrictions, as set forth in the A&R RSP and an award agreement evidencing the grant of RSUs.
The amendments effected by the A&R RSP also eliminated provisions of the RSP under which automatic grants of restricted shares had been issued to the Company’s independent directors and provisions related to the Company being externally managed. In lieu of automatic grants of restricted shares, following the Initial Closing the Company’s non-employee directors will receive annual grants of awards of RSUs or restricted shares for their services to the Company, as described in more detail below under the caption “Director Compensation Policy.”
Director Compensation Policy
Effective at the Initial Closing, the Special Compensation Committee adopted a new director compensation policy, which will apply to all directors who are not employees of the Company. Mr. Mehlman, as an employee of the Company, will not receive any compensation for his service on the Board but all other directors (including Redeemable Preferred Directors) will receive compensation.
Under the new director compensation policy, directors will be paid an annual cash retainer in the amount of $100,000 as consideration for their time and efforts in serving on the Company’s board of directors. The chairs of the Audit Committee and Compensation Committee will each receive an additional cash retainer of $15,000, while the chairs of the Nominating and Corporate Governance Committee and Conflicts Committee each receive an additional cash retainer of $10,000. Members of the Audit Committee other than the chair will each receive an additional cash retainer of $5,000, while members of the Compensation Committee, Nominating and Corporate Governance Committee and Conflicts Committee will each receive an additional cash retainer of $2,500. There will be no additional fees paid for attending Board or committee meetings. Directors may be offered an election to receive all or any portion of their cash retainers in vested shares of the Company’s common stock or RSUs in lieu of cash.
In addition, the director compensation policy contemplates that, on the first business day in July of each year starting in 2017, directors will be granted an award of RSUs or restricted shares (as determined by the Company's board of directors on the date of grant) having an aggregate value of $50,000, based on the fair market value of a share of the Company’s common stock (as determined by the Company’s board of directors in good faith on the date of grant). These RSUs or restricted shares would become vested on the earlier of the date of the annual meeting in the year following the year in which the grant date occurs and the first anniversary of the date of grant, in each case, subject to continued service on the Company's board of directors through the vesting date. If a director resigns prior to any vesting date, the director would forfeit all unvested RSUs or restricted shares for no consideration. Vesting of RSUs or restricted shares would accelerate upon a change in control (as defined in the A&R RSP) of the Company. Unless deferred pursuant to a timely election under a deferred compensation arrangement approved by the Company’s board of directors, vested RSUs will be settled in shares of the Company’s common stock on the earlier of the date of the termination of their service to the Company’s board of directors, a change in control, and the third anniversary of vesting.
Executive Employment Agreements
HOSPITALITY INVESTORS TRUST, INC.
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
At the Initial Closing, the Company entered into employment agreements (the “Employment Agreements”) with each of Mr. Mehlman, the Company’s chief executive officer and president, Edward Hoganson, the Company’s chief financial officer and treasurer (who also served as the Company’s secretary prior to the election of Mr. Hughes to that position), and Paul C. Hughes, who was elected as the Company's general counsel and secretary at the Initial Closing.
Employment Agreement with Mr. Mehlman
Pursuant to his Employment Agreement, Mr. Mehlman will serve as the Company’s chief executive officer and president from the Initial Closing through the second anniversary of the Initial Closing, with automatic one year renewals at the end of the employment term (including any renewal employment term) unless either party delivers written notice of non-renewal at least 90 days prior to the scheduled expiration of the employment term.
Pursuant to his Employment Agreement, Mr. Mehlman will receive an annual base salary of $750,000 and be eligible for an annual bonus upon achievement of performance goals based on the achievement of individual and Company performance goals previously established by the Company’s board of directors after consultation with Mr. Mehlman. Mr. Mehlman’s target annual bonus will be 130% of his base salary, Mr. Mehlman's threshold annual bonus will be 67% of his base salary and Mr. Mehlman's maximum annual bonus will be 225% of his base salary, with the actual annual bonus determined in the sole discretion of the Company’s board of directors, except that for the fiscal year ending December 31, 2017, Mr. Mehlman's bonus will be no less than 67% of his base salary. Mr. Mehlman will be eligible to participate in the employee benefits generally provided to employees, subject to the satisfaction of eligibility requirements, and will receive a whole life insurance policy with a death benefit of at least $500,000 and a health club membership.
Mr. Mehlman will be eligible to participate in the Company’s long-term incentive program (the “LTIP”) during his employment. Mr. Mehlman will receive an initial LTIP award on the first business day of July, 2017, subject to his continued employment through that date, consisting of 35,000 RSUs vesting 25% per year on each of the first four anniversaries of the grant date, subject to his continued employment through each applicable vesting date. Thereafter, for each fiscal year beginning with the 2017, Mr. Mehlman will be eligible to receive an annual LTIP award of RSUs, vesting 25% per year on each of the first four anniversaries of the grant date, subject to continued employment through each applicable vesting date. Annual LTIP awards will be granted by February 15 in the first quarter of the year following the year to which the annual LTIP award relates, subject to Mr. Mehlman’s continued employment through the date of grant. Under his Employment Agreement, Mr. Mehlman’s target annual LTIP award is 135,000 RSUs, with the actual number of RSUs comprising the annual LTIP award for any year to be determined by the Company’s board of directors in its sole discretion based on the achievement of Company performance goals established by the Company’s board of directors after consultation with Mr. Mehlman.
If Mr. Mehlman’s employment is terminated by the Company without “cause” or by Mr. Mehlman for “good reason” (as such terms are defined in his Employment Agreement) or upon expiration following non-renewal of the employment term by the Company, then Mr. Mehlman would be entitled to receive accrued salary and earned bonuses, to the extent unpaid, a pro-rata annual bonus for the year of termination based on actual performance for the full fiscal year, and immediate vesting of his outstanding and unvested equity awards. In addition, Mr. Mehlman would receive an aggregate amount equal to the sum of (i) the greater of (x) one and one-half times his annual base salary and (y) his annual base salary payable through the remainder of the initial employment term (the “Salary Amount”), plus (ii) the greater of (x) the annual bonus paid to him in the most recently completed fiscal year preceding the date of termination and (y) the average annual bonus paid to him for the three most recently completed fiscal years preceding the date of termination (the “Bonus Amount”), with such amount payable in equal payments over 12 months (or if longer, the remainder of the initial employment term) (the “Severance Period”), and continued payment or reimbursement by the Company for his life, disability, dental, and health insurance coverage, on a monthly basis, for the longer of (x) the Severance Period and (y) 18 months following termination, to the same extent that the Company paid distributionsfor such coverage during his employment; provided, however, if such termination occurs within 12 months following a change in control of $1.7 millionthe Company (as defined in the Employment Agreements), then he will receive a lump sum payment equal to stockholderstwo times the Salary Amount plus three times the Bonus Amount, and up to 24 months’ continuation of recordlife, disability, dental, and health insurance coverage. The foregoing severance payments and benefits generally are conditioned on timely execution and delivery (without revocation) of a release of claims by Mr. Mehlman.
HOSPITALITY INVESTORS TRUST, INC.
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
Mr. Mehlman’s Employment Agreement also generally provides that Mr. Mehlman will be subject to perpetual non-disclosure obligations with respect to confidential information and, during his employment and for a period of 12 months after termination, restrictions against disparaging the monthCompany, soliciting the Company’s employees, clients and investors, and, if severance is paid, competing with the Company.
Employment Agreements with Messrs. Hoganson and Hughes
Pursuant to their respective Employment Agreements, Mr. Hoganson will serve as the Company’s chief financial officer and treasurer, and Mr. Hughes will serve as the Company’s general counsel and secretary, from the Initial Closing through the first anniversary of the Initial Closing, with automatic one year renewals at the end of the employment term (including any renewal employment term) unless either party delivers written notice of non-renewal at least 90 days prior to the scheduled expiration of the employment term.
Pursuant to their respective Employment Agreements, each of Messrs. Hoganson and Hughes will receive an annual base salary of $375,000 and be eligible for an annual bonus upon achievement of performance goals based on the achievement of individual and Company performance goals previously established by the Company’s board of directors after consultation with the Company’s chief executive officer. In addition, each of Messrs. Hoganson and Hughes will have a target annual bonus equal to 75% of his base salary, a threshold annual bonus equal to 50% of his base salary and a maximum annual bonus equal to 150% of his base salary, with the actual annual bonus determined in the sole discretion of the Company’s board of directors, except that for the fiscal year ending December 31, 2017, the bonus for each of Messrs. Hughes and Hoganson will be no less than 50% of his base salary. Messrs. Hoganson and Hughes will be eligible to participate in the employee benefits generally provided to employees, subject to the satisfaction of eligibility requirements. Under his Employment Agreement, the Company has agreed to continue to pay or reimburse Mr. Hughes for the cost of the annual premiums for certain existing life and disability insurance policies.
During employment with the Company, each of Messrs. Hoganson and Hughes will be eligible to participate in the LTIP. Each of Messrs. Hoganson and Hughes will receive an initial LTIP award on the first business day of July 2017, subject to his continued employment through that date, consisting of 8,750 RSUs vesting 25% per year on each of the first four anniversaries of the grant date, subject to continued employment through each applicable vesting date. Thereafter, for each fiscal year beginning with the 2017 fiscal year, each of Messrs. Hoganson and Hughes will be eligible to receive an annual LTIP award of RSUs, granted by February 2015. Approximately $0.9 million15 in the first quarter of the year following the year to which the annual LTIP award relates, subject to continued employment through the date of grant. The annual LTIP award will vest 25% per year on each of the first four anniversaries of the grant date, subject to continued employment through each applicable vesting date. Under their respective Employment Agreements, the target annual LTIP award for each of Messrs. Hoganson and Hughes is 33,250 RSUs, with the actual number of RSUs comprising their annual LTIP awards for any year to be determined by the Company’s board of directors in its sole discretion based on the achievement of Company performance goals established by the Company’s board of directors after consultation with the Company’s chief executive officer.
If the employment of either of Messrs. Hoganson or Hughes is terminated by the Company without “cause” or by either of Messrs. Hoganson or Hughes for “good reason” (as such terms are defined in the applicable Employment Agreement) or upon expiration following non-renewal of the employment term by the Company, then either of Messrs. Hoganson or Hughes would be entitled to receive accrued salary and earned bonuses, to the extent unpaid, a pro-rata annual bonus for the year of termination based on actual performance for the full fiscal year, and immediate vesting of his outstanding and unvested equity awards. In addition, either of Messrs. Hoganson or Hughes would receive an aggregate amount (the “Severance Amount”) equal to the sum of (i) his annual base salary, plus (ii) the greater of (x) the annual bonus paid to him in the most recently completed fiscal year preceding the date of termination and (y) the average annual bonus paid to him for the three most recently completed fiscal years preceding the date of termination, payable over 12 months, as well as continued payment or reimbursement by the Company for his life, disability, dental, and health insurance coverage for 12 months to the same extent that the Company paid for such coverage during his employment; provided, however, if such termination occurs within 12 months following a change in control of the Company (as defined in the Employment Agreements), then either of Messrs. Hoganson or Hughes will receive a lump sum payment equal to two times the Severance Amount and continuation of life, disability, dental, and health insurance coverage for up to 24 months. The foregoing severance payments and benefits generally
HOSPITALITY INVESTORS TRUST, INC.
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
are conditioned on timely execution and delivery (without revocation) of a release of claims by either of Messrs. Hoganson or Hughes.
The Employment Agreements for Messrs. Hoganson and Hughes also generally provide that each will be subject to perpetual non-disclosure obligations with respect to confidential information and, during his employment and for a period of 12 months after termination, restrictions against disparaging the Company, soliciting the Company’s employees, clients and investors, and, if severance is paid, competing with the Company.
Charter Amendment
In connection with the Initial Closing, the Company filed an amendment to the Company's charter solely to change the name of the Company from “American Realty Capital Hospitality Trust, Inc.” to “Hospitality Investors Trust, Inc.” with the SDAT, which became effective upon filing.
Change to Aggregate Share Ownership Limit
In connection with the Initial Closing, the Company filed a Certificate of Notice (the “Notice”) with the SDAT with respect to the determination of the Company’s board of directors to decrease the Aggregate Share Ownership Limit (as defined in the Company’s charter) to 4.9% in value of the aggregate of the outstanding shares of Capital Stock (as defined in the Company’s charter) and not more than 4.9% in value or in number of shares, whichever is more restrictive, of any class or series of shares of Capital Stock. The decreased Aggregate Share Ownership Limit will not be effective for any person whose percentage ownership of Capital Stock is in excess of such distributions were paiddecreased Aggregate Share Ownership Limit at the time of the Notice until such time as such person’s percentage of Capital Stock equals or falls below the decreased Aggregate Share Ownership Limit, but any further acquisition of Capital Stock in cash, while $0.8 million was reinvestedexcess of the decreased Aggregate Share Ownership Limit is prohibited.
Amendment to purchase 33,643 sharesBylaws
At the Initial Closing, the amendment and restatement of the Company’s bylaws (the “A&R Bylaws”) contemplated by the SPA became effective. The amendments to the Company’s bylaws reflected in the A&R Bylaws generally give effect to the rights of the holder of the Redeemable Preferred Share and the role of the Redeemable Preferred Directors under the DRIP.Articles Supplementary. The A&R Bylaws also give effect to other clarifications and revisions to the Company’s bylaws, including the removal of the Advisor and its affiliates from the provisions related to indemnification and the advancement of expenses.
Acquisition
Termination of Share Repurchase Program
On February 27, 2015,March 31, 2017, as authorized by the Company closedCompany’s board of directors, the Grace Acquisition (See Note 1 - Organization).SRP was terminated effective as of April 30, 2017.
AMERICAN REALTY CAPITAL HOSPITALITY INVESTORS TRUST, INC.
Real Estate and Accumulated Depreciation
Schedule III
December 31, 20142016
(dollar amounts in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Initial Cost | | Subsequent Costs Capitalized | | Gross Amount at December 31, 2014 (1) | |
| Property | U.S. State or Country | Acquisition
Date | Debt at December 31, 2014 | Land | Building and
Improvements | | Land | Building and Improvements | | Land | Building and Improvements | Total | Accumulated
Depreciation (2) |
| Baltimore Courtyard Inner Harbor Hotel | MD | 2014 | $ | 24,980 |
| $ | 4,960 |
| $ | 34,343 |
| | $ | — |
| $ | 1 |
| | $ | 4,960 |
| $ | 34,344 |
| $ | 39,304 |
| $ | (679 | ) |
| Courtyard Providence Downtown Hotel | RI | 2014 | 20,520 |
| 4,724 |
| 29,388 |
| | — |
| 1,238 |
| | 4,724 |
| 30,626 |
| 35,350 |
| (586 | ) |
| Homewood Suites Stratford | CT | 2014 | — |
| 2,377 |
| 13,874 |
| | — |
| 2,332 |
| | 2,377 |
| 16,206 |
| 18,583 |
| (304 | ) |
| Total | | | $ | 45,500 |
| $ | 12,061 |
| $ | 77,605 |
| | $ | — |
| $ | 3,571 |
| | $ | 12,061 |
| $ | 81,176 |
| $ | 93,237 |
| $ | (1,569 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Initial Cost | | Subsequent Costs Capitalized | | Gross Amount at December 31, 2016 (1) | |
| Property | U.S. State or Country | Acquisition
Date | Debt at December 31, 2016 | Land | Building and
Improvements | | Land | Building and Improvements | | Land | Building and Improvements | Total | Accumulated
Depreciation (2) |
| Courtyard Baltimore Downtown Inner Harbor | MD | 2014 | (24,980 | ) | 4,961 |
| 34,343 |
| | — |
| — |
| | 4,961 |
| 34,343 |
| 39,304 |
| (2,421 | ) |
| Courtyard Providence Downtown | RI | 2014 | (20,520 | ) | 4,724 |
| 29,388 |
| | — |
| 1,247 |
| | 4,724 |
| 30,635 |
| 35,359 |
| (2,221 | ) |
| Georgia Tech Hotel and Conference Center | GA | 2014 | — |
| — |
| — |
| | — |
| — |
| | — |
| — |
| — |
| — |
|
| Homewood Suites Stratford | CT | 2014 | (12,500 | ) | 2,377 |
| 13,875 |
| | — | 1,402 |
| | 2,377 |
| 15,277 |
| 17,654 |
| (1,238 | ) |
| Westin Virginia Beach Town Center | VA | 2014 | — |
| — |
| — |
| | — |
| — |
| | — |
| — |
| — |
| — |
|
| Hilton Garden Inn Blacksburg | VA | 2014/2015 | (10,500 | ) | — |
| 14,107 |
| | — |
| — |
| | — |
| 14,107 |
| 14,107 |
| (613 | ) |
| Courtyard Lexington South Hamburg Place | KY | 2015 | (13,474 | ) | 2,766 |
| 10,242 |
| | — |
| 38 |
| | 2,766 |
| 10,280 |
| 13,046 |
| (513 | ) |
| Courtyard Louisville Downtown | KY | 2015 | (26,501 | ) | 3,727 |
| 33,543 |
| | — |
| 9 |
| | 3,727 |
| 33,552 |
| 37,279 |
| (1,545 | ) |
| Embassy Suites Orlando International Drive Jamaican Court | FL | 2015 | (19,449 | ) | 2,356 |
| 23,646 |
| | (4 | ) | 1,742 |
| | 2,352 |
| 25,387 |
| 27,739 |
| (1,338 | ) |
| Fairfield Inn & Suites Atlanta Vinings | GA | 2015 | (8,305 | ) | 1,394 |
| 8,968 |
| | — |
| 1,896 |
| | 1,395 |
| 10,864 |
| 12,259 |
| (647 | ) |
| Homewood Suites Chicago Downtown | IL | 2015 | (61,659 | ) | 15,314 |
| 73,248 |
| | 4 |
| 5,574 |
| | 15,318 |
| 78,822 |
| 94,140 |
| (4,119 | ) |
| Hyatt Place Albuquerque Uptown | NM | 2015 | (14,773 | ) | 987 |
| 16,386 |
| | (1 | ) | 1,204 |
| | 986 |
| 17,589 |
| 18,575 |
| (862 | ) |
| Hyatt Place Baltimore Washington Airport | MD | 2015 | (9,510 | ) | 3,129 |
| 9,068 |
| | 2 |
| 1,297 |
| | 3,131 |
| 10,365 |
| 13,496 |
| (613 | ) |
| Hyatt Place Baton Rouge I 10 | LA | 2015 | (10,664 | ) | 1,888 |
| 8,897 |
| | (1 | ) | 1,261 |
| | 1,887 |
| 10,158 |
| 12,045 |
| (472 | ) |
| Hyatt Place Birmingham Hoover | AL | 2015 | (8,935 | ) | 956 |
| 9,689 |
| | 1 |
| 133 |
| | 957 |
| 9,822 |
| 10,779 |
| (519 | ) |
| Hyatt Place Cincinnati Blue Ash | OH | 2015 | (6,754 | ) | 652 |
| 7,951 |
| | (1 | ) | 1,520 |
| | 651 |
| 9,471 |
| 10,122 |
| (527 | ) |
| Hyatt Place Columbus Worthington | OH | 2015 | (8,585 | ) | 1,063 |
| 11,319 |
| | (1 | ) | 201 |
| | 1,063 |
| 11,520 |
| 12,583 |
| (573 | ) |
| Hyatt Place Indianapolis Keystone | IN | 2015 | (11,233 | ) | 1,918 |
| 13,935 |
| | (1 | ) | 1,310 |
| | 1,917 |
| 15,245 |
| 17,162 |
| (760 | ) |
| Hyatt Place Memphis Wolfchase Galleria | TN | 2015 | (10,247 | ) | 971 |
| 14,505 |
| | 2 |
| 105 |
| | 974 |
| 14,611 |
| 15,584 |
| (709 | ) |
| Hyatt Place Miami Airport West Doral | FL | 2015 | (17,327 | ) | 2,634 |
| 17,897 |
| | 1 |
| 468 |
| | 2,634 |
| 18,365 |
| 20,999 |
| (875 | ) |
| Hyatt Place Nashville Franklin Cool Springs | TN | 2015 | (14,446 | ) | 2,201 |
| 15,003 |
| | 2 |
| 2,150 |
| | 2,202 |
| 17,154 |
| 19,356 |
| (754 | ) |
| Hyatt Place Richmond Innsbrook | VA | 2015 | (7,401 | ) | 1,584 |
| 8,013 |
| | (5 | ) | 1,483 |
| | 1,578 |
| 9,497 |
| 11,075 |
| (595 | ) |
| Hyatt Place Tampa Airport Westshore | FL | 2015 | (16,425 | ) | 3,329 |
| 15,710 |
| | (5 | ) | 1,255 |
| | 3,324 |
| 16,966 |
| 20,290 |
| (835 | ) |
HOSPITALITY INVESTORS TRUST, INC.
Real Estate and Accumulated Depreciation
Schedule III
December 31, 2016
(dollar amounts in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Residence Inn Lexington South Hamburg Place | KY | 2015 | (11,970 | ) | 2,044 |
| 13,313 |
| | — |
| 1,990 |
| | 2,044 |
| 15,303 |
| 17,347 |
| (771 | ) |
| SpringHill Suites Lexington Near The University Of Kentucky | KY | 2015 | (13,662 | ) | 3,321 |
| 13,064 |
| | — |
| 7 |
| | 3,321 |
| 13,071 |
| 16,392 |
| (660 | ) |
| Hampton Inn Albany Wolf Road Airport | NY | 2015 | (16,123 | ) | 1,717 |
| 16,572 |
| | — |
| 80 |
| | 1,717 |
| 16,652 |
| 18,369 |
| (855 | ) |
| Hampton Inn Colorado Springs Central Airforce Academy | CO | 2015 | (3,455 | ) | 449 |
| 6,322 |
| | — |
| 14 |
| | 449 |
| 6,335 |
| 6,784 |
| (374 | ) |
| Hampton Inn Baltimore Glen Burnie | MD | 2015 | (3,376 | ) | — |
| 5,438 |
| | — |
| 1,248 |
| | — |
| 6,686 |
| 6,686 |
| (748 | ) |
| Hampton Inn Beckley | WV | 2015 | (15,440 | ) | 857 |
| 13,670 |
| | — |
| 54 |
| | 857 |
| 13,724 |
| 14,581 |
| (697 | ) |
| Hampton Inn Birmingham Mountain Brook | AL | 2015 | (8,031 | ) | — |
| 9,863 |
| | — |
| 10 |
| | — |
| 9,873 |
| 9,873 |
| (495 | ) |
| Hampton Inn Boca Raton | FL | 2015 | (13,080 | ) | 2,027 |
| 10,420 |
| | — |
| 2,371 |
| | 2,027 |
| 12,792 |
| 14,819 |
| (514 | ) |
| Hampton Inn Boca Raton Deerfield Beach | FL | 2015 | (12,215 | ) | 2,781 |
| 9,338 |
| | — |
| 28 |
| | 2,781 |
| 9,366 |
| 12,147 |
| (480 | ) |
| Hampton Inn Charleston Airport Coliseum | SC | 2015 | (4,072 | ) | 1,768 |
| 6,586 |
| | — |
| — |
| | 1,768 |
| 6,586 |
| 8,354 |
| (392 | ) |
| Hampton Inn Chattanooga Airport I 75 | TN | 2015 | (4,647 | ) | 1,827 |
| 5,268 |
| | — |
| — |
| | 1,827 |
| 5,268 |
| 7,095 |
| (390 | ) |
| Hampton Inn Chicago Gurnee | IL | 2015 | (10,717 | ) | 757 |
| 12,189 |
| | — |
| 92 |
| | 757 |
| 12,281 |
| 13,038 |
| (634 | ) |
| Hampton Inn Columbia I 26 Airport | SC | 2015 | (5,022 | ) | 1,209 |
| 3,684 |
| | — |
| 11 |
| | 1,209 |
| 3,695 |
| 4,904 |
| (278 | ) |
| Hampton Inn Columbus Dublin | OH | 2015 | (10,518 | ) | 1,140 |
| 10,856 |
| | — |
| 9 |
| | 1,140 |
| 10,865 |
| 12,005 |
| (552 | ) |
| Hampton Inn Columbus Airport | GA | 2015 | (2,827 | ) | 941 |
| 1,251 |
| | — |
| — |
| | 941 |
| 1,251 |
| 2,192 |
| (204 | ) |
| Hampton Inn Detroit Madison Heights South Troy | MI | 2015 | (11,679 | ) | 1,950 |
| 11,834 |
| | — |
| 32 |
| | 1,950 |
| 11,865 |
| 13,815 |
| (617 | ) |
| Hampton Inn Detroit Northville | MI | 2015 | (8,335 | ) | 1,210 |
| 8,591 |
| | — |
| 205 |
| | 1,210 |
| 8,795 |
| 10,005 |
| (527 | ) |
| Hampton Inn Kansas City Overland Park | KS | 2015 | (4,480 | ) | 1,233 |
| 9,210 |
| | — |
| 129 |
| | 1,233 |
| 9,339 |
| 10,572 |
| (624 | ) |
| Hampton Inn Kansas City Airport | MO | 2015 | (8,560 | ) | 1,362 |
| 9,247 |
| | — |
| 164 |
| | 1,362 |
| 9,411 |
| 10,773 |
| (485 | ) |
| Hampton Inn Memphis Poplar | TN | 2015 | (12,077 | ) | 2,168 |
| 10,618 |
| | — |
| 66 |
| | 2,168 |
| 10,684 |
| 12,852 |
| (548 | ) |
| Hampton Inn Morgantown | WV | 2015 | (12,893 | ) | 3,062 |
| 12,810 |
| | — |
| 76 |
| | 3,062 |
| 12,886 |
| 15,948 |
| (641 | ) |
| Hampton Inn Norfolk Naval Base | VA | 2015 | (3,786 | ) | — |
| 6,873 |
| | — |
| 2,004 |
| | — |
| 8,876 |
| 8,876 |
| (641 | ) |
| Hampton Inn Palm Beach Gardens | FL | 2015 | (19,160 | ) | 3,253 |
| 17,724 |
| | — |
| 2 |
| | 3,253 |
| 17,726 |
| 20,979 |
| (872 | ) |
| Hampton Inn Pickwick Dam @ Shiloh Falls | TN | 2015 | (1,979 | ) | 148 |
| 2,089 |
| | — |
| 26 |
| | 148 |
| 2,115 |
| 2,263 |
| (158 | ) |
| Hampton Inn Scranton @ Montage Mountain | PA | 2015 | (10,787 | ) | 754 |
| 11,174 |
| | — |
| 28 |
| | 753 |
| 11,201 |
| 11,954 |
| (596 | ) |
HOSPITALITY INVESTORS TRUST, INC.
Real Estate and Accumulated Depreciation
Schedule III
December 31, 2016
(dollar amounts in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Hampton Inn St Louis Westport | MO | 2015 | (7,369 | ) | 1,359 |
| 8,486 |
| | — |
| 29 |
| | 1,359 |
| 8,515 |
| 9,874 |
| (430 | ) |
| Hampton Inn State College | PA | 2015 | (10,936 | ) | 2,509 |
| 9,359 |
| | — |
| 68 |
| | 2,509 |
| 9,427 |
| 11,936 |
| (524 | ) |
| Hampton Inn West Palm Beach Florida Turnpike | FL | 2015 | (16,218 | ) | 2,008 |
| 13,636 |
| | — |
| 31 |
| | 2,008 |
| 13,667 |
| 15,675 |
| (674 | ) |
| Homewood Suites Hartford Windsor Locks | CT | 2015 | (10,624 | ) | 3,072 |
| 8,996 |
| | — |
| 182 |
| | 3,072 |
| 9,178 |
| 12,251 |
| (697 | ) |
| Homewood Suites Memphis Germantown | TN | 2015 | (7,423 | ) | 1,024 |
| 8,871 |
| | — |
| 2,276 |
| | 1,024 |
| 11,147 |
| 12,171 |
| (663 | ) |
| Homewood Suites Phoenix Biltmore | AZ | 2015 | (16,877 | ) | — |
| 23,722 |
| | — |
| 2,154 |
| | — |
| 25,875 |
| 25,875 |
| (1,151 | ) |
| Hampton Inn & Suites Boynton Beach | FL | 2015 | (26,922 | ) | 1,393 |
| 24,759 |
| | — |
| 42 |
| | 1,393 |
| 24,801 |
| 26,194 |
| (1,213 | ) |
| Hampton Inn Cleveland Westlake | OH | 2015 | (11,738 | ) | 4,177 |
| 10,002 |
| | — |
| 9 |
| | 4,176 |
| 10,011 |
| 14,187 |
| (588 | ) |
| Courtyard Athens Downtown | GA | 2015 | (8,683 | ) | 3,201 |
| 7,305 |
| | — |
| 8 |
| | 3,201 |
| 7,312 |
| 10,513 |
| (382 | ) |
| Courtyard Gainesville | FL | 2015 | (12,031 | ) | 2,904 |
| 8,605 |
| | — |
| 137 |
| | 2,904 |
| 8,742 |
| 11,646 |
| (450 | ) |
| Courtyard Knoxville Cedar Bluff | TN | 2015 | (10,436 | ) | 1,289 |
| 8,556 |
| | — |
| 1,049 |
| | 1,289 |
| 9,606 |
| 10,895 |
| (478 | ) |
| Courtyard Mobile | AL | 2015 | (4,899 | ) | — |
| 3,657 |
| | — |
| 1,369 |
| | — |
| 5,027 |
| 5,027 |
| (326 | ) |
| Courtyard Orlando Altamonte Springs Maitland | FL | 2015 | (12,513 | ) | 1,716 |
| 11,463 |
| | — |
| 24 |
| | 1,716 |
| 11,488 |
| 13,204 |
| (571 | ) |
| Courtyard Sarasota Bradenton | FL | 2015 | (8,456 | ) | 1,928 |
| 8,334 |
| | — |
| 165 |
| | 1,928 |
| 8,498 |
| 10,426 |
| (413 | ) |
| Courtyard Tallahassee North I 10 Capital Circle | FL | 2015 | (10,230 | ) | 2,767 |
| 9,254 |
| | — |
| 144 |
| | 2,767 |
| 9,397 |
| 12,164 |
| (515 | ) |
| Holiday Inn Express & Suites Kendall East Miami | FL | 2015 | (8,745 | ) | 1,248 |
| 7,525 |
| | — |
| 316 |
| | 1,248 |
| 7,842 |
| 9,090 |
| (377 | ) |
| Residence Inn Chattanooga Downtown | TN | 2015 | (10,427 | ) | 1,142 |
| 10,112 |
| | — |
| 1,405 |
| | 1,142 |
| 11,517 |
| 12,659 |
| (549 | ) |
| Residence Inn Fort Myers | FL | 2015 | (8,365 | ) | 1,372 |
| 8,765 |
| | — |
| 57 |
| | 1,372 |
| 8,822 |
| 10,194 |
| (437 | ) |
| Residence Inn Knoxville Cedar Bluff | TN | 2015 | (10,014 | ) | 1,474 |
| 9,580 |
| | — |
| 38 |
| | 1,474 |
| 9,617 |
| 11,091 |
| (518 | ) |
| Residence Inn Macon | GA | 2015 | (4,928 | ) | 1,046 |
| 5,381 |
| | — |
| 1,626 |
| | 1,046 |
| 7,007 |
| 8,053 |
| (449 | ) |
| Residence Inn Mobile | AL | 2015 | (6,537 | ) | — |
| 6,714 |
| | — |
| 23 |
| | — |
| 6,737 |
| 6,737 |
| (366 | ) |
| Residence Inn Sarasota Bradenton | FL | 2015 | (9,968 | ) | 2,138 |
| 9,118 |
| | — |
| — |
| | 2,138 |
| 9,118 |
| 11,256 |
| (484 | ) |
| Residence Inn Savannah Midtown | GA | 2015 | (7,650 | ) | 1,106 |
| 9,349 |
| | — |
| 402 |
| | 1,106 |
| 9,751 |
| 10,857 |
| (475 | ) |
| Residence Inn Tallahassee North I 10 Capital Circle | FL | 2015 | (9,682 | ) | 1,349 |
| 9,983 |
| | — |
| 1,644 |
| | 1,349 |
| 11,627 |
| 12,976 |
| (528 | ) |
HOSPITALITY INVESTORS TRUST, INC.
Real Estate and Accumulated Depreciation
Schedule III
December 31, 2016
(dollar amounts in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Residence Inn Tampa North I 75 Fletcher | FL | 2015 | (8,858 | ) | 1,251 |
| 8,174 |
| | — |
| 94 |
| | 1,251 |
| 8,268 |
| 9,519 |
| (462 | ) |
| Residence Inn Tampa Sabal Park Brandon | FL | 2015 | (11,736 | ) | 1,773 |
| 10,830 |
| | — |
| 39 |
| | 1,773 |
| 10,869 |
| 12,642 |
| (572 | ) |
| Courtyard Bowling Green Convention Center | KY | 2015 | (10,868 | ) | 503 |
| 11,003 |
| | — |
| 25 |
| | 504 |
| 11,028 |
| 11,532 |
| (552 | ) |
| Courtyard Chicago Elmhurst Oakbrook Area | IL | 2015 | (9,871 | ) | 1,323 |
| 11,868 |
| | — |
| 84 |
| | 1,323 |
| 11,952 |
| 13,275 |
| (1,320 | ) |
| Courtyard Jacksonville Airport Northeast | FL | 2015 | (4,918 | ) | 1,783 |
| 5,459 |
| | — |
| 1,392 |
| | 1,783 |
| 6,852 |
| 8,635 |
| (494 | ) |
| Hampton Inn & Suites Nashville Franklin Cool Springs | TN | 2015 | (18,942 | ) | 2,526 |
| 16,985 |
| | — |
| — |
| | 2,525 |
| 16,985 |
| 19,510 |
| (880 | ) |
| Hampton Inn Boston Peabody | MA | 2015 | (12,254 | ) | 3,008 |
| 11,846 |
| | — |
| 59 |
| | 3,008 |
| 11,905 |
| 14,913 |
| (673 | ) |
| Hampton Inn Grand Rapids North | MI | 2015 | (11,400 | ) | 2,191 |
| 11,502 |
| | — |
| 67 |
| | 2,191 |
| 11,569 |
| 13,760 |
| (616 | ) |
| Homewood Suites Boston Peabody | MA | 2015 | (8,631 | ) | 2,508 |
| 8,654 |
| | — |
| 2,807 |
| | 2,508 |
| 11,461 |
| 13,969 |
| (738 | ) |
| Hyatt Place Las Vegas | NV | 2015 | (16,951 | ) | 2,902 |
| 17,419 |
| | — |
| 1,727 |
| | 2,902 |
| 19,147 |
| 22,049 |
| (1,008 | ) |
| Hyatt Place Minneapolis Airport South | MN | 2015 | (11,517 | ) | 2,519 |
| 11,810 |
| | — |
| 1,164 |
| | 2,519 |
| 12,974 |
| 15,493 |
| (644 | ) |
| Residence Inn Boise Downtown | ID | 2015 | (8,555 | ) | 1,776 |
| 10,203 |
| | — |
| 2,257 |
| | 1,776 |
| 12,459 |
| 14,235 |
| (618 | ) |
| Residence Inn Portland Downtown Lloyd Center | OR | 2015 | (32,508 | ) | 25,213 |
| 23,231 |
| | — |
| 511 |
| | 25,213 |
| 23,742 |
| 48,955 |
| (1,326 | ) |
| SpringHill Suites Grand Rapids North | MI | 2015 | (9,952 | ) | 1,063 |
| 9,312 |
| | — |
| 75 |
| | 1,063 |
| 9,387 |
| 10,450 |
| (458 | ) |
| Hyatt Place Kansas City Overland Park Metcalf | KS | 2015 | (7,679 | ) | 1,038 |
| 7,792 |
| | — |
| 1,565 |
| | 1,039 |
| 9,357 |
| 10,396 |
| (524 | ) |
| Courtyard Asheville | NC | 2015 | (12,391 | ) | 2,236 |
| 10,290 |
| | — |
| 49 |
| | 2,236 |
| 10,339 |
| 12,575 |
| (508 | ) |
| Courtyard Dallas Market Center | TX | 2015 | (18,115 | ) | — | 19,768 |
| | — |
| 2,358 |
| | — | 22,127 |
| 22,127 |
| (1,081 | ) |
| Fairfield Inn & Suites Dallas Market Center | TX | 2015 | (8,566 | ) | 1,550 |
| 7,236 |
| | 1 |
| 19 |
| | 1,552 |
| 7,256 |
| 8,808 |
| (362 | ) |
| Hilton Garden Inn Austin Round Rock | TX | 2015 | (12,016 | ) | 2,797 |
| 10,920 |
| | 2 |
| 1,960 |
| | 2,799 |
| 12,880 |
| 15,679 |
| (576 | ) |
| Residence Inn Los Angeles Airport El Segundo | CA | 2015 | (33,991 | ) | 16,416 |
| 21,618 |
| | 13 |
| 1,856 |
| | 16,429 |
| 23,474 |
| 39,903 |
| (1,147 | ) |
| Residence Inn San Diego Rancho Bernardo Scripps Poway | CA | 2015 | (23,251 | ) | 5,261 |
| 18,677 |
| | — |
| — |
| | 5,261 |
| 18,677 |
| 23,938 |
| (928 | ) |
| SpringHill Suites Austin Round Rock | TX | 2015 | (8,087 | ) | 2,196 |
| 8,305 |
| | (1 | ) | 126 |
| | 2,196 |
| 8,431 |
| 10,627 |
| (436 | ) |
| SpringHill Suites Houston Hobby Airport | TX | 2015 | (10,835 | ) | 762 |
| 11,755 |
| | 2 |
| 103 |
| | 763 |
| 11,858 |
| 12,621 |
| (584 | ) |
| SpringHill Suites San Antonio Medical Center Northwest | TX | 2015 | (5,272 | ) | — |
| 7,161 |
| | — |
| 911 |
| | — |
| 8,072 |
| 8,072 |
| (355 | ) |
HOSPITALITY INVESTORS TRUST, INC.
Real Estate and Accumulated Depreciation
Schedule III
December 31, 2016
(dollar amounts in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| SpringHill Suites San Diego Rancho Bernardo Scripps Poway | CA | 2015 | (19,197 | ) | 3,905 |
| 16,999 |
| | (3 | ) | 1 |
| | 3,902 |
| 17,000 |
| 20,902 |
| (840 | ) |
| Hampton Inn Charlotte Gastonia | NC | 2015 | (9,564 | ) | 1,357 |
| 10,073 |
| | — |
| 32 |
| | 1,357 |
| 10,105 |
| 11,462 |
| (513 | ) |
| Hampton Inn Dallas Addison | TX | 2015 | (9,168 | ) | 1,538 |
| 7,475 |
| | — |
| 17 |
| | 1,538 |
| 7,492 |
| 9,030 |
| (397 | ) |
| Red Lion Inn & Suites Fayetteville I 95 | NC | 2015 | (5,307 | ) | 922 |
| 7,069 |
| | (257 | ) | (2,163 | ) | | 664 |
| 4,906 |
| 5,570 |
| (74 | ) |
| Homewood Suites San Antonio Northwest | TX | 2015 | (13,720 | ) | 1,998 |
| 13,060 |
| | — |
| 3,634 |
| | 1,998 |
| 16,694 |
| 18,692 |
| (784 | ) |
| Courtyard Dalton | GA | 2015 | (7,827 | ) | 676 |
| 8,241 |
| | 1 |
| 1,597 |
| | 677 |
| 9,839 |
| 10,516 |
| (498 | ) |
| Hampton Inn Orlando International Drive Convention Center | FL | 2015 | (13,762 | ) | 1,183 |
| 14,899 |
| | — |
| 90 |
| | 1,183 |
| 14,990 |
| 16,173 |
| (721 | ) |
| Hilton Garden Inn Albuquerque North Rio Rancho | NM | 2015 | (9,454 | ) | 1,141 |
| 9,818 |
| | 1 |
| 32 |
| | 1,142 |
| 9,850 |
| 10,992 |
| (513 | ) |
| Homewood Suites Orlando International Drive Convention Center | FL | 2015 | (24,291 | ) | 2,182 |
| 26,507 |
| | 6 |
| 946 |
| | 2,187 |
| 27,452 |
| 29,639 |
| (1,284 | ) |
| Hampton Inn Chicago Naperville | IL | 2015 | (9,292 | ) | 1,363 |
| 9,460 |
| | — |
| 9 |
| | 1,363 |
| 9,469 |
| 10,832 |
| (557 | ) |
| Hampton Inn Indianapolis Northeast Castleton | IN | 2015 | (11,025 | ) | 1,587 |
| 8,144 |
| | — |
| 49 |
| | 1,587 |
| 8,193 |
| 9,780 |
| (604 | ) |
| Hampton Inn Knoxville Airport | TN | 2015 | (6,448 | ) | 1,033 |
| 5,898 |
| | — |
| — |
| | 1,033 |
| 5,898 |
| 6,931 |
| (413 | ) |
| Hampton Inn Milford | CT | 2015 | (4,092 | ) | 1,652 |
| 5,060 |
| | — |
| 91 |
| | 1,652 |
| 5,151 |
| 6,803 |
| (439 | ) |
| Homewood Suites Augusta | GA | 2015 | (6,837 | ) | 874 |
| 8,225 |
| | — |
| 1,552 |
| | 874 |
| 9,777 |
| 10,651 |
| (510 | ) |
| Homewood Suites Seattle Downtown | WA | 2015 | (52,632 | ) | 12,580 |
| 41,011 |
| | — |
| 4,499 |
| | 12,580 |
| 45,510 |
| 58,090 |
| (1,891 | ) |
| Hampton Inn Champaign Urbana | IL | 2015 | (16,967 | ) | 2,206 |
| 17,451 |
| | — |
| — |
| | 2,206 |
| 17,451 |
| 19,657 |
| (844 | ) |
| Hampton Inn East Lansing | MI | 2015 | (10,681 | ) | 3,219 |
| 10,101 |
| | — |
| 205 |
| | 3,219 |
| 10,306 |
| 13,525 |
| (519 | ) |
| Hilton Garden Inn Louisville East | KY | 2015 | (15,059 | ) | 1,022 |
| 16,350 |
| | 1 |
| 139 |
| | 1,023 |
| 16,489 |
| 17,512 |
| (803 | ) |
| Residence Inn Jacksonville Airport | FL | 2015 | (5,697 | ) | 1,451 |
| 6,423 |
| | — |
| 2,187 |
| | 1,451 |
| 8,610 |
| 10,061 |
| (522 | ) |
| TownePlace Suites Savannah Midtown | GA | 2015 | (10,339 | ) | 1,502 |
| 7,827 |
| | — |
| — |
| | 1,502 |
| 7,827 |
| 9,329 |
| (402 | ) |
| Courtyard Houston I 10 West Energy Corridor | TX | 2015 | (19,536 | ) | 10,444 |
| 20,710 |
| | 6 |
| 2,805 |
| | 10,449 |
| 23,516 |
| 33,965 |
| (1,169 | ) |
| Courtyard San Diego Carlsbad | CA | 2015 | (18,868 | ) | 5,080 |
| 14,007 |
| | 9 |
| 46 |
| | 5,090 |
| 14,053 |
| 19,143 |
| (725 | ) |
| Hampton Inn Austin North @ IH 35 & Highway 183 | TX | 2015 | (13,782 | ) | 1,774 |
| 9,798 |
| | 2 |
| 303 |
| | 1,776 |
| 10,101 |
| 11,877 |
| (504 | ) |
| SpringHill Suites Asheville | NC | 2015 | (14,284 | ) | 2,149 |
| 9,930 |
| | — |
| 57 |
| | 2,149 |
| 9,988 |
| 12,137 |
| (490 | ) |
HOSPITALITY INVESTORS TRUST, INC.
Real Estate and Accumulated Depreciation
Schedule III
December 31, 2016
(dollar amounts in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Hampton Inn College Station | TX | 2015 | (13,873 | ) | 3,306 |
| 10,523 |
| | — |
| 140 |
| | 3,306 |
| 10,664 |
| 13,970 |
| (523 | ) |
| Courtyard Flagstaff | AZ | 2015 | (19,849 | ) | 5,258 |
| 24,313 |
| | — |
| 55 |
| | 5,258 |
| 24,368 |
| 29,626 |
| (853 | ) |
| DoubleTree Baton Rouge | LA | 2015 | (11,978 | ) | 1,497 |
| 14,777 |
| | — |
| 49 |
| | 1,497 |
| 14,826 |
| 16,324 |
| (664 | ) |
| Fairfield Inn & Suites Baton Rouge South | LA | 2015 | (3,422 | ) | 971 |
| 3,391 |
| | — |
| 42 |
| | 971 |
| 3,433 |
| 4,404 |
| (170 | ) |
| Hampton Inn Medford | OR | 2015 | (8,556 | ) | 1,245 |
| 10,353 |
| | — |
| — |
| | 1,245 |
| 10,353 |
| 11,598 |
| (365 | ) |
| Hampton Inn Fort Wayne Southwest | IN | 2015 | (8,898 | ) | 1,242 |
| 10,511 |
| | — |
| — |
| | 1,242 |
| 10,512 |
| 11,754 |
| (425 | ) |
| Hampton Inn & Suites El Paso Airport | TX | 2015 | (13,347 | ) | 1,641 |
| 18,733 |
| | — |
| — |
| | 1,641 |
| 18,733 |
| 20,374 |
| (713 | ) |
| Residence Inn Fort Wayne Southwest | IN | 2015 | (10,609 | ) | 1,267 |
| 12,136 |
| | — |
| 8 |
| | 1,267 |
| 12,144 |
| 13,411 |
| (429 | ) |
| SpringHill Suites Baton Rouge South | LA | 2015 | (4,449 | ) | 1,131 |
| 5,744 |
| | — |
| 44 |
| | 1,131 |
| 5,788 |
| 6,919 |
| (216 | ) |
| SpringHill Suites Flagstaff | AZ | 2015 | (10,951 | ) | 1,641 |
| 14,283 |
| | — |
| 61 |
| | 1,641 |
| 14,344 |
| 15,985 |
| (567 | ) |
| TownePlace Suites Baton Rouge South | LA | 2015 | (4,791 | ) | 1,055 |
| 6,173 |
| | — |
| 17 |
| | 1,055 |
| 6,190 |
| 7,245 |
| (257 | ) |
| Courtyard Columbus Downtown | OH | 2015 | (21,051 | ) | 2,367 |
| 25,191 |
| | — |
| 61 |
| | 2,367 |
| 25,252 |
| 27,619 |
| (726 | ) |
| Hilton Garden Inn Monterey | CA | 2015 | (19,333 | ) | 6,110 |
| 27,713 |
| | — |
| — |
| | 6,110 |
| 27,713 |
| 33,823 |
| (1,131 | ) |
| Hyatt House Atlanta Cobb Galleria | GA | 2015 | (21,230 | ) | 4,386 |
| 22,777 |
| | — |
| 12 |
| | 4,386 |
| 22,788 |
| 27,174 |
| (673 | ) |
| Hyatt Place Chicago Schaumburg | IL | 2015 | (6,637 | ) | 1,519 |
| 9,582 |
| | — |
| 57 |
| | 1,519 |
| 9,639 |
| 11,158 |
| (414 | ) |
| Fairfield Inn & Suites Spokane | WA | 2016 | (8,964 | ) | 1,732 |
| 10,750 |
| | — |
| — |
| | 1,733 |
| 10,749 |
| 12,482 |
| (275 | ) |
| Fairfield Inn & Suites Denver | CO | 2016 | (11,620 | ) | 1,429 |
| 15,675 |
| | — |
| — |
| | 1,430 |
| 15,675 |
| 17,105 |
| (405 | ) |
| Springhill Suites Denver | CO | 2016 | (8,632 | ) | 941 |
| 10,870 |
| | — |
| 49 |
| | 941 |
| 10,918 |
| 11,859 |
| (310 | ) |
| Hampton Inn Ft. Collins | CO | 2016 | (5,976 | ) | 641 |
| 5,578 |
| | — |
| — |
| | 641 |
| 5,577 |
| 6,218 |
| (176 | ) |
| Fairfield Inn & Suites Bellevue | WA | 2016 | (22,244 | ) | 18,769 |
| 14,182 |
| | — |
| — |
| | 18,769 |
| 14,182 |
| 32,951 |
| (438 | ) |
| Hilton Garden Inn Ft. Collins | CO | 2016 | (12,948 | ) | 1,331 |
| 17,606 |
| | — |
| — |
| | 1,331 |
| 17,605 |
| 18,936 |
| (480 | ) |
| Total | | | $(1,709,101) | $340,043 | $1,756,484 | | $ | (224 | ) | $82,110 | | $339,819 | $1,838,594 | $2,178,414 | $(92,848) |
| |
| (1) | The tax basis of aggregate land, buildings and improvements as of December 31, 20142016 is $92.3 million.$2,138,616,972. |
| |
| (2) | Each of the properties has a depreciable life of: up to 40 years for buildings, up to 15 years for improvements. |
HOSPITALITY INVESTORS TRUST, INC.
Real Estate and Accumulated Depreciation
Schedule III
December 31, 2016
(dollar amounts in thousands)
A summary of activity for real estate and accumulated depreciation for the period from March 21 toyears ended December 31, 2014(1): to December 31, 2016:
|
| | | | | |
| | | For the Period from March 21 to December 31, 2014 |
| | |
| Land, buildings and improvements, at cost: | | | |
| Balance at March 21, 2014 | | $ | 89,666 |
| |
| Additions-Acquisitions | | — |
| |
| Capital improvements | | 3,571 |
| |
| Balance at December 31, 2014 | | $ | 93,237 |
| |
| | | |
| |
| Accumulated depreciation and amortization: | | |
| |
| Balance at March 21, 2014 | | $ | — |
| |
| Depreciation expense | | (1,569 | ) | |
| Balance at December 31, 2014 | | $ | (1,569 | ) | |
|
| | | | | | | | | | | | | |
| | | 2016 | | 2015 | | 2014(1) | |
| Land, buildings and improvements, at cost: | | | | | | | |
| Balance at January 1 | | $ | 2,047,831 |
| | $ | 93,237 |
| | $ | 89,666 |
| |
| Additions: | | | | | | | |
| Acquisitions | | 99,727 |
| | 1,917,101 |
| | — |
| |
| Capital improvements | | 43,030 |
| | 37,493 |
| | 3,571 |
| |
| Deductions: | | | | | | | |
| Dispositions | | (9,744 | ) | | — |
| | — |
| |
| Impairment of depreciable assets | | (2,430 | ) | | — |
| | — |
| |
| Balance at December 31 | | $ | 2,178,414 |
| | $ | 2,047,831 |
| | $ | 93,237 |
| |
| | | |
| | | | | |
| Accumulated depreciation and amortization: | | |
| | | | | |
| Balance at January 1 | | $ | (39,252 | ) | | $ | (1,569 | ) | | $ | — |
| |
| Depreciation expense | | (54,377 | ) | | (37,683 | ) | | (1,569 | ) | |
| Accumulated depreciation: | | | | | | | |
| Dispositions and other | | 781 |
| | | | | |
| Balance at December 31 | | $ | (92,848 | ) | | $ | (39,252 | ) | | $ | (1,569 | ) | |
| |
| (1) | The change in the real estate investments for the Predecessor has not been presented because the land, building and improvements were recorded by the Predecessor at the pre-acquisition basis. |