UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
|
| |
| (Mark One) |
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20162017
OR
|
| |
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _________ to __________
Commission file number: 000-55394
HOSPITALITY INVESTORS TRUST, INC.
(Exact name of registrant as specified in its charter)
|
| | |
| Maryland | | 80-0943668 |
| (State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
3950 University Drive, Fairfax, VA450 Park Avenue, Suite 1400, New York, NY
| | 2203010022 |
| (Address of principal executive offices) | | (Zip Code) |
| (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. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See definition of "large accelerated filer," "accelerated filer," and "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
|
| | |
Large accelerated filer ¨ | | Accelerated filer ¨ |
Non-accelerated filer ¨x | (Do not check if a smaller reporting company) | Smaller reporting company ¨ |
| Emerging growth company x | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. x Yes ¨ No
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 number of outstanding shares of the registrant's common stock on March 15, 20172018 was 38,813,40839,505,742 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement to be delivered to stockholders in connection with the registrant's 20172018 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 INVESTORS TRUST, INC.
FORM 10-K
Year Ended December 31, 20162017
This Annual Report on Form 10-K may contain registered trademarks, including Hampton Inn®, Hampton 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 and Suites®, TownePlace Suites®, SpringHill Suites®, Residence Inn® and Westin® which are the exclusive property of Marriott International, Inc.® or one of its affiliates, Hyatt House® and Hyatt Place®, which are the exclusive property of Hyatt Hotels Corporation® or one of its affiliates, and Holiday Inn Express and Suites® and Staybridge Suites®, which isare 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 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$160.0 million in units of a new class of limited partner interests in our operating partnership 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$240.0 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 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.
The interests of the Brookfield Investor may conflict with our interests and the interests of our stockholders, 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 able to identify an additional source of capital on favorable terms and obtain prior approval from the Brookfield Investor.
We have a history 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”“Former Advisor”), and other agreements with its affiliates as part of our transition from external management to self-management. As part of this transition, our business may be disrupted and we may become exposed to risks to which 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.
We have incurred substantial indebtedness, which may limit our future 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 115112 of our hotels (the “Grace Preferred Equity Interests”).
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.
We may fail to realize the expected benefits of our acquisitions of hotels within the anticipated timeframe or at all and we may incur unexpected costs.
Increases in labor costs could adversely affect the profitability of our hotels.
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 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 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.
Our failure to continue to qualify to be treated as a real estate investment trust for U.S. federal income tax purposes ("REIT") 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 qualified 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. As of December 31, 2016,2017, we had acquired or had an interest in a total of 141145 hotels, including one hotel that was classified as held for sale (See Note 18 - Assets Held for Sale to our accompanying consolidated financial statements included in this Annual Report on Form 10-K), with a total of 17,19317,483 guestrooms located in 3233 states. As of December 31, 2016,2017, 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 and Intercontinental Hotels Group and Red Lion Hotels Corporation or one of their respective subsidiaries or affiliates.
As of December 31, 2017, 79 of the hotel assets we have acquired were managed by Crestline Hotels & Resorts, LLC (“Crestline”) and 66 of the hotel assets we have acquired were managed by other property managers. As of December 31, 2017, our other property managers were Hampton Inns Management LLC and Homewood Suites Management LLC, affiliates of Hilton Worldwide Holdings Inc. (39 hotels), InnVentures IVI, LP (2 hotels), McKibbon Hotel Management, Inc. (21 hotels) and Larry Blumberg & Associates, Inc. (4 hotels).
On January 7, 2014, we commenced our IPOprimary initial public offering (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 well as up to 21,052,631 shares of common stock available pursuant to the Distribution Reinvestment Plan (the "DRIP") under which our common stockholders could 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 instead of cash.
On July 1, 2016, our board of directors approved an initial 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 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 that2016. On June 19, 2017, our board of directors determinedapproved an updated Estimated Per-Share NAV.NAV (the "2017 NAV") equal to $13.20 based on an estimated fair value of our assets less the estimated fair value of our liabilities, divided by 39,617,676 shares of common stock outstanding on a fully diluted basis as of March 31, 2017. 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) (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 Former Advisor, our former property managers, American Realty Capital Hospitality Properties, LLC and American Realty Capital Hospitality Grace Portfolio, LLC (together, the “Property“Former Property Manager”), Crestline Hotels & Resorts, LLC (“Crestline”), then an affiliate of the Former Advisor and the Former Property Manager, American Realty Capital Hospitality Special Limited Partnership, LLC (the “Special“Former Special Limited Partner”), another affiliate of the Former Advisor and the Former 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 (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.
On February 27, 2018, the second closing under the SPA (the “Second Closing”) occurred, pursuant to which we sold 1,694,915.25 additional Class C Units to the Brookfield Investor, for a purchase price of $14.75 per Class C Unit, or $25.0 million in the 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$240.0 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. Prior to the Initial Closing, we were the sole general partner and held substantially all of the units of limited partner interest in the OP entitled “OP Units” ("OP Units"). Following the Initial Closing, theThe Brookfield Investor holds all the issued and outstanding Class C Units, representing $135.0 million in liquidation preference with respect to the OP that rankswhich rank 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,and 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 unablefail to redeem the Class C Units when required to do so, as described below.including the ability to commence selling the OP’s assets until the Class C Units are convertible into OP Units based on an initial conversion pricehave been fully redeemed. As of $14.75, subject to anti-dilution and other adjustments uponDecember 31, 2017, the occurrencetotal liquidation preference 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 ratewas $140.2 million, and as of 7.50% per annum from legally available funds. If we fail to pay these cash distributions when due,February 27, 2018, following the per annum rate will increase to 10% until all accrued and unpaid distributions required to be paid in cash are reduced to zero. HoldersSecond Closing, the total liquidation preference of the 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%.was $165.2 million.
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 requiring approval of the Class C Units 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 theour 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.conditions.
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 employees, and we depended on the Former Advisor to manage certain aspects of our affairs on a day-to-day basis pursuant to our advisory agreement with the Former Advisor (the "Advisory Agreement"). In addition, prior to the Initial Closing, the Former Property Manager served as our property manager and had retained Crestline to provide services, including locating investments, negotiating financing and operating certain hotel assets in our portfolio.
TheAs of March 31, 2017, the Former Advisor, the Former Property Manager and Crestline arewere under common control with AR Capital, LLC ("AR Capital"), the parent of our sponsor,American Realty Capital IX, LLC (“ARC IX”), and AR Global Investments, LLC ("AR Global"), the successor to certain of AR Capital's businesses. ARC IX served as our sponsor prior to our transition to self-management at the Initial Closing. Following the sale of AR Global’s membership interest in Crestline in April 2017, Crestline is no longer under common control with AR Global and AR Capital.
At the Initial Closing, the Advisory Agreement was terminated and certain employees of the Former Advisor or its affiliates (including, at that time, 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.
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 of2017, we had 25 full-time employees. The staff at 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 adoptedare employed by our boardthird-party hotel managers. We now conduct our operations independently of directors in March 2016. Shares are only issued pursuant to our DRIP in connectionthe Former Advisor and its affiliates, 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.which we have no ongoing affiliation.
See Note 3 - 17 Subsequent EventsBrookfield Investment and Related Transactions to our accompanying consolidated/combinedconsolidated 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,terms of the Property ManagerSPA and their affiliates,the Framework Agreement and our transition to self-management.the other transactions and agreements contemplated thereby, as well as the Redeemable Preferred Share and the Class C Units, including conversion rights, distribution rights, approval rights and redemption rights associated therewith.
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 has been a focus on meeting our capital requirements and on maximizing the value of our existing portfolio by continuing to invest in our hotels primarily through brand-mandated property improvement plans (“PIPs”), and through intensive asset management. While receipt of all the proceeds from our sale of Class C Units at the Initial Closing, the Second Closing and any Subsequent Closings would provide the liquidity needed to satisfy certain of our liquidity and capital requirements, including our obligation to redeem the $242.9$223.5 million in liquidation value of the Grace Preferred Equity Interests outstanding following the InitialSecond 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, whichrequirements. Such financing 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 strategies:
Lodging Properties. We have primarily acquired lodging properties in the midscale limited service, extended stay and select-service segments within the hospitality sector in secondary markets with strong demand generators.generators such as state capitals, major universities and hospitals, as well as corporate, leisure and retail attractions. We believe these segments can provide more stable cash flows than full service hotels and less market volatility than primary market locations. We believe in affiliating our hotels with premium global and national brands owned by leading international franchisors such as Marriott, Hilton and Hyatt.
Our Investment Portfolio in the Current Economic Environment. We believe the current macroeconomic environment continues to offer attractive opportunities for significant long-term value appreciation for our portfolio.
Our Lodging-Centric Investment Strategy. 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. We believe that lodging industry fundamentals in our targeted asset classes continue to be favorable.
The Lodging Sector. We believe the operationally 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 hotels are managed by strong and experienced regional and national property management companies. Our asset management approach is designedactivities seek to capitalize on opportunities during periods of strong growthencourage our third party management companies to develop effective sales programs, operate hotels effectively, control costs and also to exploit efficiencies and operating leverage during periods of slower growth.develop operational initiatives for our hotels that increase guest satisfaction.
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 then-current market rates.
Continued Investment in our Hotels. We engage in a continued process of renovating and improving our hotels. Since acquisition we have reinvested more than $216.5 million in our hotels through PIPs and other capital improvements. This includes the approximately $350 million PIP program we are currently undertaking across a significant portion of the portfolio. We expect to complete our PIP program over the next two to three years. As of December 31, 2017, we have substantially completed work on 51 of the 141 hotels that are part of our PIP program, and an additional 35 hotels are in process and expected to be substantially completed early in the second quarter of
2018. We expect the investments we have made, and continue to make, in PIPs will enhance the performance of our hotel portfolio in future years and thereby, we believe, increase our cash flow and the value of our portfolio.
Disciplined Capital Reallocation. We regularly review our hotel portfolio to determine if any changes to specific markets or our properties have occurred or are anticipated to occur that would warrant the sale of one or more hotels. We sold three non-core assets during 2017 (with a fourth sale pending as of December 31, 2017), and we intend to continue to look at opportunities to strategically sell assets and reallocate capital in the future.
Acquisitions
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 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""Second Summit Portfolio") and made a new purchase price deposit of $7.5 million with proceeds from the Summit Loan. Under the reinstated agreement, Summit hashad 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 completionclosing of our Pending Acquisition. Whether or notthe acquisition of the Second 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.Portfolio. In June 2016, Summit informed us that two of the ten hotels had been sold, thereby reducing the Pending AcquisitionSecond Summit Portfolio 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 Acquisitionacquisition of the Second Summit Portfolio to April 27, 2017 (or October 24,
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.us, which has since been repaid.
We intend to utilize $26.9 millionOn April 27, 2017, we completed the acquisition 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 considerationSecond Summit Portfolio for the seven hotels to be purchased in our Pending Acquisition on April 27, 2017.an aggregate purchase price of $66.5 million. Additionally, during June 2017, Summit has informed us that the eighth hotel that is scheduled to bewas 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 ifby Summit does not sell it to a third party, in connection with which our right and we are ultimately requiredobligation to purchase it. There can be no assurance such financing will be available on favorablethis hotel was terminated in accordance with the 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 underof the reinstated purchase agreement and forfeit all or a portion of the $10.5 million deposit.agreement.
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 to complete our 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 all. We also domay not expectbe able 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 Class C Units at Subsequent Closings, which also would require prior approval. Given our capital constraints, to the extent we seek to acquire hotels, we may do so through joint venture arrangements.
With respect to prior acquisitions, we have sought properties that we believe meet the following investment criteria:
Strong location:
hotel properties located in markets with higher barriers to entry, including those markets in the top 50 metropolitan statistical 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 radius 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.
The 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 acquired lodging properties directly, for example, by acquiring fee interests in real property. We also have acquired lodging properties through investments in joint venture entities, including joint venture entities in which we may not own a controlling interest. Our assets generally are held in wholly and majority-owned subsidiaries, 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 owned subsidiary of our taxable REIT subsidiary, or to an unrelated third party.
We have acquired and own hotels located throughout the United States.
Property Management Agreements
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 insteadWe 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.
As of March 15,December 31, 2017, 7179 of the hotel assets we have acquired were managed by Crestline and 7066 of the hotel assets we have acquired were managed by third-party sub-propertyother property managers. As of March 15,December 31, 2017, our third-party sub-propertyother 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(39 hotels), InnVentures IVI, LP (2 hotels) and, McKibbon Hotel Management, Inc. (21 hotels) and Larry Blumberg & Associates, Inc. (4 hotels). On April 3, 2017, as contemplated by the Framework Agreement, the five
For three of our hotels that are managed by Interstate Management Company, LLCCrestline and all of our hotels that are scheduled to transition to be managed by Crestline.a property manager other than Crestline, our management agreements with the applicable property manager generally have an initial term of approximately one to five years, renewing automatically for one or three-year terms unless either party provides advance notice of non-renewal. These agreements are generally terminable by us at any time subject to 60 - 90 days’ notice, in limited instances only during any renewal term or during the initial term upon sale of the applicable hotel with a fee in an amount not more than the property management fee payable for the trailing 12 months.
For 74 of our hotels that are managed by Crestline, our management agreements have aan initial 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 April 1, 2021, the first day of the 49th month following the Initial Closing, we will have an “on-sale” termination right upon payment of a fee in an amount equal to two and one halfone-half times the property management fee inpayable for 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 oneIf, prior 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, duringMarch 31, 2023, the six years immediately followingyear anniversary of the Initial Closing, we sell a hotel managed by Crestline,one of these hotels, 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 the remaining two hotels that are managed by Crestline, and for which our ownership is structured as a joint venture interest, the management agreements have an initial 10-year term, renewing automatically for one five-year term unless either party provides notice of non-renewal. These management agreements are generally only terminable prior to expiration for cause, including performance-related reasons, except the joint venture has an “on-sale” termination right upon payment of a fee in an amount of the property management fee in the trailing six or 12 months, depending on the hotel.
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% (or 4.0% in the case of one of our joint venture hotels) of the monthly gross receipts from the properties to Crestline or a third-partythe applicable property manager, as applicable.manager. We reimburse the costs and expenses incurred by Crestline or any third-partythe 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 properties, and, in certain circumstances, who are engaged in off-site activities.
We also pay to Crestline an annual incentive fee equal to 15%
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-partythe 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%1.5% to 5.2%4.3% of gross room revenues as a program or reservation feesfee 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, 2016,2017, we had $1.4$1.5 billion in outstanding indebtedness and $290.2$234.1 million in liquidation value of Grace Preferred Equity Interests (which is treated as indebtedness for accounting purposes). At the InitialSecond Closing, we redeemed $47.3$10.6 million in liquidation value of Grace Preferred Equity Interests. See “Item 2. Properties - Debt.”
As of December 31, 2016,2017, our loan-to-value ratio was 72%69.5% including the Grace Preferred Equity Interests and our loan-to-value ratio excluding the Grace Preferred Equity Interests was 60%60.1%. 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 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 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,With the approval of 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, 2016,2017, our total portfolio leverage was 236%196%.
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 for 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.
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.
Tax Status
We elected and qualified 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 as a REIT. We 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 GAAP) determined without regards to the 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 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 labor and other 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 are not 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, 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.
Regulations
Our investments are 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 obtain all permits and approvals that we believe are necessary under current law to operate our investments.
Environmental
As an owner of real property, we are subject to various federal, state and local laws 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 these laws and regulations and the penalties for non-compliance can be substantial. Even with respect to properties that we do not operate or manage, we may be held primarily or jointly and severally liable for costs relating to the investigation and clean-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 20162017, and do not expect that we will be required to make any such material capital expenditures during 2017.2018.
Employees
As of December 31, 2016 and immediately prior to the Initial Closing,2017, we had no 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 to perform services that are essential to us, including asset and property management and other general administrative services.
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. Following the Initial Closing, we had approximately 2025 full-time employees. The staffs at our hotels are employed by our third-party hotel managers. At the Initial Closing, we also terminated all ofWe now conduct our other agreements with affiliatesoperations independently of the Former Advisor except for our hotel-level property management agreementsand its affiliates, with Crestline, andwhich we have no ongoing affiliation. We have entered into a transitionan annually renewable shared services agreement with each of the Advisor and Crestline pursuant to which we will receive their assistance in connectionCrestline provides us 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 accountingtreasury, information technology 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.
other administrative services.
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 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 Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements and all amendments to those filings with the SEC. 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.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 Hospitality Investors Trust, Inc.
We have a history of operating losses and cannot assure our stockholders that we will achieve profitability.
Since inception in July 2013 through December 31, 2016,2017, we have incurred net losses (calculated in accordance with GAAP) equal to $181.4$252.5 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.
Because no public trading market for our shares currently exists and our share repurchase program has been terminated, it is difficult for our stockholders to sell their 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. We currently have no plans to list our shares on a national securities 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 4.9% in value of the aggregate of outstanding shares of capital stock or more than 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.
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 during January 2017 in connection with our entry into the SPA and terminated effective as of April 30, 2017 in connection with the Initial Closing. We did not makeThere is no assurance that we will reinstate the SRP or any repurchases of our common stock pursuantother program to our SRP (except in January 2016 with respectprovide liquidity for stockholders seeking to requests received during the year ended December 31, 2015) or 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.
sell their shares. Therefore, it is difficult for our stockholders to sell their shares promptly or at all.shares. If a stockholder is able to sell his or her shares, it would likely be at a substantial discount to the price paid.
We may require funds, which may not be available on favorable terms or at all, in addition to our 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 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. 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. Following our redemption of $47.3$10.6 million in liquidation value of Grace Preferred Equity Interests with a portion of the proceeds from the InitialSecond Closing, we are required to redeem an additional $19.4the remaining $223.5 million
representing 50.0% of the aggregate amountGrace Preferred Equity Interests originally issued by 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 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, the Second 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 Former Advisor (offset by expenses previously borne by the Former Advisor that willare now be incurred directly by us as a self-managed company).
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 issuing equity issuances or convertible debt 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.
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 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 conflict with our interests and the interests of our stockholders, and the Brookfield Investor has significant governance and other rights that could be used to control or influence our decisions 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 the interests of our stockholders. Moreover, as the holder of the Redeemable Preferred Share and all of the issued 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 other 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 control 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.
Under 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, paymentpayments of dividends or other distributions, redemptions or repurchases of securities, property acquisitions and property sales and dispositions.sales. In addition, pursuant to the terms of the Redeemable Preferred Share, 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, as well as 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..
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 replaced with or without cause at any time by the Brookfield Investor), as well as to approve (such approval not to be unreasonably withheld, conditioned or delayed)
two additional independent directors to be recommended and nominated by our 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, an affiliate of the Brookfield Investor does not own or control anyowns 7,576 restricted shares of our common stock and, as("restricted shares"). Except for such cannot directly participate in the outcome of matters requiring approval of our stockholders,restricted shares and 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.holder, 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. However, giving effect to the immediate conversion of all 9,152,54211,202,807 Class C Units held by the Brookfield Investor as of the date of this Annual Report on Form 10-K into OP Units which are subsequently redeemed for shares of our common 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 or control approximately 18.8%22.1% of the voting power of our common stock. Any such redemption may also 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 beis subject to certain restrictions that will limit its ability to leverage any ownership of shares of our common stock to control or influence our management or policies. These restrictions include customary standstill restrictions related to, among other things, acquisition proposals, proxy solicitations,
attempts to elect or remove members of our board of directors, limits on acquiring 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 requirement 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 directors. 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 common stock. However, these restrictions are generally of limited duration and remain 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 Redeemable 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 exercise 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 business and investment activities, including investments in the hospitality industry. In the ordinary course of their business activities, the Brookfield Investor and its affiliateswhich may engage ininclude activities where their interests conflict with ours or those of our 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 havehas 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 InvestorsInvestor 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.
To 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. During February 2018, our board of directors, including the Redeemable Preferred Directors, unanimously approved the 2018 Annual Business Plan.
TheseThe restrictions with respect to the Annual Business Plan 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 the 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 Companyus 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 our Pending Acquisition. If any hotel is sold in this manner, the agreement will terminate with respect to such hotel and the purchase price will be reduced by the amount allocated to such hotel. 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.
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.
Whether or not we complete our Pending Acquisition, in whole or in part, we will still be subject to several risks, including the incurrence of legal, accounting and due diligence costs relating to the transaction that are payable whether or not the transaction is completed.
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 willmay 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 IPO or our DRIP, which reduced the capital available for other purposes that could increase the value of an investment in our common stock. Funding distributions from borrowings could restrict the amount we can borrow for investments, which may affect our profitability. Funding distributions with the sale of assets may affect our ability to generate additional operating cash flows. Funding distributions from the sale of additional securities could dilute 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. We also may not have sufficient cash from operations to make a distribution required to qualify for or maintain our REIT 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
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 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, the First Summit Portfolio, the Second Summit Portfolio, the Third Summit Portfolio and the First Noble and Second Noble Portfolios 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, the First Summit Portfolio, the Second Summit Portfolio, the Third Summit Portfolio and the First Noble and Second Noble Portfolios, 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$17.1 million in periodic PIP reserve deposits during 20172018 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. As of December 31, 2017, we substantially completed work on 51 of the 141 hotels that are part of our $350 million PIP program, and an additional 35 hotels are in process and expected to be substantially completed by early in the second quarter of 2018. We expect to spend approximately $90 million as part of our PIP program and other capital improvements during 2018.
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 InitialSecond Closing, $22.1$16.5 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 ourrelated 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.
The management of a large number of hotels in our portfolio is currently concentrated with one hotel management company pursuant to long-term management agreements.
As of December 31, 2017, Crestline managed 79 of our 145 hotels. Thus, a substantial portion of our revenues is generated by hotels managed by Crestline. Further, most of our management agreements with Crestline have an initial term of 20 years and are generally only terminable by us prior to expiration for cause, including performance-related reasons, except, beginning on April 1, 2021, we will have an “on-sale” termination right upon payment of a fee. This significant concentration of operational risk in one hotel management company makes us more vulnerable economically than if our hotel management was more evenly diversified among several hotel management companies, or if our management agreements with Crestline included broader termination rights. We cannot provide assurance that Crestline will satisfy its obligations to us or effectively and efficiently operate our hotel properties. Any adverse developments in Crestline’s business, financial strength or the failure or inability of Crestline to satisfy its obligations to us or effectively and efficiently operate our hotel properties could adversely affect our financial position, results of operations and cash flows.
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 Former Advisor and its affiliates to conduct all our operations. At the Initial Closing, the Advisory Agreement was terminated and certain employees of the Former Advisor or its affiliates (including, at that time, 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 allFollowing the expiration of certain transition service arrangements, we now conduct our other agreements with affiliatesoperations independently of the Former Advisor except for our hotel-level property management agreements with Crestline and its affiliates. We have entered into a transitionan annually renewable shared services agreement with each of the Advisor and Crestline pursuant to which we will receive their assistance in connectionCrestline provides us 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 accountingtreasury, information technology 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.other administrative services. There can be no assurance, however, that these agreementsarrangements 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 continue 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 Former Advisor. However, some of the expenses previously borne by the Former Advisor willare 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; theemployees. The Former Advisor formerly provided these services. As a result of usour 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 successful 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 key personnel.
Our rights and the rights of our stockholders to recover claims against our officers, directors and the Former Advisor are limited, which could reduce our 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’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 the Former Advisor and the Former 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 Former Advisor and its affiliates have now 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 Former 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 the Former Advisor and its affiliates than might otherwise exist under common law, which could reduce our 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 the AdvisorsFormer Advisor and its affiliates in some cases.
Estimated Per-Share NAV is based upon subjective judgments, assumptions and opinions about future events.
On July 1, 2016,June 19, 2017, our board of directors approved an updated Estimated Per-Share NAV equal to $21.48$13.20 as of March 31, 2016,2017, 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 operating 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 be 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 next valuation of our assets yielding an Estimated Per-Share NAV could yield an Estimated Per-Share NAV substantially less than $21.48.
Under our valuation guidelines, our independent valuer estimates the market value of our principal real estate and real estate-related assets, and we determine the net value of our real estate and real estate-related assets and liabilities taking into consideration such estimate provided by the independent valuer. We review the valuation provided by the independent valuer for consistency with its determinations of value and our valuation guidelines and the reasonableness of the independent valuer's conclusions. Our board of directors reviews the appraisals and valuations and makes a final determination of the Estimated Per-SharePer-
Share NAV. Although the valuations of our real estate assets by the independent valuer are reviewed by us and approved by our board of directors, neither we nor our board of directors will independently verify the appraised value of our properties. Therefore, these valuations do not necessarily represent the price at which we would be able to sell an asset, and the appraised value of a particular property may be greater or less than its potential realizable value.
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 maydoes 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 calculationOn June 19, 2017, our board of directors approved an updated Estimated Per-Share NAV equal to $13.20 as of March 31, 2017, which was published on July 1, 2016, subsequent valuations are expected to occur annually.the same date. 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 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 or the actual operating results differ from what we originally budgeted. In connection with any annual valuation, our 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 any valuation. Any changes in value that may have occurred since the most recent periodic valuation will not be 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 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 date 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 SPA. 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 stockholder’s investment in shares of common stock.
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 maydoes 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.
Our business could suffer in the event we, Crestline or any other party that provides us with services essential to our operations experiences system failures or cyber-incidents or a deficiency in cybersecurity.
Despite system redundancy, the implementation of security measures and the existence of a disaster recovery plan, our internal information technology networks and related systems and those of Crestline and other parties that provide us with services essential to our operations 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 result in a material disruption to our business.
A 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 third parties gaining unauthorized access to systems to disrupt operations, corrupt data or steal confidential information. As our 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 services essential to our operations, both internal and those that have been outsourced.operations. 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.
The remediation costs and 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 ITinformation technology networks and related systems or those of Crestline or any other party that provides us with services essential to our operations could:
result in misstated financial reports, violations of loan covenants, missed reporting deadlines and/or missed permitting deadlines;
affect our ability to properly monitor our compliance with the rules and regulations regarding our qualification as a REIT;
result in the unauthorized 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 guests at our tenants for the efficient use of their leased space;hotels;
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 leasesfranchise or other agreements; or
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 turn, have an adverse impact on us.
We have identified a material weakness in our internal 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 this 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 record, 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 reputation and business and the value of our common stock may 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 Preferred 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 cash flows. 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 and 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.
Each of our OP’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. For example, the Grace Preferred Equity Interests were issued by two of our subsidiaries that indirectly own 115112 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 stockholders’ claims as stockholders are structurally subordinated to all existing and future liabilities and obligations of the OP and its subsidiaries, including distribution and redemption
obligations to the holders of Class C Units and the Grace Preferred Equity 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 InitialSecond 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$165.2 million in liquidation preference Class C Units, $242.9$223.5 million in liquidation value of Grace Preferred Equity Interests and $895.4$915.0 million in principal outstanding under outstanding mortgage and mezzanine debt and $26.7 million in principal outstanding under the Summit Loan.debt.
We are not currently paying cash distributions to our common stockholders, 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 liquidity, 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 our common stockholders, except for cash distributions equal to or less than $0.525 per annum per share. Our ability to pay cash distributions is also subject to the seniority of Class C Units with respect to all distributions by the OP, and we will not be able to make any cash distributions to our common stockholders if we are not able to meet our quarterly distributions obligations to the holders of Class C Units. We are also required to make periodic payments of interest to our lenders and monthly distributions to the holders of the Grace Preferred Equity Interests that have priority over any cash distributions to holders of our common stock.
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 further diluted to the extent we issue additional Class C Units at Subsequent Closings and as PIK Distributions.
AtFollowing the InitialSecond Closing, we issued $135.0approximately $165.2 million in liquidation preference of Class C Units to the 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.was outstanding. 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 one-for-one-basis or the cash value of a corresponding number of shares, at our election.
Further dilution could also occur with respect to additional Class C Units we issue.issue in the future. 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$240.0 million at Subsequent Closings 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. In addition, holders of Class C Units have received and are also entitled to continue 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 also conduct future offerings of common stock or equity securities that are senior to our common stock for purposes of dividend distributions or upon liquidation. We also have, and expect to continue to, issue 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 cannot predict or estimate the amount, timing or nature of our future offerings. 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.
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.
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.
The amount we would be required to pay holders of Class C Units upon the consummation of any Fundamental Sale Transaction, which would generally include any merger or acquisition transaction whereby all shares of our common stock or
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 InitialSecond Closing, approximately $135.0$165.2 million in liquidation preference of Class C Units was outstanding and an additional $265.0$240.0 million in liquidation preference of Class C Units may be issued at Subsequent Closing. QuarterlyClosings. Future 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 statute, our board of directors has exempted any business combination involving the Brookfield Investor and certain affiliates of the 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 inunder the JOBS Act,federal securities laws, 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,until the last day of the fiscal year following the fifth anniversary of the commencement of our IPO, or untilDecember 31, 2019, or, if earlier, the earliest of (1) the last day of the first fiscal year in which we have total annual gross revenue of $1$1.07 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, emergingEmerging 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 electinghave elected 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 ourOur 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 theour charter, as provided in Article XIII of theour charter; (c) dissolution of us;our dissolution; and (d) to the extent required under Maryland law our merger or consolidation of uswith another entity 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 adverse impact on the real estate market in general, and we may not be profitable or 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.
A prolonged economic slowdown, a lengthy or severe recession or declining real estate values could harm our investments.
Our investments may be susceptible to economic 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 certain of our 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, most of our management agreements with Crestline doare not terminateterminable 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 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 liens. These provisions affect our ability to turn our investments into cash and thus affect cash available for distributions to our stockholders.cash. 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.
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.
EightA total of ten hotels in our portfolio are on land subject to ground leases or their equivalent, including eight of the hotels in the Grace Portfolio are on land subject to ground leases. Accordingly,Portfolio. For these hotels, 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 and will not share in the income stream derived from the lease 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 default under the Grace Indebtedness.applicable 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 Indebtednessapplicable 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.
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 and could be the case for any future 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.cash flows.
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, which 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.
Our hotel operating expensescosts may increase in the future which could cause usand we may be unable to raise ouroffset any increased costs with higher room rates depleting room occupancy and thereby decreasing our cash flow and our operating results.or other expense reduction measures.
OperatingCertain of the expenses associated with operating our hotels, such as essential hotel staff, real estate taxes and insurance, are relatively fixed. They do not necessarily decrease directly with a reduction in revenue at the hotels and may be subject to increases that are not related to the performance of our hotels or the increase in the rate of inflation.
Additionally, certain costs, such as expenses for fuel, utilities, labor (housekeeping and insurance,room operations), reservation systems, room supplies, linen and laundry services, are not fixed and may increase in the future. ToIn the extent such increases affectevent of a significant decrease in demand, our room rates and therefore our room occupancy at our lodging properties, our cash flow and operating resultshotel managers may not be able to reduce the size of hotel work forces in order to decrease compensation costs. Our managers also may be negatively affected.unable to offset any fixed or increased expenses with higher room rates. Any of our efforts to reduce operating costs also could adversely affect the future growth of our business and the value of our hotel properties.
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 could reduce our cash flows.
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 costs of defense. Similarly, we may not have adequate
coverage against the risk of direct physical damage or to reimburse us on a 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 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 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.
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.
Our 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.
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 properties' ability to conduct their operations profitably or our ability to borrow money or issue capital stock at acceptable prices.
Competition with third parties in acquiring properties and other investments may reduce our profitability and the return on our 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 investments.
Acquiring or attempting to acquire multiple properties in a single transaction may adversely affect our operations.
WeOur hotel portfolio was acquired in a series of portfolio transactions covering multiple properties. For example, we acquired interests in 116 hotels in one transaction when we acquired the Grace Portfolio. We have also acquired 20 additional hotels and may acquire up to 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, 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.property. Any of the foregoing events may have an adverse effect on our operations.
Crestline or any of our third-partyOur property managers may fail to integrate their subcontractors into their operations in an efficient manner.
Crestline or any of our third-partyOur property managers may rely on multiple subcontractors for on-site property management of our properties. If Crestline or any of our third-party property managers are unable to integrate these subcontractors into their operations in an efficient manner, Crestline or any of our third-party property managersthey 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 (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. 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 properties could require us to undertake a costly remediation program to contain or remove the mold from the affected property.
Accordingly, we may incur significant costs to defend against claims of liability, to comply with environmental regulatory requirements, to remediate any contaminated property, or to pay personal injury claims.
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 third-party property managers from operating such properties. 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 laws.
Costs associated with complying with the Americans with Disabilities Act of 1990 may decrease our cash available for distributions.flows.
Our properties may be subject to the Americans with Disabilities Act of 1990, as amended or the Disabilities Act.(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 ofour cash available for distributions to our stockholders.
Risks Related to the Lodging Industry
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, 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. Dollar 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. 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 labor and other operating costs due to inflation and other factors that may not be offset by increased room rates;
unavailability of labor;labor and increases in minimum wage levels which increase the cost associated with hourly employees at our hotels;
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.
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 will be sufficient to offset any shortfalls that occur as a result of these fluctuations.
We do not operate our lodging properties.
We cannot and do not directly or indirectly operate our lodging properties and, as a result, we depend on the ability of Crestline and any third-party property managers, to operate our hotel properties successfully. Because of certain REIT qualification rules, we cannot directly operate any lodging properties we own or actively participate in the decisions affecting their daily operations. 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 management company to change their method of operation of our lodging properties. 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 meet our capital requirements. There can be no assurance that any management company we engage will manage any lodging properties we acquire in an efficient and satisfactory manner.
We rely on Crestline and third-party property managers to establish and maintain adequate internal controls over financial reporting at our lodging properties. In doing so, Crestline and any third-partythe property managersmanager 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 consolidated/combinedconsolidated financial statements. Because the operations of our lodging properties
ultimately become a component of our consolidated/combinedconsolidated 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 Crestline and third-partythe property 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 Crestline or terminate any third-party property manager, we may be required by the terms of the relevant management agreement 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 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 meet our capital requirements.
Our use of the taxable REIT subsidiary structure increases our expenses.
A taxable REIT subsidiary structure subjects us to the risk of increased lodging operating expenses. The performance of our taxable 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 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.
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 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 them as a condition to 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 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 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 taxable REIT subsidiaries, which enter into property management agreements with Crestline or a third-party property manager to operate the properties. Hotel operating revenues and expenses for these properties are included in our consolidated results of operations. As a result, although we do not 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. Crestline or a third-partyThe property 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. Crestline or a third-partyOur property managermanagers may be targeted by union actions or adversely impacted by the disruption caused by organizing activities.
The increase in the use of third-party internet travel intermediaries and the increase in alternative lodging channels, such as Airbnb, could adversely affect our profitability.
Many of our 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 our managers and franchisors for sales of our rooms through such agencies. If bookings through the internet intermediaries increase, they may be able to negotiate higher commissions, reduced room rates or other contract concessions from our managers or our franchisors. In addition, internet intermediaries use extensive marketing, which could result in hotel consumers developing brand loyalties to the internet intermediary instead of our franchise brands. Further, internet intermediaries emphasize pricing and quality indicators, such as a star rating system, at the expense of brand identification.
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 recognition and supply and availability of 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. As of December 31, 2016,2017, based on the number of hotels, 46.1%43.4% of our hotels were franchised with Hilton Worldwide, 39.7%42.1% with Marriott International and 12.1%11.7% with Hyatt Hotels Corporation, and no other brand accounts for more than 2.1%2.8% 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.
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 and increase the risk of our stockholder’s investments.
Risks Related to Debt Financing
Our incurrence of substantial indebtedness limits our future operational and 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. To complete our Pending Acquisition, we intend to incur indebtedness andWe may incur additional indebtedness, subject to the Brookfield 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 mortgage, mezzanine and other indebtedness, and any other indebtedness we may incur, and the issuance of the Grace Preferred Equity Interests, which are treated as debt for accounting purposes, limit our future operational and financial flexibility in ways that could have a material adverse effect on our results of operations and financial condition such as:
requiring us to use a substantial portion of our cash flow from operations to service indebtedness and pay distributions on the Grace Preferred Equity 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 are limited in our ability to 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 conduct our business because of financial and operating covenants in the agreements governing our indebtedness;
consent rights the holders of the Grace Preferred Equity Interests will have 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, 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.
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 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 on behalf of the entities that own our 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. Substantially 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 business and results of operations could be adversely affected.
We may not be able to extend the maturity date of, or refinance, these debt obligations, or any of our other indebtedness, on acceptable terms.
Substantially all of our properties have 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, 2017, subject to two (one-year) extension rights. The mortgage loan we used to finance a portion of the purchase price of 20 hotels during 2015 and 2016 (the "SN Term Loan") matures on August 31, 2018, subject to two (one-year) extension rights. These extensions can only occur if certain conditions are met, including 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 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 conditions and extend the Assumed Grace Indebtedness for the final extension period or the SN Term Loan pursuant to their respective terms.
As of December 31, 2016,2017, approximately $290.2$234.1 million of liquidation value was outstanding under the Grace Preferred Equity Interests. Following our redemption of $47.3$10.6 million in liquidation value of Grace Preferred Equity Interests with a portion of the proceeds from the InitialSecond Closing, $242.9$223.5 million of liquidation value was outstanding, and,all of which 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 InitialSecond Closing, the Brookfield Investor has agreed to purchase additional Class C Units at Subsequent Closings in an aggregate amount not to exceed $265.0$240.0 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.
Increases in interest rates could increase the amount of our debt payments.
We have incurred substantial indebtedness, of which approximately $1.1$1.2 billion outstanding as of December 31, 20162017 bears interest at variable interest rates. Accordingly, increases in interest rates would increase our interest costs, which could reduce
our cash 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.
Interest-only 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 December 31, 2016,2017, all $1.4$1.5 billion of our mortgage and mezzanine indebtedness was interest-only, including the SN Term Loan which is interest-only for the initial three-year term until August 2018.interest-only. During the interest-only period, the amount of each scheduled payment will 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 sell assets, subject to the 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 assets at prices 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 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.
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 an investment in our common stock.
We 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% or 95% gross income tests.
U.S. Federal Income Tax Risks
Our failure to 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 elected and qualified 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 remain qualified as a REIT is not binding on the Internal Revenue Service ("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 the corporate rates.rate. 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, upon the occurrence of certain events related to our 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 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.”
Even though we have 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 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. 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 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 the OP or at the level of the other companies through which we indirectly own our assets, such as our 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 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 pay 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 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 gainthe net income 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 the OP, but generally excluding 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 taxable REIT subsidiary (but such taxable 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 the OP, but generally excluding 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 taxable REIT subsidiaries are subject to corporate-level taxes and our dealings with our taxable REIT subsidiaries may be subject to 100% excise tax.
A REIT may own up to 100% of the stock of one or more taxable REIT subsidiaries. Both the subsidiary and the REIT must jointly elect to treat the subsidiary as a taxable REIT subsidiary. A corporation of which a taxable REIT subsidiary directly or indirectly owns more than 35% of the voting power or value of the stock will automatically be treated as a taxable REIT subsidiary. Overall, no more than 25% (20%20% (25% for taxable years beginning after December 31, 2017)prior to January 1, 2018) of the gross value of a REIT’s assets may consist of stock or securities of one or more taxable REIT subsidiaries. A taxable REIT subsidiary 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. Accordingly, we may use our taxable REIT subsidiaries generally 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.
Furthermore, in order to ensure the income we receive from our hotels qualifies as “rents from real property,” generally we must lease our hotels to taxable REIT subsidiaries (which are owned by our OP) which must engage “eligible independent contractors” to operate the hotels on their behalf. These taxable REIT subsidiaries and other taxable 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 taxable 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)20% of the value of our total assets, there can be no assurance that we will be able to comply with the taxable 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 taxable 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 from real property.” In order for such rent to qualify as “rents from real 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 the 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 the 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 the 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 stockholder’s investments. In addition, if any of the partnerships or limited liability companies through which the 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 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 taxable 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 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 taxable 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 taxable REIT subsidiaries must qualify as an “eligible independent contractor” under the REIT rules in order for the rent paid to us by our taxable 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 taxable 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 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.
We may choose to pay 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 pay distributions that are payable in cash 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), 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.
Various tax aspects
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 our 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. For tax years beginning after December 31, 2017, noncorporate stockholders are entitled to a 20% deduction with respect to these ordinary REIT dividends which would, if allowed in full, result in a maximum effective federal income tax rate on them of 29.6% (or 33.4% including the 3.8% surtax on net investment income). However, a portion of our distributions may (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, (2) be designated by us as qualified dividend income, taxable at capital gains rates, generally to the extent they are attributable to dividends we receive from our taxable REIT subsidiaries, or (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 tax basis of a stockholder’s investment in our common stock. Distributions that exceed our current and accumulated earnings and profits and a stockholder's tax basis in our common stock generally will be taxable as capital gains.
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 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.
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. Tax rates could be changed in future legislation.
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 taxable REIT subsidiary. This could increase the cost of our hedging activities because our taxable 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 taxable REIT subsidiary generally will not provide any tax benefit, except for being carried forward against future taxable income of such 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 securities of one or more taxable REIT subsidiaries, 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 securities of one or more taxable REIT subsidiaries, government securities and qualified real estate assets) can consist of the securities of any one issuer, no more than 25% of the value of our assets may be securities, excluding government securities, stock issued by our qualified REIT subsidiaries, and other securities that qualify as real estate assets, and no more than 25% (20% for taxable years beginning after December 31, 2017)20% of the value of our total assets can be represented bymay consist of stock or securities of one or more 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.
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 continue to qualify to be taxed as a REIT, we 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. 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 discourage a third party from acquiring us in a manner that might otherwise result in a premium price to our stockholders.”
We may be subject to adverse legislative or regulatory tax changes that could increase our tax 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 advisors with respect to the impact of recent legislation on their investments in our shares and the status of legislative, regulatory or administrative developments and proposals and their potential effect on an investment in our shares.
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.
Reform proposals have been recently put forth by members of Congress 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 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 4.9% in value of the aggregate of our outstanding shares of stock and more than 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 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 2017March 2018 is 2.09%2.18%.) 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.limited.
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 undergohave undergone an ownership change in connection with the Initial Closing or the Second 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”), capital gain distributions attributable to sales or exchanges of “U.S. real property 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 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 “domestically-controlled.” We will be domestically-controlled if at all times during a specified testing period, less than 50% in value of our stock is held directly or indirectly by non-U.S. stockholders. We believe, but cannot assure our stockholders, that we will a domestically-controlled qualified investment entity.
Even if we do not qualify as domestically-controlled 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, 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 advisors to determine the tax consequences applicable to them if our stockholders are non-U.S. 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
The following table presents certain additional information about the properties we owned at December 31, 2016:2017:
| | | Property | Location | Number of Rooms | Ownership Percentage of Hotel | Location | Number of Rooms | Ownership Percentage of Hotel |
Baltimore Courtyard(2)(9) | Baltimore, MD | 205 | 100% | Baltimore, MD | 205 | 100% |
Providence Courtyard(2)(9) | Providence, RI | 219 | 100% | Providence, RI | 219 | 100% |
Stratford Homewood Suites(3)(9) | Stratford, CT | 135 | 100% | Stratford, CT | 135 | 100% |
Georgia Tech Hotel(1)(9) | Atlanta, GA | 252 | N/A | |
Georgia Tech Hotel(1)(9)(11) | | Atlanta, GA | 252 | N/A |
Westin Virginia Beach(9) | Virginia Beach, VA | 236 | 31% | Virginia Beach, VA | 236 | 31% |
Hilton Garden Inn Blacksburg(9)(7) | Blacksburg, VA | 137 | 57% | Blacksburg, VA | 137 | 57% |
Courtyard Asheville(4)(11) | Asheville, NC | 78 | 100% | |
Courtyard Athens Downtown(4)(11) | Athens, GA | 105 | 100% | |
Courtyard Asheville(4)(10) | | Asheville, NC | 78 | 100% |
Courtyard Athens Downtown(4)(10) | | Athens, GA | 105 | 100% |
Courtyard Bowling Green Convention Center(4)(9) | Bowling Green, KY | 93 | 100% | Bowling Green, KY | 93 | 100% |
Courtyard Chicago Elmhurst Oakbrook Area(4)(9) | Elmhurst, IL | 140 | 100% | Elmhurst, IL | 140 | 100% |
Courtyard Columbus Downtown(6)(9) | Columbus, OH | 150 | 100% | Columbus, OH | 150 | 100% |
Courtyard Dallas Market Center(4)(9)(8) | Dallas, TX | 184 | 100% | Dallas, TX | 184 | 100% |
Courtyard Dalton(5)(9) | Dalton, GA | 93 | 100% | Dalton, GA | 93 | 100% |
Courtyard Flagstaff(6)(9) | Flagstaff, AZ | 164 | 100% | Flagstaff, AZ | 164 | 100% |
Courtyard Gainesville(4)(11) | Gainesville, FL | 81 | 100% | |
Courtyard Gainesville(4)(10) | | Gainesville, FL | 81 | 100% |
Courtyard Houston I 10 West Energy Corridor(5)(9) | Houston, TX | 176 | 100% | Houston, TX | 176 | 100% |
Courtyard Jacksonville Airport Northeast(4)(9) | Jacksonville, FL | 81 | 100% | 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% | |
Courtyard Jackson Ridgeland(6)(10) | | Jackson, MS | 117 | 100% |
|
| | | |
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% |
|
| | | |
Courtyard Knoxville Cedar Bluff(4)(10) | 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 Memphis Germantown(6)(9) | Germantown, TN | 93 | 100% |
Courtyard Mobile(8)(10) | Mobile, AL | 78 | 100% |
Courtyard Orlando Altamonte Springs Maitland(4)(10) | Orlando, FL | 112 | 100% |
Courtyard San Diego Carlsbad(5)(9) | Carlsbad, CA | 145 | 100% |
Courtyard Sarasota Bradenton(4)(10) | Sarasota, FL | 81 | 100% |
Courtyard Tallahassee North I 10 Capital Circle(4)(10) | 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(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)(9) | Denver, CO | 160 | 100% |
Fairfield Inn & Suites Memphis Germantown(6)(9) | Germantown, TN | 80 | 100% |
Fairfield Inn & Suites Spokane(6)(9) | Spokane, WA | 84 | 100% |
Hampton Inn & Suites Boynton Beach(4)(10) | Boynton Beach, FL | 164 | 100% |
Hampton Inn & Suites El Paso Airport(6)(9) | 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)(10) | 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)(10) | Glen Burnie, MD | 116 | 100% |
Hampton Inn Beckley(4)(10) | Beckley, WV | 108 | 100% |
Hampton Inn Birmingham Mountain Brook(4)(8)(10) | Birmingham, AL | 129 | 100% |
Hampton Inn Boca Raton(4)(10) | Boca Raton, FL | 94 | 100% |
Hampton Inn Boca Raton Deerfield Beach(4)(10) | 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 Charlotte Gastonia(4)(10) | Gastonia, NC | 107 | 100% |
Hampton Inn Chattanooga Airport I 75(10) | Chattanooga, TN | 167 | 100% |
Hampton Inn Chicago Gurnee(4)(10) | Gurnee, IL | 134 | 100% |
Hampton Inn Chicago Naperville(5)(10) | Naperville, IL | 129 | 100% |
Hampton Inn Cleveland Westlake(4)(10) | Westlake, OH | 122 | 100% |
Hampton Inn College Station(5)(10) | College Station, TX | 133 | 100% |
Hampton Inn Colorado Springs Central Airforce Academy(10) | Colorado Springs, CO | 125 | 100% |
Hampton Inn Columbia I 26 Airport(4)(10) | West Columbia, SC | 120 | 100% |
Hampton Inn Columbus Dublin(4)(10) | Dublin, OH | 123 | 100% |
Hampton Inn Dallas Addison(4)(10) | Addison, TX | 158 | 100% |
Hampton Inn Detroit Madison Heights South Troy(4)(10) | Madison Heights, MI | 123 | 100% |
Hampton Inn Detroit Northville(4)(10) | Northville , MI | 124 | 100% |
Hampton Inn East Lansing(5)(9) | East Lansing, MI | 86 | 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% |
|
| | | |
Hampton Inn Fort Collins(6)(9) | 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)(10) | Indianapolis, IN | 128 | 100% |
Hampton Inn Kansas City Airport(4)(10) | Kansas City, MO | 120 | 100% |
Hampton Inn Kansas City Overland(4)(10) Park(4)(10) | Overland Park, KS | 133 | 100% |
Hampton Inn Knoxville Airport(5)(10) | Alcoa, TN | 118 | 100% |
Hampton Inn Medford(6)(9) | Medford, OR | 75 | 100% |
Hampton Inn Memphis Poplar(4)(10) | Memphis, TN | 124 | 100% |
Hampton Inn Milford(5)(10) | Milford, CT | 148 | 100% |
Hampton Inn Morgantown(4)(10) | Morgantown, WV | 107 | 100% |
Hampton Inn Norfolk Naval Base(4)(8)(10) | Norfolk, VA | 117 | 100% |
Hampton Inn Orlando International Drive Convention Center(5)(9) | Orlando, FL | 170 | 100% |
Hampton Inn Palm Beach Gardens(4)(10) | Palm Beach Gardens, FL | 116 | 100% |
Hampton Inn Pickwick Dam at Shiloh Falls(4)(10) | Counce, TN | 50 | 100% |
Hampton Inn Scranton at Montage Mountain(4)(10) | Moosic, PA | 129 | 100% |
Hampton Inn St Louis Westport(4)(10) | Maryland Heights, MO | 122 | 100% |
Hampton Inn State College(4)(10) | State College, PA | 119 | 100% |
Hampton Inn West Palm Beach Florida Turnpike(4)(10) | 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)(10) | Miami, FL | 66 | 100% |
Homewood Suites Augusta(5)(10) | 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)(10) | Windsor Locks, CT | 132 | 100% |
Homewood Suites Jackson Ridgeland(6)(10) | Ridgeland, MS | 91 | 100% |
Homewood Suites Memphis Germantown(4)(10) | Germantown, TN | 92 | 100% |
Homewood Suites Orlando International Drive Convention Center(5)(9) | Orlando, FL | 252 | 100% |
Homewood Suites Phoenix Biltmore(4)(8)(10) | Phoenix , AZ | 124 | 100% |
Homewood Suites San Antonio Northwest(4)(10) | San Antonio, TX | 123 | 100% |
Homewood Suites Seattle Downtown(5)(10) | Seattle, WA | 162 | 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 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 | |
|
| | | |
Hyatt Place Las Vegas(4)(9) | Las Vegas, NV | 202 | 100% |
Hyatt Place Memphis Wolfchase Galleria(4)(9) | Memphis, TN | 126 | 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)(10) | Boise, ID | 104 | 100% |
Residence Inn Chattanooga Downtown(4)(10) | Chattanooga, TN | 76 | 100% |
Residence Inn Fort Myers(4)(10) | Fort Myers, FL | 78 | 100% |
Residence Inn Fort Wayne Southwest(6)(9) | Ft. Wayne, IN | 109 | 100% |
Residence Inn Jackson Ridgeland(6)(10) | Ridgeland, MS | 100 | 100% |
Residence Inn Jacksonville Airport(5)(9) | Jacksonville, FL | 78 | 100% |
Residence Inn Knoxville Cedar Bluff(4)(10) | 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)(10) | Macon, GA | 78 | 100% |
Residence Inn Mobile(4)(8)(10) | Mobile, AL | 66 | 100% |
Residence Inn Memphis Germantown(6)(9) | Germantown, TN | 78 | 100% |
Residence Inn Portland Downtown Lloyd Center(4)(10) | Portland, OR | 168 | 100% |
Residence Inn San Diego Rancho Bernardo Scripps Poway(4)(9) | San Diego, CA | 95 | 100% |
Residence Inn Sarasota Bradenton(4)(10) | Sarasota, FL | 78 | 100% |
Residence Inn Savannah Midtown(4)(10) | Savannah, GA | 66 | 100% |
Residence Inn Tallahassee North I 10 Capital Circle(4)(10) | Tallahassee, FL | 78 | 100% |
Residence Inn Tampa North I 75Fletcher(4)(10) Fletcher(4)(10) | Tampa, FL | 78 | 100% |
Residence Inn Tampa Sabal Park Brandon(4)(10) | Tampa, FL | 102 | 100% |
Springhill Suites Asheville(5)(10) | 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)(9) | 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(9)(8) | San Antonio, TX | 112 | 100% |
Springhill Suites San Diego Rancho Bernardo Scripps Poway(4)(9) | San Diego, CA | 137 | 100% |
Staybridge Suites Jackson(6)(10) | Ridgeland, MS | 92 | 100% |
TownePlace Suites Baton Rouge South(6)(9) | Baton Rouge, LA | 90 | 100% |
TownePlace Suites Savannah Midtown(5)(10) | Savannah, GA | 93 | 100% |
| | | 17,483 | |
________________
| |
| (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 Indebtedness87-Pack Loans as part of the Grace Portfolio |
| |
| (5) | Encumbered by the Additional Grace Mortgage Loan as part of the Grace Portfolio |
| |
| (6) | Encumbered by the SNRefinanced 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-managedManaged by Crestline; management transitioned directly to Crestline effective as of the Initial Closing on March 31, 2017 |
| |
| (10) | Sub-managedManaged by Interstate; management is scheduled to be transitioned directly toa property manager other than Crestline on April 3, 2017 with property management terms similar to those applicable to our other hotels managed by Crestline. |
| |
| (11) | Sub-managedEncumbered by a third-party sub-property manager other than Crestline or Interstate; management transitioned directly to the third party sub-property manager effectiveRefinanced Term Loan, as part of the Initial Closing on March 31, 2017Barceló Portfolio |
Debt
As of December 31, 2017, we had $1.5 billion in outstanding indebtedness and $234.1 million in liquidation value of Grace Preferred Equity Interests (which is treated as indebtedness for accounting purposes). Substantially all of our hotel assets have been pledged as collateral under this indebtedness. At the Second Closing, we redeemed $10.6 million in liquidation value of Grace Preferred Equity Interests. In March 2014, 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.
In February 2015, we acquired the Grace 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 hotels in the Grace Portfolio (“Equity Inns Portfolio I”), and through 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 the contract purchase price of the Grace Portfolio was satisfied by the issuance of the Grace Preferred Equity Interests. Due
In April 2017, we entered into a mortgage loan agreement (the “87-Pack Mortgage Loan”) and a mezzanine loan agreement (the “87-Pack Mezzanine Loan” and, collectively with the 87-Pack Mortgage Loan, the “87-Pack Loans”) with an aggregate principal balance of $915.0 million to refinance mortgage and mezzanine indebtedness encumbering the factEquity Inns Portfolio I. The principal amount of the 87-Pack Mortgage Loan is $805.0 million and the 87-Pack Mortgage Loan is secured by 87 of our hotel properties, all of which served as collateral for the mortgage loan that was refinanced (each, a “87-Pack Collateral Property”). The principal amount of the 87-Pack Mezzanine Loan is $110.0 million and the 87-Pack Mezzanine Loan is secured by the ownership interest in the entities which own the 87-Pack Collateral Properties and the related operating lessees.
In October 2015, we refinanced the mortgage loan secured by Equity Inns Portfolio II and one hotel from the Barceló Portfolio to reduce and fix the interest rate and extend the maturity (the “Additional 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.Mortgage Loan”).
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/combinedconsolidated 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 loan is secured by a mortgage on the Hilton Garden Inn Blacksburg.
In August 2015, we entered into the SN Term Loana 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 amendedmanager, and, restated the SN Term Loan during October 2015. Onin February 11, 2016, we further amended the SN Term Loan pursuantthis term loan to whichreduce the lenders' total commitment was reduced from $450.0 million to $293.4 million. Proceeds from the SN Term Loanthis 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 JanuaryApril 2017, in connection with our entry into the SPA, we entered into an amendment of the Pending Acquisitionamended 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 newrestated loan agreement pursuant to refinance this loan (the “Refinanced Term Loan”) in an aggregate principal amount of $310.0 million. The Refinanced Term Loan is collateralized by 28 of our hotel properties, 20 of which served as collateral for the loan that was refinanced, seven hotels which were acquired from affiliates of Summit agreed to loan usHotel Properties, Inc. on the same date as the refinancing for an additional $3.0 million, which was used as an additionalaggregate purchase price deposit onof $66.5 million (the “Second Summit Portfolio”), and one previously unencumbered hotel from our Pending Acquisition.existing portfolio.
The following table summarizes certain information regarding our debt obligations as of December 31, 2016:2017: |
| | | | | |
| 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 |
|
| | | | | |
| Use of Proceeds/Collateral | Principal Balance as of December 31, 2017 (In Thousands) | Number of rooms | Debt per Room | Interest Rate | Maturity Date |
87 properties in Grace Portfolio - Equity Inns Portfolio I (87 Pack Mortgage Loan)
| $805,000 | 10,041 | $80,171 | LIBOR plus 2.56% | May 1, 2019; 1st ext. May 1, 2020; 2nd ext. May 1, 2021; 3rd ext. May 1, 2022
|
87 properties in Grace Portfolio - Equity Inns Portfolio I (87 Pack Mezzanine Loan)
| $110,000 | 10,041 | $10,955 | LIBOR plus 6.50% | May 1, 2019; 1st ext. May 1, 2020; 2nd ext. May 1, 2021; 3rd ext. May 1, 2022
|
92 properties in Grace Portfolio - Equity Inns Portfolio I ( Grace Preferred Equity Interests)
| $179,439 | 10,665 | $16,825 | (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 Inns Portfolio II & Homewood Suites Stratford
| $232,000 | 2,691 | $86,213 | 4.96% | October 6, 2020 |
20 properties in Grace Portfolio - Equity Inns Portfolio II ( Grace Preferred Equity Interests)
| $54,678 | 2,556 | $21,392 | (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, Georgia Tech -28 Properties (Refinanced Term Loan)
| $310,000 | 3,330 | $93,093 | LIBOR plus 3.00% | May 1, 2019; 1st ext. May 1, 2020; 2nd ext. May 1, 2021; 3rd ext. May 1, 2022
|
| 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 |
| |
(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.proceedings, other than as set forth below.
In February 2018, one of our stockholders, Tom Milliken, filed a derivative complaint (the “Complaint”) on behalf of us and against us, as well as the Former Advisor, the Former Property Manager, various affiliates of those entities (together, the “Former Advisor Defendants”), and certain current and former directors and officers of the Company (the “Director Defendants”). The Complaint was filed in the District Court for the Southern District of New York on February 26, 2018. The Complaint alleges, among other things, that the Former Advisor and Director Defendants breached their fiduciary duties to us and our stockholders by putting their own interests above our interests, which breach was aided and abetted by certain of the Former Advisor Defendants. The Complaint also asserts claims of breach of contract against the Director Defendants, corporate waste against the Former Advisor and certain of the Director Defendants, and unjust enrichment against certain of the Director Defendants and Former Advisor Defendants. The Company has been investigating the above claims and others made by the stockholder since receipt of a shareholder demand letter from Mr. Milliken's attorneys in July 2017 and a supplemental demand letter in December 2017. Based on its investigation to date, the Company believes that the claims are without merit. The Company has consulted with its outside legal counsel and it is evaluating the next steps that will be taken in the case.
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 established 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. In 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 approved an initial Estimated Per-Share NAV of $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 that2016. On June 19, 2017, our board of directors determinedapproved an updated Estimated Per-Share NAV.NAV equal to $13.20 based on an estimated fair value of the Company’s assets less the estimated fair value of the Company’s liabilities, divided by 39,617,676 shares of common stock outstanding on a fully diluted basis as of March 31, 2017. We anticipate that we will publish an updated Estimated Per-Share NAV no less frequently than once each calendar year.
Holders
As of December 31, 2016,2017, we had 38,493,43039,505,742 shares of common stock outstanding held by a total of 19,47619,463 stockholders.
Distributions
We elected and qualified to be taxed as a REIT under Sections 856 through 860 of the Code commencing with the tax year ended December 31, 2014. As a REIT, we are required to distribute at least 90% of our REIT taxable income, determined without regard for the deduction for dividends paid and excluding net capital gains, to our stockholders annually. The amountOur distribution policy is subject to revision at the discretion of distributions payable to our stockholders is determined by our board of directors, and ismay be changed at any time. There can be no assurance that we will resume paying distributions in shares of common stock or in cash at any time in the future. Our ability to make future cash distributions will depend on our future cash flows and may be dependent on a number of factors, including fundsour ability to obtain additional liquidity, which may not be available for distribution, financial condition, capital expenditure requirements, as applicable and annual distribution requirements needed to maintain our status as a REITon favorable terms, or at all.
Currently, under the Code. We may be subjectBrookfield Approval Rights, prior approval of at least one of the Redeemable Preferred Directors is required before we can declare or pay any distributions or dividends to certain state and local taxes on our income and property, and federal income and excise taxes on our undistributed income. Each hotel is leasedcommon stockholders, except for cash distributions equal to a taxable REIT subsidiary which is owned by the OP. A taxable REIT subsidiary is subject to federal, state and local income taxes.or less than $0.525 per annum per share.
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 $0.0046575343 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 fundedFor the period from May 2014 until May 2016 when we commenced paying distributions in common stock, we paid cash distributions, all of our cash distributions from inception in July 2013 through the suspension of cash distributions in March 2016 usingwhich were funded with proceeds from our IPO orand proceeds realized from the sale of common stock issued pursuant to our DRIP. Our IPO was suspended on November 15, 2015. The IPO2015 and terminated on January 7, 2017, the third anniversary of itsthe commencement of our IPO, 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 stockholder. Accordingly, we paid a cash distribution to stockholders of record each day during the quarter ended March 31, 2016, but any 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 initial determination of Estimated Per-Share NAV, our 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 the Estimated 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, 2016 were paid in shares of common stock in an amount equal to 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,June 30, 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.
HoldersAlso commencing on June 30, 2017, 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 failureIf we fail 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 beis 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.$14.75.
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.
For the three months ended December 31, 2017, we paid cash distributions of $2.7 million and PIK Distributions of 119,956.95 Class C Units to the Brookfield Investor, as the sole holder of the Class C Units. For the year ended December 31, 2017, we paid cash distributions of $7.9 million and PIK Distributions of 355,349.60 Class C Units to the Brookfield Investor, as the sole holder of the Class C Units. The cash distributions were funded from cash flow from operations.
Share-based Compensation
We have adopted an employee and director incentive restricted share plan (the(as amended and/or restated, the “RSP”), which provides us 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 thean 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 our directors, officers and employees; andemployees, as well as the directors and employees of entities that provide services to us. The total number of shares of common stock that may be granted under the RSP may not exceed 5% of ourthe authorized shares of common stock at any time and in any event may not exceed 4,000,000 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 us 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 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 shallgenerally will be subject to the same restrictions as the underlying restricted shares. The fair value of the restricted shares will beis expensed over the applicable vesting period. We recognize the impact of forfeited restricted share awards as they occur.
Under our current director compensation policy, which applies to all directors who are not our employees, our directors receive cash compensation and equity compensation which is in the form of restricted shares for Messrs. Baron and Wiles, the Redeemable Preferred Directors, and in the form of RSUs for all other directors.
Prior to the Initial Closing, we made annual restricted share awards to our independent directors that vested annually over a five-year period following the date of five years.grant, subject to continued service. In connection with the Initial Closing, we implemented a new director compensation program. Following the Initial Closing and pursuant to a compensation payment agreement, restricted share awards are generally made to an affiliate of the Brookfield Investor in respect of the Redeemable Preferred Directors’ service on the board of directors and vest on the earlier of the first anniversary of the date of grant and the
date of the next annual meeting of the board of directors following the date of grant, subject to the continued service of the applicable Redeemable Preferred Director.
RSUs 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 RSUs may not, in general, be sold or otherwise transferred until restrictions are removed and the rights 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 have vested. Holders of RSUs do not have or receive any voting rights with respect to eachthe RSUs or any shares underlying any award of RSUs, but such holders are generally credited with dividend or other distribution equivalents that are regarded as having been reinvested in RSUs which are subject to the same vesting conditions and/or other restrictions as the underlying RSUs. The fair value of the independent directors, without any further action byRSUs is expensed over the applicable vesting period. We recognize the impact of forfeited RSUs as they occur.
RSU awards to our board of directors or the stockholders, onexecutive officers and other employees generally vest annually over a four-year vesting period following the date of initial electiongrant, subject to our board ofcontinued service. RSU awards to directors andother than Redeemable Preferred Directors vest on the dateearlier of each annual stockholders meeting. Restricted stock issued to independent directors vests over a five-year period following the first anniversary of the date of grant and the date of the next annual meeting of the board of directors following the date of grant, subject to the continued service of the applicable director. In addition, during the year ended December 31, 2017, certain RSU awards to directors other than Redeemable Preferred Directors were issued in incrementsconnection with the simultaneous forfeiture of 20% per annum.
an equal number of restricted shares. These RSU awards have the same vesting terms as the restricted shares which were forfeited (i.e., annually over a five-year period following the date of grant of the original restricted share award). Vested RSUs may only be settled in shares of common stock and such settlement generally will be on the earliest of (i) in the calendar year in which the third anniversary of each applicable vesting date occurs, (ii) termination of the recipient’s services to the Company and (iii) a change in control event.
As of December 31, 2016,2017, we had granted 14,8527,576 restricted shares and 100,398 RSUs under the RSP. The following table sets forth information regarding securities authorized for issuance under our RSP as of December 31, 2016:2017:
|
| | | | | | | | | |
| 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 | | — |
| | — |
| | 3,985,1483,883,699 |
|
| Equity Compensation Plans not approved by security holders | | — |
| | — |
| | — |
|
| Total | | — |
| | — |
| | 3,985,1483,883,699 |
|
Unregistered Sales of Equity Securities and Use of Proceeds.
We did not sell any equity securities that were not registered under the Securities Act during the year ended December 31, 2016,2017, 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, we commenced our IPO on a "reasonable best efforts" basis of up to 80,000,000 shares of common stock at a price of $25.00 per share, subject to certain volume and other discounts, pursuant to the registration Statement on Form S-11 (File No. 333-190698), filed with the SEC (the "Registration Statement"). The Registration Statement also covered up to 21,052,631 shares of common stock available pursuant to the DRIP under which our common stockholders could elect to have their cash distributions reinvested in additional shares of our common stock.
On November 15, 2015, we suspended our IPO, which was conducted by the Former Dealer Manager, as exclusive wholesale distributor, effective December 31, 2015, and, on November 18, 2015, the Former 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 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, 2016, we had approximately 38.5 million shares of common stock outstanding and had received total gross 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 through December 31, 2016, as a result of our change in distribution policy adopted by our board of directors in March 2016, 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. 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 associated with the issuance of common stock:
|
| | | | |
| | | For the Period from July 25, 2013 (date of inception) to |
| (In thousands) | | December 31, 2016 |
| Selling commissions and dealer manager fees | | $ | 85,249 |
|
| Other offering costs | | 23,559 |
|
| Total offering costs | | $ | 108,808 |
|
The Former Dealer Manager was able to reallow the selling commissions and a portion of the dealer manager fees to participating broker-dealers. The following table details the selling commissions incurred and reallowed related to the sale of 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, 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 $85.2 million of selling commissions and dealer manager fees and $19.6 million of offering cost reimbursements incurred from the Advisor and Former Dealer Manager. Under the Advisory Agreement, which terminated at the Initial Closing, we were obligated to reimburse the Advisor or its affiliates, as applicable, for organization and offering costs paid by them on our behalf, provided that the 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 IPO exceed 2.0% of gross offering proceeds 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 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 purchase price of the Grace Portfolio, $53.2 million to fund part of the purchase price of the First Summit Portfolio, and $39.3 million to fund part of 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 exchange. There is no regular established trading market for shares of our common stock and there can be no assurance one will develop. We currently have no plans to list shares of our common stock on a national securities exchange. In order to provide stockholders with interim liquidity, our board of directors adopted our SRP that enabled our stockholders to sell their shares back to us after having held them for at least one year, subject to significant conditions and limitations, including that our board of directors had the right 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 SPA, our board of directors suspended our SRP effective as of January 23, 2017. In connection with the Initial 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 (except2017, except pursuant to the self-tender offer (the “Company Offer”) we commenced on October 25, 2017 for the repurchasesup to 1,000,000 shares of 28,264 shares for $0.6 million at an average repurchase price per share of $23.44 with respect to repurchase requests received during the year ended December 31, 2015 that were completed in January 2016) and have not, and will not, make any repurchase of our common stock duringat a price of $6.50 per share. On November 15, 2017, we increased the period between January 1,purchase price in the Company Offer to $6.75 per share. We made the Company Offer in response to an unsolicited offer to stockholders commenced on October 23, 2017 by MacKenzie Realty Capital, Inc. The Company Offer expired at 5:00 p.m., New York City time, on December 22, 2017. On December 26, 2017, a total of 113,091 shares were tendered in the Company Offer and the effectivenesspurchased by us, for an aggregate purchase price of the termination of the SRP.$763,366.
Item 6. Selected Financial Data.
The following selected financial data as of December 31, 2017, 2016, 2015, 2014, 2013, and 20122013 should be read in conjunction with the accompanying consolidated/combinedconsolidated financial statements of 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 hospitality assets and operations owned by Barceló Crestline Corporation and its consolidated subsidiaries, or the Barceló Portfolio (in such capacity, the "Predecessor") are included for the period from January 1, 2014 to March 20, 2014.
| | | Balance sheet data (In thousands) | | December 31, 2016 | | December 31, 2015 | | December 31, 2014 | | December 31, 2017 | | December 31, 2016 | | December 31, 2015 | | December 31, 2014 |
| Total real estate investments, at cost | | $ | 2,391,407 |
| | $ | 2,211,347 |
| | 98,545 |
| | $ | 2,489,289 |
| | $ | 2,391,407 |
| | $ | 2,211,347 |
| | $ | 98,545 |
|
| Total assets | | 2,353,411 |
| | 2,347,839 |
| | 333,374 |
| | $ | 2,420,653 |
| | $ | 2,353,411 |
| | $ | 2,347,839 |
| | $ | 333,374 |
|
| Mortgage notes payable, net | | 1,410,925 |
| | 1,341,033 |
| | 45,500 |
| | $ | 1,495,777 |
| | $ | 1,410,925 |
| | $ | 1,341,033 |
| | $ | 45,500 |
|
| Total liabilities | | 1,793,968 |
| | 1,706,630 |
| | 131,579 |
| | $ | 1,797,287 |
| | $ | 1,793,968 |
| | $ | 1,706,630 |
| | $ | 131,579 |
|
| Total equity | | 559,443 |
| | 641,209 |
| | 201,795 |
| | $ | 495,322 |
| | $ | 559,443 |
| | $ | 641,209 |
| | $ | 201,795 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Successor | | Predecessor |
| | | Year Ended December 31, 2017 | | 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 | | $ | 621,075 |
| | $ | 599,592 |
| | $ | 446,184 |
| | $ | 34,871 |
| | $ | 8,245 |
| | $ | 39,797 |
|
| | | | | | | | | | | | | |
| Operating expenses: | | | | | | | | | | | | |
| Rooms | | 147,814 |
| | 139,169 |
| | 99,543 |
| | 5,411 |
| | 1,405 |
| | 6,340 |
|
| Food and beverage | | 16,158 |
| | 15,986 |
| | 12,774 |
| | 3,785 |
| | 1,042 |
| | 4,461 |
|
| Management fees | | 23,643 |
| | 42,560 |
| | 22,107 |
| | 1,498 |
| | 289 |
| | 1,471 |
|
| | | | | Successor | | Predecessor | |
| | | 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 | | $ | 599,592 |
| | $ | 446,184 |
| | $ | 34,871 |
| | $ | 8,245 |
| | $ | 39,797 |
| |
| | | | | | | | | | | | |
| Operating expenses: | | | | | | | | | | | |
| Rooms | | 139,169 |
| | 99,543 |
| | 5,411 |
| | 1,405 |
| | 6,340 |
| |
| Food and beverage | | 15,986 |
| | 12,774 |
| | 3,785 |
| | 1,042 |
| | 4,461 |
| |
| Management fees | | 42,560 |
| | 22,107 |
| | 1,498 |
| | 289 |
| | 1,471 |
| |
| Other property-level operating costs | | 230,546 |
| | 171,488 |
| | 13,049 |
| | 3,490 |
| | 15,590 |
| |
| Other property-level operating expenses | | | 242,925 |
| | 230,546 |
| | 171,488 |
| | 13,049 |
| | 3,490 |
| | 15,590 |
|
| Acquisition and transaction related costs | | | 498 |
| | 25,270 |
| | 64,513 |
| | 10,884 |
| | — |
| | — |
|
| General and administrative | | | 18,889 |
| | 15,806 |
| | 11,621 |
| | 2,316 |
| | — |
| | — |
|
| Depreciation and amortization | | 101,007 |
| | 68,500 |
| | 2,796 |
| | 994 |
| | 5,105 |
| | 105,237 |
| | 101,007 |
| | 68,500 |
| | 2,796 |
| | 994 |
| | 5,105 |
|
| Impairment of long-lived assets | | 2,399 |
| | — |
| | — |
| | — |
| | — |
| |
| Impairment of goodwill and long-lived assets | | | 32,689 |
| | 2,399 |
| | — |
| | — |
| | — |
| | — |
|
| Gain on disposal of assets | | — |
| | — |
| | — |
| | — |
| | 74 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 74 |
|
| Rent | | 6,714 |
| | 6,249 |
| | 3,879 |
| | 933 |
| | 4,321 |
| | 6,569 |
| | 6,714 |
| | 6,249 |
| | 3,879 |
| | 933 |
| | 4,321 |
|
| Total operating expenses | | 538,381 |
| | 380,661 |
| | 30,418 |
| | 8,153 |
| | 37,362 |
| | 594,422 |
| | 579,457 |
| | 456,795 |
| | 43,618 |
| | 8,153 |
| | 37,362 |
|
| Income from operations | | 61,211 |
| | 65,523 |
| | 4,453 |
| | 92 |
| | 2,435 |
| |
| Operating income (loss) | | | 26,653 |
| | 20,135 |
| | (10,611 | ) | | (8,747 | ) | | 92 |
| | 2,435 |
|
| Interest expense | | (92,264 | ) | | (80,667 | ) | | (5,958 | ) | | (531 | ) | | (2,265 | ) | | (98,865 | ) | | (92,264 | ) | | (80,667 | ) | | (5,958 | ) | | (531 | ) | | (2,265 | ) |
| Acquisition and transaction related costs | | (25,270 | ) | | (64,513 | ) | | (10,884 | ) | | — |
| | — |
| |
| Other income (expense) | | 1,169 |
| | (491 | ) | | 103 |
| | — |
| | — |
| | (1,260 | ) | | 1,169 |
| | (491 | ) | | 103 |
| | — |
| | — |
|
| Equity in earnings (losses) of unconsolidated entities | | 399 |
| | 238 |
| | 352 |
| | (166 | ) | | (65 | ) | | 403 |
| | 399 |
| | 238 |
| | 352 |
| | (166 | ) | | (65 | ) |
| General and administrative | | (15,806 | ) | | (11,621 | ) | | (2,316 | ) | | — |
| | — |
| |
| Total other expenses, net | | (131,772 | ) | | (157,054 | ) | | (18,703 | ) | | (697 | ) | | (2,330 | ) | | (99,722 | ) | | (90,696 | ) | | (80,920 | ) | | (5,503 | ) | | (697 | ) | | (2,330 | ) |
| Net income (loss) attributable to Hospitality Investors Trust, Inc. | | $ | (72,247 | ) | | $ | (94,826 | ) | | $ | (14,841 | ) | | $ | (605 | ) | | $ | 105 |
| |
| Loss before taxes | | | $ | (73,069 | ) | | $ | (70,561 | ) | | $ | (91,531 | ) | | $ | (14,250 | ) | | $ | (605 | ) | | $ | 105 |
|
| Income tax (benefit) expense | | | (1,926 | ) | | 1,371 |
| | 3,106 |
| | 591 |
| | — |
| | — |
|
| Net income (loss) and comprehensive income (loss) | | | $ | (71,143 | ) | | $ | (71,932 | ) | | $ | (94,637 | ) | | $ | (14,841 | ) | | $ | (605 | ) | | $ | 105 |
|
| Less: Net income attributable to non-controlling interest | | | 244 |
| | 315 |
| | 189 |
| | — |
| | — |
| | — |
|
| Net income (loss) before dividends and accretion | | | $ | (71,387 | ) | | $ | (72,247 | ) | | $ | (94,826 | ) | | $ | (14,841 | ) | | $ | (605 | ) | | $ | 105 |
|
| Deemed dividend related to beneficial conversion feature of Class C Units | | | (4,535 | ) | | — |
| | — |
| | — |
| | — |
| | — |
|
| Dividends on Class C Units (cash and PIK) | | | (13,103 | ) | | — |
| | — |
| | — |
| | — |
| | — |
|
| Accretion of Class C Units | | | (1,668 | ) | | — |
| | — |
| | — |
| | — |
| | — |
|
| Net income (loss) attributable to common stockholders | | | $ | (90,693 | ) | | $ | (72,247 | ) | | $ | (94,826 | ) | | $ | (14,841 | ) | | $ | (605 | ) | | $ | 105 |
|
| Other data: | | | | | | | | | | | | | | | | | | | | | | |
| Cash flows provided by (used in) operations | | $ | 67,846 |
| | $ | 6,507 |
| | $ | (9,650 | ) | | $ | (556 | ) | | $ | 5,818 |
| | $ | 81,532 |
| | $ | 67,846 |
| | $ | 6,507 |
| | $ | (9,650 | ) | | $ | (556 | ) | | $ | 5,818 |
|
| Cash flows used in investing activities | | $ | (111,866 | ) | | $ | (772,046 | ) | | $ | (122,082 | ) | | $ | (551 | ) | | $ | (2,273 | ) | | $ | (170,748 | ) | | $ | (111,866 | ) | | $ | (772,046 | ) | | $ | (122,082 | ) | | $ | (551 | ) | | $ | (2,273 | ) |
| Cash flows provided by (used in) financing activities | | $ | 39,978 |
| | $ | 680,507 |
| | $ | 263,593 |
| | $ | (937 | ) | | $ | (677 | ) | | $ | 102,165 |
| | $ | 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/combinedconsolidated 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
We were incorporated on July 25, 2013 as a Maryland corporation and qualified 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. As of December 31, 2016,2017, we had acquired or had an interest in a total of 141145 hotels, including one hotel that was classified as held for sale (See Note 18 - Assets Held for Sale to our accompanying consolidated financial statements included in this Annual Report on Form 10-K), with a total of 17,19317,483 guestrooms located in 3233 states. As of December 31, 2016,2017, 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 and Intercontinental Hotels Group and Red Lion Hotels Corporation or one of their respective subsidiaries or affiliates.
As of December 31, 2017, 79 of the hotel assets we have acquired were managed by Crestline Hotels & Resorts LLC ("Crestline") and 66 of the hotel assets we have acquired were managed by other property managers. As of December 31, 2017, our other property managers were Hampton Inns Management LLC and Homewood Suites Management LLC, affiliates of Hilton Worldwide Holdings Inc. (39 hotels), InnVentures IVI, LP (2 hotels), McKibbon Hotel Management, Inc. (21 hotels) and Larry Blumberg & Associates, Inc. (4 hotels).
On January 7, 2014, we commenced our IPOprimary initial public offering (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 well as up to 21,052,631 shares of common stock available pursuant to the Distribution Reinvestment Plan (the "DRIP") under which our common stockholders could 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 instead of cash.
On July 1, 2016, our board of directors approved an initial 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 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 that2016. On June 19, 2017, our board of directors determinedapproved an updated Estimated Per-Share NAV.NAV (the "2017 NAV") equal to $13.20 based on an estimated fair value of our assets less the estimated fair value of our liabilities, divided by 39,617,676 shares of common stock outstanding on a fully diluted basis as of March 31, 2017. 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) (the “OP”), entered into (i) a Securities Purchase, Voting and Standstill Agreement (the “SPA”) with the Brookfield Strategic Real Estate Partners II Hospitality REIT II LLC (the “Brookfield Investor”),Investor, as well as related guarantee agreements with certain affiliates of the Brookfield Investor, and (ii) a Framework Agreement (the “Framework Agreement”) with the Former Advisor, our advisor, American Realty Capital Hospitality Advisors, LLC (the “Advisor”), ourformer property managers, American Realty Capital Hospitality Properties, LLC and American Realty Capital Hospitality Grace Portfolio, LLC (together, the “Property“Former Property Manager”), Crestline Hotels & Resorts, LLC (“Crestline”), then an affiliate of the Former Advisor and the Former Property Manager, American Realty Capital Hospitality Special Limited Partnership, LLC (the “Special“Former Special Limited Partner”), another affiliate of the Former Advisor and the Former 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 (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.
On February 27, 2018, the second closing under the SPA (the “Second Closing”) occurred, pursuant to which we sold 1,694,915.25 additional Class C Units to the Brookfield Investor, for a purchase price of $14.75 per Class C Unit, or $25.0 million in the 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$240.0 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. Prior to the Initial Closing, we were the sole general partner and held substantially all of the units of limited partner interest in the OP entitled “OP Units” ("OP Units"). Following the Initial Closing, theThe Brookfield Investor holds all the issued and outstanding Class C Units, representing $135.0 million in liquidation preference with respect to the OP that rankswhich rank 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,and 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 unablefail to redeem the Class C Units when required to do so, as described below.including the ability to commence selling the OP’s assets until the Class C Units are convertible into OP Units based on an initial conversion pricehave been fully redeemed. As of $14.75, subject to anti-dilution and other adjustments uponDecember 31, 2017, the occurrencetotal liquidation preference 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 ratewas $140.2 million, and as of 7.50% per annum from legally available funds. If we fail to pay these cash distributions when due,February 27, 2018, following the per annum rate will increase to 10% until all accrued and unpaid distributions required to be paid in cash are reduced to zero. HoldersSecond Closing, the total liquidation preference of the 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%.was $165.2 million.
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 requiring approval of the Class C Units 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 theour annual business plan (including the annual operating and capital budget) required under the terms of the Redeemable Preferred Share (the “Annual"Annual Business Plan”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.conditions.
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 employees, and we depended on the Former Advisor to manage certain aspects of our affairs on a day-to-day basis pursuant to our advisory agreement with the Former Advisor ( the(the "Advisory Agreement"). In addition, prior to the Initial Closing, the Former Property Manager served as our property manager and had retained Crestline to provide services, including locating investments, negotiating financing and operating certain hotel assets in our portfolio. The
As of March 31, 2017, the Former Advisor, the Former Property Manager and Crestline arewere under common control with AR Capital, LLC ("AR Capital"), the parent of our sponsor,American Realty Capital IX, LLC (“ARC IX”), and AR Global Investments, LLC ("AR Global"), the successor to certain of AR Capital's businesses. ARC IX served as our sponsor prior to our transition to self-management at the Initial Closing. Following the sale of AR Global’s membership interest in Crestline in April 2017, Crestline is no longer under common control with AR Global and AR Capital.
At the Initial Closing, the Advisory Agreement was terminated and certain employees of the Former Advisor or its affiliates (including, at that time, 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.
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 of2017, we had 25 full-time employees. The staff at 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 adoptedare employed by our boardthird-party hotel managers. We now conduct our operations independently of directors in March 2016. Shares are only issued pursuant to the DRIP in connectionFormer Advisor and its affiliates, 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.
which we have no ongoing affiliation.
See Note 3 - 17 Subsequent EventsBrookfield Investment and Related Transactions to our accompanying consolidated/combinedconsolidated financial statements included in this Annual Report on Form 10-K for additional information regarding changes tothe terms of the SPA and the Framework Agreement and the other transactions and agreements contemplated thereby, as well as the Redeemable Preferred Share and the Class C Units, including conversion rights, distribution rights, approval rights and redemption rights associated therewith.
Our customers fall into three broad groups: transient business, group business and contract business. Transient business broadly represents individual business or leisure travelers. Business travelers make up the majority of transient demand at our relationship with AR Capital, AR Global, the Advisor, the Property Managerhotels.
Our revenues are comprised of rooms revenue, food and their affiliates,beverage revenue and other revenue which accounted for approximately 94.7%, 3.2%, and 2.1%, respectively, of our transition to self-management.2017 total revenues. Hotel operating expenses (which exclude acquisition and transaction costs, general and administrative, depreciation and amortization and impairment of goodwill and long-lived assets) represent approximately 74% of our 2017 total operating expenses.
Significant Accounting Estimates and Critical Accounting Policies
Principles of Consolidation and Basis of Presentation
The accompanying consolidated/combinedconsolidated 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 considerswe consider 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 are the primary beneficiary.
The Predecessor represents hospitality assets and operations owned by Barceló Crestline Corporation and its consolidated subsidiaries ("BCC"), which historically
Certain amounts in prior periods have been maintainedreclassified in various legal entities. Historically, financial statements have not been prepared fororder to conform to current period presentation, specifically, we changed the Predecessorpresentation of our Consolidated Statements of Operations and Comprehensive Loss with respect to "general and administrative" expenses and "acquisition and transaction related costs". The change in presentation was to reclassify these line items so that they are included as a discrete stand-alone entity. The accompanying consolidated financial statementscomponent of Operating income (loss). We made this change in presentation for the Predecessor as of December 31, 2014, for the period from January 1 to March 20, 2014 and for the year ended December 31, 2014 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.all periods presented.
Use of Estimates
The preparation of the accompanying consolidated/combinedconsolidated financial statements in conformity with U.S.United States Generally Accepted Accounting Principles ("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
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 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. 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 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 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 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.
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 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/CombinedConsolidated Statements of Operations and Comprehensive Income (Loss).
Impairment of Long Lived Assets and Investments in Unconsolidated Entities
When circumstances indicate the carrying valueamount 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 an impairment exists, due to the inability to recover the carrying valueamount of a property, an impairment loss will be recorded to the extent that the carrying valueamount exceeds the estimated fair value of the property. An impairment lossproperty which results in an immediate negative adjustment reflected incharge to net income. An impairment loss of $2.4 million was recorded on one hotel during the quarter ended June 30, 2016income (See Note 1417 - Impairments to our accompanying consolidated/combinedconsolidated 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 hasand our board of directors have 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 qualifiedAny adjustment to be treatedthe carrying amount is recorded as an asset held for sale as of September 30, 2016, which was subsequently sold on October 14, 2016impairment loss (See Note 1518 - Assets Held for Sale of Hotel to our accompanying consolidated/combinedconsolidated financial statements included in this Annual Report on Form 10-K).
Goodwill
We had no assets that qualifiedallocate goodwill to be treated as an asset heldeach reporting unit. For our purposes, each of our wholly-owned hotels is considered a reporting unit. We test goodwill for sale asimpairment at least annually, or upon the occurrence of December 31, 2016.
Cashany "triggering events" if sooner, and Cash Equivalents
Cashwe have elected to test for goodwill impairment during the quarter ended June 30 of each year. During the second quarter ended June 30, 2017, we adopted ASU 2017-04, Intangibles - Goodwill and cash equivalents include cash in bank accounts as well as investments in highly-liquid money market funds with original maturitiesOther, which simplified the measurement 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 ofgoodwill by eliminating Step 2 from 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 expensedgoodwill impairment test in the period in which itevent that there is determined that the financing will not be successful.
In April 2015, the Financial Accounting Standards Board (“FASB”) issuedevidence of an impairment based on any "triggering events." We chose to adopt 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 presented2017-04 in the balance sheetsecond quarter ended June 30, 2017, as a direct deduction fromthis was the first time we were required to test goodwill for impairment.
Upon the occurrence of any "triggering events," we are required to compare the fair value of each reporting unit to which goodwill has been allocated, to the carrying amount of that debt liability, consistent with debt discounts. Prior to applicationsuch reporting unit including the allocation of this new guidance,goodwill. As required by Accounting Standards Codification section 350 - Intangibles - Goodwill and Other (ASC 350), as amended by ASU 2017-04, if the carrying amount of a reporting unit exceeds its fair value, we presented debt issuance costs as an asset onapply a one-step quantitative test and record the Consolidated Balance Sheets. The recognition andamount of
measurement guidance for debt issuance costs weregoodwill impairment as the excess of the reporting unit's carrying amount over its fair value, not affected byto exceed the amendments in ASU 2015-03. total amount of goodwill allocated to such reporting unit.
We adopted this ASUrecognized $31.6 million as goodwill and $17.1 million of January 1, 2016, on a retrospective basis. The impact togoodwill impairment during the Consolidated Balance Sheets as ofyear ended 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 acquisition2017 (See Note 34 - Business Combinations and Note 17- Impairments to our accompanying consolidated/combinedconsolidated 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
We recognize hotel revenue as earned, which is generally defined as the date upon which a guest occupies a room or utilizes the hotel services.
Income Taxes
We elected and qualified to be taxed as a REIT under Sections 856 through 860 of the 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. We generally will not be subject to federal corporate income tax on that portion of our REIT taxable income that we distribute to our stockholders. We may be subject to certain state and local taxes on our income, property taxtaxes and federal income and excise taxes on our undistributed income. Our hotels are leased to taxable REIT subsidiaries which are owned by the OP. The taxable REIT subsidiarysubsidiaries 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. 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 calculate 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 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 ASCAccounting Standards Codification section 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 CostsClass C Units
We expense advertising costs for hotel operations as incurred. These costs were $17.2 million forinitially measured the year ended December 31, 2016, $12.2 million forClass C Units at fair value net of issuance costs. We are required to accrete the year ended December 31, 2015, and $0.4 million combined forcarrying value of the Company andClass C Units to 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 accountsliquidation preference using the allowance method. Expected credit losses associatedeffective interest method over the five-year period prior to the holder's redemption option becoming exercisable. However, if it becomes probable that the Class C Units will become redeemable prior to such date, we will adjust the carrying value of the Class C Units to the maximum liquidation preference.
Pursuant to the SPA with trade receivables are recordedthe Brookfield Investor, we may become obligated to issue additional Class C Units to the Brookfield Investor and this obligation is considered a contingent forward contract under Accounting Standards Codification section 480 - Distinguishing Liabilities from Equity and accounted for as an allowance for doubtful accounts.a liability. The allowance for doubtful accounts is estimated based upon historical patternsfair value of credit losses for aged receivables as well as specific provisions for certain identifiable, potentially uncollectible balances. When internal collection efforts on accountsthe contingent forward liability was initially recognized at zero since the contingent forward contract was executed at fair market value. We have been exhausted,determined 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 rates. Our derivativesfair value was $1.4 million as of December 31, 2016, consisted of interest rate cap agreements, which we believe will help2017 (See Note 13 - Commitment and Contingencies 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/combinedaccompanying consolidated financial statements was immaterial.included in this Annual Report on Form 10-K). We will measure the contingent forward liability on a recurring basis until the underlying Class C Units are issued and any changes in fair value will be recognized through earnings. At the time that the underlying Class C Units are issued, the corresponding liability will be extinguished.
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 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 measures within the hotel industry to evaluate hotel operating performance. ADR and RevPAR do 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
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. Following the suspension of our IPO in 2015, our primary business objective has been a focus on meeting our capital requirements and on maximizing the value of our existing portfolio by continuing to invest in our hotels primarily through brand-mandated property improvement plans (“PIPs”),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 Framework Agreement, and the consummation of the transactions contemplated by these agreements in March 2017 has generated, and is expected to continue to, generate additional liquidity through the sale of Class C Units to the Brookfield Investor at the Initial Closing, the Second Closing and at other 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 Former Advisor (offset by expenses previously borne by the Former Advisor that willare now be incurred directly by us as a self-managed company). 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.
While receipt of all the proceeds from our sale of Class C Units at the Initial Closing, the Second 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$223.5 million of the Grace Preferred Equity Interests outstanding following the InitialSecond 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 of 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 due to the disruptions to the operations of the hotels being renovated. Additionally,We are currently undertaking an approximately $350 million PIP program across a significant portion of our portfolio. We expect to complete our PIP program over the next two to three years. Accordingly, we have significant PIP renovation work that we will be required to make during 20172018 and in future years which will also adversely impact our operating results.results while renovation work is ongoing.
Our PIP program has also impacted our Estimated Per-Share NAV, which is based in part on the net cash flows for each hotel estimated over a ten-year hold period commencing on the valuation date, after which the hotel is estimated to be sold. We intend to utilize hotel excess cash flows to fund PIP work, and taking guest rooms out of service is expected to adversely impact hotel performance while PIP work is ongoing (normally a three- to four- month period). Therefore, in estimating net cash flows over the ten-year hold period for each hotel, the estimated cost of the PIP work for each hotel was deducted from the hotel’s net operating income in the year or years the PIP work is expected to be performed, and the estimated adverse impact to net operating income of taking guest rooms out of service was factored into the annual estimates of the net cash flows for the hotel. Moreover, shortly prior to the 2017 NAV valuation date, which was also the date of the Initial Closing, we negotiated modifications with the brands with respect to certain of our future PIP obligations, and, on that date, we sold $135 million of Class C Units to the Brookfield Investor. These agreements were highly beneficial to us by, among other things, providing the time and liquidity to complete the hotel renovations. However, because these arrangements also provided greater certainty as to the timing, scope and cost of the PIP work, they caused an increase to the estimated cost of the PIP work used to determine the net cash flows for the hotels and the impact of taking guest rooms out of service for the 2017 NAV calculation, as compared to the 2016 NAV calculation.
We believe that the continued execution of our hotel reinvestment program, primarily through the brand-mandated PIPs will maximize long-term value for our stockholders, position us for future success, and position us for a potential liquidity event for our investors. While it is our intention to achieve a liquidity event, there can be no assurance as to when or if we will ultimately be able to do so and as to the terms of any such liquidity event.
Our results of operations have in the past, 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 aggregate 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 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 additional proceeds from the Summit Loan.Loan (the "Reinstatement Agreement"). Under the reinstated agreementReinstatement Agreement, Summit hashad 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 effortsacquisition pursuant 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.the Reinstatement Agreement. In June 2016, Summit informed us that two of the ten hotels had been sold, thereby reducing the Pending Acquisitionnumber of hotels that could be purchased under the Reinstatement Agreement 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 Acquisitionacquisition of seven of the remaining hotels to April 27, 2017 (or(and October 24, 2017 in the case of onethe eighth hotel) and made an additional purchase price deposit of $3.0 million in the form of a new loan by Summit to us.us (the "Additional Loan").
We intend to utilize $26.9 million of the proceeds from
At the Initial Closing to fund a portion ofon March 31, 2017, we repaid 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 principalbalance 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 utilizewith $23.7 million of the proceeds from the Initial Closingsale of Class C Units. On April 27, 2017, we completed the acquisition of seven hotels from Summit for an aggregate purchase price of $66.5 million (the "April Acquisition"). Concurrent with the completion of the April Acquisition the Additional Loan was deemed repaid in full. Subsequently, Summit informed us that they have sold the eighth hotel to funda third party, in connection with which our right and obligation to purchase this repayment.hotel was terminated in accordance with the terms of the Reinstatement Agreement.
Although we are permitted under the Brookfield Approval Rights to complete our Pending Acquisition, weWe 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, 20162017 to the Year Ended December 31, 20152016
Room revenues for the portfolio were $588.3 million for the year ended December 31, 2017, compared to room revenues of $566.6 million for the year ended December 31, 2016, compared to room revenues of $420.6 million for the year ended December 31, 2015.2016. The increase in room revenues was primarily due to acquisitions.driven by the impact of the April Acquisition of seven hotels from Summit and increased occupancy and ADR.
The following table presents actual operating information of the hotels in our portfolio for the periods in which we have owned them.
| | | | | Year Ended | | Year Ended |
| Total Portfolio | | December 31, 2016 | | December 31, 2015 | | December 31, 2017 | | December 31, 2016 |
| Number of rooms | | 17,114 |
| | 16,644 |
| | 17,483 |
| | 17,114 |
|
| Occ | | 75.6 | % | | 76.2 | % | | 75.9 | % | | 75.6 | % |
| ADR | | $ | 120.93 |
| | $ | 118.42 |
| | $ | 122.64 |
| | $ | 120.93 |
|
| RevPAR | | $ | 91.48 |
| | $ | 90.26 |
| | $ | 93.12 |
| | $ | 91.48 |
|
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 of December 31, 2017, as if we had owned each hotel in our portfolio as of December 31, 2016, for the full periods presented.
|
| | | | | | | | |
| | | Year Ended |
| Pro forma (145 hotels) | | December 31, 2017 | | December 31, 2016 |
| Number of rooms | | 17,483 |
| | 17,483 |
|
| Occ | | 76.3 | % | | 75.7 | % |
| ADR | | $ | 122.91 |
| | $ | 121.16 |
|
| RevPAR | | $ | 93.82 |
| | $ | 91.71 |
|
| RevPAR change | | 2.3 | % | | |
The information in the table includesbelow presents pro-forma operating information for only the hotels that we classify as not under renovation.renovation as of December 31, 2017. 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.
| | | | | Year Ended | | Year Ended |
| Proforma hotels not under renovation (99 hotels) | | December 31, 2016 | | December 31, 2015 | |
| Pro forma hotels not under renovation (95 hotels) | | | December 31, 2017 | | December 31, 2016 |
| Number of rooms | | 12,013 |
| | 12,012 |
| | 11,810 |
| | 11,810 |
|
| Occ | | 76.2 | % | | 75.7 | % | | 77.4 | % | | 75.4 | % |
| ADR | | $ | 119.79 |
| | $ | 117.79 |
| | $ | 123.50 |
| | $ | 121.98 |
|
| RevPAR | | $ | 91.28 |
| | $ | 89.15 |
| | $ | 95.57 |
| | $ | 91.99 |
|
| RevPAR growth rate | | 2.4 | % | |
| |
| RevPAR change | | | 3.9 | % | | |
The pro-forma RevPAR growth rate for the year ended December 31, 20162017, compared to the year ended December 31, 2015,2016, increased by 1.7%2.3% due to an increase in ADR.ADR and, to a lesser extent, occupancy. Pro-forma RevPAR for our hotels not under renovation increased 2.4%3.9% 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, 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 yearsyear ended December 31, 2017, and the year ended December 31, 2016, and 2015, decreased 0.8%1.9% over the prior year period driven primarily by a decline in other ancillary revenues.lower food and beverage revenue.
Our hotel 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 hotel 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 paid are computed as a percentage of gross revenue. Beginning as of the Initial Closing, the base management fees will bewere 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, arewere 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 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 hotel operating expenses (excluding(which exclude acquisition and transaction costs, general and administrative, depreciation and amortization and impairment of long livedgoodwill and long-lived assets), including the results of the hotels in our portfolio as if we had owned each hotel in our portfolio for the year ended December 31, 2017, and the year ended December 31, 2016, decreased approximately 1.9% over the prior year primarily due to the reduction in base property management fees and the elimination of asset management fees in the second quarter of 2017, partially offset by an increase in rooms expense and other property-level operating costs. The increase in rooms expense was driven in part by an increase in labor costs across our portfolio primarily due to U.S. labor market tightening, job creation and increases in minimum wage levels which increase the cost associated with our hourly employees. Further, while labor costs increased, inflation remained generally muted, which limited our ability to raise room rates to offset the increase in labor costs. These factors impacted the performance of our hotels during 2017, and may continue to do so if they continue during 2018.
Acquisition and transaction related costs decreased approximately $24.8 million for the year ended December 31, 2017, compared to the prior year, driven by reduced acquisition activity in 2017, and the non-recurrence of forfeited deposits related to terminated acquisitions of approximately $19.1 million recorded in 2016.
General and administrative increased approximately $3.1 million for the year ended December 31, 2017, compared to the prior year, primarily due to the commencement of payment of employee salaries and benefits following our transition to self-management, partially offset by lower professional fees.
Depreciation and amortization increased approximately $4.2 million for the year ended December 31, 2017, compared to the prior year, due to the completion of certain PIPs, higher capital expenditures and acquisitions.
Impairment of goodwill and long-lived assets increased $30.3 million for the year ended December 31, 2017. The increase was primarily due to impairment of goodwill of $17.1 million and impairment of long-lived assets of $15.6 million, including the loss on assets held for sale of $5.2 million as a result of the purchase and sale agreements we entered into to sell four non-core hotels during the third quarter 2017. Three of these hotels were sold during the fourth quarter of 2017, and the fourth sale was pending as of December 31, 2017. See Note 17 - Impairments to our accompanying consolidated financial statements included in this Annual Report on Form 10-K for further details.
Interest expense increased $6.6 million for year ended December 31, 2017, compared to the prior year, primarily driven by increased debt balances and higher total deferred financing costs on the new loans from the April 2017 refinancing transactions.
Other income (expense) changed by approximately $2.4 million for the year ended December 31, 2017, compared to the prior year period. Expense recognized in 2017 was primarily due to a $1.4 million change in fair value of the contingent forward liability associated with our obligation to issue additional Class C Units to the Brookfield Investor. Income recognized in 2016 was primarily due to a $2.5 million gain on the sale of a hotel in 2016, partially offset by a change in contingent consideration in 2016.
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.
|
| | | | | | | | |
| | | 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 |
|
The following table presents pro-forma operating information of the hotels in our portfolio as of December 31, 2016, as if we had owned each hotel for the full periods presented.
|
| | | | | | | | |
| | | 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 of December 31, 2016, 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 were classified as under renovation as of December 31, 2016.
|
| | | | | | | | |
| | | 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, 2016, 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.
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.
Total operating expenses (which exclude acquisition and transaction costs, general and administrative, depreciation and amortization and impairment of goodwill and long-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, 2016, compared to the prior year, due primarily to acquisitions and completed PIPs.
Impairment of long-lived assets was $2.4 million for the year ended December 31, 2016, due to the recognition of an impairment on one hotel in the third quarter of 2016.
Interest expense increased approximately $11.6 million for the year ended December 31, 2016, compared to the prior year, due primarily to new mortgage and promissory notes in 2016, and the full year impact of mortgage 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 for the year ended December 31, 2016, compared to the prior year, due to decreased acquisition activity in 2016.
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 arewere 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 increase after the Initial Closing, because of our transition to self-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, partially offset by the loss recorded related to the change in the fair value associated with the contingent consideration payable due in connection with the acquisition of the Barceló Portfolio.
Comparison of the Year Ended December 31, 2015 to the Year 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 year ended December 31, 2014, including results from the Predecessor period. The increase in room revenues was primarily due to acquisitions.
The following table presents operating information of the hotels in our portfolio for the periods in which we have owned them.
|
| | | | | | | | |
| | | 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 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.
|
| | | | | | | | |
| | | 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, compared to the year ended December 31, 2014 was 6.7%, driven by growth in occupancy and ADR.
Other 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, 2015, and 2014, increased approximately 5.5%, over the prior year period.
Total operating expenses, 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, 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 overall increase in expenses. Additionally, 2015 was negatively impacted by disruption from and transition costs associated with the consolidation of management companies throughout 2015 as we strategically aligned markets and management companies.
Depreciation and amortization increased approximately $64.8 million for the year ended 2015, compared to the prior year, due primarily to acquisitions.
Interest 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 approximately $19.1 million.
General and administrative 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 to 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 MeasuresHotel EBITDA
This section includes non-GAAP financial measures, including funds from operations ("FFO"), modified funds from operations ("MFFO"), anddisclosures with respect to hotel earnings before interest, taxes and depreciation and amortization ("Hotel EBITDA"). Descriptions, which is a non-GAAP financial measure. A description of these non-GAAP measuresHotel EBITDA and reconciliationsa reconciliation to the most directly comparable GAAP measure, which is net income (loss), attributable to common stockholders, is provided below.
Funds from Operations and Modified Funds from Operations
The historical accounting convention used for real estate 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”), an industry trade group, has published a standardized measure of performance known as FFO, which is used 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 set forth in the White Paper on FFO approved by the Board of Governors of NAREIT, as revised in February 2004 (the “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 related impairments, plus real estate related depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures.
We believe that the use of FFO 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 or loss as determined under GAAP.
Changes in the accounting and reporting promulgations under GAAP that were put into effect in 2009 subsequent to the establishment of NAREIT’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 or property acquisitions, has resulted in acquisition fees and expenses being 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 typically paying acquisition fees.
Because of these factors, the Investment Program Association (the “IPA”), an industry trade group, has published a standardized measure of performance known as MFFO, which the IPA has recommended as a supplemental measure for publicly registered, non-listed REITs. MFFO is designed to be reflective 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 REITs, 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 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.
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 (the “Practice Guideline”) issued by the IPA in November 2010. The Practice Guideline defines MFFO as FFO further adjusted for acquisition and transaction related fees and 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, mark-to-market adjustments included in net 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.
We believe that, because MFFO excludes costs that we consider more reflective of acquisition activities and other non-operating items, 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. We also believe that MFFO is a recognized measure of sustainable operating performance by the non-listed REIT industry and allows for an evaluation of our performance against other publicly registered, non-listed REITs.
Not all REITs, including 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 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 (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 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 methods utilized to evaluate the performance of a publicly registered, non-listed REIT under GAAP should be construed as more relevant measures of operational performance and considered more prominently than the non-GAAP measures, FFO and MFFO, and the adjustments to GAAP in calculating 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 or another regulatory body could 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 accordingly.
The table below reflects the items deducted from or added to net income (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 not related to operating hotels 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 isand general and administrative expenses are 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 attributable to common stockholders in accordance with GAAP to Hotel EBITDA for the years ended December 31, 2017, 2016, 2015, and 2014.2015. (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) | | For the Year Ended December 31, 2017 (unaudited) | | For the Year Ended December 31, 2016 (unaudited) | | For the Year Ended December 31, 2015 (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 attributable to common stockholders | | | $ | (90,693 | ) | | $ | (72,247 | ) | | $ | (94,826 | ) |
| Deemed dividend related to beneficial conversion feature of Class C Units | | | 4,535 |
| | — |
| | — |
|
| Dividends on Class C Units | | | 13,103 |
| | — |
| | — |
|
| Accretion of Class C Units | | | 1,668 |
| | — |
| | — |
|
| Net loss before dividends and accretion (in accordance with GAAP) | | | (71,387 | ) | | (72,247 | ) | | (94,826 | ) |
| Plus: Net income attributable to non-controlling interest | | | 244 |
| | 315 |
| | 189 |
|
| Net loss and comprehensive loss (in accordance with GAAP) | | $ | (71,932 | ) | | $ | (94,637 | ) | | $ | (14,841 | ) | | $ | (71,143 | ) | | $ | (71,932 | ) | | $ | (94,637 | ) |
| Depreciation and amortization | | 101,007 |
| | 68,500 |
| | 2,796 |
| | 105,237 |
| | 101,007 |
| | 68,500 |
|
| Impairment of long-lived assets | | 2,399 |
| | — |
| | — |
| |
| Impairment of goodwill and long-lived assets | | | 32,689 |
| | 2,399 |
| | — |
|
| Interest expense | | 92,264 |
| | 80,667 |
| | 5,958 |
| | 98,865 |
| | 92,264 |
| | 80,667 |
|
| Acquisition and transaction related costs | | 25,270 |
| | 64,513 |
| | 10,884 |
| | 498 |
| | 25,270 |
| | 64,513 |
|
| Other (income) expense | | (1,169 | ) | | 491 |
| | (103 | ) | | 1,260 |
| | (1,169 | ) | | 491 |
|
| Equity in earnings of unconsolidated entities | | (399 | ) | | (238 | ) | | (352 | ) | | (403 | ) | | (399 | ) | | (238 | ) |
| General and administrative | | 15,806 |
| | 11,621 |
| | 2,316 |
| | 18,889 |
| | 15,806 |
| | 11,621 |
|
| Provision for income taxes | | 1,371 |
| | 3,106 |
| | 591 |
| |
| Income tax (benefit) expense | | | (1,926 | ) | | 1,371 |
| | 3,106 |
|
| Hotel EBITDA | | $ | 164,617 |
| | $ | 134,023 |
| | $ | 7,249 |
| | $ | 183,966 |
| | $ | 164,617 |
| | $ | 134,023 |
|
Cash Flows for the Year Ended December 31, 2017
Net cash provided by operating activities was $81.5 million for the year ended December 31, 2017. Cash provided by operating activities was positively impacted primarily by increases in accounts payable and accrued expenses and restricted cash, partially offset by decreases in due to related parties.
Net cash used in investing activities was $170.7 million for the year ended December 31, 2017, primarily attributable to capital investments in our properties, the April Acquisition of seven hotels from Summit, an increase in restricted cash and payment of cash consideration related to the Property Management Transactions (as defined in Note 3 - Brookfield Investment and Related Transactions to our accompanying consolidated financial statements included in this Annual Report on Form 10-K), partially offset by proceeds from sales of hotels.
Net cash flow provided by financing activities was $102.2 million for the year ended December 31, 2017. Cash provided by financing activities was primarily impacted by the net proceeds from the sale of Class C Units at the Initial Closing as well as the refinancing of the Assumed Grace Indebtedness and the SN Term Loan, partially offset by the use of a portion of those net proceeds to partially redeem the Grace Preferred Equity Interests and repay the Summit Loan in full.
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 January 1 to December 31, 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.
Liquidity and Capital Resources
As of December 31, 2016,2017, we had cash on hand of $42.8$55.7 million. Under certain of our debt obligations, we are required to maintain minimum liquidity of $20$15.0 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, 2016,2017, we had principal outstanding of $1.4$1.5 billion under our indebtedness plus an additional $290.2$234.1 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. Followingfollowing our redemption of $47.3$10.6 million in liquidation value of Grace Preferred Equity Interests with a portion of the proceeds from the InitialSecond Closing pursuant to our obligation to redeem 50.0% of the Grace Preferred Equity Interests originally issued by that date, 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 valueof Grace Preferred Equity Interests originally issued 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 final 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.
BecauseFollowing the suspension of our IPO, we required funds in addition to operating cash flow and cash on hand to meet our capital requirements,requirements. Accordingly, 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, the Second Closing and at other 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 Former Advisor (offset by expenses previously borne by the Former Advisor that willare now be incurred directly by us as a self-managed company).
Of
Pursuant to the $135.0SPA, at the Initial Closing, we used a portion of the net proceeds to redeem $47.3 million in outstanding Grace Preferred Equity Interests and to pay in full the $23.7 million outstanding under the Summit Loan. Pursuant to the SPA, subsequent to the Initial Closing, we used $26.9 million of the net proceeds to pay a portion of the purchase price for the April Acquisition. Pursuant to the SPA, the gross proceeds from the sale of the Class C Units at the InitialSecond Closing we have retained $26.9 million that maywere, and will be used, as follows: (i) $10.6 million to pay a portion of the closing consideration for our Pending Acquisition, $23.7redeem outstanding Grace Preferred Equity Interests; and (ii) $14.4 million that may be used to repay the Summit Loan and $15.0 million that may be used to fund brand-mandated PIPs and related lender reserves. Following the Initial Closing, the
The Brookfield Investor has agreed to purchase additional Class C Units at Subsequent Closings in an aggregate amount not to exceed $265.0$240.0 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 InitialSecond Closing, $242.9$223.5 million in liquidation value of Grace Preferred Equity Interests was outstanding, and, accordingly, $22.1$16.5 million in Class C Units was available to be issued at Subsequent Closings to meet theseany other capital requirements.
Pursuant to the SPA, $15.0 million of the net proceeds from the Initial Closing were used to fund PIPs and related lender reserves and $14.4 million of proceeds from the Second Closing will be used to fund PIPs and related lender reserves.
We engage in a continued process of renovating and improving our hotels. Since acquisition we have reinvested more than $216.5 million in our hotels through PIPs and other capital improvements. This includes the approximately $350 million PIP program we are currently undertaking across a significant portion of the portfolio. We expect to complete our PIP program over the next two to three years. As of December 31, 2017, we have substantially completed work on 51 of the 141 hotels that are part of our PIP program, and an additional 35 hotels are in process and expected to be substantially completed early in the second quarter of 2018. We expect to spend approximately $90 million as part of our PIP program and other capital improvements during 2018. We periodically deposit reserves with our mortgage lenders that we utilize to fund a portion of the PIP work and other capital improvements. As of December 31, 2017, we had $50.4 million of PIP and other capital improvements reserves. We are scheduled to fund an additional $17.1 million in PIP reserves with our mortgage lenders during 2018, and $26.6 million during the period from 2019 through 2021.
Our PIP program represents capital expenditures required by the franchisors as a condition to the acquisition of the hotel and the entry into a long-term franchise agreement. Our PIP program does not include, and we will also be required by the franchisors to perform, periodic capital expenditures to bring the physical condition of the hotel into compliance with the specifications and standards each hotel franchisor or hotel brand has developed, such as cyclical renovations with respect to soft goods (such as carpeting, bedspreads, artwork and upholstery) and case goods (such as furniture and fixtures such as armoires, chairs, beds, desks, tables, mirrors and lighting fixtures).
To date, we have funded our PIP program primarily from proceeds from our IPO, which terminated at the end of 2015, operating cash flows, and proceeds from borrowings and the sale of Class C Units to the Brookfield Investor. We expect to fund our ongoing PIP program and other capital improvements during 2018 primarily from operating cash flows and proceeds from the sale of Class C Units to the Brookfield Investor. Depending upon market conditions, we may seek to generate additional liquidity from financing and refinancing of hotels in our portfolio, and this liquidity may be applied to fund the PIP program and other capital improvements.
In April 2017, we refinanced $895.4 million principal amount then outstanding under the Assumed Grace Indebtedness with new mortgage and mezzanine loans encumbering 87 of those properties (the “87-Pack Loans”). The 87-Pack Loans have an aggregate principal amount of $915.0 million and mature in May 2019, subject to three one-year extension rights. Also in April 2017, we refinanced $235.5 million principal amount then outstanding under the SN Term Loan secured by 20 of our hotels that was scheduled to mature in August 2018, with a new term loan secured by those hotels as well as the seven hotels acquired in the April Acquisition and one unencumbered hotel from our existing portfolio (the “Refinanced Term Loan”). The Refinanced Term Loan has an aggregate principal amount of $310.0 million and matures in May 2019, subject to three one-year extension rights.
On April 27, 2017, we completed the April Acquisition of seven hotels from Summit for an aggregate purchase price of $66.5 million, and $26.9 million of the purchase price was funded with proceeds from the Initial Closing pursuant to the SPA. The remaining amount was funded by (i) $33.1 million in net proceeds from the Refinanced Term Loan and (ii) $6.5 million previously paid by us as an earnest money deposit. Additionally, during the quarter ended June 30, 2017, Summit informed us that they sold the eighth hotel that we had been obligated to purchase to a third party, and our right and obligation to purchase this hotel was terminated in accordance with the terms of the Reinstatement Agreement.
In addition to paying a portion of the purchase price of the April Acquisition and the principal outstanding under the indebtedness being financed, the net proceeds from the Refinanced Term Loan were also used to pay in full the $4.6 million in contingent consideration payable with respect to one of our prior acquisitions and to fund $30.0 million in a reserve under the 87-Pack Loans in order to fund expenditures for work required to be performed under PIPs required by hotels securing the 87-Pack Loans. This reserve is in addition to (not a replacement of) ongoing obligations under the 87-Pack Loans and the Refinanced Term Loan, which are similar to obligations that were applicable under the indebtedness that was refinanced, to reserve certain amounts to fund capital expenditures required pursuant to our PIPs. The 87-Pack Loans also provides for certain additional amounts to be deposited in reserve accounts, into which $1.0 million of the proceeds from the 87-Pack Loans was deposited.
Concurrent with the completion of the April Acquisition the Additional Loan was deemed repaid in full.
During the quarter ended September 30, 2017, we entered into purchase and sale agreements to sell four non-core hotels, classified the four hotels as held for sale as of September 30, 2017, and recognized a loss on the sale of three of the four hotels, totaling $5.4 million, which includes the costs to sell those assets. The aggregate contract purchase price of these sales is $17.4 million, and the sales were expected to generate net proceeds of approximately $5.0 million to us after the redemption of the amount of Grace Preferred Equity Interests required in accordance with their terms and payment of transaction costs. During the quarter ended December 31, 2017, we completed the sale of three of the hotels for a sale price of $11.7 million, resulting in a net gain of approximately $0.1 million, which is reflected in other income (expense) of our consolidated statement of operations and comprehensive income (loss) included in this Annual Report on Form 10-K. We used the proceeds from the sales to redeem $8.8 million in Grace Preferred Equity Interests and the remainder for general corporate purposes.
On October 25, 2017, we commenced the Company Offer for up to 1,000,000 shares of common stock at a price, following our amendment of the Company Offer on November 15, 2017, of $6.75 per share. The Company Offer expired at 5:00 p.m., New York City time, on December 22, 2017. On December 26, 2017, a total of 113,091 shares were tendered in the Company Offer, and purchased by us, for an aggregate purchase price of $763,306, funded with cash on hand.
We believe theseour current 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, 2016,2017, our loan-to-value ratio was 72%69.5% including the Grace Preferred Equity Interests, which are treated as indebtedness for accounting purposes, and our loan-to-value ratio excluding the Grace Preferred Equity Interests was 60%60.1%.
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 majority of our independent directors and disclosed to stockholders in our next quarterly report following that borrowing, along with the justification for exceeding suchthe 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, 2016,2017, our total portfolio leverage was 236%196%.
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 for 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, 2014Our distribution policy is subject to revision at the discretion of our board of directors, declaredand may be changed at any time. There can be no assurance that we will resume paying distributions payablein shares of common stock or in cash at any time 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.
Currently, under the Brookfield Approval Rights, prior approval is required before we can declare or pay any distributions
or dividends to our common stockholders, of record each day during the applicable month at a rateexcept for cash distributions equal to $0.0046575343 per day (or $0.0046448087 if a 366-day year), or $1.70less than $0.525 per annum per share of common stock. The first distribution was paid inshare.
For the period from May 2014 to holders of recorduntil May 2016 when we commenced paying distributions in April 2014.common
To date,stock, we have fundedpaid cash distributions, all of our cash distributionswhich were funded with proceeds from our IPO whichand proceeds realized from the sale of common stock issued pursuant to our DRIP.
Our IPO was suspended on November 15, 2015 and terminated on January 7, 2017, the third 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 stockholder. Accordingly, we paid a cash distribution to stockholders of record each day during the quarter ended March 31, 2016, but any distributions for subsequent periods have beenwere 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 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 the Estimated 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, 2016 were paid in shares of common stock in an amount equal to 0.000185792 per share per day, or $1.46064 per annum, divided by $21.48. We anticipate that the Company 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, weboard of directors 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,June 30, 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.
HoldersAlso commencing on June 30, 2017, 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 failureannum ("PIK Distributions"). If we fail 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 beis equal to the 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):
|
| | | | | | | | | | | | | | |
| | | 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).
|
| | | | | | | | |
| 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 |
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, 2016 (in thousands)(1):
|
| | | | |
| | | For the Period from July 25, 2013 (date of inception) to |
| | | December 31, 2016 |
| Distributions paid: | | |
| Common stockholders in cash (including distributions reinvested in DRIP) | | $ | 61,447 |
|
| Issuance of common stock for distributions | | 38,714 |
|
| Total distributions paid | | $ | 100,161 |
|
| | | |
|
| Reconciliation of net loss: | | |
|
| Revenues | | $ | 1,080,647 |
|
| Depreciation and amortization | | (172,303 | ) |
| Impairment of long lived Asset |
| $ | (2,399 | ) |
| Other operating expenses | | (774,758 | ) |
| Acquisition and transaction related | | (100,667 | ) |
| Other non-operating expenses | | (206,862 | ) |
| Income tax | | (5,068 | ) |
| Net loss (in accordance with GAAP) | | $ | (181,410 | ) |
| | | |
| 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.
Contractual Obligations
We have the following contractual obligations as of December 31, 2016:2017:
Debt Obligations:
The following is a summary of our mortgage notes payable obligations as of December 31, 20162017 (in thousands):
| | | | | Total | | 2017 | | 2018-2020 | | 2021 | | Thereafter | | Total | | 2018 | | 2019-2021 | | 2022 | | Thereafter |
| Principal payments due on mortgage notes payable | | $ | 1,418,913 |
| | $ | — |
| | $ | 1,418,913 |
| | $ | — |
| | $ | — |
| | $ | 1,513,000 |
| | $ | — |
| | $ | 288,000 |
| | $ | 1,225,000 |
| | $ | — |
|
| Interest payments due on mortgage notes payable | | 176,387 |
| | 59,133 |
| | 117,254 |
| | — |
| | — |
| | 277,248 |
| �� | 64,891 |
| | 189,399 |
| | 22,958 |
| | — |
|
| Total | | $ | 1,595,300 |
| | $ | 59,133 |
| | $ | 1,536,167 |
| | $ | — |
| | $ | — |
| | $ | 1,790,248 |
| | $ | 64,891 |
| | $ | 477,399 |
| | $ | 1,247,958 |
| | $ | — |
|
Mortgage notes payable due dates assume exercise of all borrower extension options.
The following is a summary of our promissory note payable obligations as of December 31, 20162017 (in thousands):
|
| | | | | | | | | | | | | | | | | | | | |
| | | 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 |
| | $ | — |
| | $ | — |
|
Promissory note payable due dates assume exercise of all borrower extension options.In January 2017, we entered into an amendment of the Pending Acquisition with Summit (the “Summit Amendment”). Concurrent with our entry into the Summit Amendment, we entered into an amendment to the Summit 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 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. If the closing of our purchase of the seven hotels under the Pending Acquisition occurs prior to February 11, 2018, then the outstanding principal of 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 loan under the Additional Loan Agreement (the “Additional Loan”) is July 31, 2017, however if the sale of the seven hotels to be 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 on the last day of May, June and July 2017. |
| | | | | | | | | | | | | | | | | | | | |
| | | Total | | 2018 | | 2019-2021 | | 2022 | | Thereafter |
| Principal payments due on promissory note payable | | $ | 1,000 |
| | $ | 1,000 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Interest payments due on promissory note payable | | — |
| | — |
| | — |
| | — |
| | — |
|
| Total | | $ | 1,000 |
| | $ | 1,000 |
| | $ | — |
| | $ | — |
| | $ | — |
|
The following is a summary of the Grace Preferred Equity Interests, our mandatorily redeemable preferred securities, as of December 31, 20162017 (in thousands):
| | | | | Total | | 2017 | | 2018-2020 | | 2021 | | Thereafter | | Total | | 2018 | | 2019-2021 | | 2022 | | Thereafter |
| Mandatory redemptions due on mandatorily redeemable preferred securities | | $ | 290,188 |
| | $ | — |
| | $ | 290,188 |
| | $ | — |
| | $ | — |
| | $ | 234,117 |
| | $ | 10,568 |
| | 223,549 (1) |
| | $ | — |
| | $ | — |
|
| Monthly distributions due on mandatorily redeemable preferred securities | | 44,589 |
| | 23,215 |
| | 21,374 |
| | — |
| | — |
| | 21,120 |
| | 16,863 |
| | 4,257 |
| | — |
| | — |
|
| Total | | $ | 334,777 |
| | $ | 23,215 |
| | $ | 311,562 |
| | $ | — |
| | $ | — |
| | $ | 255,237 |
| | $ | 27,431 |
| | $ | 4,257 |
| | $ | — |
| | $ | — |
|
(1) We are required to redeem this amount by February 27, 2019.
Class C Unit Obligations:
The following table reflects the cash distributions on the Class C Units due from us over the next five years and thereafter for our arrangements as of December 31, 2017 (in thousands):
|
| | | | | | | | | | | | | | | | | | | | |
| | | Total | | 2018 | | 2019-2021 | | 2022 | | Thereafter |
| Distributions on Class C Units | | $ | 50,178 |
| | $ | 10,869 |
| | $ | 36,128 |
| | $ | 3,181 |
| | $ | — |
|
The foregoing summary includes PIK Distributions associated with Class C Units issued at the Initial Closing but does not include the impact of Class C Units that were issued at the Second Closing or that may be issued at Subsequent Closings or their associated PIK Distributions.
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, 20162017 (in thousands):
|
| | | | | | | | | | | | | | | | | | | | |
| | | Total | | 2017 | | 2018-2020 | | 2021 | | Thereafter |
| Lease payments due | | $ | 107,867 |
| | $ | 5,144 |
| | $ | 15,709 |
| | $ | 5,271 |
| | $ | 81,743 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | | Total | | 2018 | | 2019-2021 | | 2022 | | Thereafter |
| Lease payments due | | $ | 102,655 |
| | $ | 5,149 |
| | $ | 15,763 |
| | $ | 5,292 |
| | $ | 76,451 |
|
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, 20162017 (in thousands):
|
| | | | | | | | | | | | | | | | | | | | |
| | | Total | | 2017 | | 2018-2020 | | 2021 | | Thereafter |
| PIP reserve deposits due | | $ | 34,134 |
| | $ | 24,128 |
| | $ | 10,006 |
| | $ | — |
| | $ | — |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | | Total | | 2018 | | 2019-2021 | | 2022 | | Thereafter |
| PIP reserve deposits due | | $ | 43,628 |
| | $ | 17,057 |
| | $ | 26,571 |
| | $ | — |
| | $ | — |
|
Election as a REIT
We elected and qualified 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. As 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. Each of our hotels is leased to a taxable REIT subsidiary which is owned by the OP. A taxable REIT subsidiary is subject to federal, state and local income taxes. If we fail to remain qualified 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 continue to operate so as to remain qualified as a REIT.
Inflation
We may be adversely impacted by increases in labor and other operating costs due to inflation that may not be offset by increased room rates.
Related Party Transactions and Agreements
See Note 1114 - Related Party Transactions and Arrangements to our consolidated/combinedconsolidated financial statements included in this report.
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 cap agreements, 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.
As of December 31, 2016,2017, we had not fixed the interest rate for $1.13$1.2 billion of our secured variable-rate debt. As a result, we are subject to the potential impact of rising 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 $1.13all $1.2 billion of our variable-rate debt. The estimated impact on our annual results of operations, of an increase of 100 basis points in interest rates, would be to increase annual interest expense by approximately $11.5$12.4 million. Decreasing interest rates by the lesser of 100 basis points or to the lowest possible rate, but to no lower than a zero percent variable rate, would decrease annual interest expense by $7.5approximately $12.4 million. The estimated impact assumes no changes in our capital structure. As the information presented above includes only those exposures that exist as of December 31, 2016,2017, it does not consider those exposures or positions that 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 Consolidated/CombinedConsolidated 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.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures 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 management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a - 15(e)-15(e) as of the end of the period covered by this report. Based upon this evaluation and as a result of the material weakness described below under “Management’s Report on Internal Control Over Financial Reporting,” our chief executive officer and chief financial officer concluded 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 thisManagement’s Annual Report on Form 10-K are fairly presented in all material respects in accordance with GAAP. Our chief executive officer and 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 single financial covenant included in a non-recourse carve-out guarantee entered into with respect to one of our mortgage loans might have been inconsistent with the terms of that guarantee. We have also determined that we were 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 US GAAP.
Management’s ReportReporting on Internal Control Overover 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 a process designeddefined in Rule 13a-15(f) or 15d-15(f) promulgated under the supervision of our chief executive officer and our chief financial officer to provide reasonable assurance regarding the reliability of financial reporting andExchange Act.
In connection with the preparation of our consolidated financial statements for external reporting purposes in accordance with GAAP.
Our 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 ofForm 10-K, 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 ofassessed the effectiveness of our internal control over financial reporting based onas of December 31, 2017. In making that assessment, management used the framework established in Internal Control - Integrated Framework issuedcriteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (1992). During this
Based on its assessment, and in connection with the preparationour management concluded that, as of this Annual Report on Form 10-K and the consolidated financial statements and related disclosures contained herein, management identified a material weakness inDecember 31, 2017, our internal control over financial reporting aswas effective.
The rules of December 31, 2016, as discussed in more detail below. A material weakness is a deficiency, or a combinationthe SEC do not require from us, and this annual report does not include, an attestation report of deficiencies, inour independent registered public accounting firm regarding internal control over financial reporting, such that 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.reporting.
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 has determined that, to the extent 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 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.
Management has determined that our internal control over financial reporting as of December 31, 2016 was not effective as a result of this material weakness.
Remediation of Material Weakness
Management has begun taking and intends to take a number of steps to remediate the underlying causes of the material weakness described above, including the following:
Evaluating the processes surrounding the monitoring and 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 additional 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 board 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 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
Other than with respect toDuring the material weakness identified above,fourth quarter of the fiscal year ended December 31, 2017, there were no changes in our internal control over financial reporting during(as defined in Rule 13a-15(f) and 15d-15(f) of the quarter ended December 31, 2016Exchange Act) 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.
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 is available on our website at www.HITREIT.com, and may also be obtained, free of charge, by sending a written request to our principal executive office at 3950 University Drive, Fairfax, VA 22030,450 Park Avenue, Suite 1400, New York, New York 10022, Attention: Chief Financial Officer.General Counsel.
The other information required by this Item is incorporated by reference to our definitive proxy statement to be filed with the SEC with respect to our 20172018 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 20172018 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 20172018 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 20172018 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 20172018 annual meeting of stockholders.
PART IV
Item 15. Exhibits and Financial Statement Schedules.
(a) Financial Statement Schedules
See the Index to Consolidated/CombinedConsolidated 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, 20162017 (and are numbered in accordance with Item 601 of Regulation S-K).
|
| | |
| Exhibit No. | | Description |
1.1(15)
| | Exclusive Dealer Manager Termination Agreement, dated as of December 31, 2015, among the Company, American Realty Capital Hospitality Advisors, LLC and Realty Capital Securities, LLC. |
3.1(2) | | Articles of Amendment and Restatement of Hospitality Investors Trust, Inc. |
3.2(18)(16) | | 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)(18) | | 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)(17) | | 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)(18) | | 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)(18) | | 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)(18) | | Amended and Restated Bylaws of Hospitality Investors Trust, Inc. |
4.1(20)(18) | | Amended and Restated Agreement of Limited Partnership of Hospitality Investors Trust Operating Partnership L.P., dated as of March 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)(12) | | Hospitality Investors Trust, Inc. Distribution Reinvestment Plan. |
4.3(20)(18) | | 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, Hospitality Investors Trust Operating Partnership, L.P. and American Realty Capital Hospitality Advisors, LLC. |
10.2(17) | | Form of Restricted Stock Award Agreement Pursuant to the Employee and Director Incentive Restricted Share Plan of the Company. |
10.3(1)
| | Form Operating Lease Agreement between the Company and the Company’s TRSs. |
10.410.3(5)
| | Loan Agreement dated as of March 21, 2014 between GERMAN AMERICAN CAPITAL CORPORATION, HIT BALTIMORE, LLC and HIT PROVIDENCE, LLC. |
10.510.4(5)
| | Guaranty of Recourse Obligations dated as of March 21, 2014 by HOSPITALITY INVESTORS TRUST OPERATING PARTNERSHIP, L.P., AR CAPITAL, LLC and certain individuals for the benefit of GERMAN AMERICAN CAPITAL CORPORATION. |
10.610.5(5)
| | Guaranty of Recourse Obligations dated as of April 8, 2014 by DANIEL A. HOFFLER, LOUIS S. HADDAD and HOSPITALITY INVESTORS TRUST, INC. for the benefit of GERMAN AMERICAN CAPITAL CORPORATION. |
10.710.6(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, HOSPITALITY INVESTORS TRUST, INC., HAMPTON W COMPANY, LLC, HAMPTON UNIVERSITY, LEGACY HOSPITALITY, LLC, and VB CITY HOTELS LLC. |
|
| | |
| Exhibit No. | | Description |
10.810.7(6)
| | Amended and Restated Real Estate Sale Agreement, dated November 11, 2014, by and among American Realty Capital Hospitality Portfolio Member, LLC, HIT Portfolio I Owner, LLC, ARC Hospitality Portfolio I TFGL Owner, LLC, HIT Portfolio I BHGL Owner, LLC, HIT Portfolio I PXGL Owner, LLC, HIT Portfolio I GBGL Owner, LLC, HIT Portfolio I NFGL Owner, LLC, HIT Portfolio I MBGL 1000 Owner, LLC, HIT Portfolio I MBGL 950 Owner, LLC, HIT Portfolio I NTC Owner, LP, HIT Portfolio I DLGL Owner, LP, HIT Portfolio I SAGL Owner, LP, HIT Portfolio II Owner, LLC, HIT 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. |
10.910.8(7)
| | Indemnification Agreement between 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 Hospitality Investors Trust, Inc., American Realty Capital Hospitality Advisors, LLC, AR Capital, LLC and RCS Capital Corporation, dated as of December 31, 2014. |
10.10(7)
| | Amended and Restated Limited Liability Company Agreement of HIT Portfolio I Holdco, LLC dated February 27, 2015. |
10.1110.9(7)
| | Amended and Restated Limited Liability Company Agreement of HIT Portfolio II Holdco, LLC dated February 27, 2015. |
10.1210.10(*)(24)
| | 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, HIT 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, HOSPITALITY INVESTORS TRUST OPERATING PARTNERSHIP, L.P., and HOSPITALITY INVESTORS TRUST, INC. |
10.14(15)
| | Guaranty 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. |
10.15(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., HIT PORTFOLIO I OWNER, LLC, HIT PORTFOLIO I BHGL OWNER, LLC, HIT PORTFOLIO I PXGL OWNER, LLC, HIT PORTFOLIO I GBGL OWNER, LLC, HIT PORTFOLIO I NFGL OWNER, LLC, HIT PORTFOLIO I MBGL 1000 OWNER, LLC, HIT PORTFOLIO I MBGL 950 OWNER, LLC, HIT PORTFOLIO I NTC OWNER, LP, HIT PORTFOLIO I DLGL OWNER, LP, HIT 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, HOSPITALITY INVESTORS TRUST OPERATING PARTNERSHIP, L.P., a Delaware limited partnership and HOSPITALITY INVESTORS TRUST, INC. |
10.18(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 |
|
| | |
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 Hospitality Investors Trust Operating Partnership, L.P., 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. |
10.22(7)
| | Payment Guaranty Agreement dated as of February 27, 2015 by 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. |
10.2310.11(7)
| | Guaranty (Pool I) dated as of February 27, 2015 by HOSPITALITY INVESTORS TRUST OPERATING PARTNERSHIP, L.P., 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. |
10.2410.12(7)
| | Guaranty (Pool II) dated as of February 27, 2015, by HOSPITALITY INVESTORS TRUST OPERATING PARTNERSHIP, L.P., 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. |
10.2510.13(7)
| | Environmental Indemnity Agreement (Pool I) dated as of February 27, 2015 by HOSPITALITY INVESTORS TRUST OPERATING PARTNERSHIP, L.P., 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. |
10.2610.14(7)
| | Environmental Indemnity Agreement (Pool II) dated as of February 27, 2015, by HOSPITALITY INVESTORS TRUST OPERATING PARTNERSHIP, L.P., 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. |
10.2710.15(7)
| | Mandatory Redemption Guaranty (Pool I) dated as of February 27, 2015 by HOSPITALITY INVESTORS TRUST OPERATING PARTNERSHIP, L.P., 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. |
10.2810.16(7)
| | Mandatory Redemption Guaranty (Pool II) dated as of February 27, 2015, by HOSPITALITY INVESTORS TRUST OPERATING PARTNERSHIP, L.P., 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. |
10.2910.17(15)(14)
| | 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. |
10.3010.18(15)(14)
| | 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. |
10.3210.19(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. |
10.3310.20(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. |
10.3410.21(8)(9)
| | Form ofLetter Agreement, of Purchase and Sale, dated JuneJuly 15, 2015, by and among SUMMIT HOTEL OP, LP and 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,SMT, LLC. |
|
| | |
| Exhibit No. | | Description |
10.3610.22(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. |
10.3810.23(10)
| | Loan Agreement, dated as of October 6, 2015, among the borrower entities party thereto, Ladder Capital Finance LLC and German American Capital Corporation. |
10.3910.24(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. |
10.4010.25(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. |
10.4110.26(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. |
10.4810.27(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)(11)
| | Letter Agreement, dated August 21, 2015, by and among SUMMIT HOTEL OP, LP and certain related sellers and HIT PORTFOLIO SMT, LLC. |
10.5010.28(12)(11)
| | Letter Agreement, dated August 21, 2015, by and among SUMMIT HOTEL OP, LP and certain related sellers and HIT PORTFOLIO SMT, LLC. |
10.5110.29(12)(11)
| | Letter Agreement, dated October 15, 2015, by and among SUMMIT HOTEL OP, LP and certain related sellers and HIT PORTFOLIO SMT, LLC. |
10.5210.30(12)(11)
| | Letter Agreement, dated October 20, 2015, by and among SUMMIT HOTEL OP, LP and certain related sellers and HIT PORTFOLIO SMT, LLC. |
10.5310.31(12)(11)
| | 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. |
10.5410.32(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)(13)
| | Letter Agreement, dated February 11, 2016, by and among Summit Hotel OP, LP and certain related sellers and American Realty Capital Hospitality PortfolioHIT PORTFOLIO SMT ALT, LLC. |
10.56(14)
| | Amendment No. 1 dated as of February 11, 2016, to the 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. |
10.5710.33(3)
| | Form of Management Agreement by and between Taxable REIT Subsidiary and American Realty Capital Hospitality Properties, LLC. (Crestline form). |
|
| | |
Exhibit No. | | Description |
10.5810.34(15)(14)
| | Form of Management Agreement by and between Taxable REIT Subsidiary and American Realty Capital Hospitality Grace Portfolio, LLC (Hilton Form). |
10.5910.35(15)(14)
| | Form of Management Agreement by and between Taxable REIT Subsidiary and American Realty Capital Hospitality Grace Portfolio, LLC (McKibbon Form). |
10.6010.36(15)(14)
| | 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). |
10.6210.37(3)
| | Form of Sub-Property Management Agreement among American Realty Capital Hospitality Properties, LLC and Crestline Hotels & Resorts, LLC. |
10.6310.38(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)(14)
| | 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. |
10.7210.39(19)(17)
| | 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. |
10.7310.40(19)(17)
| | 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. |
10.7410.41(19)(17)
| | Letter Agreement, dated as of January 12, 2017, by and among Summit Hotel OP, LP and certain related sellers and American Realty Capital Hospitality PortfolioHIT PORTFOLIO SMT ALT, LLC. |
10.7510.42(19)(17)
| | 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. |
10.7610.43(19)(17)
| | Loan Agreement, dated as of January 12, 2017, between Hospitality Investors Trust, Inc. as Borrower and Summit Hotel OP, LP, as Lender. |
10.7710.44(20)(18)
| | 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. |
|
| | |
| Exhibit No. | | Description |
10.7810.45(20)(18)
| | 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. |
10.7910.46(20)(18)
| | 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. |
10.8010.47(20)(18)
| | 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 |
10.8110.48(20)(18)
| | 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. |
10.8210.49(20)(18)
| | 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. |
10.8310.50(20)(18)
| | 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. |
10.8410.51(20)(18)
| | 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. |
10.8510.52(20)(18)
| | 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. |
10.8610.53(20)(18)
| | 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. |
10.8710.54(20)(18)
| | 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. |
10.8810.55(20)(18)
| | 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. |
10.8910.56(20)(18)
| | 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. |
10.9010.57(20)(18)
| | 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. |
10.9110.58(20)(18)
| | 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. |
10.9210.59(20)(18)
| | 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. |
10.9310.60(20)(18)
| | 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. |
10.9410.61(20)(18)
| | 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. |
10.9510.62(20)(18)
| | 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 |
10.10010.63(20)(18)
| | Amended and Restated Employee and Director Incentive Restricted Share Plan of Hospitality Investors Trust, Inc. |
10.64(18) | | Employment Agreement, dated as of March 31, 2017, by and between Jonathan P. Mehlman and Hospitality Investors Trust, Inc. |
10.65(18) | | Employment Agreement, dated as of March 31, 2017, by and between Edward Hoganson and Hospitality Investors Trust, Inc. |
10.66(18) | | Employment Agreement, dated as of March 31, 2017, by and between Paul C. Hughes and Hospitality Investors Trust, Inc. |
10.10110.67(20)(18)
| | 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 |
10.10210.68(20)(18)
| | Form of Indemnification Agreement. |
10.69(19) | | Mortgage Loan Agreement, dated as of April 28, 2017, by and among the Entities Listed on Schedule 1-A thereto, collectively, as borrower, and the Entities Listed on Schedule 1-B thereto, collectively, as operating lessee and Deutsche Bank AG, New York Branch, Citigroup Global Markets Realty Corp., and JPMorgan Chase Bank, National Association, collectively, as lender. |
10.70(19) | | Mezzanine Loan Agreement, dated as of April 28, 2017, by and among the Entities Listed on Schedule 1-A thereto, collectively, as borrower, and the Entities Listed on Schedule 1-B thereto, collectively, as operating lessee and Deutsche Bank AG, New York Branch, Citigroup Global Markets Realty Corp., and JPMorgan Chase Bank, National Association, collectively, as lender. |
10.71(19) | | Second Amended and Restated Term Loan Agreement, dated as of April 27, 2017, by and among the Borrowers Party thereto, as borrowers, Hospitality Investors Trust, Inc. and Hospitality Investors Trust Operating Partnership, L.P., as guarantors, the Initial Lenders named therein, as initial lenders, and Citibank, N.A., as administrative agent and as collateral agent, with Citigroup Global Markets Inc. and Deutsche Bank Securities Inc., as joint lead arrangers and joint book running managers. |
10.72(19) | | Guaranty of Recourse Obligations by Hospitality Investors Trust Operating Partnership, LP and Hospitality Investors Trust, Inc. to and for the benefit of Deutsche Bank AG, New York Branch, Citigroup Global Markets Realty Corp. and JPMorgan Chase Bank, National Association, dated as of April 28, 2017. |
10.73(19) | | Guaranty of Recourse Obligations by Hospitality Investors Trust Operating Partnership, LP and Hospitality Investors Trust, Inc. to and for the benefit of Deutsche Bank AG, New York Branch, Citigroup Global Markets Realty Corp. and JPMorgan Chase Bank, National Association, dated as of April 28, 2017. |
10.74(19) | | Environmental Indemnity Agreement, dated as of April 28, 2017, on behalf of Hospitality Investors Trust, Inc., Hospitality Investors Trust Operating Partnership, L.P. and the Entities Listed on Schedule I, as indemnitors, in favor of Deutsche Bank AG, New York Branch, Citigroup Global Markets Realty Corp. and JPMorgan Chase Bank, National Association, as indemnitee. |
10.75(19) | | Environmental Indemnity Agreement, dated as of April 28, 2017, on behalf of Hospitality Investors Trust, Inc., Hospitality Investors Trust Operating Partnership, L.P. and the Entities Listed on Schedule I, as indemnitors, in favor of Deutsche Bank AG, New York Branch, Citigroup Global Markets Realty Corp. and JPMorgan Chase Bank, National Association, as indemnitee. |
10.76(20) | | Second Amended and Restated Limited Liability Company Agreement of HIT Portfolio I Holdco, LLC, dated as of April 28, 2017. |
10.77(21) | | First Amendment to Loan Agreement dated as of May 17, 2017 by and among the Entities Listed on Schedule 1-A thereto, collectively, as borrower, and the Entities Listed on Schedule 1-B thereto, collectively, as operating lessee and Deutsche Bank AG, New York Branch, Citigroup Global Markets Realty Corp., and JPMorgan Chase Bank, National Association, collectively, as lender |
10.78(21) | | Note Consolidation and Splitter and Loan Modification Agreement dated as of May 24, 2017 by and among HIT Portfolio I Mezz, LP, as borrower, HIT Portfolio I TRS Holdco, as leasehold pledgor, and Deutsche Bank AG, New York Branch, Citigroup Global Markets Realty Corp., and JPMorgan Chase Bank, National Association, collectively, as lender |
10.79(21) | | Amendment No. 1 to Second Amended and Restated Term Loan Agreement dated as of June 29, 2017 by and among the Borrowers Party thereto, as borrowers, Hospitality Investors Trust, Inc. and Hospitality Investors Trust Operating Partnership, L.P., as guarantors, and Citibank, N.A., as administrative agent and as collateral agent |
10.80(21) | | First Amendment to Amended and Restated Agreement of Limited Partnership of Hospitality Investors Trust Operating Partnership, L.P. dated as of July 10, 2017, by Hospitality Investors Trust, Inc., as general partner |
10.81(21) | | Form of Restricted Share Unit Award Agreement (Non-Employee Directors) |
10.82(21) | | Form of Restricted Share Award Agreement (Non-Employee Directors) |
|
| | |
| Exhibit No. | | Description |
10.83(22) | | Second Amendment to Amended and Restated Agreement of Limited Partnership of Hospitality Investors Trust Operating Partnership, L.P. dated as of September 29, 2017, by Hospitality Investors Trust, Inc., as general partner |
10.84(22) | | Amendment to Employment Agreement, dated as of August 10, 2017, by and between Jonathan P. Mehlman and Hospitality Investors Trust, Inc. |
10.85(22) | | Amendment to Employment Agreement, dated as of August 10, 2017, by and between Edward T. Hoganson and Hospitality Investors Trust, Inc. |
10.86(22) | | Amendment to Employment Agreement, dated as of August 10, 2017, by and between Paul C. Hughes and Hospitality Investors Trust, Inc. |
10.87(23) | | Form of Restricted Share Unit Award Agreement (officers) |
10.88(*) | | |
21.1(*) | | |
23.1(*) | | |
31.1(*) | | |
31.2(*) | | |
32(*) | | |
99.1(16)(15) | | Amended and Restated Share Repurchase Program effective as of February 28, 2016 |
101(*) | | XBRL (eXtensible Business Reporting Language). The following materials from Hospitality Investors Trust, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2016,2017, 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. 2 to the Company's Registration Statement on Form S-11/A with the SEC on November 14, 2013. |
| |
| 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 10-K filed with the SEC on March 31, 2015. |
| |
| 8. | Filed 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 the 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. |
| |
13.12. | Filed as Appendix A to the Company's Registration Statement on Form S-3 filed with the SEC on January 4, 2016. |
| |
14.13. | Filed as an exhibit to the Company’s Current Report on Form 8-K filed with the SEC on February 16, 2016. |
| |
15.14. | Filed as an exhibit to the Company’s Form 10-K filed with the SEC on March 28, 2016. |
| |
16.15. | 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. |
| |
18.16. | Filed as an exhibit to the Company's Form 10-Q filed with the SEC on November 10, 2016. |
| |
| 17. | Filed as an exhibit to the Company’s Current Report on Form 8-K filed with the SEC on January 13, 2017. |
| |
| 18. | Filed as an exhibit to the Company’s Current Report on Form 8-K filed with the SEC on March 31, 2017. |
| |
| 19. | Filed as an exhibit to the Company’s Current Report on Form 8-K filed with the SEC on January 13,May 3, 2017. |
| |
| 20. | Filed as an exhibit to the Company’s Current ReportForm 10-Q filed with the SEC on May 15, 2017. |
| |
| 21. | Filed as an exhibit to the Company’s Form 8-K10-Q filed with the SEC on August 10, 2017. |
| |
| 22. | Filed as an exhibit to the Company’s Schedule 10-Q filed with the SEC on October 25, 2017. |
| |
| 23. | Filed as an exhibit to the Company’s Form 10-Q filed with the SEC on November 13, 2017. |
| |
| 24. | Filed as an exhibit to the Company’s Form 10-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 day of March 31, 2017.27, 2018.
|
| | |
| | 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, President and PresidentDirector (Principal Executive Officer) | | March 31, 201727, 2018 |
| Jonathan P. Mehlman | | | |
| | | | | |
| /s/ Edward T. Hoganson | | Chief Financial Officer and Treasurer (Principal Financial Officer and Principal Accounting Officer) | | March 31, 201727, 2018 |
| Edward T. Hoganson | | | |
| | | | | |
| /s/ Bruce G. Wiles | | Chairman of the Board of Directors | | March 27, 2018 |
| Bruce G. Wiles | | | |
| | | | |
| /s/ Lowell G. Baron | | Director | | March 27, 2018 |
| Lowell G. Baron | | | | |
| | | | | |
| /s/ Stanley R. Perla | | Lead Independent Director | | March 31, 201727, 2018 |
| Stanley R. Perla | | | | |
| | | | | |
| /s/ Abby M. Wenzel | | Independent Director | | March 31, 201727, 2018 |
| Abby M. Wenzel | | | | |
| | | | | |
| /s/ Edward A. Glickman | | Independent Director | | March 27, 2018 |
| Edward A. Glickman | | | | |
Lowell G. Baron | | | | |
| /s/ Stephen P. Joyce | | Independent Director | | March 27, 2018 |
| Stephen P. Joyce | | | | |
| | | | |
HOSPITALITY INVESTORS TRUST, INC.
INDEX TO FINANCIAL STATEMENTS
|
| | |
| Hospitality Investors Trust, Inc. | | |
Audited Consolidated/CombinedConsolidated Financial Statements: | | |
| | |
Consolidated Balance Sheets as of December 31, 2017 and December 31, 2016
| | |
Consolidated Statements of Operations and Comprehensive Loss for the Years Ended December 2017, December 31, 2016 and December 31, 2015
| | |
Consolidated/Combined Statements of Operations and Comprehensive Loss of the Successor for the Years Ended December 31, 2016 and December 31, 2015 and for the Period from March 21 to December 31, 2014, and of the Predecessor for the Period from January 1 to March 20, 2014
| | |
| | |
Consolidated/CombinedConsolidated Statements of Cash Flows of the Successor for the Years Ended December 31, 2017, December 31, 2016 and December 31, 2015 and from March 21 to December 31, 2014, and of the Predecessor for the Period from January 1 to March 20, 2014
| | |
| | |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TheTo the Stockholders and Board of Directors and Stockholders
Hospitality Investors Trust, Inc.:
Opinion on theConsolidatedFinancial Statements
We have audited the accompanying consolidated balance sheets as of December 31, 2016 and December 31, 2015 of Hospitality Investors Trust, Inc. and subsidiaries (formerly American Realty Capital Hospitality Trust, Inc.)(the Company) as of December 31, 2017 and 2016, the related consolidated statements of operations and comprehensive income (loss),loss, changes in equity, and cash flows for each of the years in the three‑year period ended December 31, 2016 and 20152017, and the period from March 21, 2014 to December 31, 2014 (successor)related notes 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 (predecessor). In connection with the audits of the consolidated and combined financial statements, we have also audited the financial statement schedule III. III - Real Estate and Accumulated Depreciation (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the years in the three‑year period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
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 are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the auditsaudit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. Anmisstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit includesof its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the consolidated financial statements. An auditOur audits also includes assessingincluded evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statement presentation.statements. We believe that our audits provide a reasonable basis for our opinion.
In our opinion,We have served as the consolidated and combined financial statements referred to above present fairly, in all material respects, the financial position of Hospitality Investors Trust, Inc. and subsidiaries as of December 31, 2016 and 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 (predecessor) in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, with all material respects, the information set forth therein.
Company’s auditor since 2014.
/s/ KPMG LLP
McLean, Virginia
March 31, 201727, 2018
HOSPITALITY INVESTORS TRUST, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except for share and per share data)
| | | | December 31, 2016 | | December 31, 2015 | December 31, 2017 | | December 31, 2016 |
| ASSETS | | | | | | |
| Real estate investments: | | | | | | |
| Land | $ | 339,819 |
| | $ | 317,871 |
| $ | 341,651 |
| | $ | 339,819 |
|
| Buildings and improvements | 1,838,594 |
| | 1,729,960 |
| 1,921,396 |
| | 1,838,594 |
|
| Furniture, fixtures and equipment | 212,994 |
| | 163,516 |
| 226,242 |
| | 212,994 |
|
| Total real estate investments | 2,391,407 |
| | 2,211,347 |
| 2,489,289 |
| | 2,391,407 |
|
| Less: accumulated depreciation and amortization | (169,486 | ) | | (70,648 | ) | (257,592 | ) | | (169,486 | ) |
| Total real estate investments, net | 2,221,921 |
| | 2,140,699 |
| 2,231,697 |
| | 2,221,921 |
|
| Assets held for sale | | 5,586 |
| | — |
|
| Cash and cash equivalents | 42,787 |
| | 46,829 |
| 55,736 |
| | 42,787 |
|
| Acquisition deposits | 7,500 |
| | 40,504 |
| — |
| | 7,500 |
|
| Restricted cash | 35,050 |
| | 71,288 |
| 63,444 |
| | 35,050 |
|
| Investments in unconsolidated entities | 3,490 |
| | 3,458 |
| 3,649 |
| | 3,490 |
|
| Below-market lease asset, net | 9,827 |
| | 10,225 |
| 9,428 |
| | 9,827 |
|
| Prepaid expenses and other assets | 32,836 |
| | 34,836 |
| 36,705 |
| | 32,836 |
|
| Goodwill | | 14,408 |
| | — |
|
| Total Assets | $ | 2,353,411 |
| | $ | 2,347,839 |
| $ | 2,420,653 |
| | $ | 2,353,411 |
|
| | | | | | | |
| LIABILITIES, NON-CONTROLLING INTEREST AND EQUITY | | | | | | |
| Mortgage notes payable, net | $ | 1,410,925 |
| | $ | 1,341,033 |
| $ | 1,495,777 |
| | $ | 1,410,925 |
|
| Promissory notes payable, net | 23,380 |
| | — |
| 1,000 |
| | 23,380 |
|
| Mandatorily redeemable preferred securities, net | 288,265 |
| | 291,796 |
| 233,058 |
| | 288,265 |
|
| Accounts payable and accrued expenses | 68,519 |
| | 67,255 |
| 67,452 |
| | 68,519 |
|
| Due to Related Parties | 2,879 |
| | 6,546 |
| |
| Due to related parties | | — |
| | 2,879 |
|
| Total Liabilities | $ | 1,793,968 |
| | $ | 1,706,630 |
| $ | 1,797,287 |
| | $ | 1,793,968 |
|
| 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, 38,493,430 and 36,300,777 shares issued and outstanding as of December 31, 2016, and December 31, 2015, respectively | 385 |
| | 363 |
| |
| | | | | |
| Commitments and Contingencies | |
| |
|
| Contingently Redeemable Class C Units in operating partnership; 9,507,892 units issued and outstanding ($140,241 liquidation preference) | | 128,044 |
| | — |
|
| | | | | |
| Stockholders' Equity | | | | |
| Preferred stock, $0.01 par value, 50,000,000 shares authorized, one and zero shares issued and outstanding, respectively | | — |
| | — |
|
| Common stock, $0.01 par value, 300,000,000 shares authorized, 39,505,742 and 38,493,430 shares issued and outstanding, respectively | | 395 |
| | 385 |
|
| Additional paid-in capital | 843,149 |
| | 793,786 |
| 871,840 |
| | 843,149 |
|
| Deficit | (286,852 | ) | | (155,680 | ) | (379,559 | ) | | (286,852 | ) |
| Total equity of Hospitality Investors Trust, Inc. stockholders | 556,682 |
| | 638,469 |
| 492,676 |
| | 556,682 |
|
| Non-controlling interest - consolidated variable interest entity | 2,761 |
| | $ | 2,740 |
| 2,646 |
| | $ | 2,761 |
|
| Total Equity | $ | 559,443 |
| | $ | 641,209 |
| |
| Total Liabilities, Non-controlling Interest and Equity | $ | 2,353,411 |
| | $ | 2,347,839 |
| |
| Total Stockholders' Equity | | $ | 495,322 |
| | $ | 559,443 |
|
| Total Liabilities, Contingently Redeemable Class C Units, and Stockholders' Equity | | $ | 2,420,653 |
| | $ | 2,353,411 |
|
The accompanying notes are an integral part of these statements.
HOSPITALITY INVESTORS TRUST, INC.
CONSOLIDATED/COMBINED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except for share and per share data)
|
| | | | | | | | | | | | | | | | |
| | 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 |
| Revenues | | | | | | | | |
| Rooms | $ | 566,633 |
| | $ | 420,617 |
| | $ | 26,163 |
| | | $ | 6,026 |
|
| Food and beverage | 20,039 |
| | 15,908 |
| | 5,612 |
| | | 1,543 |
|
| Other | 12,920 |
| | 9,659 |
| | 3,096 |
| | | 676 |
|
| Total revenue | $ | 599,592 |
| | $ | 446,184 |
| | $ | 34,871 |
| | | $ | 8,245 |
|
| Operating expenses | | | | | | | | |
| Rooms | 139,169 |
| | 99,543 |
| | 5,411 |
| | | 1,405 |
|
| Food and beverage | 15,986 |
| | 12,774 |
| | 3,785 |
| | | 1,042 |
|
| Management fees | 42,560 |
| | 22,107 |
| | 1,498 |
| | | 289 |
|
| Other property-level operating expenses | 230,546 |
| | 171,488 |
| | 13,049 |
| | | 3,490 |
|
| Depreciation and amortization | 101,007 |
| | 68,500 |
| | 2,796 |
| | | 994 |
|
| Impairment of real estate investments | 2,399 |
| | — |
| | — |
| | | — |
|
| Rent | 6,714 |
| | 6,249 |
| | 3,879 |
| | | 933 |
|
| Total operating expenses | $ | 538,381 |
| | $ | 380,661 |
| | $ | 30,418 |
| | | $ | 8,153 |
|
| Income from operations | $ | 61,211 |
| | $ | 65,523 |
| | $ | 4,453 |
| | | $ | 92 |
|
| Interest expense | (92,264 | ) | | (80,667 | ) | | (5,958 | ) | | | (531 | ) |
| Acquisition and transaction related costs | (25,270 | ) | | (64,513 | ) | | (10,884 | ) | | | — |
|
| Other income (expense) | 1,169 |
| | (491 | ) | | 103 |
| | | — |
|
| Equity in earnings (losses) of unconsolidated entities | 399 |
| | 238 |
| | 352 |
| | | (166 | ) |
| General and administrative | (15,806 | ) | | (11,621 | ) | | (2,316 | ) | | | — |
|
| 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 | 1,371 |
| | 3,106 |
| | 591 |
| | | — |
|
| 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 | $ | (1.86 | ) | | $ | (3.61 | ) | | $ | (3.04 | ) | | | N/A |
| Basic and diluted weighted average shares outstanding | 38,732,949 |
| | 26,247,563 |
| | 4,874,229 |
| | | N/A |
NA - not applicable
The accompanying notes are an integral part of these statements.
HOSPITALITY INVESTORS TRUST, INC.
CONSOLIDATED/COMBINED STATEMENT CONSOLIDATED STATEMENTSOF CHANGES IN EQUITYOPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except for share and per 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 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 |
|
|
| | | | | | | | | | | |
| | Year Ended December 31, 2017 | | Year Ended December 31, 2016 | | Year Ended December 31, 2015 |
| Revenues | | | | | |
| Rooms | $ | 588,308 |
| | $ | 566,633 |
| | $ | 420,617 |
|
| Food and beverage | 19,811 |
| | 20,039 |
| | 15,908 |
|
| Other | 12,956 |
| | 12,920 |
| | 9,659 |
|
| Total revenue | $ | 621,075 |
| | $ | 599,592 |
| | $ | 446,184 |
|
| Operating expenses | | | | | |
| Rooms | 147,814 |
| | 139,169 |
| | 99,543 |
|
| Food and beverage | 16,158 |
| | 15,986 |
| | 12,774 |
|
| Management fees | 23,643 |
| | 42,560 |
| | 22,107 |
|
| Other property-level operating expenses | 242,925 |
| | 230,546 |
| | 171,488 |
|
| Acquisition and transaction related costs | 498 |
| | 25,270 |
| | 64,513 |
|
| General and administrative | 18,889 |
| | 15,806 |
| | 11,621 |
|
| Depreciation and amortization | 105,237 |
| | 101,007 |
| | 68,500 |
|
| Impairment of goodwill and long-lived assets | 32,689 |
| | 2,399 |
| | — |
|
| Rent | 6,569 |
| | 6,714 |
| | 6,249 |
|
| Total operating expenses | $ | 594,422 |
| | $ | 579,457 |
| | $ | 456,795 |
|
| Operating income (loss) | $ | 26,653 |
| | $ | 20,135 |
| | $ | (10,611 | ) |
| Interest expense | (98,865 | ) | | (92,264 | ) | | (80,667 | ) |
| Other income (expense) | (1,260 | ) | | 1,169 |
| | (491 | ) |
| Equity in earnings of unconsolidated entities | 403 |
| | 399 |
| | 238 |
|
| Total other expenses, net | (99,722 | ) | | (90,696 | ) | | (80,920 | ) |
| Loss before taxes | $ | (73,069 | ) | | $ | (70,561 | ) | | $ | (91,531 | ) |
| Income tax (benefit) expense | (1,926 | ) | | 1,371 |
| | 3,106 |
|
| Net loss and comprehensive loss | $ | (71,143 | ) | | $ | (71,932 | ) | | $ | (94,637 | ) |
| Less: Net income attributable to non-controlling interest | 244 |
| | 315 |
| | 189 |
|
| Net loss before dividends and accretion | $ | (71,387 | ) | | $ | (72,247 | ) | | $ | (94,826 | ) |
| Deemed dividend related to beneficial conversion feature of Class C Units | (4,535 | ) | | — |
| | — |
|
| Dividends on Class C Units (cash and PIK) | (13,103 | ) | | — |
| | — |
|
| Accretion of Class C Units | (1,668 | ) | | — |
| | — |
|
| Net loss attributable to common stockholders | (90,693 | ) | | (72,247 | ) | | (94,826 | ) |
| | | | | | |
| Basic and diluted net loss attributable to common stockholders per common share | $ | (2.30 | ) | | $ | (1.86 | ) | | $ | (3.61 | ) |
| | | | | | |
| Basic and diluted weighted average common shares outstanding | 39,411,677 |
| | 38,732,949 |
| | 26,247,563 |
|
The accompanying notes are an integral part of these statements.
HOSPITALITY INVESTORS TRUST, INC.
CONSOLIDATED/COMBINED STATEMENTS OF CASH FLOWS
(In thousands)
|
| | | | | | | | | | | | | | | | | |
| | | 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 | ) | | — |
| | | — |
|
HOSPITALITY INVESTORS TRUST, INC.
CONSOLIDATED/COMBINED STATEMENTSCONSOLIDATED STATEMENT OF CASH FLOWSCHANGES IN EQUITY
(In thousands)
thousands, except for share data)
|
| | | | | | | | | | | | | | | | | |
| 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 |
|
|
| | | | | | | | | | | | | | | | | | |
| | | | | 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 |
| | | — |
| |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | | | | | | | | | |
| | Number of
Shares | | Par Value | | Additional Paid-in Capital | | Deficit | | Total Equity of Hospitality Investors Trust, Inc. Stockholders | | Non-controlling Interest | | Total Non-controlling Interest and Equity |
| 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 |
|
| 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 |
|
| Issuance of common stock, net | 1,125,403 |
| | 11 |
| | 18,597 |
| | — |
| | 18,608 |
| | — |
| | 18,608 |
|
HOSPITALITY INVESTORS TRUST, INC.
CONSOLIDATED/COMBINED STATEMENTS OF CASH FLOWS(In thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Repurchase and retirement of common stock | (113,091 | ) | | (1 | ) | | (762 | ) | | — |
| | (763 | ) | | — |
| | (763 | ) |
Net loss before dividends and accretion
| — |
| | — |
| | — |
| | (71,387 | ) | | (71,387 | ) | | — |
| | (71,387 | ) |
Net income attributable to non-controlling interest
| — |
| | — |
| | — |
| | — |
| | — |
| | 244 |
| | 244 |
|
| Dividends paid or declared | — |
| | — |
| | — |
| | (2,014 | ) | | (2,014 | ) | | (359 | ) | | (2,373 | ) |
| Deemed dividend related to beneficial conversion feature of Class C Units | — |
| | — |
| | 4,535 |
| | (4,535 | ) | | — |
| | — |
| | — |
|
| Cash distributions on Class C Units | — |
| | — |
| | — |
| | (7,862 | ) | | (7,862 | ) | | — |
| | (7,862 | ) |
| Accretion on Class C Units | — |
| | — |
| | — |
| | (1,668 | ) | | (1,668 | ) | | — |
| | (1,668 | ) |
| PIK distributions on Class C Units | — |
| | — |
| | — |
| | (5,241 | ) | | (5,241 | ) | | — |
| | (5,241 | ) |
| Share-based payments | — |
| | — |
| | 499 |
| | — |
| | 499 |
| | — |
| | 499 |
|
| Waiver of obligation from Former Advisor | — |
| | — |
| | 5,822 |
| | — |
| | 5,822 |
| | — |
| | 5,822 |
|
| Balance, December 31, 2017 | 39,505,742 |
| | $ | 395 |
| | $ | 871,840 |
| | $ | (379,559 | ) | | $ | 492,676 |
| | $ | 2,646 |
| | $ | 495,322 |
|
The accompanying notes are an integral part of these statements.
HOSPITALITY INVESTORS TRUST, INC.
CONSOLIDATEDSTATEMENTS OF CASH FLOWS
(In thousands)
|
| | | | | | | | | | | | |
| | | Year Ended December 31, 2017 | | Year Ended December 31, 2016 | | Year Ended December 31, 2015 |
| Cash flows from operating activities: | | | | | | |
| Net loss | | $ | (71,143 | ) | | $ | (71,932 | ) | | $ | (94,637 | ) |
| Adjustments to reconcile net loss to net cash provided by operating activities: | | | | | | |
| Depreciation and amortization | | 105,237 |
| | 101,007 |
| | 68,500 |
|
| Impairment of goodwill and long-lived assets | | 32,689 |
| | 2,399 |
| | — |
|
| Amortization and write-off of deferred financing costs | | 11,339 |
| | 9,547 |
| | 11,161 |
|
| Loss of acquisition deposits | | — |
| | 22,000 |
| | — |
|
| Other adjustments, net | | 2,065 |
| | (721 | ) | | 1,548 |
|
| Changes in assets and liabilities: | | | | | |
|
| Prepaid expenses and other assets | | (2,348 | ) | | 2,982 |
| | (15,175 | ) |
| Restricted cash | | 1,320 |
| | (389 | ) | | (11,602 | ) |
| Due to related parties | | (2,879 | ) | | (3,399 | ) | | 1,259 |
|
| Accounts payable and accrued expenses | | 5,252 |
| | 6,352 |
| | 45,453 |
|
| Net cash provided by operating activities | | $ | 81,532 |
| | $ | 67,846 |
| | $ | 6,507 |
|
| | | | | | | |
| Cash flows from investing activities: | | | | | | |
| Acquisition of hotel assets, net of cash received | | (60,043 | ) | | (69,892 | ) | | (629,760 | ) |
| Proceeds from sales of hotels, net | | 11,525 |
| | 12,710 |
| | — |
|
| Real estate investment improvements and purchases of property and equipment | | (78,935 | ) | | (91,311 | ) | | (46,523 | ) |
| Fees related to Property Management Transactions | | (13,000 | ) | | — |
| | — |
|
| Acquisition deposits | | — |
| | — |
| | (40,504 | ) |
| Change in restricted cash related to real estate improvements | | (29,714 | ) | | 36,627 |
| | (55,259 | ) |
| Other adjustments, net | | (581 | ) | | $ | — |
| | $ | — |
|
| Net cash used in investing activities | | $ | (170,748 | ) | | $ | (111,866 | ) | | $ | (772,046 | ) |
| | | | | | | |
| Cash flows from financing activities: | | | | | | |
| Proceeds from issuance of common stock, net | | — |
| | 678 |
| | 631,698 |
|
| Repurchase of Common Shares | | (763 | ) | | — |
| | — |
|
| Proceeds from Class C Units | | 135,000 |
| | — |
| | — |
|
| Payment of Class C Units issuance costs | | (13,866 | ) | | — |
| | — |
|
| Payments of offering costs | | — |
| | (1,055 | ) | | (79,280 | ) |
| Dividends/Distributions paid | | (8,221 | ) | | (11,500 | ) | | (19,153 | ) |
HOSPITALITY INVESTORS TRUST, INC.
CONSOLIDATEDSTATEMENTS OF CASH FLOWS
(In thousands)
|
| | | | | | | | | | | | |
| Repayments of promissory and mortgage notes payable | | (1,030,622 | ) | | (13,473 | ) | | (291,849 | ) |
| Payment of deferred consideration payable | | — |
| | — |
| | (3,500 | ) |
| Repayment of Contingent Consideration | | (4,620 | ) | | — |
| | — |
|
| Mandatorily redeemable preferred securities redemptions | | (56,071 | ) | | (4,335 | ) | | (152,574 | ) |
| Proceeds from mortgage notes payable | | 1,101,000 |
| | 70,384 |
| | 624,100 |
|
| Deferred financing fees | | (19,672 | ) | | (721 | ) | | (27,944 | ) |
| Restricted cash for debt service | | — |
| | — |
| | (991 | ) |
| Net cash provided by financing activities | | $ | 102,165 |
| | $ | 39,978 |
| | $ | 680,507 |
|
| Net change in cash and cash equivalents | | 12,949 |
| | (4,042 | ) | | (85,032 | ) |
| Cash and cash equivalents, beginning of period | | 42,787 |
| | 46,829 |
| | 131,861 |
|
| Cash and cash equivalents, end of period | | $ | 55,736 |
| | $ | 42,787 |
| | $ | 46,829 |
|
HOSPITALITY INVESTORS TRUST, INC.
CONSOLIDATEDSTATEMENTS OF CASH FLOWS
(In thousands)
|
| | | | | | | | | | | |
| | | | | | |
| | | Year Ended December 31, 2017 | Year Ended December 31, 2016 | | Year Ended December 31, 2015 |
| Supplemental disclosure of cash flow information: | | | | | |
| Interest paid | | $ | 88,392 |
| $ | 84,683 |
| | $ | 68,108 |
|
| Income taxes paid | | $ | 1,865 |
| $ | 763 |
| | $ | 6,408 |
|
| Non-cash investing and financing activities: | | | | | |
| Deemed dividend related to beneficial conversion feature of Class C Units | | $ | (4,535 | ) | — |
| | — |
|
| Accretion of Class C Units | | $ | (1,668 | ) | — |
| | — |
|
| PIK Accrual on Class C Units | | $ | (5,241 | ) | — |
| | — |
|
| Waiver of Obligation from Former Advisor | | $ | (5,822 | ) | — |
| | — |
|
| Offering costs payable | | $ | — |
| — |
| | $ | 308 |
|
| Class B Units in operating partnership converted and redeemed for Common Stock | | $ | 7,659 |
| — |
| | — |
|
| Note payable to Former Property Manager | | $ | 1,000 |
| — |
| | — |
|
| Common stock issued to Former Property Manager | | $ | 4,076 |
| — |
| | — |
|
| Real estate investment improvements and purchases of property and equipment in accounts payable and accrued expenses | | $ | 14,267 |
| $ | 12,478 |
| | $ | 17,518 |
|
| Proceeds receivable from stock sales | | — |
| $ | — |
| | $ | 90 |
|
| Seller financed acquisition | | — |
| $ | 20,000 |
| | — |
|
| Seller financed acquisition deposit | | — |
| $ | 7,500 |
| | — |
|
| 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 | | — |
| — |
| | — |
|
| Deferred consideration on acquisition | | — |
| — |
| | — |
|
| Dividends declared but not paid | | — |
| $ | 4,765 |
| | $ | 4,936 |
|
| Common stock issued through distribution reinvestment plan | | — |
| $ | 9,468 |
| | $ | 18,150 |
|
The accompanying notes are an integral part of these statements.
HOSPITALITY INVESTORS TRUST, INC.
NOTES TO CONSOLIDATED/COMBINEDCONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization
Hospitality Investors Trust, Inc. (the "Company") was incorporated on July 25, 2013 as a Maryland corporation and qualified as a 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. As of December 31, 2016,2017, the Company had acquired or had an interest in a total of 141145 hotels, including one hotel classified as held for sale (See Note 18 - Assets Held for Sale) with a total of 17,19317,483 guestrooms located in 3233 states. As of December 31, 2016,2017, 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, and Intercontinental Hotels Group and Red Lion Hotels Corporation or one of their respective subsidiaries or affiliates.
As of December 31, 2017, 79 of the hotel assets the Company has acquired were managed by Crestline and 66 of the hotel assets the Company has acquired were managed by other property managers. As of December 31, 2017, the Company’s other property managers were Hampton Inns Management LLC and Homewood Suites Management LLC, affiliates of Hilton Worldwide Holdings Inc. (39 hotels), InnVentures IVI, LP (2 hotels), McKibbon Hotel Management, Inc. (21 hotels) and Larry Blumberg & Associates, Inc. (4 hotels).
On January 7, 2014, the Company commenced its primary initial public offering (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 well as 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 could elect to have their cash distributions reinvested in additional shares of the Company's common stock.
On November 15, 2015, the Company suspended its IPO, and, on November 18, 2015, Realty Capital Securities, LLC (the "Former Dealer Manager"), the dealer manager of the IPO, suspended sales activities, effective immediately. On December 31, 2015, the Company terminated the Former Dealer Manager as the dealer manager of ourthe IPO.
On March 28, 2016, the Company announced that, because it required funds in addition to operating cash flow and cash on hand to meet its capital requirements, beginning with distributions payable with respect to April 2016 the Company would pay distributions to its stockholders in shares of common stock instead of cash.
On July 1, 2016, the Company's board of directors approved an initial 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 Company's assets less the estimated fair value of ourits liabilities, divided by 36,636,016 shares of 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 that2016. On June 19, 2017, the Company's board of directors determinedapproved an updated Estimated Per- Share NAV..Per-Share NAV (the "2017 NAV") equal to $13.20 based on an estimated fair value of the Company's assets less the estimated fair value of the Company's liabilities, divided by 39,617,676 shares of common stock outstanding on a fully diluted basis as of March 31, 2017. 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, it terminated in accordance with its terms.
On January 12, 2017, the Company along with its operating partnership, Hospitality Investors Trust Operating Partnership, L.P. (then known as American Realty Capital Hospitality Operating Partnership, L.P. the) (the “OP”), entered into (i) a Securities Purchase, Voting and Standstill Agreement (the “SPA”) with the Brookfield Strategic Real Estate Partners II Hospitality REIT II LLC (the “Brookfield Investor”),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”),Former Advisor, the Company’sCompany's former property managers, American Realty Capital Hospitality Properties, LLC and American Realty Capital Hospitality Grace Portfolio, LLC (together, the “Property“Former Property Manager”), Crestline Hotels & Resorts, LLC (“Crestline”), then an affiliate of the Former Advisor and the Former Property Manager, American Realty Capital Hospitality Special Limited Partnership, LLC (the “Special“Former Special Limited Partner”), another affiliate of the Former Advisor and the Former Property Manager, and, for certain limited purposes, the Brookfield Investor.
HOSPITALITY INVESTORS TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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:
HOSPITALITY INVESTORS TRUST, INC.
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.
On February 27, 2018, the second closing under the SPA (the “Second Closing”) occurred, pursuant to which the Company sold 1,694,915.25 additional Class C Units to the Brookfield Investor, for a purchase price of $14.75 per Class C Unit, or $25.0 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$240.0 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 was the sole general partner and held substantially all of the units of limited partner interest in the OP entitled “OP Units” ("OP Units"). Following the Initial Closing, theThe Brookfield Investor holds all the issued and outstanding Class C Units, representing $135.0 million in liquidation preference with respect to the OP that rankswhich rank 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,the Company, and 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 the OP is unableCompany fails to redeem the Class C Units when required to do so, as described below.including the ability to commence selling the OP's assets until the Class C Units are convertible into OP Units based on an initial conversion pricehave been fully redeemed. As of $14.75, subject to anti-dilution and other adjustments uponDecember 31, 2017, the occurrencetotal liquidation preference 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 the Company’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 ratewas $140.2 million, and as of 7.50% per annum from legally available funds. IfFebruary 27, 2018, following the Company fails to pay these cash distributions when due,Second Closing, the per annum rate will increase to 10% until all accrued and unpaid distributions required to be paid in cash are reduced to zero. Holderstotal liquidation preference of the 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%was $165.2 million.
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 requiring approval of the Class C Units 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
HOSPITALITY INVESTORS TRUST, INC.
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
Class C Units for an amount in cash equal to the liquidation preference. The OP 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 Special General Partner, to commence selling its assets until the Class C Units have been fully redeemed.
At any time and from time to time on or after March 31, 2022, the OP 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. 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.
See 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.conditions.
Also at the Initial Closing, as contemplated by the SPA and the Framework Agreement, the Company changed its 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 the Company’s transition from external management to self-management.
HOSPITALITY INVESTORS TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Prior to the Initial Closing, the Company had no employees, and the Company depended on the Former Advisor to manage certain aspects of its affairs on a day-to-day basis pursuant to the advisory agreement with the Former Advisor (the "Advisory Agreement"). In addition, prior to the Initial Closing, the Former Property Manager served as the Company's property manager and had retained Crestline to provide services, including locating investments, negotiating financing and operating certain hotel assets in the Company's portfolio.
TheAs of March 31, 2017, the Former Advisor, the Former Property Manager and Crestline arewere under common control with AR Capital, LLC (“AR Capital”), the parent of the Company’s sponsor,American Realty Capital IX, LLC ("ARC IX"), and AR Global Investments, LLC ("AR Global"), the successor to certain of AR Capital's businesses. ARC IX served as the Company’s sponsor prior to its transition to self-management at the Initial Closing. Following the sale of AR Global’s membership interest in Crestline in April 2017, Crestline is no longer under common control with AR Global and AR Capital.
At the Initial Closing, the Advisory Agreement was terminated and certain employees of the Former Advisor or its affiliates (including, at the time, 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 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, 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.
HOSPITALITY INVESTORS TRUST, INC.
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
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.employees. As of December 31, 2016, 71 of the Company's 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.
As of December 31, 2016,2017, the Company had approximately 38.5 million shares of common stock outstanding and had received total proceeds of approximately $913.0 million from25 full-time employees. The staff at the IPO and shares issued underCompany’s hotels are employed by the DRIP, net of repurchases.Company's third-party hotel managers. The shares outstanding include shares of common stock issued as stock distributions as a resultCompany now conducts its operations independently of the change in distribution policy adopted byFormer Advisor and its affiliates, with which the Company’s board of directors in March 2016. Shares are only issued pursuant to the DRIP in connection with distributions paid in cash. In connection with the Company’s entry into the SPA, the Company’s board of directors suspended the payment of distributions to its stockholders in shares of common stock and suspended the DRIP. The Company will not issue any additional shares of common stock under the DRIP or recommence paying distributions in cash or in shares of its common stock unless and until its board of directors lifts these suspensions and subject to the Brookfield Approval Rights.has no ongoing affiliation.
See Note 173 - Subsequent EventsBrookfield Investment and Related Transactions for additional information regarding changes to the Company's relationship with AR Capital, AR Global,terms of the Advisor,SPA and the Property ManagerFramework Agreement and their affiliates,the other transactions and our transition to self-management.agreements contemplated thereby, as well as the Redeemable Preferred Share and the Class C Units, including conversion rights, distribution rights, approval rights and redemption rights associated therewith.
Note 2 - Summary of Significant Accounting Policies
The accompanying consolidated/combinedconsolidated financial statements of the Company included herein were prepared in accordance with United States Generally Accepted Accounting Principles ("GAAP"). Certain immaterial amountsThe consolidated financial statements reflect all adjustments which are, in priorthe opinion of management, necessary to a fair statement of the results for the interim periods have been reclassified in orderpresented. These adjustments are considered to conform to current period presentation.be of a normal, recurring nature.
Principles of Consolidation and Basis of Presentation
The accompanying consolidated/combinedconsolidated 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 consists of the Barceló Portfolio, which consists of hospitality assets and operations owned by Barceló Crestline Corporation and certain consolidated subsidiaries ("BCC") that had
Certain amounts in prior periods have been maintainedreclassified in various legal entities untilorder to conform to current period presentation, specifically, the Company acquired them from BCC on March 21, 2014. Historically, financial statements had not been prepared forchanged the Predecessorpresentation of its Consolidated Statements of Operations and Comprehensive Income (Loss) with respect to "general and administrative" expenses and "acquisition and transaction related costs". The change in presentation was to reclassify these line items so that they are included as a discrete stand-alone entity.component of Operating income (loss). The accompanying consolidated financial statementsCompany made this change in presentation for the Predecessor, for the period from January 1 to March 20, 2014 have been derived from the historical accounting records of BCC and reflect 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.all periods presented.
Use of Estimates
The preparation of the accompanying consolidated/combined consolidatedfinancial 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 consolidated 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.
HOSPITALITY INVESTORS TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Real Estate Investments
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 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
HOSPITALITY INVESTORS TRUST, INC.
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. 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.
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 leases acquired (See Note 45 - 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/CombinedConsolidated Statements of Operations and Comprehensive Income (Loss).
Impairment of Long Lived Assets and Investments in Unconsolidated Entities
When circumstances indicate the carrying valueamount 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 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 valueamount of a property, an impairment loss will be recorded to the extent that the carrying valueamount exceeds the estimated fair value of the property. An impairment lossproperty which results in an immediate negative adjustment reflected incharge to net income. An impairment loss of $2.4 million was recorded on one hotel duringDuring the yearyears ended December 31, 2017 and December 31, 2016, the Company recognized impairment losses on long-lived assets of $15.6 million and $2.4 million, respectively (See Note 14 - Impairments)17-Impairments). The Company has not recorded an impairment in any other periods.
Assets Held for Sale (Long Lived-Assets)
When the 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 hasand the Company's board of directors have 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;
HOSPITALITY INVESTORS TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. Any such adjustment to the carrying amount is recorded as an impairment loss. The Company has one hotel that is qualified to be treated as an asset held for sale as of December 31, 2017 and an impairment loss of $1.4 million which includes goodwill impairment was recognized on this hotel (See Note 18 - Assets Held for Sale).
Goodwill
TableThe Company allocates goodwill to each reporting unit. For the Company’s purposes, each of Contentsits wholly-owned hotels is considered a reporting unit. The Company tests goodwill for impairment at least annually, or upon the occurrence of any "triggering events" if sooner, and has elected to test for goodwill impairment during the quarter ended June 30 of each year. During the second quarter ended June 30, 2017, the Company adopted ASU 2017-04, Intangibles - Goodwill and Other, which simplified the measurement of goodwill by eliminating Step 2 from the goodwill impairment test in the event that there is evidence of an impairment based on any "triggering events." The Company chose to adopt ASU 2017-04 in the second quarter ended June 30, 2017, as this was the first time it was required to test goodwill for impairment.
Upon the occurrence of any "triggering events," the Company is required to compare the fair value of each reporting unit to which goodwill has been allocated, to the carrying amount of such reporting unit including the allocation of goodwill. As required by Accounting Standards Codification section 350 - Intangibles - Goodwill and Other (ASC 350), as amended by ASU 2017-04, if the carrying amount of a reporting unit exceeds its fair value, the Company applies a one-step quantitative test and records the amount of goodwill impairment as the excess of the reporting unit's carrying amount over its fair value, not to exceed the total amount of goodwill allocated to such reporting unit.
HOSPITALITY INVESTORS TRUST, INC.
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
During the year ended December 31, 2017, the Company recognized goodwill of $31.6 million, and goodwill impairment of $17.1 million (See Note 4 - Business Combinations and Note 17-Impairments).
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 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") 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.
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 3 - Business 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 has therefore not consolidated the entity. The Company has accounted for the entity under the equity method of accounting and included it in investments in unconsolidated entities in the accompanying Consolidated Balance Sheets.
The Company classifies the distributions from its investments in unconsolidated entities in the Consolidated Statement of Cash 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
The Company recognizes hotel revenue as earned, which is generally defined as the date upon which a guest occupies a room or utilizes the hotel services.
HOSPITALITY INVESTORS TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income Taxes
The Company elected and qualified 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. The Company generally will not be subject to federal corporate income tax on that portion of its REIT taxable income that it distributes to its stockholders. The Company may be subject to certain state and local taxes on its income, property taxtaxes and federal income and excise taxes on its undistributed income. The Company's hotels are leased to taxable REIT subsidiaries, which are owned by the OP. The taxable 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.
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, unvested restricted shares of common stock ("restricted shares") and unvested restricted share units in respect of shares of common stock awards,("RSUs"), except when doing so would be anti-dilutive. Beginning withFor distributions payable with respect to April 1, 2016 and through the period from January 1, 2017 to January 13,
HOSPITALITY INVESTORS TRUST, INC.
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
2017 the(the date these distributions to stockholders were suspended,suspended), the Company has paid cumulative distributions of 2,047,877 shares of common stock and has adjusted at each reporting date, retroactively for all periods presented its computation of loss per share in order to reflect this as a change in capital structure (See Note 810 - Common Stock).
The Company currently has outstanding restricted shares whose holders are entitled to participate in dividends when and if paid on shares of common stock. Holders of RSUs generally are credited with dividend or other distribution equivalents when and if paid on shares of common stock. These dividends or other distribution equivalents will be regarded as having been reinvested in RSUs and will only be paid to the extent the related RSUs vest. To the extent the Company were to have distributions in the future, it would be required to calculate earnings per share using the two-class method with regard to restricted shares, whereby earnings or losses are reduced by distributed earnings as well as any available undistributed earnings allocable to holders of restricted shares.
Fair Value Measurements
In accordance with ASCAccounting Standards Codification section 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
HOSPITALITY INVESTORS TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Class C Units
The Company initially measured the Class C Units at fair value net of issuance costs. The Company is required to accrete the carrying value of the Class C Units to the liquidation preference using the effective interest method over the five year period prior to the holder's redemption option becoming exercisable. However, if it becomes probable that the Class C Units will become redeemable prior to such date, the Company will adjust the carrying value of the Class C Units to the maximum liquidation preference.
Pursuant to the SPA with the Brookfield Investor, the Company may become obligated to issue additional Class C Units to the Brookfield Investor and this obligation is considered a contingent forward contract under Accounting Standards Codification section 480 - Distinguishing Liabilities from Equity, and accounted for as a liability. The fair value of the contingent forward liability was initially recognized at zero since the contingent forward contract was executed at fair market value. The Company has determined the fair value of the contingent forward liability was $1.4 million as of December 31, 2017 (See Note 13 - Commitments and Contingencies). The Company will measure the contingent forward liability on a recurring basis until the underlying Class C Units are issued and any changes in fair value will be recognized through earnings. At the time that the underlying Class C Units are issued, the corresponding liability will be extinguished.
Advertising Costs
The Company expenses advertising costs for hotel operations as incurred. These costs were $18.4 million for the year ended December 31, 2017, $17.2 million for the year ended December 31, 2016, and $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, 2014.2015.
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
HOSPITALITY INVESTORS TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 and note receivable balances, net of the allowance for doubtful accounts, are included in prepaid expenses and other assets in the accompanying Consolidated Balance Sheets, and are as follows (in thousands):
HOSPITALITY INVESTORS TRUST, INC.
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
| | | | December 31, 2016 | | December 31, 2015 | December 31, 2017 | | December 31, 2016 |
| Trade receivables | $ | 6,238 |
| | $ | 5,848 |
| $ | 9,638 |
| | $ | 9,145 |
|
Note receivable(1) | | 1,625 |
| | — |
|
| Allowance for doubtful accounts | (434 | ) | | (697 | ) | (312 | ) | | (434 | ) |
| Trade receivables, net of allowance | $ | 5,804 |
| | $ | 5,151 |
| |
| Trade and Note receivables, net of allowance | | $ | 10,951 |
| | $ | 8,711 |
|
Derivative Transactions________________
The Company at certain times enters into derivative instruments to hedge exposure to changes in interest rates. The Company’s derivatives as(1) See Note 19 - Sales 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.Hotels.
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 revenues. Management evaluates the operating performance of the Company’s investments in real estate on an individual property level, and therefore each property is considered a reporting unit. Each of the Company's reporting units are also considered to be operating segments, but none of which representthese individual operating segments represents a reportable segment as they meet the criteria in GAAP to aggregate all properties into one reportable segment.
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, 2017, 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, 2017, was immaterial to the consolidated financial statements.
Pursuant to the SPA with the Brookfield Investor, the Company may become obligated to issue additional Class C Units to the Brookfield Investor and this obligation is considered a contingent forward contract under Accounting Standards Codification section 480 - Distinguishing Liabilities from Equity, and accounted for as a liability. The fair value of the contingent forward liability was initially recognized at zero since the contingent forward contract was executed at fair market value. The Company has determined the fair value of the contingent forward liability was $1.4 million as of December 31, 2017 (See Note 13 - Commitments and Contingencies). The Company will measure the contingent forward liability on a recurring basis until the underlying Class C Units are issued and any changes in fair value will be recognized through earnings. At the time that the underlying Class C Units are issued, the corresponding liability will be extinguished.
Recently Issued Accounting Pronouncements
In May 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 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 consolidated/combined financial statements and related disclosures. The Company has not yet selected a transition method and has not determined the effect of the standard on its ongoing financial reporting. The adoption of this ASU is not expected to have a material effectBased on the Company's consolidated/combined financial statements.
In August 2014,assessment of this standard, it will not materially affect the FASB issued ASU 2014-15 Disclosureamount or timing of Uncertainties about an Entity’s Abilityrevenue recognition for revenues from room, food and beverage, and other hotel level sales; however, it may allow for earlier gain recognition for future asset sale transactions pursuant 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 has continuing involvement with the asset. The Company will adopt this standard as of January 1, 2018 using the modified retrospective approach, and based 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 onfinal assessment, 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 resultimpact 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 ofadoption will not be material and will not impact the amount recordedor timing of revenue recognition 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/combinedits consolidated 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
HOSPITALITY INVESTORS TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, under which it is the lessee, as right of use assets and liabilities onin the Consolidated Balance Sheets.Sheet. Early adoption is permitted. The Company is still evaluating the impact this standard will have on its consolidated financial statements and related disclosures, and, other than the inclusion of right of use assets and related liabilities in the Company's Consolidated Balance Sheet, such effects have not yet been determined.
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 becomesbecame effective for the Company for the fiscal year beginning after December 15, 2016, and all subsequent annual and interim periods. Early adoption is permitted.January 1, 2017. The adoption of ASU 2016-07 isdid not expected to have a material effect on the Company’s consolidated/combinedconsolidated 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 becomesbecame effective for the Company for the fiscal year beginning after December 15, 2016, and all subsequent annual and interim periods. Early adoption is permitted.January 1, 2017. The adoption of ASU 2016-09 isdid not expected to have a material effect on the Company’s consolidated/combinedconsolidated financial statements.
In August 2016, the FASB issued ASU 2016-15 Statement of Cash Flows—ClassificationFlows-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 Company adopted ASU 2016-15 in the quarter ended June 30, 2017. The adoption of this ASU 2016-15 becomesdid not have a material effect on the Company's consolidated financial statements.
In November 2016, FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230) Restricted Cash, which requires the statement of cash flows to include amounts generally described as restricted cash and cash equivalents, with cash and cash equivalents when reconciling the beginning and ending total amounts thereof. The ASU is effective for the Company for fiscal years beginning after December 15, 2017. The adoption of this ASU will result in reclassification of restricted cash balances and activity in the Company’s statement of cash flows. The Company will adopt this standard as of January 1, 2018, and other than the reclassification of restricted cash balances and activity in the statement of cash flows, it is not expected to have a material impact on the Company’s consolidated financial statements. The adoption of this standard does not change the Company’s balance sheet presentation.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805) Clarifying the Definition of a Business, with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Additionally, this update also narrows the definition of an output. ASU 2017-01 requires that when substantially all of the fair value of the gross assets acquired or disposed of is concentrated in a single identifiable asset or group of similar identifiable assets, the set is not a business, thus reducing the number of transactions that need to be further evaluated. As a result of this standard, the Company expects that future hotel purchases, if any, will be considered asset purchases as opposed to business combinations, however the determination will be made on a transaction-by-transaction basis. ASU 2017-01 is effective for the Company for fiscal yearyears beginning after December 15, 2018, and early adoption is permitted.
In January 2017, FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350), which simplified the measurement of goodwill by eliminating Step 2 from the goodwill impairment test, if there is evidence of an impairment based on any "triggering events." The Company adopted ASU 2017-04 during the second quarter ended June 30, 2017.
HOSPITALITY INVESTORS TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718), which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. An entity should account for the effects of a modification unless all the following are met: the fair value of the modified award is the same as the fair value of the original award immediately before the original award is modified, the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified, the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The amendments to this update are effective for the Company for fiscal years beginning after December 15, 2017, and all subsequent annual and interim periods.early adoption is permitted. ASU 2017-09 is required to be adopted prospectively to an award modified on or after the adoption date. The adoption of this ASU 2016-15 is not expected to have a material effect on the Company's consolidated/combinedconsolidated financial statements.
Note 3 - Brookfield Investment and Related Transactions
Securities Purchase, Voting and Standstill Agreement
On January 12, 2017, the Company and the OP entered into the SPA with the Brookfield Investor, as well as related guarantee agreements with certain affiliates of the Brookfield Investor. 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 in the aggregate. The Initial Closing occurred on March 31, 2017.
The Redeemable Preferred Share has been classified as permanent equity on the Consolidated Balance Sheets, and the Class C Units have been classified as temporary equity due to the contingent redemption features described in more detail below. The Company measured the Class C Units issued at fair value, or $135.0 million, representing the gross proceeds of the issuance of the Class C Units at the Initial Closing. As discussed below, the Class C Units include conversion rights. Because the effective conversion price of the Class C Units under GAAP of $14.09 as of March 31, 2017 (which is calculated on a net investment basis after transaction fees and costs payable to the Brookfield Investor as $129.0 million divided by 9,152,542.37 Class C Units issued) is less than the fair value of the Company’s common stock of $14.59 on such date (See Note 10 - Common Stock), the conversion rights represent a “beneficial conversion feature” under GAAP. The Company measured the beneficial conversion feature at $4.5 million, and has recognized the beneficial conversion feature as a deemed dividend as of March 31, 2017, reducing income available to common stockholders for purposes of calculating earnings per share.
As of December 31, 2017, the Class C Units are reflected on the Consolidated Balance Sheets at $128.0 million. The value of the Class C Units as of December 31, 2017, is derived by reducing the $135.0 million in gross proceeds by the $13.8 million in costs directly attributable to the issuance of Class C Units at the Initial Closing, including $6.0 million paid directly to Brookfield at the Initial Closing in the form of expense reimbursements and a commitment fee, and increased by $5.2 million in distributions payable to holders of Class C Units in the form of additional Class C Units ("PIK Distributions") and $1.6 million in the accretion of the carrying value to the liquidation preference through December 31, 2017.
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 at Subsequent Closings as follows:
• 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 (as defined in Note 8 below) to approximately $223.5 million. Proceeds from this Subsequent Closing must be used by the OP exclusively to, concurrently therewith, 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. Proceeds from this Subsequent Closing must be used by the OP exclusively to, concurrently therewith, 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 Subsequent Closings must be used by the OP exclusively to
HOSPITALITY INVESTORS TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
fund brand-mandated property improvement plans ("PIPs") and related lender reserves, repay amounts then outstanding with respect to mortgage debt principal and interest and working capital.
On February 27, 2018, the Second Closing occurred, pursuant to which the Company sold 1,694,915.25 additional Class C
Units to the Brookfield Investor, for a purchase price of $14.75 per Class C Unit, or $25.0 million in the aggregate. See Note 21
– Subsequent Events.
Consummation of any Subsequent Closing is subject to the satisfaction of certain conditions, and there can be no assurance they will be completed on their current terms, or at all. 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.
The SPA also contains certain standstill and voting restrictions applicable to the Brookfield Investor and certain of its affiliates.
The Redeemable Preferred Share
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.
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, which relates to involvement in certain legal proceedings, in any definitive proxy statement filed by the Company), as well as to approve (such approval not to be unreasonably withheld, conditioned or delayed) two additional independent directors (each, an “Approved Independent Director”) to be recommended and nominated by the Company's board of directors for election by the 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 of 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 Approved Independent Directors 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.
If the OP fails to redeem Class C Units when required to do so, beginning three months after such failure and 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 (as defined in the Company's charter).
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 with respect to the Redeemable Preferred Share (the "Articles Supplementary")) is subject to a separate class vote of the Redeemable Preferred Share.
In addition, the Redeemable Preferred Directors have the Brookfield Approval Rights.
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 amendment and restatement of the OP's existing agreement of limited partnership ( the "A&R LPA"); or (iii) in connection
HOSPITALITY INVESTORS TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
with a failure of the Brookfield Investor to consummate the applicable purchase of Class C Units at any Subsequent Closing (subject to the terms set forth in the SPA, a “Funding Failure”), the 11th business day after the date the Company obtains a final, non-appealable judgment of a court of competent jurisdiction in connection with such Funding Failure. Under the circumstances described in clause (iii) in the foregoing sentence, in addition, (i) the Brookfield Approval Rights would be permanently terminated, (ii) the OP would be entitled to redeem all or any portion of the then outstanding Class C Units in cash for their liquidation preference, (iii) all Class C Units received in respect of all PIK Distributions accrued from the date of the Initial Closing would be forfeited, and (iv) the Brookfield Investor would be required to cause each of the Redeemable Preferred Directors to resign from the Company’s board of directors.
Class C Units
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, which established the terms, rights, obligations and preferences of the Class C Units as set forth in more detail below.
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 and 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
Commencing on June 30, 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 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.
Commencing on June 30, 2017 and subject to the occurrence of a Funding Failure if one were to occur, holders of Class C Units are also entitled to receive, with respect to each Class C Unit, a fixed, quarterly, cumulative PIK Distribution at a rate of 5% per annum ("PIK Distributions"). If the Company fails 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 $14.75.
The Brookfield Investor is also entitled to receive tax distributions under certain limited circumstances.
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
At any time and subject to the occurrence of a Funding Failure, 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
HOSPITALITY INVESTORS TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
If the OP consummates any 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”) prior to March 31, 2022, the fifth anniversary of the Initial Closing, the holders of Class C Units will be 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
In the event of the occurrence of a 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) or a 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), 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.
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
If the OP fails to redeem Class C Units when required to do so pursuant to the terms of the A&R LPA, beginning three months after such failure 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 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.
In addition and as described elsewhere herein, if the OP fails to redeem Class C Units when required to do so pursuant to the terms of the A&R LPA, beginning three months after such failure and until all Class C Units requested to be redeemed have been redeemed:
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 thereby subject to compliance with 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); and
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%.
HOSPITALITY INVESTORS TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 also 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.
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.
Preemptive Rights
Subject to the occurrence of a Funding Failure, 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.
Brookfield 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 (including the OP) 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; hiring and compensation decisions related to certain key personnel (including executive officers); property acquisitions and property sales and dispositions that do not meet transaction-size limits and other defined criteria and would be outside of the OP’s normal course of business; 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 (other than a Redeemable Preferred 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.
Framework Agreement
On January 12, 2017, the Company and the OP, entered into the Framework Agreement with the Former Advisor, the Former Property Manager, Crestline, the Former 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 Former Advisor and its affiliates to manage its day-to-day operations to a self-managed company. The transactions contemplated by the Framework Agreement generally were consummated at, and as a condition to, the Initial Closing, and the Framework Agreement would have terminated automatically upon the termination of the SPA in accordance with its terms prior to the Initial Closing.
At the Initial Closing, pursuant to the Framework Agreement, the Advisory Agreement was terminated. The Framework Agreement also provided for the extension or renewal of the Advisory Agreement on specified terms under certain circumstances, none of which occurred.
HOSPITALITY INVESTORS TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Until the expiration without renewal or termination of the Advisory Agreement, the Former 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 deemed necessary to transition to self-management, including, but not limited to providing books and records, accounting systems, software and office equipment. In addition, the Former Advisor also granted the Company the right to hire certain of employees of the Former 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 Former Advisor and its affiliates prior to the Initial Closing.
Pursuant to the Framework Agreement, at the Initial Closing, the Company and the Former Advisor and/or certain of its affiliates, as applicable, entered into a series of agreements to facilitate the transition to self-management, including the agreements described in more detail below.
Property Management Transactions
Prior to the Initial Closing, the Company, directly or indirectly through its taxable REIT subsidiaries, had entered into agreements with the Former 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 Former Property Manager was the same as the term of the Former 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 Former 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 Framework Agreement.
At the consummation of the Property Management Transactions, among other things:
• property management agreements for a total of 69 hotels then sub-managed by Crestline (collectively, the "Crestline Agreements") were assigned by the Former Property Manager to Crestline;
• property management agreements for a total of five additional hotels (together with the Crestline Agreements, the "Long-Term Agreements") were transitioned to Crestline and the sub-property management agreements with Interstate Management Company, LLC related to these properties were terminated effective April 3, 2017;
• in connection with the assignment of the Long-Term Agreements to Crestline, they were amended as follows:
the total property management fee of up to 4.0% of the monthly gross receipts from the properties was reduced to 3.0%;
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;
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
if, prior to March 31, 2023, the six-year anniversary of 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; and
the property management agreements with the Former Property Manager for the Company’s 65 other hotels were terminated and the sub-property managers managing these hotels prior to the Initial Closing continued 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 Former Property Manager;
have made and will continue to make a monthly cash payment in the amount of $333,333.33, $4.0 million in the aggregate, to the Former Property Manager on the 15th day of each month for the 12 months following the Initial Closing (See Note 7 - Promissory Notes Payable);
HOSPITALITY INVESTORS TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
issued 279,329 shares of the Company’s common stock to the Former Property Manager, for which the fair value on the date of grant has been determined to be $14.59 per share (See Note 10 - Common Stock);
waived any and all obligations of the Former 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, which amount had been reflected as a reduction in offering proceeds due to it being directly related to issuing shares of common stock in prior periods; and
converted all 524,956 units of limited partnership in the OP entitled “Class B Units” (“Class B Units") held by the Former 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.
The foregoing consideration aggregates to $31.6 million and was recorded as goodwill on the Company’s Consolidated Balance Sheets (See Note 4 - Business Combinations).
Assignment and Assumption Agreement
At the Initial Closing, as contemplated by the Framework Agreement, the Company, the Former Advisor and AR Global entered into an assignment and assumption agreement, pursuant to which the Former Advisor and AR Global assigned to the Company all right, title and interest 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.
Facilities Use Agreement
The Framework Agreement contemplates that the Company would enter into a Facilities Use Agreement with Crestline at the Initial Closing in the form attached to the Framework Agreement (the “Facilities Use Agreement”), pursuant to which the OP would sublease office space at Crestline’s principal place of business, 3950 University Drive, Fairfax, Virginia 22030, and would pay a portion of the total rent equivalent to the portion of the total space used. The term of the sublease would continue through December 31, 2019, automatically renewing for successive one-year periods unless either party delivered written notice to the other at least 120 days prior the expiration of the initial term or any renewal term. While the Facilities Use Agreement was not entered into at the Initial Closing, the Company commenced its occupation of the space at the Initial Closing on the terms contemplated by the Facilities Use Agreement and continued to do so through June 30, 2017. Effective as of July 1, 2017, the Company and Crestline entered into a new annually renewable joint occupancy agreement which replaces the Facilities Use Agreement contemplated pursuant to the Framework Agreement and the Company continued its occupancy of the space.
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 Former Advisor and Crestline, pursuant to which it would receive their assistance in connection with investor relations/shareholder services and support services for pending transactions in the case of the Former Advisor and accounting and tax related services in the case of Crestline until no later than June 29, 2017. As compensation for the foregoing services, the Former Advisor received a one-time fee of $225,000 (which was paid $150,000 at the Initial Closing and $75,000 on May 15, 2017) and Crestline received a fee of $25,000 per month through and including June 2017. The Former Advisor and Crestline were also entitled to reimbursement of out-of-pocket fees, costs and expenses. The transition services agreement with the Former Advisor has expired. Effective as of July 1, 2017, the transition services agreement with Crestline was terminated and the Company entered into a new annually renewable shared services agreement with Crestline pursuant to which Crestline provides the Company with accounting, tax related, treasury, information technology and other administrative services.
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 Former Advisor and the Former 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 Former Advisor and the Former Property Manager have similar rights with respect to the 524,956 and 279,329 shares of the Company’s common stock issued to them, respectively, pursuant to the Framework Agreement.
Note 34 - Business Combinations
Barceló Portfolio: On March 21, 2014, the Company completed 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 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 and (iii) equity interests in the HGI Blacksburg JV and the Westin Virginia Beach JV.Summit Acquisition
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 on February 27, 2015 (in thousands):
|
| | | | |
| Assets acquired and liabilities assumed | | February 27, 2015 |
|
| Land | | $ | 274,512 |
|
| Buildings and improvements | | 1,391,695 |
|
| Below-market lease obligation, net | | 2,605 |
|
| Furniture, fixtures and equipment | | 127,954 |
|
| Prepaid expenses and other assets | | 8,247 |
|
| Accounts payable and accrued expenses | | (5,002 | ) |
| Total operating assets acquired, net | | 1,800,011 |
|
| Seller financing of real estate investments | | (1,351,282 | ) |
| Total assets acquired, net | | $ | 448,729 |
|
HGI Blacksburg JV: On May 20, 2015, the Company acquired an additional equity interest in the HGI Blacksburg JV, increasing its percentage ownership to 56.5% from 24.0%. As a result of this transaction, the Company concluded that it is 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 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 entered 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 Company 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 offeringIPO and $96.9 million from an advance, secured by a mortgage on the hotels in the First Summit Closing, under the SN Term Loan (as defined below) (See Note 56 - Mortgage Notes Payable).
The following table presents the allocation of the assets acquired and liabilities assumed by the Company on October 15, 2015 (in thousands):
|
| | | | |
| 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 |
|
On December 29, 2015, the Company and the Summit Sellers agreed to terminate the purchase agreement pursuant to which the Company had the right to acquire a fee simple interest in ten hotels (the "Second Summit Closing") for a total purchase price of $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 Summit 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 67 - Promissory NoteNotes 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 havehad 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. IfFor any hotel is sold in this manner, the Reinstatement Agreement will terminateterminated with respect to such hotel and the purchase price will bewas 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 purchase of seven of the hotels remaining to be purchased under the Reinstatement Agreement for an aggregate purchase price of $66.8$66.5 million was extended from January 12, 2017 to April 27, 2017, following an amendment entered into on December 30, 2016 to extend the closing date from December 30, 2016 to January 10, 2017, and 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. The Summit Sellers have 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 an amendment to the Summit Loan (the “Loan Amendment”) and the Summit Sellers 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 67 - Promissory Notes Payable and Note 17 - Subsequent Events.Payable.
Noble Acquisitions:
On June 15, 2015,April 27, 2017, 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,through the CompanyOP, 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 IPO and $26.0 million from an advance, secured by a mortgage on theseven hotels in the First NobleSecond Summit 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 NobleSummit Sellers (the "April Acquisition") pursuant to the Reinstatement Agreement for an aggregate purchase price of $59.0 million,$66.5 million. Additionally, during the quarter ended June 30, 2017, the Summit Sellers informed the Company that the eighth hotel was sold by the Summit Sellers to a third party, in connection with which Company’s right and obligation to purchase this hotel was fundedterminated in accordance with $4.4 million previously paidthe terms of the Reinstatement Agreement.
The following table presents the preliminary allocation of the assets acquired and liabilities assumed by the Company as of December 31, 2017 for the April Acquisition (in thousands):
|
| | | |
| Assets acquired and liabilities assumed | | December 31, 2017 |
|
| Land | | 9,732 |
|
| Building and Improvements | | 50,407 |
|
| Furniture, fixtures and equipment | | 6,461 |
|
| Prepaid expenses and other assets | | 167 |
|
| Accounts payable and accrued expenses | | (239 | ) |
| | |
| Total operating assets acquired, net | | 66,528 |
|
Framework Agreement: The Company has determined that the consummation of the transactions contemplated by the Framework Agreement and the transfer of consideration in exchange for an earnest money deposit, $12.3 million in proceeds from the IPOin-place workforce, intellectual property and $42.3 million frominfrastructure assets represent a business combination as defined by FASB Accounting Standard Codifications 805 - Business Combinations. The Company anticipates an advance, secured by a mortgage on the hotelsincreased economic return to its investors in the Second Noble Closing, under the SN Term Loan.
On January 25, 2016, the hotel purchase agreements related to thirdform of reduced advisory and fourth closing of the Noble acquisition comprising nine hotels in total were terminated,property management fees as a result of whichthe transactions completed at the Initial Closing pursuant to the Framework Agreement.
The Company determined total consideration remitted as a result of the transactions completed at the Initial Closing pursuant to the Framework Agreement was $31.6 million, comprised of a cash payment of $10.0 million, a non-interest bearing short-term note payable of $4.0 million, a waiver of repayment by the Former Advisor of Organization or Offering Expenses owed to the Company forfeited $22.0of $5.8 million, in non-refundable earnest money deposits.newly issued common stock of $4.1 million, and common stock issued upon conversion and redemption of Class B Units of $7.7 million (See Note 3 - Brookfield Investment and Related Transactions). The Company determined the fair value on the date of grant of the Company's common stock to be $14.59 per share (See Note 10 - Common Stock). The Company determined this value by utilizing income and market based approaches further adjusted for fair value of debt and the Class C Units, and applied a discount for lack of marketability. As part of the process, the Company made the determination after consulting with a nationally recognized third party advisor.
In applying the acquisition method of accounting, the Company recognized all consideration transferred of $31.6 million as goodwill since no value was allocated to the immaterial infrastructure fixed assets and immaterial intellectual property. The recognized goodwill balance is representative of employees acquired and the synergies expected to be achieved through reduced fees. During the year ended December 31, 2017, the Company recognized goodwill impairment of $17.1 million (See Note 17- Impairments).
Note 45 - Leases
In connection with its acquisitions the Company has assumed various lease agreements. These lease agreements are primarily comprisecomprised of one operating lease with respect to the Georgia Tech Hotel & Conference Center and nine ground leases which are also classified as operating leases. The following table summarizes the Company's future minimum rental commitments under these leases (in thousands):
|
| | | | | | | | |
| | | Minimum Rental Commitments | | Amortization of Below Market Lease Intangible to Rent Expense |
| 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 |
|
| Year ended December 31, 2022 | | 5,292 |
| | 398 |
|
| Thereafter | | 76,451 |
| | 7,438 |
|
| Total | | $ | 102,723 |
| | $ | 9,428 |
|
HOSPITALITY INVESTORS TRUST, INC.
NOTES TO CONSOLIDATED/COMBINEDCONSOLIDATED FINANCIAL STATEMENTS
these 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 |
|
The Company has allocated values to certain above and below-market lease intangibles based on the difference between market rents and rental commitments under the leases. During the years ended December 31, 2016,2017, December 31, 20152016 and December 31, 2014,2015, amortization of below-market lease intangibles, net, to rent expense was $0.4 million, $0.4 million and $0.3$0.4 million, respectively. Rent expense for the years ended December 31, 2017, December 31, 2016 and December 31, 2015 and December 31, 2014 was $6.2 million, $6.3 million and $5.8 million, and $4.8 million, respectively. Included in the year ended December 31, 2014 is rent expense recognized by the Predecessor. The Company recognizes rent expense on a straight line basis.
Note 56 - Mortgage Notes Payable
The Company’s mortgage notes payable as of December 31, 20162017 and December 31, 20152016 consist of the following, respectively (in thousands):
Table of Contents |
| | | | | | | | | | | | | | |
| | | Outstanding Mortgage Notes Payable | | |
| Encumbered Properties | | December 31, 2017 | | December 31, 2016 | | Interest Rate | | Payment | | Maturity |
| Baltimore Courtyard & Providence Courtyard | | $ | 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 |
| 87 - Pack Mortgage Loan - 87 properties in Grace Portfolio | | 805,000 |
| | 793,647 |
| (1) | One-month LIBOR plus 2.56% | | Interest Only, Principal paid at Maturity | | May 2019, subject to three, one year extension rights |
| 87 - Pack Mezzanine Loan - 87 properties in Grace Portfolio | | 110,000 |
| | 101,794 |
| (1) | One-month LIBOR plus 6.50% | | Interest Only, Principal paid at Maturity | | May 2019, subject to three, 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 |
| Refinanced Term Loan -27 properties in Summit and Noble Portfolios and one additional property | | 310,000 |
| | 235,484 |
| (1) | One-month LIBOR plus 3.00% | | Interest Only, Principal paid at Maturity | | May 2019, subject to three, one year extension rights |
| Total Mortgage Notes Payable | | $ | 1,513,000 |
| | $ | 1,418,925 |
| | | | | | |
| Less: Deferred Financing Fees, Net | | $ | 17,223 |
| | $ | 8,000 |
| | | | | | |
| Total Mortgage Notes Payable, Net | | $ | 1,495,777 |
| | $ | 1,410,925 |
| | | | | | |
HOSPITALITY INVESTORS TRUST, INC.
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
|
| | | | | | | | | | | | | | |
| | | Outstanding Mortgage Notes Payable | | |
| Encumbered Properties | | December 31, 2016 | | December 31, 2015 | | Interest Rate | | Payment | | Maturity |
| Baltimore Courtyard & Providence Courtyard | | $ | 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)On January 12, These loans were refinanced in April 2017 the Company amended this loanon different terms with respect to interest rate, principal amount and entered into a related additional loan with Summit. See Note17 - Subsequent Events.maturity.
Interest expense related to the Company's mortgage notes payable for the year ended December 31, 2017, for the year ended December 31, 2016, and for the year ended December 31, 2015 and for the combined year ended December 31, 2014 was $66.8 million, $60.1 million, $43.1 million, and $2.1$43.1 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
HOSPITALITY INVESTORS TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
87- Pack Loans
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. In connection with this acquisition, the Company assumed existing mortgage and mezzanine indebtedness encumbering those hotels (comprising the "Assumed Grace Indebtedness
Mortgage Loan" and the "Assumed Grace Mezzanine Loan," collectively, the "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 carriescarried an interest rate of London Interbank Offered Rate ("LIBOR") plus 3.31%, and the Assumed Grace Mezzanine Loan carriescarried an interest rate of LIBOR plus 4.77%, for a combined weighted average interest rate of LIBOR plus 3.47%. Pursuant
On April 28, 2017, the Company and the OP through certain wholly-owned subsidiaries of the OP, entered into a mortgage loan agreement (the “87-Pack Mortgage Loan”) and a mezzanine loan agreement (the “87-Pack Mezzanine Loan” and, collectively with the 87-Pack Mortgage Loan, the “87-Pack Loans”) with an aggregate principal balance of $915.0 million to refinance the Assumed Grace Mortgage Loan and the Assumed Grace Mezzanine Loan. The principal amount of the 87-Pack Mortgage Loan is $805.0 million and the 87-Pack Mortgage Loan is secured by 87 of the Company’s hotel properties, all of which served as collateral for the Assumed Grace Mortgage Loan (each, a “87-Pack Collateral Property”). The principal amount of the 87-Pack Mezzanine Loan is $110.0 million and the 87-Pack Mezzanine Loan is secured by the ownership interest in the entities which own the 87-Pack Collateral Properties and the related operating lessees.
At the closing of the 87-Pack Loans, the net proceeds after accrued interest and closing costs were used to repay the $895.4 million principal amount then outstanding under the Assumed Grace Indebtedness and pay $1.0 million into the Reserve Funds (as defined below).
The 87-Pack Loans mature on May 1, 2019, subject to three one-year extension rights which, if all three extension rights are exercised, would result in a fully extended maturity date of May 1, 2022. The 87-Pack Loans are prepayable in whole or in part with certain prepayment fees applicable on or prior to November 1, 2018, after which each loan is prepayable without any prepayment fee or any other fee or penalty. Prepayments under the 87-Pack Mortgage Loan are generally conditioned on a pro-rata prepayment being made under the 87-Pack Mezzanine Loan.
The 87-Pack Mortgage Loan requires monthly interest payments at a variable rate equal to one-month LIBOR plus 2.56%, and the 87-Pack Mezzanine Loan requires monthly interest payments at a variable rate equal to one-month LIBOR plus 6.50%, for a combined weighted average interest rate of LIBOR plus 3.03%. Pursuant to an interest rate cap agreement, the LIBOR portions of the interest rates due under the 87-Pack Loans are effectively capped at the greater of (i) 4.0% and (ii) a rate that would result in a debt service coverage ratio specified in the loan documents.
In connection with a sale or disposition to a third party of an individual 87-Pack Collateral Property, such 87-Pack Collateral Property may be released from the 87-Pack Loans, subject to certain conditions and limitations, by prepayment of a portion of the 87-Pack Loans at a release price calculated in accordance with the terms of the 87-Pack Loans.
At closing, the 87-Pack Mortgage Loan borrowers deposited $30.0 million to fund a reserve (the “87-Pack PIP Reserve”) in order to fund expenditures for work required to be performed under PIPs required by franchisors of the 87-Pack Collateral Properties. The 87-Pack PIP Reserve was funded with a portion of the proceeds of the Refinanced Term Loan (as defined below). The 87-Pack Loans also provides for certain additional amounts to be deposited in reserve accounts (collectively with the 87-Pack PIP Reserve, the “Reserve Funds”).
The 87-Pack Loans (i) are non-recourse except for certain environmental indemnities and certain so-called “bad boy” events and (ii) are fully recourse (subject in certain cases to a specified cap) upon the occurrence of certain other “bad boy” events.
For the term of the 87-Pack Loans, the Company has agreedand the OP are required 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: minimummaintain, on a consolidated basis, a net worth of $250.0 million (excluding accumulated depreciation and minimum consolidated liquidity.amortization). As of December 31, 2016,2017, the Company was in compliance with thesethis financial covenants.covenant.
HOSPITALITY INVESTORS TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Refinanced Additional Grace Mortgage Loan
A portion of the purchase price of the Grace Portfolio was financed 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”). 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, 2016,2017, the Company was in compliance with these financial covenants.
SNRefinanced 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 restatedDraws under the SN Term Loan and madewere used to finance approximately $235.5 million of the initial draw downapproximately $366 million purchase price with respect to a total of borrowings20 of $96.9 millionthe Company's hotels, including the hotels acquired in connection with the First Summit Closing. On November 2, 2015,Closing and 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 NobleThird Summit 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 was amended 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. NoUpon such expiration, no additional amounts arewere 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/CombinedConsolidated Statements of Operations and Comprehensive Loss.Income (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
On April 27, 2017, the restCompany and the OP, as guarantors, and certain wholly-owned subsidiaries of the term. The SNOP (each a “Term Loan Borrower” and collectively the “Term Loan Borrowers”), as borrowers, entered into a Second Amended and Restated Term Loan has a termAgreement (the “Refinanced Term Loan”) in an aggregate principal amount of three years, with two one-year extension options,$310.0 million to amend, restate and is secured by the fee interest in the hotels as and when they are acquired. The extensions onrefinance the SN Term Loan. The Refinanced Term Loan can only occur if certain conditions are met, including a condition that a minimum ratiois collateralized by 28 of net operating income to debt outstanding be satisfied. If the Company exercises the extension options the Loans will amortize in an amountCompany’s hotel properties, 20 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 towhich served as collateral for the SN Term Loan, the seven hotels acquired on the same date as the refinancing pursuant to the April Acquisition, and one unencumbered hotel from Company’s existing portfolio (each, a “Term Loan Collateral Property”).
At the closing of the Refinanced Term Loan, the net proceeds after accrued interest and closing costs were used (i) to repay the $235.5 million principal amount then outstanding under the SN Term Loan; (ii) to fund $33.1 million of the purchase price of the hotels purchased in the April Acquisition; (iii) to deposit $30.0 million to fund the 87-Pack PIP Reserve; and (iv) to pay in full the contingent consideration payable to the seller as part of an acquisition of hotels by the Company agreedduring March 2014 of $4.6 million.
The Refinanced Term Loan matures on May 1, 2019, subject to make periodic payments intothree one-year extension rights which, if all three extension rights are exercised, would result in an escrow accountoutside maturity date of May 1, 2022. The Refinanced Term Loan is prepayable in whole or in part at any time, subject to payment of (i) LIBOR breakage, if any, and (ii) except for the property improvement plans required byfirst $99.1 million pay-down of the franchisors. loan balance, certain fees applicable prior to May 1, 2018.
The SNRefinanced Term Loan includesrequires monthly interest payments at a variable rate of one-month LIBOR plus 3.00%. Pursuant to an interest rate cap agreement, the following financial covenants: minimumLIBOR portions of the interest rates due under the Refinanced Term Loan is capped at 4.00% during the initial term, and a rate based on a debt service coverage ratio minimumduring any extension term.
In connection with a sale or disposition to a third party of an individual Term Loan Collateral Property, such Term Loan Collateral Property may be released from the Refinanced Term Loan, subject to certain prepayment fees and conditions.
The Refinanced Term Loan also provides for certain amounts to be deposited into reserve accounts, including with respect to all costs associated with the PIPs required pursuant to any franchise agreement related to any Term Loan Collateral Property.
HOSPITALITY INVESTORS TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Refinanced Term Loan (i) is non-recourse except for certain environmental indemnities and certain so-called “bad boy” events and (ii) is fully recourse (subject in certain cases to a specified cap) upon the occurrence of certain other “bad boy” events.
For the term of the Refinanced Term Loan, the Company, the OP and the Term Loan Borrowers are required to maintain, on a consolidated basis, a net worth of $250.0 million (excluding accumulated depreciation and minimum consolidated liquidity.amortization). As of December 31, 2016,2017, the Company was in compliance with thesethis financial covenants.covenant.
Note 67 - Promissory Notes Payable
The Company’s promissory notes payable as of December 31, 20162017 and December 31, 20152016 were as follows (in thousands):
Table of Contents |
| | | | | | | | | | | |
| | | Outstanding Promissory Notes Payable |
| Note Payable | | December 31, 2017 | | December 31, 2016 | | Interest Rate |
| Summit Loan Promissory Note | | $ | — |
| | $ | 23,405 |
| | 14.0 | % |
| Note Payable to Former Property Manager | | $ | 1,000 |
| | $ | — |
| | — | % |
| Less: Deferred Financing Fees, Net | | $ | — |
| | $ | 25 |
| |
|
|
| Promissory Notes Payable, Net | | $ | 1,000 |
| | $ | 23,380 |
| | |
HOSPITALITY INVESTORS TRUST, INC.Interest expense related to the Company's promissory notes payable for the year ended December 31, 2017, the year ended December 31, 2016, and the year ended December 31, 2015 were $0.9 million, $2.9 million, and $1.4 million, respectively.
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
|
| | | | | | | | | | | |
| | | 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 |
| | $ | — |
| | |
Summit Loan Promissory Note
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. On January 12, 2017, the Company entered into the Loan Amendment, amending the Summit Loan. See Note 4 - Business Combinations.
As of December 31, 2016,The interest rate on the Summit Loan, bore interest at a rate of 13.0% per annum, of whichas amended, included 9.0% is paid in cash monthly and an additional 4% (the “Added Rate”) accrues, which accrued and iswas compounded monthly and added to the outstanding principal balance at maturity unless otherwise paid in cash by the Company. As of December 31, 2016, theThe Summit Loan, as amended, had a maturity date of February 11, 2017, and2018, however, if the Seller Loan Agreement provides for two one-year extensions atclosing of the Company’s option. Upon each extension,April Acquisition occurred prior to February 11, 2018, then the Added Rate will be increased by 1%. As required pursuant tooutstanding principal of the Summit Loan the Company paid principaland any accrued interest thereon would become immediately due and payable in the amount of $5.0 million during the year ended December 31, 2016.full. The Company maywas also permitted to pre-pay the Summit Loan in whole or in part without penalty at any time.
Interest expense related to the Company's promissory notes payable for the year ended December 31, 2016, the 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 intoCompany and the Summit Amendment, the CompanySellers entered into the Loan Amendment which amended the Summit Loan Promissory Note and the Additional Loan Agreement pursuant to which the Summit Sellers agreed to loan the Company an additional $3.0 million as consideration for the Summit Amendment described in Note 4. The maturity date of the Additional Loan under the Additional Loan Agreement was July 31, 2017, however, if the sale of the seven hotels to be sold pursuant to the Reinstatement Agreement on April 27, 2017 was completed on that date, the entire principal amount of the Additional Loan would be deemed paid in full and the interest accrued thereon would become immediately due and payable.
On March 31, 2017, at the Initial Closing and using a portion of the proceeds therefrom, the Company paid in full the Summit Loan. On April 27, 2017, the Company completed the acquisition of seven of the hotels remaining to be purchased
HOSPITALITY INVESTORS TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
under the Reinstatement Agreement, and as a result, the Additional Loan was deemed paid in full (See Note 174 - Subsequent Events)Business Combinations).
Note Payable to Former Property Manager
As part of the consideration for the Property Management Transactions, the Company and the OP agreed pursuant to the Framework Agreement to make certain cash payments to the Former Property Manager, which agreement is classified under GAAP as a short-term note payable with the Former Property Manager. The note payable is non-interest bearing and is required to be repaid in twelve monthly installments of $333,333.33, with the final payment in March 2018 (See Note 3 - Brookfield Investment and Related Transactions).
Note 8 - Mandatorily Redeemable Preferred Securities
In February 2015, approximately $447.1 million of the contract purchase price for the Grace Portfolio was satisfied by the issuance to the sellers of the Grace Portfolio of preferred equity interests (the "Grace Preferred Equity Interests") in two newly-formed Delaware limited liability companies, 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 "Holdco entities"), each of which is an indirect subsidiary of the Company and an indirect owner of the 112 hotels currently comprising the Grace Portfolio. The two Holdco entities correspond, respectively, to the pool of hotels encumbered by the 87-Pack Loan (plus eight additional otherwise unencumbered hotels) and the pool of hotels encumbered by the Refinanced Additional Grace Mortgage Loan.
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 are entitled to 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, 2017, the Company has redeemed $213.0 million of the Grace Preferred Equity Interests, resulting in $234.1 million of liquidation value remaining outstanding under the Grace Preferred Equity Interests.
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 Company is required to redeem 50.0% of the Grace Preferred Equity Interests originally issued, or an additional $10.6 million by February 27, 2018, and is required to redeem the remaining $223.5 million by February 27, 2019.
See Note 21 – Subsequent Events for information about the Second Closing which occurred on February 27, 2018 and the
use of a portion of the proceeds thereof to redeem $10.6 million of liquidation value of the Grace Preferred Equity Interests.
Note 79 - Accounts Payable and Accrued Expenses
The following is a summary of the components of accounts payable and accrued expenses (in thousands):
|
| | | | | | | |
| | 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 |
|
|
| | | | | | | |
| | December 31, 2017 | | December 31, 2016 |
| Trade accounts payable | $ | 24,261 |
| | $ | 22,403 |
|
| Accrued expenses | 43,191 |
| | 41,497 |
|
| Contingent consideration from Barceló Portfolio (See Note 13 - Commitments and Contingencies) | — |
| | 4,619 |
|
| Total | $ | 67,452 |
| | $ | 68,519 |
|
Note 810 - Common Stock
The Company had 38,493,43039,505,742 shares and 36,300,77738,493,430 shares of common stock outstanding and had received total proceeds therefrom of $913.0 million and $902.9 million as of December 31, 20162017 and December 31, 20152016, respectively. The shares of common stock outstanding include shares issued as distributions through December 31, 2016,March 2017, 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
Common Stock Issuances
At the year ended December 31, 2016 and through March 15, 2017 ,Initial Closing the Company issued 315,383279,329 shares of the Company’s common stock as stock distributions with respect to December 2016the Former Property Manager, and converted all 524,956 Class B Units held by the period from January 1, 2017 through January 13, 2017,Former Advisor into 524,956 OP Units, and, immediately following such conversion, redeemed such 524,956 OP Units for 524,956 shares of the date these distributions were suspended (See Note 17 - Subsequent Events).
DistributionsCompany’s common stock.
TableThe Company determined the fair value on the date of Contentsissuance of the Company's common stock to be $14.59 per share. The Company determined this value by utilizing income and market based approaches further adjusted for fair value of debt and the Class C Units, and applied a discount for lack of marketability. As part of the process, the Company made the determination after consulting with a nationally recognized third party advisor.
HOSPITALITY INVESTORS TRUST, INC.
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
Distributions
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 $0.0046575343 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.
To date,For the period from May 2014 until May 2016 when the Company has fundedcommenced paying distributions in common stock, the Company paid cash distributions, all of its cash distributionswhich were funded with proceeds from the Offering which has beenand proceeds realized from the sale of common stock issued pursuant to the DRIP. The Offering was suspended ason November 15, 2015 and terminated on January 7, 2017, the third anniversary of December 31, 2015.the commencement of the Offering, in accordance with its terms.
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 stockholder. Accordingly, the Company paid a cash distribution to stockholders of record each day during the quarter ended March 31, 2016, but any distributions for subsequent periods have beenwere 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 initial 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 the 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.at that time. 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 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 its approval of the Company's entry into the SPA, the CompanyCompany's board of directors suspended paying distributions to itsthe Company's stockholders entirely (See Note 17 - Subsequent Events).entirely. 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
In order to provide stockholders with interim liquidity, theThe Company’s board of directors adopted a share repurchase program (“SRP”) in connection with the IPO that enabled 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.limitations. In connection with the Company’s entry into the SPA, the Company's board of directors
HOSPITALITY INVESTORS TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
suspended the SRP effective as of January 23, 2017. In connection with the Initial Closing, the Company's board of directors terminated the SRP effective as of April 30, 2017. The Company did not make any repurchases of common stock pursuant to the SRP or otherwise during the yearyears ended December 31, 2016 (except for the repurchases of 28,264 shares for $0.6 million at an average repurchase price per share of $23.44 with respect to repurchase requests received during the year endedor December 31, 2015 that were completed2017, except pursuant to the tender offer which the Company commenced in January 2016) and has not, and will not, make any repurchaseOctober 2017, as described below.
Company Tender Offer
On October 25, 2017, the Company commenced a self-tender offer (the “Company Offer”) for up to 1,000,000 shares of common stock duringat a price of $6.50 per share. On November 15, 2017, the period between January 1,Company increased the purchase price in the Company Offer to $6.75 per share. The Company Offer was made in response to an unsolicited offer to stockholders commenced on October 23, 2017 by MacKenzie Realty Capital, Inc. The Company Offer expired at 5:00 p.m., New York City time, on December 22, 2017. On December 26, 2017, a total of 113,091 shares were tendered in the Company Offer and purchased and subsequently retired by the effectivenessCompany, for an aggregate purchase price of the termination of the SRP.$763,366.
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. No dealer manager fees or selling commissions are paid with respect to shares purchased pursuant to the DRIP. The shares purchased pursuant to the DRIP have the same rights and are treated in the same manner as all other shares of the 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 Consolidated Balance Sheets in the period distributions are paid.
There were 1,226,867 shares issued under the DRIP as of December 31, 2016. There were 828,217 shares issued under the
DRIP as of December 31, 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 ourthe DRIP in connection with distributions paid in cash. All shares issued under
On January 13, 2017, as authorized by the Company's board of directors, the DRIP were purchased at $23.75 per share. Ifwas suspended effective as of February 12, 2017.
Note 11 - Share-Based Payments
The Company has adopted an employee and whendirector incentive restricted share plan (as amended and/or restated, the Company issues any additional“RSP”), which provides it with the ability to grant awards of restricted shares and, following an amendment and restatement in connection with the Initial Closing, RSUs to the Company’s directors, officers and employees, as well as the directors and employees of entities that provide services to the Company. The total number of shares of common stock that may be granted under the DRIP,RSP may not exceed 5% of the authorized shares of common stock at any time and in any event may not exceed 4,000,000 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 Company 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. 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 are generally subject to the same restrictions as the underlying restricted shares. The fair value of the restricted shares is expensed over the applicable vesting period. The Company recognizes the impact of forfeited restricted share awards as they occur.
RSUs represent a contingent right to receive shares of common stock 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. RSUs may not, in general, be sold or otherwise transferred until restrictions are removed and the rights to the shares of common stock have vested. Holders of RSUs do not have or receive any voting rights with respect to the RSUs or any shares underlying any award of RSUs, but such holders generally are credited with dividend or other distribution equivalents that are regarded as having been reinvested in common stock will be at a price equalRSUs which are subject to the Estimated Per-Share NAV.same vesting conditions and/or other restrictions as the underlying RSUs. The fair value of the RSUs is expensed over the applicable vesting period. The Company recognizes the impact of forfeited RSUs as they occur.
HOSPITALITY INVESTORS TRUST, INC.
NOTES TO CONSOLIDATED/COMBINEDCONSOLIDATED FINANCIAL STATEMENTS
On January 13,Restricted Share Awards
A summary of the Company's restricted share awards for the year ended December 31, 2017 is presented below.
|
| | | | | | | | | | | |
| | | Number of Shares | | Weighted Average Grant Date Fair Value
(per share) | | Aggregate Intrinsic Value
(in thousands) |
| Non-vested December 31, 2016 | | 11,387 |
| | $ | 22.12 |
| | $ | 252 |
|
| Granted | | 7,576 |
| | $ | 14.59 |
| | $ | 111 |
|
| Vested | | 4,862 |
| | $ | 22.21 |
| | $ | 108 |
|
| Forfeitures | | 6,525 |
| | $ | 22.06 |
| | $ | 144 |
|
| Non-vested December 31, 2017 | | 7,576 |
| | $ | 14.59 |
| | $ | 111 |
|
Prior to the Company'sInitial Closing, the Company made annual restricted share awards to its independent directors that vested annually over a five-year period following the date of grant, subject to continued service. In connection with the Initial Closing, the Company implemented a new director compensation program. Following the Initial Closing and pursuant to a compensation payment agreement, restricted share awards are generally made to an affiliate of the Brookfield Investor in respect of the Redeemable Preferred Directors’ service on the board of directors suspendedand vest on the DRIP (See Note 17 - Subsequent Events)earlier of the first anniversary of the date of grant and the date of the next annual meeting of the board of directors following the date of grant, subject to the continued service of the applicable Redeemable Preferred Director. As of December 31, 2017, the Company anticipates that all unvested restricted share awards will vest in accordance with their terms.
The compensation expense related to restricted shares for the year ended December 31, 2017 was less than $0.1 million. As of December 31, 2017 there was less than $0.1 million of unrecognized compensation expense remaining.
RSU Awards
A summary of the Company's RSU awards for the year ended December 31, 2017 is presented below:
|
| | | | | | | | | | | |
| | | Number of Shares | | Weighted Average Grant Date Fair Value
(per share) | | Aggregate Intrinsic Value
(in thousands) |
| Non-vested December 31, 2016 | | — |
| | $ | — |
| | $ | — |
|
| Granted | | 100,398 |
| | $ | 15.08 |
| | $ | 1,514 |
|
| Vested | | 558 |
| | $ | 21.48 |
| | $ | 12 |
|
| Forfeited | | — |
| | $ | — |
| | $ | — |
|
| Non-vested December 31, 2017 | | 99,840 |
| | $ | 15.04 |
| | $ | 1,502 |
|
RSU awards to the Company’s executive officers and other employees generally vest annually over a four-year vesting period following the date of grant, subject to continued service. RSU awards to directors other than Redeemable Preferred Directors vest on the earlier of the first anniversary of the date of grant and the date of the next annual meeting of the board of directors following the date of grant, subject to the continued service of the applicable director. In addition, during the year ended December 31, 2017, certain RSU awards to directors other than Redeemable Preferred Directors were issued in connection with the simultaneous forfeiture of an equal number of restricted shares. These RSU awards have the same vesting terms as the restricted shares which were forfeited (i.e., annually over a five-year period following the date of grant of the original restricted share award). Vested RSUs may only be settled in shares of common stock and such settlement generally will be on the earliest of (i) in the calendar year in which the third anniversary of each applicable vesting date occurs, (ii) termination of the recipient’s services to the Company and (iii) a change in control event. As of December 31, 2017, the Company anticipates that all unvested RSUs will vest in accordance with their terms.
The compensation expense related to RSUs for the year ended December 31, 2017 was approximately $0.4 million. As of December 31, 2017 there was $1.2 million of unrecognized compensation expense remaining.
HOSPITALITY INVESTORS TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 912 - Fair Value Measurements
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 valuesamounts and the fair values of material non-current liabilities, excluding deferred financing fees, that qualify as financial instruments (in thousands):
| | | | December 31, 2016 | December 31, 2017 |
| | Carrying Amount | | Fair Value | Carrying Amount | | Fair Value |
Mortgage notes payable(1) | $ | 1,442,330 |
| | $ | 1,439,990 |
| $ | 1,513,000 |
| | $ | 1,516,368 |
|
(1) Carrying amount does not include that associated deferred financing fees as of December 31, 2016. | |
| Mandatorily redeemable preferred securities | | $ | 234,117 |
| | $ | 222,700 |
|
Contingent forward liability(1) | | $ | 1,437 |
| | $ | 1,437 |
|
| Total | | $ | 1,748,554 |
| | $ | 1,740,505 |
|
______________
(1) See Note 13 - Commitments and Contingencies
The fair value of the mortgage notes payable and mandatorily redeemable preferred securities were determined using the discounted cash flow method and applying current market rates and is classified as level 3 under the fair value hierarchy. As describedMarket rates take into consideration general market conditions and maturity.
The contingent forward liability represents the fair value of the Company's obligation to issue Class C Units to the Brookfield Investor in the future (See Note 1013 - Commitments and Contingencies,Contingencies), and is estimated by using option pricing analysis and discounting the carrying amountestimated value of theClass C Units to account for uncertainty and lack of marketability. The contingent consideration related toforward liability is classified as level 3 under the Barceló Portfolio acquisition was remeasured to fair value as of December 31, 2016.hierarchy.
As described in Note 14 - Impairments,During 2017, the Company recorded an impairment chargeloss of $2.4$10.4 million during the quarter ended June 30, 2016, to reflect oneon its hotel asset at itsproperties (See Note 17-Impairments). The fair value of $6.2 million. Thisthese hotel properties was based on the observable market data which is considered level 2 input under the fair value hierarchy and unobservable inputs that reflect the Company's internal assumptions, which are considered level 3 input under the fair value hierarchy.
The Company recognized an impairment loss of $5.2 million, including impairment of $3.9 million on the sale of two hotels and impairment of $1.3 million on one hotel classified as held for sale as of December 31, 2017, which includes the costs to sell those assets. The fair value was determined using one or more unobservable inputs representing a nonrecurring level 3 fair value measurement.2 measurements, which were agreed upon sales prices with third party buyers (See Note 17 - Impairments of Long-Lived Assets).
Note 1013 - Commitments and Contingencies
Litigation
In the ordinary course of business, the Company may become subject to litigation, 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.filing, other than as set forth below.
In February 2018, a stockholder of the Company, Tom Milliken, filed a derivative complaint (the “Complaint”) on behalf of the Company and against the Company, as well as the Former Advisor, the Former Property Manager, various affiliates of those entities (together, the “Former Advisor Defendants”), and certain current and former directors and officers of the Company (the “Director Defendants”). The Complaint was filed in the District Court for the Southern District of New York on February 26, 2018. The Complaint alleges, among other things, that the Former Advisor and Director Defendants breached their fiduciary duties to the Company and its stockholders by putting their own interests above those of the Company, which breach was aided and abetted by certain of the Former Advisor Defendants. The Complaint also asserts claims of breach of contract against the Director Defendants, corporate waste against the Former Advisor and certain of the Director Defendants, and unjust enrichment against certain of the Director Defendants and Former Advisor Defendants. The Company has been
HOSPITALITY INVESTORS TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
investigating the above claims and others made by the stockholder since receipt of a shareholder demand letter from Mr. Milliken's attorneys in July 2017 and a supplemental demand letter in December 2017. Based on its investigation to date, the Company believes that the claims are without merit and no accrual of any potential liability was necessary as of December 31, 2017. The Company has consulted with its outside legal counsel and it is evaluating the next steps that will be taken in the case.
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 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 Company's March 2014 acquisition of the Barceló Portfolio isinterests in six hotels through fee simple, leasehold and joint venture interests (the "Barceló Portfolio") was a contingent consideration payable to BCCthe seller based on the future operating results of three of the six hotels: Baltimore Courtyard, Providence Courtyard and Stratford Homewood Suites. During August 2016, the Company and BCCthe seller entered into an agreement extending and modifying the payment terms of the contingent consideration. The amount payable iswas calculated by applying a contractual capitalization rate to the excess earnings before interest, taxes, and depreciation and amortization, earned in the third year after the acquisition over an agreed upon target, provided the contingent consideration generally willwould not be less than $4.1 million or exceed $4.6 million. During the year ended December 31, 2016, theThe Company revised its forecast resulting in an increase inpaid the contingent consideration payable of $1.5 million.$4.6 million with proceeds used from the Refinanced Term Loan (See Note 6 - Mortgage Notes Payable).
Contingent Forward Liability
Pursuant to the SPA with the Brookfield Investor, the Company may become obligated to issue additional Class C Units to the Brookfield Investor and this obligation is considered a contingent forward contract under Accounting Standards Codification section 480 - Distinguishing Liabilities from Equity, and accounted for as a liability. The change infair value of the contingent consideration payable is reflected in other income (expense) inforward liability was initially recognized at zero since the Consolidated/Combined Statementscontingent forward contract was executed at fair market value. The Company has determined the fair value of Operations and Comprehensive Income (Loss) for the year ended December 31, 2016. The contingent consideration payableforward liability was $1.4 million as of December 31, 2016 is $4.6 million.2017. The Company anticipates payingwill measure the contingent considerationforward liability on July 3, 2017.a recurring basis until the Company is no longer obligated to issue additional Class C Units and any changes in fair value will be recognized through earnings. At the time that the Company is no longer obligated to issue additional Class C Units, the corresponding liability will be extinguished.
Note 1114 - Related Party Transactions and Arrangements
Relationships with the Brookfield Investor and its Affiliates
As described in Note 3 - Brookfield Investment and Related Transactions, on January 12, 2017, the Company and the OP entered into the SPA and the Framework Agreement. On March 31, 2017, the Initial Closing occurred and a variety of transactions contemplated by the SPA and the Framework Agreement were consummated, including the issuance and sale of the Redeemable Preferred Share and 9,152,542.37 Class C Units and the execution or taking of various agreements and actions required to effectuate the Company's transition to self-management. 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. Holders of Class C Units are also entitled to receive, with respect to each Class C Unit, fixed, quarterly, cumulative PIK Distributions payable in Class C Units at a rate of 5% per annum. For the year ended December 31, 2016, American Realty Capital Hospitality Special Limited Partner, LLC (the "Special Limited Partner"), which is wholly owned by AR Capital, owned 9,308 shares2017, the Company paid cash distributions of $7.9 million and PIK Distributions of 355,349.60 Class C Units to the Brookfield Investor, as the sole holder of the Class C Units.
Two of the Company’s outstanding common stock. Additionally,directors, Bruce G. Wiles, who also serves as of December 31, 2016, AR Capital, the parentChairman of the Company's sponsor, owned 23,270 sharesBoard, and Lowell G. Baron, have been elected to the Company’s board of directors as the Redeemable Preferred Directors pursuant to the Brookfield Investor’s
HOSPITALITY INVESTORS TRUST, INC.
NOTES TO CONSOLIDATED/COMBINEDCONSOLIDATED FINANCIAL STATEMENTS
Company's outstanding common stock, and AR Global owned 6,699 sharesrights as the holder of the Company's outstanding common stock. Crestline is also under common controlRedeemable Preferred Share and pursuant to the SPA. Messrs. Wiles and Baron are Managing Partners of Brookfield Asset Management, Inc., an affiliate of the Brookfield Investor.
Relationships with AR Capital, AR Global and AR Global.their Affiliates
See Note 17 - Subsequent Events for additional information regarding
As of March 31, 2017, the Company’s issuance of additional shares ofFormer Advisor, the Company’s common stock to theFormer 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 alsoCrestline were under common control with AR Capital, the parent of the Company's sponsor,ARC IX, and AR Global. In May 2016, RCAPGlobal, the successor to certain of AR Capital's businesses. ARC IX served as the Company’s sponsor prior to its transition to self-management at the Initial Closing. Following the sale of AR Global’s membership interest in Crestline in April 2017, Crestline is no longer under common control with AR Global and AR Capital.
The Former Dealer Manager was paid fees and compensation in connection with the sale of the Company’s common stock in the Offering prior to its affiliated debtors emerged from bankruptcy under the new name, Aretec Group, Inc.suspension.
Prior to the Initial Closing, the Former Advisor and its affiliates were entitled to a variety of fees, and may incur and pay costs and fees on behalf of the Company for which they were entitled to reimbursement. The Company had a payable due to related parties related to operating, acquisition, financing and offering costs of $2.9 million and $6.5 million as of December 31, 2016 and December 31, 2015, respectively.reimbursement, including those described in more detail below.
At the Initial Closing, the Advisory Agreement was terminated and certain employees of the Former 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 then current affiliates of the Former Advisor except for its hotel-level property management agreements with Crestline and entered into a transition services agreement with each of the Former 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.Crestline.
See Note 173 - Subsequent EventsBrookfield Investment and Related Transactions for additional information regarding otherall payments and issuances of common stock made to the Former Advisor and the Former Property Manager at the Initial Closing during the three months ended March 31, 2017, as well as other terms of the transactions contemplated by the Framework Agreement.Agreement, including the transition services agreements with the Former Advisor and Crestline, that would result in additional payments to the Former Advisor and the Former Property Manager or their affiliates in future periods.
Fees Paid to the Former Advisor and its Affiliates in Connection with the Offering
The Former Dealer Manager was paid fees and compensation in connection with the sale of the Company's common stock in the Offering prior to its suspension. The Former Dealer Manager was paid a selling commission of up to 7.0% of the per share purchase price of the Company’s Offering proceeds before reallowance of commissions earned by participating broker-dealers. In addition, the Former Dealer Manager was 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 was entitled to reallow its dealer-manager fee to participating broker-dealers. A participating broker dealer was 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 was elected, the dealer manager fee has 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 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):
HOSPITALITY INVESTORS TRUST, INC.
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
|
| | | | | | | | | | | | | | | | | | | | |
| | | 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 Advisor and its affiliates were paid compensation and/or received reimbursement for services relating to the Offering, including transfer agency services provided by ANST, an affiliate ofin addition to selling commissions and dealer manager fees paid to 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 Former Advisor’s responsibility. As of DecemberMarch 31, 2016,2017, Offering and related costs (excluding selling commissions and dealer manager fees) exceeded 2.0% of gross proceeds received from the Offering by $5.9$5.8 million. At the Initial Closing, pursuant to the Framework Agreement, the Company waived the Former Advisor's obligations to reimburse the Company for these Offering and related costs (See Note 173 - Subsequent Events).
Offering costs incurred by the Advisor or its affiliated entities on behalf of the Company have generally been recorded as a reduction to additional paid-in-capital on the accompanying Consolidated Balance Sheets. The table below shows compensationBrookfield Investment and reimbursements incurred and payable to the Advisor and its affiliates for services relating to the Offering during the year ended December 31, 2016, the year ended December 31, 2015, and the year ended December 31, 2014, and the associated amounts 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)Related Transactions).
|
| | | | | | | | | | | | | | | | | | | | |
| | | 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 |
|
(1) Included in the table above for the year ended December 31, 2015, were certain reimbursements incurred and payable to the Advisor and its affiliates for services of approximately $0.8 million that were reflected in general and administrative expenses on the accompanying consolidated/combined 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.
The Company was also party to a transfer agency agreement with ANST, pursuant to which ANST provided the Company with transfer agency services (including broker and stockholder servicing, transaction processing, year-end IRS reporting and other services), and supervisory services overseeing the transfer agency services performed by a third-party transfer agent. AR Global received written notice from ANST on February 10, 2016 that it would wind down operations by the end of the month and would withdraw as the transfer agent effective February 29, 2016. On February 26, 2016, the Company entered into a definitive agreement with DST Systems, Inc., its previous provider of sub-transfer agency services, to provide the Company directly with transfer agency services (including broker and stockholder servicing, transaction processing, year-end IRS reporting and other services). Following the suspension of the IPO on November 15, 2015, fees payable with respect to transfer agency services are included in general and administrative expenses on the Consolidated/Combined Statements of Operations and Comprehensive Income (Loss) during the period the service was provided.
Fees Paid to the Former Advisor in Connection Withwith the Operations of the Company
HOSPITALITY INVESTORS TRUST, INC.
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
Fees Paid to the Advisor
Prior to the Initial Closing, the Former Advisor receivesreceived an acquisition fee of 1.5% of (A) the contract purchase price of each acquired property and (B) the amount advanced for a loan or other investment. The Former Advisor was also reimbursed for expenses incurred in the process of acquiring properties, in addition to third-party costs the Company may have paid directly to, or reimbursed the Former Advisor for. Additionally, the Company reimbursed the Former Advisor for legal expenses it or its affiliates directly incurred 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. Fees paid to the Former Advisor related to acquisitions arehave been reported as a component of net income (loss) in the period incurred. The aggregate amounts of acquisition fees, acquisition expenses and financing coordination fees (as described below) were also subject to certain other limitationlimitations that never became applicable during the term of the Advisory Agreement.
Prior to the Initial Closing, if the Former Advisor provided services in connection with the origination or refinancing of any debt that the Company obtained and used to acquire properties or to make other permitted investments, or that was assumed,
HOSPITALITY INVESTORS TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
directly or indirectly, in connection with the acquisition of properties, the Company paid the Former 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 Former Advisor related to debt financings arehave been deferred and amortized over the term of the related debt instrument.
Prior to the Initial Closing, the Former Advisor received a subordinated participation for asset management services it providesprovided to the Company. For asset management services provided by the Former Advisor prior to October 1, 2015, the subordinated participation was issued quarterly in the form of performance-based restricted, forfeitable partnership units of the OP designated as “Class B Units” ("Class B Units").Units.
On November 11, 2015, the Company, the OP and the Former 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 Former 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 Former Advisor prior to October 1, 2015, the Company issued Class B Units on a quarterly basis in an amount equal to:
The cost of the Company’s assets multiplied by
0.1875%, divided by
The value of one share of common stock as of the last day of such calendar quarter, which was equal to $22.50 (the Offering price prior to its suspension minus selling commissions and dealer manager fees).
In March 2016, the Company amended its agreement with the Former 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 month of asset management fees payable to the Former Advisor under the Company's agreement with the Former 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 Former Advisor was entitled to receive distributions on the Class B Units it had 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 Former Advisor and its affiliates were 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,Advisory Agreement, each as described below.
HOSPITALITY INVESTORS TRUST, INC.
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
The restricted Class B Units were not scheduled to become unrestricted Class B Units until certain performance conditions are satisfied, including untilsatisfied. Through 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 toInitial Closing on March 31, 2017, a 6.0% cumulative, pre-tax, non-compounded annual return to investors, and the occurrence of a sale of all or substantially all of the OP’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 havehad been issued as of December 31, 2016 for asset management services performed by the Former Advisor, and a total of 21,18725,454 shares of common stock havehad been issued as of December 31, 2016 to the Former Advisor foras 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 Former 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(See Note 173 - Subsequent Events.
The issuanceBrookfield Investment and Related Transactions). In applying the acquisition method 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,accounting, the Company began paying distributions onrecognized the conversion and subsequent redemption of the Class B Units in sharesas part of common stock on the same terms paidconsideration transferred pursuant to the Company’s stockholders.
The table below presents the Class B Units distribution expense for the year ended December 31, 2016, December 31, 2015,Framework Agreement and, December 31, 2014 respectively and the associated payableaccordingly, 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 |
| Class B Units distribution expense | | $ | 830 |
| | $ | 419 |
| | $ | 18 |
| | $ | 65 |
| | $ | 92 |
|
The table below presents the asset management fees, acquisition fees, acquisition cost reimbursements and financing coordination fees charged by the Former Advisor in connection with the operations of the Company for the years ended December 31, 2017, 2016, 2015, and 20142015 and the associated payable as of December 31, 20162017 and December 31, 2016, which is recorded in due to related parties on the Company's Consolidated Balance Sheets (in thousands):
HOSPITALITY INVESTORS TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31 | | Payable as of |
| | | 2017 | | 2016 | | 2015 | | December 31, 2017 | | December 31, 2016 |
| Asset management fees | | $ | 4,581 |
| | $ | 18,004 |
| | $ | 4,097 |
| | $ | — |
| | $ | 8 |
|
| Acquisition fees | | $ | — |
| | $ | 1,624 |
| | $ | 31,068 |
| | $ | — |
| | $ | — |
|
| Acquisition cost reimbursements | | $ | — |
| | $ | 108 |
| | $ | 2,066 |
| | $ | — |
| | $ | — |
|
| Financing coordination fees | | $ | — |
| | $ | 206 |
| | $ | 16,994 |
| | $ | — |
| | $ | — |
|
| | | $ | 4,581 |
| | $ | 19,942 |
| | $ | 54,225 |
| | $ | — |
| | $ | 8 |
|
Prior to the Initial Closing, the Company reimbursed the Former Advisor’s costs for providing administrative services, subject to certain limitations. Additionally, the Company reimbursed the Former Advisor for personnel costs in connection with other services; however, the Company did not reimburse the Former Advisor for personnel costs, including executive salaries, in connection with services for which the Former Advisor received acquisition fees, acquisition expenses or real estate commissions.
The table below represents reimbursements to the Former Advisor for the year ended December 31, 2017, the year ended December 31, 2016, and the year ended December 31, 2015, and the associated payable as of December 31, 2017 and December 31, 2016, 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 |
| 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 |
|
Prior to the Initial Closing, the Company reimbursed the Advisor’s costs for 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, 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 reimbursed the Advisor for personnel costs in connection with other services; however, the Company has not reimbursed the Advisor for personnel costs, including executive salaries, in connection with services for which the Advisor received acquisition fees, acquisition expenses or real estate commissions. These expense reimbursements are included in the amount reported under total compensation and
HOSPITALITY INVESTORS TRUST, INC.
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
reimbursement for services provided by the Advisor and its affiliates related to the Offering described above under "Fees Paid in Connection with the Offering."
The table below represents reimbursements to the Advisor for the year ended December 31, 2016, the year ended December 31, 2015, and the year ended December 31, 2014, and 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 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31 | | Payable as of |
| | | 2017 | | 2016 | | 2015 | | December 31, 2017 | | December 31, 2016 |
| Total general and administrative expense reimbursement for services provided by the Advisor | | $ | 869 |
| | $ | 2,442 |
| | $ | — |
| | $ | — |
| | $ | 522 |
|
Following the Initial Closing, all of the above fees and reimbursements are no longer payable to the Former Advisor as the Advisory Agreement has been terminated (See Note 173 - Subsequent Events)Brookfield Investment and Related Transactions).
Following the Initial Closing, certain other fees, participations and distributions to which the Former Advisor or the Former Special Limited Partner would have been entitled to prior to the Initial Closing were terminated or forfeited, with no amounts ever having becoming payable with respect to such fees, participations and distributions. The Former Advisor’s right to receive certain brokerage commissions under certain conditions with respect to sales of the Company’s properties was also terminated, with only $0.3 million having been paid in connection with one hotel sold during the three months ended September 30, 2016.
Fees Paid to the Former 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 Former Property Manager pursuant to property management agreements between the Company and the Former Property Manager. The Former 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.manager pursuant to the property management agreements. 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 itsthe Former Property Manager (which payment was assigned by the Former Property Manager to Crestline) an annual incentive fee equal to 15% of the amount by which the operating profit from
HOSPITALITY INVESTORS TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the properties sub-managed by Crestline for such fiscal year (or partial fiscal year) exceeds 8.5% of the total investment of such properties.properties pursuant to property management agreements with the Former Property Manager. Incentive fees incurred by the Company were approximately $0.4$0.1 million and $0.1$0.4 million for the years ended December 31, 20162017 and December 31, 2015,2016, respectively. Incentive fees incurred by the Company were less thanapproximately $0.1 million for the year ended December 31, 2014.2015.
The table below shows the management fees (including incentive fees described above) and reimbursable expenses incurred by the Company from Crestlinepursuant to or the Property Managerproperty management agreements (and not payable to a third party sub-property manager) during the year ended December 31, 2016,2017, the year ended December 31, 2015,2016, and the year ended December 31, 20142015 respectively, and the associated payable as of December 31, 20162017 and December 31, 20152016 (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 |
| | $ | — |
| | $ | — |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31 | | Payable as of |
| | | 2017 | | 2016 | | 2015 | | December 31, 2017 | | December 31, 2016 |
| Total management fees and reimbursable expenses incurred from Crestline | | $ | 4,291 |
| | $ | 16,181 |
| | $ | 9,898 |
| | $ | — |
| | $ | 1,306 |
|
| Total management fees incurred from Property Manager | | $ | 2,035 |
| | $ | 8,459 |
| | $ | 6,816 |
| | $ | — |
| | $ | 532 |
|
| Total | | $ | 6,326 |
| | $ | 24,640 |
| | $ | 16,714 |
| | $ | — |
| | $ | 1,838 |
|
Following the Initial Closing, the Company no longer has any property management agreements with the Former Property Manager and instead contracts, directly or indirectly, through its taxable REIT subsidiaries, with Crestline and the other 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 173 - Subsequent Events)Brookfield Investment and Related Transactions).
Fees Paid in Connection with the Liquidation or Listing
Prior to the Initial Closing, the Company was 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 was entitled to 15.0% of the excess total return but not to exceed 10.0% of the aggregate total return for such year. This fee was payable only upon Further, following 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 years ended December 31, 2016, December 31, 2015, and December 31, 2014 respectively, and no such fee was payable in connection with the Initial Closing.
Prior to the Initial Closing, the Company could 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 could 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 commissions were incurred during the years ended December 31, 2015 or December 31, 2014, respectively, and no commissions were payable in connection with the Initial Closing.
Prior 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 was not 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 as of December 31, 2016, and no such participation was payable in connection with the Initial Closing .
Prior to the Initial Closing, if the common stock of the Company was listed on a national exchange, 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 on their capital contributions. The Special Limited Partner would not have been entitled to the subordinated incentive listing distribution unless investors have received a 6.0% cumulative, pre-tax non-compounded annual return on their capital contributions. No such distributions have been incurred as of December 31, 2016, and no such distributions were payable in connection with the Initial Closing.
HOSPITALITY INVESTORS TRUST, INC.
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
Prior to the Initial Closing, in the event of a termination or non-renewal of the advisory agreement with the Advisor, with or without cause, the Special Limited Partner, through its controllingAR Global’s membership 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,Crestline in April 2017, Crestline is no longer under common control with AR Global and no such distributions were payable in connection with the Initial Closing.
The Special Limited Partner’s right to these distributions and participations was automatically forfeited and redeemed by the OP without the payment of any consideration to the Special Limited Partner or any of its affiliates. (See Note 17 - Subsequent Events)AR Capital).
Note 1215 - Economic Dependency
As of December 31, 2016, under various agreements,Prior to the Initial Closing, the Company has engagedwas dependent on the Former Advisor and its affiliatesaffiliates. Going forward, the Company intends to provide certain services that are essentialcontinue pursuing its investment strategies, subject to the Brookfield Approval Rights. The Company including asset management services, supervisionexpects to generate additional liquidity through the sale of Class C Units to the management, asset acquisitionBrookfield Investor at Subsequent Closings (See Note 3 - Brookfield Investment and disposition decisions, as well as other administrative responsibilities for the Company including accounting services and investor relations.AsRelated Transactions). As a result of these relationships, the Company wasis dependent upon the AdvisorBrookfield Investor and its affiliates.
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. 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 Advisor 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 extended with respect to 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 1316 - Income Taxes
The Company elected and qualified to be taxed as a REIT under Sections 856 through 860 of 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. Distributions to stockholders for the tax year endedAs of December 31, 2016 were all deemed2017, the REIT has approximately $140.0 million of net operating loss ("NOL") carry forward that may be used in the future to reduce the amount otherwise required to be returndistributed by the Company to meet REIT requirements. These NOLs will begin to expire after 2034.
H.R. 1 (Tax Cuts and Jobs Act) was enacted on December 22, 2017. Accordingly, the deferred tax assets have been remeasured using the U.S. federal income tax rate of capital.
21% that is effective beginning with calendar year 2018. The componentsimpact of this re-measurement is a decrease to deferred tax assets and an increase to the deferred income tax expense for the years endedas of December 31, 2016, December 31, 2015 and December 31,2017 of approximately $1.0 million.
The Company's TRSs had a combined loss (calculated in accordance with GAAP) in 2017, largely due to the goodwill
HOSPITALITY INVESTORS TRUST, INC.
NOTES TO CONSOLIDATED/COMBINEDCONSOLIDATED FINANCIAL STATEMENTS
2014impairment expense, which resulted in income tax benefit in 2017. The components of income tax expense for the years ended December 31, 2017, December 31, 2016 and December 31, 2015 are presented in the following table, in thousands.
| | | | Year Ended December 31, | Year Ended December 31, |
| | 2016 | | 2015 | | 2014 | 2017 | | 2016 | | 2015 |
| Current: | | | | | | |
| Current tax (benefit) expense: | | | | | | |
| Federal | $ | 994 |
| | $ | 2,664 |
| | $ | 633 |
| $ | (146 | ) | | $ | 994 |
| | $ | 2,664 |
|
| State | 48 |
| | 549 |
| | 91 |
| 217 |
| | 48 |
| | 549 |
|
| Total | $ | 1,042 |
| | $ | 3,213 |
| | $ | 724 |
| $ | 71 |
| | $ | 1,042 |
| | $ | 3,213 |
|
| | | | | | | | | | | |
| Deferred: | | | | | | |
| Deferred tax (benefit) expense: | | | | | | |
| Federal | $ | 308 |
| | $ | (98 | ) | | $ | (116 | ) | $ | (1,283 | ) | | $ | 308 |
| | $ | (98 | ) |
| State | 21 |
| | (9 | ) | | (17 | ) | (714 | ) | | 21 |
| | (9 | ) |
| Total | 329 |
| | (107 | ) | | (133 | ) | (1,997 | ) | | 329 |
| | (107 | ) |
| Income tax expense | $ | 1,371 |
| | $ | 3,106 |
| | $ | 591 |
| |
| Total income tax (benefit) expense | | $ | (1,926 | ) | | $ | 1,371 |
| | $ | 3,106 |
|
A reconciliation of the statutory federal income tax benefit of the Company's income tax expense is presented in the following table, in thousands.
| | | | Year Ended December 31, | Year Ended December 31, |
| | 2016 | | 2015 | | 2014 | 2017 | | 2016 | | 2015 |
| Statutory federal income tax benefit | $ | (23,991 | ) | | $ | (31,121 | ) | | $ | (4,845 | ) | $ | (24,843 | ) | | $ | (23,991 | ) | | $ | (31,121 | ) |
| Effect of non-taxable REIT loss | 25,266 |
| | 33,720 |
| | 5,361 |
| 22,084 |
| | 25,266 |
| | 33,720 |
|
| State income tax expense, net of federal tax benefit | 96 |
| | 507 |
| | 73 |
| (110 | ) | | 96 |
| | 507 |
|
| Other | — |
| | — |
| | 2 |
| |
| Income tax expense | $ | 1,371 |
| | $ | 3,106 |
| | $ | 591 |
| |
| Re-measurement of net deferred tax assets | | 943 |
| | — |
| | — |
|
| Income tax (benefit) expense | | $ | (1,926 | ) | | $ | 1,371 |
| | $ | 3,106 |
|
The tax effect of each type of temporary difference and carryforward, that gives rise to the deferred tax assets and liabilities for the year ended December 31, 2016,2017, December 31, 20152016 and December 31, 20142015 are presented in the following table, in thousands.
| | | | Year Ended December 31, | Year Ended December 31, |
| | 2016 | | 2015 | | 2014 | 2017 | | 2016 |
| Deferred tax asset: | | | | | | | | |
| Employee-related compensation | $ | — |
| | $ | — |
| | $ | — |
| |
| Other | — |
| | 86 |
| | 11 |
| |
| Goodwill | | 1,691 |
| | — |
|
| Net operating losses | — |
| | 186 |
| | — |
| 295 |
| | — |
|
| Total Deferred Tax Assets | $ | — |
| | $ | 272 |
| | $ | 11 |
| $ | 1,986 |
| | $ | — |
|
| | | | | | | | | |
| Deferred tax liability: | | | | | | | | |
| Investments in unconsolidated joint ventures | $ | (59 | ) | | $ | (32 | ) | | $ | (30 | ) | |
| Investments in unconsolidated entities | | $ | (52 | ) | | $ | (59 | ) |
| Other | (30 | ) | | — |
| | — |
| (25 | ) | | (30 | ) |
| Total deferred tax liability | (89 | ) | | (32 | ) | | (30 | ) | |
| Total deferred tax liabilities | | (77 | ) | | (89 | ) |
| Net deferred tax asset | $ | (89 | ) | | $ | 240 |
| | $ | (19 | ) | $ | 1,909 |
| | $ | (89 | ) |
As of December 31, 2016,2017, the Company had a net deferred tax liabilityasset of $0.1$1.9 million. The Company believes that it is more likely than not that the results of future TRS operations will generate sufficient taxable income in order to realize our
HOSPITALITY INVESTORS TRUST, INC.
NOTES TO CONSOLIDATED/COMBINEDCONSOLIDATED FINANCIAL STATEMENTS
total deferred tax assets. Accordingly, no valuation allowance has been recorded as of December 31, 2017.
As of December 31, 2016,2017, the tax years that remain subject to examination by major tax jurisdictions include 2013, 2014, 2015, 2016, and 2017.
There were no material interest or penalties recorded for the years ended December 31, 2017, 2016, and 2015.
As of December 31, 2017, the Company's taxable REIT subsidiaries have a $1.2 million net operating loss carry forward that will expire after 2037.
Note 1417 - ImpairmentImpairments
Impairments of Long LivedLong-Lived Assets
InDuring the quarter ended June 30, 2016,2017, the Company's board of directors approved the 2017 NAV, which was considered a "triggering event" under the provisions of Accounting Standards Codification section 360-Property, Plant and Equipment. The Company identified that certain reporting units (i.e. individual wholly-owned hotels) exhibited indicators of impairment as the carrying value amount (inclusive of allocation of goodwill) was greater than the appraised value and recorded and aggregate impairment loss of $1.4 million on two properties. One of these properties was classified as held for sale during the quarter ended September 30, 2017.
During the fourth quarter ended December 31, 2017, the Company conducted its annual fair value assessment of the hotel properties, which was also considered a "triggering event" under the provisions of Accounting Standards Codification section 360-Property, Plant and Equipment. The Company identified two additional hotel properties where the carrying value of the properties exceeded their fair value and management determined the excess carrying value was unrecoverable. The Company recorded an indicatoradditional impairment of $9.0 million for a cumulative impairment loss of $10.4 million for the year ended December 31, 2017. The Company recorded $2.4 million of impairment atloss on its hotel properties for the year ended December 31, 2016.
The Company also recognized an impairment loss of $5.2 million, including impairment of $3.9 million on the sale of two hotels and impairment of $1.3 million on one hotel classified as held for sale as of itsDecember 31, 2017, which includes the costs to sell those assets.
In August and September 2017, hurricanes Harvey and Irma made landfall in the United States, primarily impacting Texas and Florida, where 22 of the Company’s hotels primarily dueare located. The Company evaluated the effects of these hurricanes on the Company’s hotels to decreaseddetermine if indicators of impairment were present in accordance with the provisions of Accounting Standards Codification section 360 - Property, Plant and Equipment, and did not identify any indicators of impairment. The Company recognized an expense of $1.6 million in other property-level operating performance. expenses on the Consolidated Statements of Operations and Comprehensive Loss for repair costs during the year ended December 31, 2017, net of $0.5 million recorded as a receivable for anticipated insurance recoveries in excess of the deductible.
Impairment of Goodwill
As requireddescribed in Note 4 - Business Combinations, the Company determined that the consummation of the transactions contemplated by the Framework Agreement on March 31, 2017 represented a business combination as defined by Accounting Standards Codification section 360 (ASC 360), once805 - Business Combinations. In applying the acquisition method of accounting, the Company recognized $31.6 million of goodwill as a result of the transaction. The Company allocated the goodwill recognized to each of its wholly-owned hotels based on its determination that each hotel is a reporting unit as defined in US GAAP.
Management determined that the performance of the recoverability test of the Company's reporting units (as described above in Impairments of Long-Lived Assets) represented a "triggering event" under ASC 350. As a result, an indicatorevaluation of impairment is identified, the Company is required to perform a test for recoverability. This test compares the sum of the estimated undiscountedgoodwill allocated to each reporting unit for which a fair value was less than the carrying amount was necessary. The Company determined the fair values of each reporting unit using market and discounted cash flow based methods. The assumptions utilized in the income approach include, but are not limited to, revenue growth rates, future cash
HOSPITALITY INVESTORS TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
flows and a discount rate. The assumptions utilized in the market approach include, but are not limited to, future cash flows, attributable to the hotel to its carrying amount. Theselection of comparable companies and measures of operating results and pricing multiples. In performing this evaluation, 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 determinedcompared the fair value of the hotel usingreporting unit to the discounted cash flow methodcarrying amount of such reporting unit including the allocation of goodwill. As required by ASC 350, as amended by ASU 2017-04, if the carrying amount of the reporting unit exceeds its fair value, the Company will apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit's carrying amount over its fair value, not to be $6.2exceed the total amount of goodwill allocated to such reporting unit.
As a result of the process described above, the Company has determined that approximately $17.1 million approximately $2.4 millionof goodwill allocated to 82 reporting units for which the fair value was less than the carrying amount is impaired. The range of the hotel at June 30, 2016goodwill impairment recorded by each reporting unit was from less than $0.1 million to $1.3 million, with an average impairment of $8.6 million,$0.2 million. The Company has recorded a charge as a component of impairment of goodwill and recorded the impairment losslong-lived assets in the Consolidated/Combined StatementsConsolidated Statement of Operations and Comprehensive Income (Loss). The Company has not recorded an impairment in any other periods.Loss for the year ended December 31, 2017.
Note 1518 - Assets Held for Sale of Hotel
On October 14, 2016,During the year ended December 31, 2017, the Company entered into purchase and sale agreements to sell four non-core hotels. These sales were entered into to allow the Company to avoid re-flagging certain of the hotels and generate proceeds that will be used to redeem Grace Preferred Equity Interests in accordance with their terms and meet liquidityrequirements. These sales also generate additional liquidity through the elimination of any future PIP obligations associated with the hotels sold. During the year endedDecember 31, 2017, the Company sold three of the four hotels. The Company recognized an impairment loss of $1.4 million which includes goodwill impairment on the fourth hotel which was pending sale as of December 31, 2017, and has classified the hotel as held for sale as of such date.
The sale of these hotels does not represent a strategic shift that has, or will have, a major effect on the Company’s operations and financial results, and therefore the operating results for the period of ownership of these properties are included in income from continuing operations for the year ended December 31, 2017.
Assets held for sale as of December 31, 2017 consisted of the following (in thousands):
|
| | | |
| | December 31, 2017 |
| Property, Plant & Equipment, less accumulated depreciation | 5,700 |
|
| Less: Costs to Sell | (114 | ) |
| Assets Held for Sale | $ | 5,586 |
|
Note 19 - Sales of Hotels
During the year ended December 31, 2017, the Company completed the sale of one hotelthree hotels for a sales price of $13.0$11.7 million, resulting in a net gain of approximately $2.5$0.1 million, which is reflected in other income (expense) on the Company’s Consolidated/CombinedConsolidated Statement of Operations and Comprehensive Income (Loss).
With respect to one of the hotels sold, the Company provided mortgage financing to the buyer in the amount of $1.6 million pursuant to a Promissory Note executed on December 19, 2017, maturing on December 18, 2018. The initial interest rate is 8.5% through and including March 19, 2018; 10.0% commencing on March 20, 2018, through and including June 17, 2018; 12.5% commencing on June 18, 2018, through and including September 15, 2018; and 15.0% commencing on September 16, 2018, through and including the maturity date. The Company met the criteria for derecognition of the properties as a result of the sale.
The Company used the proceeds from the sale of the hotels to reduce the Assumed Grace Indebtedness by $8.5 million, redeem $2.1$8.8 million in Grace Preferred Equity Interests the Company's mandatorily redeemable preferred securities,in accordance with their terms and for other general corporate purposes. The Company also recognized an impairment loss on two of the three hotels sold, totaling $3.9 million, which includes the costs to sell those assets.
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 |
|
HOSPITALITY INVESTORS TRUST, INC.
NOTES TO CONSOLIDATED/COMBINEDCONSOLIDATED FINANCIAL STATEMENTS
Note 1620 – Quarterly Results (Unaudited)
Presented below is a summary of the unaudited quarterly financial information for the years ended December 31, 2017, December 31, 2016 and December 31, 2015:
| | | | | Quarters Ended | | Quarters Ended |
| (In thousands, except for share amounts) | | March 31, 2016 | | June 30, 2016 | | September 30, 2016 | | December 31, 2016 | | March 31, 2017 | | June 30, 2017 | | September 30, 2017 | | December 31, 2017 |
| Total revenues | | $ | 135,153 |
| | $ | 163,230 |
| | $ | 161,458 |
| | $ | 139,751 |
| | $ | 143,703 |
| | $ | 167,012 |
| | $ | 167,241 |
| | $ | 143,119 |
|
| Net income (loss) attributable to stockholders | | $ | (43,957 | ) | | $ | (7,024 | ) | | $ | (6,684 | ) | | $ | (14,582 | ) | |
| Net income (loss) attributable to common stockholders | | | $ | (20,679 | ) | | $ | (27,255 | ) | | $ | (14,058 | ) | | $ | (28,701 | ) |
| Basic and Diluted weighted average shares outstanding | | 38,571,410 |
| | 38,776,850 |
| | 38,788,041 |
| | 38,794,215 |
| | 38,810,386 |
| | 39,610,265 |
| | 39,611,261 |
| | 39,603,885 |
|
| Basic and Diluted net income (loss) per share | | $ | (1.14 | ) | | $ | (0.18 | ) | | $ | (0.17 | ) | | $ | (0.38 | ) | |
| Basic and Diluted net loss attributable to common stockholders per common share | | | $ | (0.53 | ) | | $ | (0.69 | ) | | $ | (0.35 | ) | | $ | (0.72 | ) |
|
| | | | | | | | | | | | | | | | | |
| | | 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 | ) |
|
| | | | | | | | | | | | | | | | | |
| | | | 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 common 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 loss attributable to common stockholders per common 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 loss attributable to common stockholders per common share | | | $ | (2.65 | ) | | $ | 0.02 |
| | $ | (0.18 | ) | | $ | (1.53 | ) |
Note 1721 - Subsequent Events
The Company has evaluated subsequent events throughSecond Closing under 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 consolidated/combined financial statements except for the following transactions:SPA
Securities Purchase, Voting and Standstill Agreement
On January 12, 2017,February 27, 2018, the Second Closing under the SPA occurred, pursuant to which the Company and the OP entered into the SPA withsold 1,694,915.25 additional Class C Units to 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$25.0 million in 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 the Redeemable Preferred Share (the “Articles Supplementary”) with the State Department of Assessments and Taxation of Maryland (the “SDAT”), which became effective upon filing and (ii) the Brookfield Investor, the Special General
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 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
HOSPITALITY INVESTORS TRUST, INC.
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
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 record 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 and will be payable to stockholders of record on each day during the period 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 23, 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
HOSPITALITY INVESTORS TRUST, INC.
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
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.;
HOSPITALITY INVESTORS TRUST, INC.
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
(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 and 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 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 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
HOSPITALITY INVESTORS TRUST, INC.
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
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.
HOSPITALITY INVESTORS TRUST, INC.
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 entirely 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.
HOSPITALITY INVESTORS TRUST, INC.
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
HOSPITALITY INVESTORS TRUST, INC.
NOTES TO CONSOLIDATED/COMBINEDCONSOLIDATED 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 distributionsaggregate. Pursuant to the extent not made) if (i)SPA, the Brookfield Investor or any other holdergross proceeds from the sale 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,Second Closing were, 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 entitledused, as follows: (i) $10.6 million 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:
| |
◦ | the total property management fee of up to 4.0% of the monthly gross receipts from the properties was reduced to 3.0%; |
HOSPITALITY INVESTORS TRUST, INC.
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
| |
◦ | 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; |
| |
◦ | 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 |
| |
◦ | 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;
| |
◦ | 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 inInterests; and (ii) $14.4 million to fund brand-mandated PIPs and related lender reserves. Following 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 consentredemption 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$10.6 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,Second Closing, the Company is also required to redeem an additional $19.4the remaining $223.5 million in liquidation value, representing 50.0% of the aggregate amountGrace Preferred Equity Interests 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 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, and with respect to the Subsequent Closings, the Company will also have an 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. 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 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 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 he will receive a lump sum payment equal to two times the Salary Amount plus three times the Bonus Amount, and up to 24 months’ continuation of life, 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 Company, 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 15 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 decreased 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 excess of the decreased Aggregate Share Ownership Limit is prohibited.
Amendment to Bylaws
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 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.
Termination of Share Repurchase Program
On March 31, 2017, as authorized by the Company’s board of directors, the SRP was terminated effective as of April 30, 2017.
HOSPITALITY INVESTORS TRUST, INC.
Real Estate and Accumulated Depreciation
Schedule III
December 31, 20162017
(dollar amounts in thousands)
| | | | | | Initial Cost | | Subsequent Costs Capitalized | | Gross Amount at December 31, 2016 (1) | | | | Initial Cost | | Subsequent Costs Capitalized | | Gross Amount at December 31, 2017 (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) | U.S. State or Country | Acquisition
Date | Debt at December 31, 2017 | 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 | ) | MD | 2014 | (24,980 | ) | 4,961 |
| 34,343 |
| | — |
| — |
| | 4,961 |
| 34,343 |
| 39,304 |
| (3,292 | ) |
| Courtyard Providence Downtown | RI | 2014 | (20,520 | ) | 4,724 |
| 29,388 |
| | — |
| 1,247 |
| | 4,724 |
| 30,635 |
| 35,359 |
| (2,221 | ) | RI | 2014 | (20,520 | ) | 4,724 |
| 29,388 |
| | — |
| 1,247 |
| | 4,724 |
| 30,635 |
| 35,359 |
| (3,056 | ) |
| Georgia Tech Hotel and Conference Center | GA | 2014 | — |
| — |
| — |
| | — |
| — |
| | — |
| — |
| — |
| — |
| GA | 2014 | (10,427 | ) | — |
| — |
| | — |
| — |
| | — |
| — |
| — |
| |
| Homewood Suites Stratford | CT | 2014 | (12,500 | ) | 2,377 |
| 13,875 |
| | — | 1,402 |
| | 2,377 |
| 15,277 |
| 17,654 |
| (1,238 | ) | CT | 2014 | (12,500 | ) | 2,377 |
| 13,875 |
| | — |
| 1,402 |
| | 2,377 |
| 15,277 |
| 17,654 |
| (1,720 | ) |
| Westin Virginia Beach Town Center | VA | 2014 | — |
| — |
| — |
| | — |
| — |
| | — |
| — |
| — |
| — |
| VA | 2014 | | — |
| — |
| | — |
| — |
| | — |
| — |
| — |
| |
| Hilton Garden Inn Blacksburg | VA | 2014/2015 | (10,500 | ) | — |
| 14,107 |
| | — |
| — |
| | — |
| 14,107 |
| 14,107 |
| (613 | ) | VA | 2014/2015 | (10,500 | ) | — |
| 14,107 |
| | — |
| — |
| | — |
| 14,107 |
| 14,107 |
| (1,000 | ) |
| Courtyard Lexington South Hamburg Place | KY | 2015 | (13,474 | ) | 2,766 |
| 10,242 |
| | — |
| 38 |
| | 2,766 |
| 10,280 |
| 13,046 |
| (513 | ) | KY | 2015 | (11,657 | ) | 2,766 |
| 10,242 |
| | — |
| 37 |
| | 2,766 |
| 10,280 |
| 13,046 |
| (795 | ) |
| Courtyard Louisville Downtown | KY | 2015 | (26,501 | ) | 3,727 |
| 33,543 |
| | — |
| 9 |
| | 3,727 |
| 33,552 |
| 37,279 |
| (1,545 | ) | KY | 2015 | (31,359 | ) | 3,727 |
| 33,543 |
| | — |
| 1,325 |
| | 3,727 |
| 34,868 |
| 38,595 |
| (2,389 | ) |
| 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 | ) | FL | 2015 | (32,262 | ) | 2,356 |
| 23,646 |
| | (4 | ) | 1,761 |
| | 2,352 |
| 25,407 |
| 27,759 |
| (2,144 | ) |
| Fairfield Inn & Suites Atlanta Vinings | GA | 2015 | (8,305 | ) | 1,394 |
| 8,968 |
| | — |
| 1,896 |
| | 1,395 |
| 10,864 |
| 12,259 |
| (647 | ) | GA | 2015 | (1,079 | ) | 1,394 |
| 8,968 |
| | — |
| 1,921 |
| | 1,395 |
| 10,889 |
| 12,284 |
| (1,082 | ) |
| Homewood Suites Chicago Downtown | IL | 2015 | (61,659 | ) | 15,314 |
| 73,248 |
| | 4 |
| 5,574 |
| | 15,318 |
| 78,822 |
| 94,140 |
| (4,119 | ) | IL | 2015 | (57,909 | ) | 15,314 |
| 73,248 |
| | 4 |
| 5,611 |
| | 15,318 |
| 78,859 |
| 94,177 |
| (6,589 | ) |
| Hyatt Place Albuquerque Uptown | NM | 2015 | (14,773 | ) | 987 |
| 16,386 |
| | (1 | ) | 1,204 |
| | 986 |
| 17,589 |
| 18,575 |
| (862 | ) | NM | 2015 | (16,434 | ) | 987 |
| 16,386 |
| | (1 | ) | 1,206 |
| | 986 |
| 17,591 |
| 18,577 |
| (1,380 | ) |
| Hyatt Place Baltimore Washington Airport | MD | 2015 | (9,510 | ) | 3,129 |
| 9,068 |
| | 2 |
| 1,297 |
| | 3,131 |
| 10,365 |
| 13,496 |
| (613 | ) | MD | 2015 | (10,314 | ) | 3,129 |
| 9,068 |
| | 2 |
| 1,358 |
| | 3,131 |
| 10,425 |
| 13,556 |
| (1,000 | ) |
| Hyatt Place Baton Rouge I 10 | LA | 2015 | (10,664 | ) | 1,888 |
| 8,897 |
| | (1 | ) | 1,261 |
| | 1,887 |
| 10,158 |
| 12,045 |
| (472 | ) | LA | 2015 | (9,286 | ) | 1,888 |
| 8,897 |
| | (1 | ) | 1,279 |
| | 1,887 |
| 10,175 |
| 12,062 |
| (807 | ) |
| Hyatt Place Birmingham Hoover | AL | 2015 | (8,935 | ) | 956 |
| 9,689 |
| | 1 |
| 133 |
| | 957 |
| 9,822 |
| 10,779 |
| (519 | ) | AL | 2015 | (5,032 | ) | 956 |
| 9,689 |
| | 1 |
| 1,463 |
| | 957 |
| 11,152 |
| 12,109 |
| (804 | ) |
| Hyatt Place Cincinnati Blue Ash | OH | 2015 | (6,754 | ) | 652 |
| 7,951 |
| | (1 | ) | 1,520 |
| | 651 |
| 9,471 |
| 10,122 |
| (527 | ) | OH | 2015 | (6,517 | ) | 652 |
| 7,951 |
| | (1 | ) | 1,521 |
| | 651 |
| 9,472 |
| 10,123 |
| (878 | ) |
| Hyatt Place Columbus Worthington | OH | 2015 | (8,585 | ) | 1,063 |
| 11,319 |
| | (1 | ) | 201 |
| | 1,063 |
| 11,520 |
| 12,583 |
| (573 | ) | OH | 2015 | (7,998 | ) | 1,063 |
| 11,319 |
| | (1 | ) | 1,609 |
| | 1,063 |
| 12,927 |
| 13,990 |
| (894 | ) |
| Hyatt Place Indianapolis Keystone | IN | 2015 | (11,233 | ) | 1,918 |
| 13,935 |
| | (1 | ) | 1,310 |
| | 1,917 |
| 15,245 |
| 17,162 |
| (760 | ) | IN | 2015 | (15,568 | ) | 1,918 |
| 13,935 |
| | (1 | ) | 1,337 |
| | 1,917 |
| 15,271 |
| 17,188 |
| (1,230 | ) |
| Hyatt Place Memphis Wolfchase Galleria | TN | 2015 | (10,247 | ) | 971 |
| 14,505 |
| | 2 |
| 105 |
| | 974 |
| 14,611 |
| 15,584 |
| (709 | ) | TN | 2015 | (10,506 | ) | 971 |
| 14,505 |
| | 2 |
| 1,851 |
| | 974 |
| 16,356 |
| 17,330 |
| (1,096 | ) |
| Hyatt Place Miami Airport West Doral | FL | 2015 | (17,327 | ) | 2,634 |
| 17,897 |
| | 1 |
| 468 |
| | 2,634 |
| 18,365 |
| 20,999 |
| (875 | ) | FL | 2015 | (15,140 | ) | 2,634 |
| 17,897 |
| | 1 |
| 1,681 |
| | 2,634 |
| 19,578 |
| 22,212 |
| (1,392 | ) |
| Hyatt Place Nashville Franklin Cool Springs | TN | 2015 | (14,446 | ) | 2,201 |
| 15,003 |
| | 2 |
| 2,150 |
| | 2,202 |
| 17,154 |
| 19,356 |
| (754 | ) | TN | 2015 | (15,360 | ) | 2,201 |
| 15,003 |
| | 2 |
| 1,737 |
| | 2,202 |
| 16,740 |
| 18,942 |
| (1,251 | ) |
| Hyatt Place Richmond Innsbrook | VA | 2015 | (7,401 | ) | 1,584 |
| 8,013 |
| | (5 | ) | 1,483 |
| | 1,578 |
| 9,497 |
| 11,075 |
| (595 | ) | VA | 2015 | (8,938 | ) | 1,584 |
| 8,013 |
| | (5 | ) | 1,483 |
| | 1,578 |
| 9,497 |
| 11,075 |
| (978 | ) |
| Hyatt Place Tampa Airport Westshore | FL | 2015 | (16,425 | ) | 3,329 |
| 15,710 |
| | (5 | ) | 1,255 |
| | 3,324 |
| 16,966 |
| 20,290 |
| (835 | ) | FL | 2015 | (16,004 | ) | 3,329 |
| 15,710 |
| | (5 | ) | 1,255 |
| | 3,324 |
| 16,966 |
| 20,290 |
| (1,340 | ) |
HOSPITALITY INVESTORS TRUST, INC.
Real Estate and Accumulated Depreciation
Schedule III
December 31, 20162017
(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 | ) | KY | 2015 | (10,882 | ) | 2,044 |
| 13,313 |
| | — |
| 2,023 |
| | 2,044 |
| 15,336 |
| 17,380 |
| (1,272 | ) |
| SpringHill Suites Lexington Near The University Of Kentucky | KY | 2015 | (13,662 | ) | 3,321 |
| 13,064 |
| | — |
| 7 |
| | 3,321 |
| 13,071 |
| 16,392 |
| (660 | ) | KY | 2015 | (11,552 | ) | 3,321 |
| 13,064 |
| | — |
| 1,963 |
| | 3,321 |
| 15,027 |
| 18,348 |
| (1,022 | ) |
| Hampton Inn Albany Wolf Road Airport | NY | 2015 | (16,123 | ) | 1,717 |
| 16,572 |
| | — |
| 80 |
| | 1,717 |
| 16,652 |
| 18,369 |
| (855 | ) | NY | 2015 | (16,986 | ) | 1,717 |
| 16,572 |
| | — |
| 3,202 |
| | 1,717 |
| 19,774 |
| 21,491 |
| (1,322 | ) |
| Hampton Inn Colorado Springs Central Airforce Academy | CO | 2015 | (3,455 | ) | 449 |
| 6,322 |
| | — |
| 14 |
| | 449 |
| 6,335 |
| 6,784 |
| (374 | ) | CO | 2015 | (917 | ) | 449 |
| 6,322 |
| | — |
| 13 |
| | 449 |
| 6,335 |
| 6,784 |
| (579 | ) |
| Hampton Inn Baltimore Glen Burnie | MD | 2015 | (3,376 | ) | — |
| 5,438 |
| | — |
| 1,248 |
| | — |
| 6,686 |
| 6,686 |
| (748 | ) | MD | 2015 | (5,342 | ) | — |
| 5,438 |
| | — |
| 1,248 |
| | — |
| 6,686 |
| 6,686 |
| (1,201 | ) |
| Hampton Inn Beckley | WV | 2015 | (15,440 | ) | 857 |
| 13,670 |
| | — |
| 54 |
| | 857 |
| 13,724 |
| 14,581 |
| (697 | ) | WV | 2015 | (13,394 | ) | 857 |
| 13,670 |
| | — |
| 197 |
| | 857 |
| 13,867 |
| 14,724 |
| (1,078 | ) |
| Hampton Inn Birmingham Mountain Brook | AL | 2015 | (8,031 | ) | — |
| 9,863 |
| | — |
| 10 |
| | — |
| 9,873 |
| 9,873 |
| (495 | ) | AL | 2015 | (6,531 | ) | — |
| 9,863 |
| | — |
| 991 |
| | — |
| 10,855 |
| 10,855 |
| (766 | ) |
| Hampton Inn Boca Raton | FL | 2015 | (13,080 | ) | 2,027 |
| 10,420 |
| | — |
| 2,371 |
| | 2,027 |
| 12,792 |
| 14,819 |
| (514 | ) | FL | 2015 | (11,828 | ) | 2,027 |
| 10,420 |
| | — |
| 1,815 |
| | 2,027 |
| 12,235 |
| 14,262 |
| (905 | ) |
| Hampton Inn Boca Raton Deerfield Beach | FL | 2015 | (12,215 | ) | 2,781 |
| 9,338 |
| | — |
| 28 |
| | 2,781 |
| 9,366 |
| 12,147 |
| (480 | ) | FL | 2015 | (8,076 | ) | 2,781 |
| 9,338 |
| | — |
| 155 |
| | 2,781 |
| 9,493 |
| 12,274 |
| (742 | ) |
| 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 | ) | TN | 2015 | (1,047 | ) | 1,827 |
| 5,268 |
| | (1,827 | ) | (5,268 | ) | | — |
| — |
| — |
| — |
|
| Hampton Inn Chicago Gurnee | IL | 2015 | (10,717 | ) | 757 |
| 12,189 |
| | — |
| 92 |
| | 757 |
| 12,281 |
| 13,038 |
| (634 | ) | IL | 2015 | (8,606 | ) | 757 |
| 12,189 |
| | — |
| 73 |
| | 757 |
| 12,262 |
| 13,019 |
| (980 | ) |
| Hampton Inn Columbia I 26 Airport | SC | 2015 | (5,022 | ) | 1,209 |
| 3,684 |
| | — |
| 11 |
| | 1,209 |
| 3,695 |
| 4,904 |
| (278 | ) | SC | 2015 | (6,708 | ) | 1,209 |
| 3,684 |
| | — |
| 1,364 |
| | 1,209 |
| 5,048 |
| 6,257 |
| (430 | ) |
| Hampton Inn Columbus Dublin | OH | 2015 | (10,518 | ) | 1,140 |
| 10,856 |
| | — |
| 9 |
| | 1,140 |
| 10,865 |
| 12,005 |
| (552 | ) | OH | 2015 | (8,567 | ) | 1,140 |
| 10,856 |
| | — |
| 22 |
| | 1,140 |
| 10,878 |
| 12,018 |
| (854 | ) |
| 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 | ) | MI | 2015 | (11,749 | ) | 1,950 |
| 11,834 |
| | — |
| 32 |
| | 1,950 |
| 11,866 |
| 13,816 |
| (955 | ) |
| Hampton Inn Detroit Northville | MI | 2015 | (8,335 | ) | 1,210 |
| 8,591 |
| | — |
| 205 |
| | 1,210 |
| 8,795 |
| 10,005 |
| (527 | ) | MI | 2015 | (7,623 | ) | 1,210 |
| 8,591 |
| | — |
| 1,601 |
| | 1,210 |
| 10,192 |
| 11,402 |
| (815 | ) |
| Hampton Inn Kansas City Overland Park | KS | 2015 | (4,480 | ) | 1,233 |
| 9,210 |
| | — |
| 129 |
| | 1,233 |
| 9,339 |
| 10,572 |
| (624 | ) | KS | 2015 | (6,948 | ) | 1,233 |
| 9,210 |
| | — |
| 161 |
| | 1,233 |
| 9,371 |
| 10,604 |
| (968 | ) |
| Hampton Inn Kansas City Airport | MO | 2015 | (8,560 | ) | 1,362 |
| 9,247 |
| | — |
| 164 |
| | 1,362 |
| 9,411 |
| 10,773 |
| (485 | ) | MO | 2015 | (10,500 | ) | 1,362 |
| 9,247 |
| | — |
| 216 |
| | 1,362 |
| 9,464 |
| 10,826 |
| (760 | ) |
| Hampton Inn Memphis Poplar | TN | 2015 | (12,077 | ) | 2,168 |
| 10,618 |
| | — |
| 66 |
| | 2,168 |
| 10,684 |
| 12,852 |
| (548 | ) | TN | 2015 | (10,968 | ) | 2,168 |
| 10,618 |
| | — |
| 2,274 |
| | 2,168 |
| 12,892 |
| 15,060 |
| (847 | ) |
| Hampton Inn Morgantown | WV | 2015 | (12,893 | ) | 3,062 |
| 12,810 |
| | — |
| 76 |
| | 3,062 |
| 12,886 |
| 15,948 |
| (641 | ) | WV | 2015 | (9,349 | ) | 3,062 |
| 12,810 |
| | — |
| 422 |
| | 3,062 |
| 13,233 |
| 16,295 |
| (992 | ) |
| Hampton Inn Norfolk Naval Base | VA | 2015 | (3,786 | ) | — |
| 6,873 |
| | — |
| 2,004 |
| | — |
| 8,876 |
| 8,876 |
| (641 | ) | VA | 2015 | (2,424 | ) | — |
| 6,873 |
| | — |
| 2,011 |
| | — |
| 8,884 |
| 8,884 |
| (1,068 | ) |
| Hampton Inn Palm Beach Gardens | FL | 2015 | (19,160 | ) | 3,253 |
| 17,724 |
| | — |
| 2 |
| | 3,253 |
| 17,726 |
| 20,979 |
| (872 | ) | FL | 2015 | (17,259 | ) | 3,253 |
| 17,724 |
| | — |
| 2 |
| | 3,253 |
| 17,726 |
| 20,979 |
| (1,348 | ) |
| Hampton Inn Pickwick Dam @ Shiloh Falls | TN | 2015 | (1,979 | ) | 148 |
| 2,089 |
| | — |
| 26 |
| | 148 |
| 2,115 |
| 2,263 |
| (158 | ) | TN | 2015 | (2,225 | ) | 148 |
| 2,089 |
| | — |
| 26 |
| | 148 |
| 2,115 |
| 2,263 |
| (245 | ) |
| Hampton Inn Scranton @ Montage Mountain | PA | 2015 | (10,787 | ) | 754 |
| 11,174 |
| | — |
| 28 |
| | 753 |
| 11,201 |
| 11,954 |
| (596 | ) | PA | 2015 | (8,430 | ) | 754 |
| 11,174 |
| | — |
| 46 |
| | 754 |
| 11,220 |
| 11,974 |
| (923 | ) |
| Hampton Inn St Louis Westport | | MO | 2015 | (9,477 | ) | 1,359 |
| 8,486 |
| | — |
| 1,105 |
| | 1,359 |
| 9,591 |
| 10,950 |
| (667 | ) |
| Hampton Inn State College | | PA | 2015 | (11,736 | ) | 2,509 |
| 9,359 |
| | — |
| 1,851 |
| | 2,509 |
| 11,210 |
| 13,719 |
| (809 | ) |
HOSPITALITY INVESTORS TRUST, INC.
Real Estate and Accumulated Depreciation
Schedule III
December 31, 20162017
(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 | ) | FL | 2015 | (14,537 | ) | 2,008 |
| 13,636 |
| | — |
| 168 |
| | 2,008 |
| 13,804 |
| 15,812 |
| (1,042 | ) |
| Homewood Suites Hartford Windsor Locks | CT | 2015 | (10,624 | ) | 3,072 |
| 8,996 |
| | — |
| 182 |
| | 3,072 |
| 9,178 |
| 12,251 |
| (697 | ) | CT | 2015 | (9,707 | ) | 3,072 |
| 8,996 |
| | — |
| 3,530 |
| | 3,072 |
| 12,526 |
| 15,598 |
| (1,078 | ) |
| Homewood Suites Memphis Germantown | TN | 2015 | (7,423 | ) | 1,024 |
| 8,871 |
| | — |
| 2,276 |
| | 1,024 |
| 11,147 |
| 12,171 |
| (663 | ) | TN | 2015 | (6,347 | ) | 1,024 |
| 8,871 |
| | — |
| 2,346 |
| | 1,024 |
| 11,217 |
| 12,241 |
| (1,115 | ) |
| Homewood Suites Phoenix Biltmore | AZ | 2015 | (16,877 | ) | — |
| 23,722 |
| | — |
| 2,154 |
| | — |
| 25,875 |
| 25,875 |
| (1,151 | ) | AZ | 2015 | (17,375 | ) | — |
| 23,722 |
| | — |
| 2,153 |
| | — |
| 25,874 |
| 25,874 |
| (1,915 | ) |
| Hampton Inn & Suites Boynton Beach | FL | 2015 | (26,922 | ) | 1,393 |
| 24,759 |
| | — |
| 42 |
| | 1,393 |
| 24,801 |
| 26,194 |
| (1,213 | ) | FL | 2015 | (26,269 | ) | 1,393 |
| 24,759 |
| | — |
| 41 |
| | 1,393 |
| 24,800 |
| 26,193 |
| (1,877 | ) |
| Hampton Inn Cleveland Westlake | OH | 2015 | (11,738 | ) | 4,177 |
| 10,002 |
| | — |
| 9 |
| | 4,176 |
| 10,011 |
| 14,187 |
| (588 | ) | OH | 2015 | (8,880 | ) | 4,177 |
| 10,002 |
| | (2,499 | ) | (6,340 | ) | | 1,678 |
| 3,662 |
| 5,340 |
| — |
|
| Courtyard Athens Downtown | GA | 2015 | (8,683 | ) | 3,201 |
| 7,305 |
| | — |
| 8 |
| | 3,201 |
| 7,312 |
| 10,513 |
| (382 | ) | GA | 2015 | (10,099 | ) | 3,201 |
| 7,305 |
| | — |
| 233 |
| | 3,201 |
| 7,538 |
| 10,739 |
| (591 | ) |
| Courtyard Gainesville | FL | 2015 | (12,031 | ) | 2,904 |
| 8,605 |
| | — |
| 137 |
| | 2,904 |
| 8,742 |
| 11,646 |
| (450 | ) | FL | 2015 | (12,720 | ) | 2,904 |
| 8,605 |
| | — |
| 178 |
| | 2,904 |
| 8,783 |
| 11,687 |
| (707 | ) |
| Courtyard Knoxville Cedar Bluff | TN | 2015 | (10,436 | ) | 1,289 |
| 8,556 |
| | — |
| 1,049 |
| | 1,289 |
| 9,606 |
| 10,895 |
| (478 | ) | TN | 2015 | (7,607 | ) | 1,289 |
| 8,556 |
| | — |
| 1,062 |
| | 1,289 |
| 9,618 |
| 10,907 |
| (778 | ) |
| Courtyard Mobile | AL | 2015 | (4,899 | ) | — |
| 3,657 |
| | — |
| 1,369 |
| | — |
| 5,027 |
| 5,027 |
| (326 | ) | AL | 2015 | (715 | ) | — |
| 3,657 |
| | — |
| 1,369 |
| | — |
| 5,027 |
| 5,027 |
| (558 | ) |
| Courtyard Orlando Altamonte Springs Maitland | FL | 2015 | (12,513 | ) | 1,716 |
| 11,463 |
| | — |
| 24 |
| | 1,716 |
| 11,488 |
| 13,204 |
| (571 | ) | FL | 2015 | (14,090 | ) | 1,716 |
| 11,463 |
| | — |
| 29 |
| | 1,716 |
| 11,492 |
| 13,208 |
| (884 | ) |
| Courtyard Sarasota Bradenton | FL | 2015 | (8,456 | ) | 1,928 |
| 8,334 |
| | — |
| 165 |
| | 1,928 |
| 8,498 |
| 10,426 |
| (413 | ) | FL | 2015 | (11,299 | ) | 1,928 |
| 8,334 |
| | — |
| 1,588 |
| | 1,928 |
| 9,922 |
| 11,850 |
| (667 | ) |
| Courtyard Tallahassee North I 10 Capital Circle | FL | 2015 | (10,230 | ) | 2,767 |
| 9,254 |
| | — |
| 144 |
| | 2,767 |
| 9,397 |
| 12,164 |
| (515 | ) | FL | 2015 | (12,464 | ) | 2,767 |
| 9,254 |
| | — |
| 144 |
| | 2,767 |
| 9,397 |
| 12,164 |
| (800 | ) |
| Holiday Inn Express & Suites Kendall East Miami | FL | 2015 | (8,745 | ) | 1,248 |
| 7,525 |
| | — |
| 316 |
| | 1,248 |
| 7,842 |
| 9,090 |
| (377 | ) | FL | 2015 | (7,758 | ) | 1,248 |
| 7,525 |
| | — |
| 316 |
| | 1,248 |
| 7,842 |
| 9,090 |
| (598 | ) |
| Residence Inn Chattanooga Downtown | TN | 2015 | (10,427 | ) | 1,142 |
| 10,112 |
| | — |
| 1,405 |
| | 1,142 |
| 11,517 |
| 12,659 |
| (549 | ) | TN | 2015 | (10,957 | ) | 1,142 |
| 10,112 |
| | — |
| 1,405 |
| | 1,142 |
| 11,517 |
| 12,659 |
| (904 | ) |
| Residence Inn Fort Myers | FL | 2015 | (8,365 | ) | 1,372 |
| 8,765 |
| | — |
| 57 |
| | 1,372 |
| 8,822 |
| 10,194 |
| (437 | ) | FL | 2015 | (9,657 | ) | 1,372 |
| 8,765 |
| | — |
| 1,786 |
| | 1,372 |
| 10,552 |
| 11,924 |
| (707 | ) |
| Residence Inn Knoxville Cedar Bluff | TN | 2015 | (10,014 | ) | 1,474 |
| 9,580 |
| | — |
| 38 |
| | 1,474 |
| 9,617 |
| 11,091 |
| (518 | ) | TN | 2015 | (8,847 | ) | 1,474 |
| 9,580 |
| | — |
| 676 |
| | 1,474 |
| 10,256 |
| 11,730 |
| (801 | ) |
| Residence Inn Macon | GA | 2015 | (4,928 | ) | 1,046 |
| 5,381 |
| | — |
| 1,626 |
| | 1,046 |
| 7,007 |
| 8,053 |
| (449 | ) | GA | 2015 | (5,615 | ) | 1,046 |
| 5,381 |
| | — |
| 1,625 |
| | 1,046 |
| 7,006 |
| 8,052 |
| (758 | ) |
| Residence Inn Mobile | AL | 2015 | (6,537 | ) | — |
| 6,714 |
| | — |
| 23 |
| | — |
| 6,737 |
| 6,737 |
| (366 | ) | AL | 2015 | (4,577 | ) | — |
| 6,714 |
| | — |
| 24 |
| | — |
| 6,738 |
| 6,738 |
| (567 | ) |
| Residence Inn Sarasota Bradenton | FL | 2015 | (9,968 | ) | 2,138 |
| 9,118 |
| | — |
| — |
| | 2,138 |
| 9,118 |
| 11,256 |
| (484 | ) | FL | 2015 | (11,015 | ) | 2,138 |
| 9,118 |
| | — |
| 192 |
| | 2,138 |
| 9,310 |
| 11,448 |
| (748 | ) |
| Residence Inn Savannah Midtown | GA | 2015 | (7,650 | ) | 1,106 |
| 9,349 |
| | — |
| 402 |
| | 1,106 |
| 9,751 |
| 10,857 |
| (475 | ) | GA | 2015 | (8,908 | ) | 1,106 |
| 9,349 |
| | — |
| 1,743 |
| | 1,106 |
| 11,092 |
| 12,198 |
| (801 | ) |
| 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 | ) | FL | 2015 | (9,092 | ) | 1,349 |
| 9,983 |
| | — |
| 1,821 |
| | 1,349 |
| 11,804 |
| 13,153 |
| (925 | ) |
| Residence Inn Tampa North I 75 Fletcher | | FL | 2015 | (9,284 | ) | 1,251 |
| 8,174 |
| | — |
| 284 |
| | 1,251 |
| 8,457 |
| 9,708 |
| (720 | ) |
| Residence Inn Tampa Sabal Park Brandon | | FL | 2015 | (14,345 | ) | 1,773 |
| 10,830 |
| | — |
| 513 |
| | 1,773 |
| 11,343 |
| 13,116 |
| (884 | ) |
HOSPITALITY INVESTORS TRUST, INC.
Real Estate and Accumulated Depreciation
Schedule III
December 31, 20162017
(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 | ) | KY | 2015 | (9,096 | ) | 503 |
| 11,003 |
| | — |
| 76 |
| | 504 |
| 11,080 |
| 11,584 |
| (853 | ) |
| Courtyard Chicago Elmhurst Oakbrook Area | IL | 2015 | (9,871 | ) | 1,323 |
| 11,868 |
| | — |
| 84 |
| | 1,323 |
| 11,952 |
| 13,275 |
| (1,320 | ) | IL | 2015 | (7,248 | ) | 1,323 |
| 11,868 |
| | — |
| 147 |
| | 1,323 |
| 12,015 |
| 13,338 |
| (2,046 | ) |
| Courtyard Jacksonville Airport Northeast | FL | 2015 | (4,918 | ) | 1,783 |
| 5,459 |
| | — |
| 1,392 |
| | 1,783 |
| 6,852 |
| 8,635 |
| (494 | ) | FL | 2015 | (6,269 | ) | 1,783 |
| 5,459 |
| | — |
| 1,392 |
| | 1,783 |
| 6,852 |
| 8,635 |
| (817 | ) |
| Hampton Inn & Suites Nashville Franklin Cool Springs | TN | 2015 | (18,942 | ) | 2,526 |
| 16,985 |
| | — |
| — |
| | 2,525 |
| 16,985 |
| 19,510 |
| (880 | ) | TN | 2015 | (19,840 | ) | 2,526 |
| 16,985 |
| | — |
| 94 |
| | 2,525 |
| 17,079 |
| 19,604 |
| (1,361 | ) |
| Hampton Inn Boston Peabody | MA | 2015 | (12,254 | ) | 3,008 |
| 11,846 |
| | — |
| 59 |
| | 3,008 |
| 11,905 |
| 14,913 |
| (673 | ) | MA | 2015 | (13,181 | ) | 3,008 |
| 11,846 |
| | — |
| 166 |
| | 3,008 |
| 12,012 |
| 15,020 |
| (1,042 | ) |
| Hampton Inn Grand Rapids North | MI | 2015 | (11,400 | ) | 2,191 |
| 11,502 |
| | — |
| 67 |
| | 2,191 |
| 11,569 |
| 13,760 |
| (616 | ) | MI | 2015 | (12,013 | ) | 2,191 |
| 11,502 |
| | — |
| 1,299 |
| | 2,191 |
| 12,802 |
| 14,993 |
| (952 | ) |
| Homewood Suites Boston Peabody | MA | 2015 | (8,631 | ) | 2,508 |
| 8,654 |
| | — |
| 2,807 |
| | 2,508 |
| 11,461 |
| 13,969 |
| (738 | ) | MA | 2015 | (7,299 | ) | 2,508 |
| 8,654 |
| | — |
| 2,906 |
| | 2,508 |
| 11,560 |
| 14,068 |
| (1,268 | ) |
| Hyatt Place Las Vegas | NV | 2015 | (16,951 | ) | 2,902 |
| 17,419 |
| | — |
| 1,727 |
| | 2,902 |
| 19,147 |
| 22,049 |
| (1,008 | ) | NV | 2015 | (18,892 | ) | 2,902 |
| 17,419 |
| | — |
| 1,727 |
| | 2,902 |
| 19,146 |
| 22,048 |
| (1,626 | ) |
| Hyatt Place Minneapolis Airport South | MN | 2015 | (11,517 | ) | 2,519 |
| 11,810 |
| | — |
| 1,164 |
| | 2,519 |
| 12,974 |
| 15,493 |
| (644 | ) | MN | 2015 | (12,206 | ) | 2,519 |
| 11,810 |
| | — |
| 1,216 |
| | 2,519 |
| 13,026 |
| 15,545 |
| (1,045 | ) |
| Residence Inn Boise Downtown | ID | 2015 | (8,555 | ) | 1,776 |
| 10,203 |
| | — |
| 2,257 |
| | 1,776 |
| 12,459 |
| 14,235 |
| (618 | ) | ID | 2015 | (13,426 | ) | 1,776 |
| 10,203 |
| | — |
| 4,773 |
| | 1,776 |
| 14,976 |
| 16,752 |
| (1,144 | ) |
| Residence Inn Portland Downtown Lloyd Center | OR | 2015 | (32,508 | ) | 25,213 |
| 23,231 |
| | — |
| 511 |
| | 25,213 |
| 23,742 |
| 48,955 |
| (1,326 | ) | OR | 2015 | (40,109 | ) | 25,213 |
| 23,231 |
| | — |
| 520 |
| | 25,213 |
| 23,750 |
| 48,963 |
| (2,061 | ) |
| SpringHill Suites Grand Rapids North | MI | 2015 | (9,952 | ) | 1,063 |
| 9,312 |
| | — |
| 75 |
| | 1,063 |
| 9,387 |
| 10,450 |
| (458 | ) | MI | 2015 | (10,695 | ) | 1,063 |
| 9,312 |
| | — |
| 1,704 |
| | 1,063 |
| 11,016 |
| 12,079 |
| (709 | ) |
| Hyatt Place Kansas City Overland Park Metcalf | KS | 2015 | (7,679 | ) | 1,038 |
| 7,792 |
| | — |
| 1,565 |
| | 1,039 |
| 9,357 |
| 10,396 |
| (524 | ) | KS | 2015 | (4,924 | ) | 1,038 |
| 7,792 |
| | — |
| 1,670 |
| | 1,039 |
| 9,462 |
| 10,501 |
| (892 | ) |
| Courtyard Asheville | NC | 2015 | (12,391 | ) | 2,236 |
| 10,290 |
| | — |
| 49 |
| | 2,236 |
| 10,339 |
| 12,575 |
| (508 | ) | NC | 2015 | (14,310 | ) | 2,236 |
| 10,290 |
| | — |
| 1,057 |
| | 2,236 |
| 11,347 |
| 13,583 |
| (785 | ) |
| Courtyard Dallas Market Center | TX | 2015 | (18,115 | ) | — | 19,768 |
| | — |
| 2,358 |
| | — | 22,127 |
| 22,127 |
| (1,081 | ) | TX | 2015 | (16,992 | ) | — |
| 19,768 |
| | — |
| 2,424 |
| | — |
| 22,192 |
| 22,192 |
| (1,769 | ) |
| Fairfield Inn & Suites Dallas Market Center | TX | 2015 | (8,566 | ) | 1,550 |
| 7,236 |
| | 1 |
| 19 |
| | 1,552 |
| 7,256 |
| 8,808 |
| (362 | ) | TX | 2015 | (11,438 | ) | 1,550 |
| 7,236 |
| | 1 |
| 19 |
| | 1,552 |
| 7,255 |
| 8,807 |
| (560 | ) |
| Hilton Garden Inn Austin Round Rock | TX | 2015 | (12,016 | ) | 2,797 |
| 10,920 |
| | 2 |
| 1,960 |
| | 2,799 |
| 12,880 |
| 15,679 |
| (576 | ) | TX | 2015 | (9,192 | ) | 2,797 |
| 10,920 |
| | 2 |
| 2,460 |
| | 2,799 |
| 13,380 |
| 16,179 |
| (1,048 | ) |
| 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 | ) | CA | 2015 | (42,740 | ) | 16,416 |
| 21,618 |
| | 13 |
| 1,857 |
| | 16,429 |
| 23,476 |
| 39,905 |
| (1,846 | ) |
| Residence Inn San Diego Rancho Bernardo Scripps Poway | CA | 2015 | (23,251 | ) | 5,261 |
| 18,677 |
| | — |
| — |
| | 5,261 |
| 18,677 |
| 23,938 |
| (928 | ) | CA | 2015 | (22,054 | ) | 5,261 |
| 18,677 |
| | — |
| 130 |
| | 5,261 |
| 18,807 |
| 24,068 |
| (1,435 | ) |
| SpringHill Suites Austin Round Rock | TX | 2015 | (8,087 | ) | 2,196 |
| 8,305 |
| | (1 | ) | 126 |
| | 2,196 |
| 8,431 |
| 10,627 |
| (436 | ) | TX | 2015 | (6,638 | ) | 2,196 |
| 8,305 |
| | (1 | ) | 2,180 |
| | 2,196 |
| 10,485 |
| 12,681 |
| (675 | ) |
| SpringHill Suites Houston Hobby Airport | TX | 2015 | (10,835 | ) | 762 |
| 11,755 |
| | 2 |
| 103 |
| | 763 |
| 11,858 |
| 12,621 |
| (584 | ) | TX | 2015 | (4,155 | ) | 762 |
| 11,755 |
| | 2 |
| 157 |
| | 763 |
| 11,911 |
| 12,674 |
| (905 | ) |
| SpringHill Suites San Antonio Medical Center Northwest | TX | 2015 | (5,272 | ) | — |
| 7,161 |
| | — |
| 911 |
| | — |
| 8,072 |
| 8,072 |
| (355 | ) | TX | 2015 | (710 | ) | — |
| 7,161 |
| | — |
| 1,028 |
| | — |
| 8,189 |
| 8,189 |
| — |
|
| SpringHill Suites San Diego Rancho Bernardo Scripps Poway | | CA | 2015 | (21,553 | ) | 3,905 |
| 16,999 |
| | (3 | ) | 1,853 |
| | 3,902 |
| 18,852 |
| 22,754 |
| (1,298 | ) |
| Hampton Inn Charlotte Gastonia | | NC | 2015 | (10,234 | ) | 1,357 |
| 10,073 |
| | — |
| 850 |
| | 1,357 |
| 10,923 |
| 12,280 |
| (794 | ) |
HOSPITALITY INVESTORS TRUST, INC.
Real Estate and Accumulated Depreciation
Schedule III
December 31, 20162017
(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 | ) | TX | 2015 | (8,039 | ) | 1,538 |
| 7,475 |
| | — |
| 116 |
| | 1,538 |
| 7,591 |
| 9,129 |
| (614 | ) |
| 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 | ) | TX | 2015 | (8,535 | ) | 1,998 |
| 13,060 |
| | — |
| 3,803 |
| | 1,998 |
| 16,863 |
| 18,861 |
| (1,451 | ) |
| Courtyard Dalton | GA | 2015 | (7,827 | ) | 676 |
| 8,241 |
| | 1 |
| 1,597 |
| | 677 |
| 9,839 |
| 10,516 |
| (498 | ) | GA | 2015 | (7,515 | ) | 676 |
| 8,241 |
| | 1 |
| 1,604 |
| | 677 |
| 9,845 |
| 10,522 |
| (834 | ) |
| Hampton Inn Orlando International Drive Convention Center | FL | 2015 | (13,762 | ) | 1,183 |
| 14,899 |
| | — |
| 90 |
| | 1,183 |
| 14,990 |
| 16,173 |
| (721 | ) | FL | 2015 | (13,339 | ) | 1,183 |
| 14,899 |
| | — |
| 103 |
| | 1,183 |
| 15,002 |
| 16,185 |
| (1,117 | ) |
| Hilton Garden Inn Albuquerque North Rio Rancho | NM | 2015 | (9,454 | ) | 1,141 |
| 9,818 |
| | 1 |
| 32 |
| | 1,142 |
| 9,850 |
| 10,992 |
| (513 | ) | NM | 2015 | (9,089 | ) | 1,141 |
| 9,818 |
| | 1 |
| 84 |
| | 1,142 |
| 9,902 |
| 11,044 |
| (794 | ) |
| 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 | ) | FL | 2015 | (23,329 | ) | 2,182 |
| 26,507 |
| | 6 |
| 1,006 |
| | 2,187 |
| 27,512 |
| 29,699 |
| (2,023 | ) |
| Hampton Inn Chicago Naperville | IL | 2015 | (9,292 | ) | 1,363 |
| 9,460 |
| | — |
| 9 |
| | 1,363 |
| 9,469 |
| 10,832 |
| (557 | ) | IL | 2015 | (8,969 | ) | 1,363 |
| 9,460 |
| | — |
| 1,034 |
| | 1,363 |
| 10,494 |
| 11,857 |
| (862 | ) |
| Hampton Inn Indianapolis Northeast Castleton | IN | 2015 | (11,025 | ) | 1,587 |
| 8,144 |
| | — |
| 49 |
| | 1,587 |
| 8,193 |
| 9,780 |
| (604 | ) | IN | 2015 | (10,705 | ) | 1,587 |
| 8,144 |
| | — |
| 49 |
| | 1,587 |
| 8,193 |
| 9,780 |
| (936 | ) |
| Hampton Inn Knoxville Airport | TN | 2015 | (6,448 | ) | 1,033 |
| 5,898 |
| | — |
| — |
| | 1,033 |
| 5,898 |
| 6,931 |
| (413 | ) | TN | 2015 | (6,205 | ) | 1,033 |
| 5,898 |
| | — |
| — |
| | 1,033 |
| 5,898 |
| 6,931 |
| (638 | ) |
| Hampton Inn Milford | CT | 2015 | (4,092 | ) | 1,652 |
| 5,060 |
| | — |
| 91 |
| | 1,652 |
| 5,151 |
| 6,803 |
| (439 | ) | CT | 2015 | (3,867 | ) | 1,652 |
| 5,060 |
| | — |
| 2,995 |
| | 1,652 |
| 8,055 |
| 9,707 |
| (680 | ) |
| Homewood Suites Augusta | GA | 2015 | (6,837 | ) | 874 |
| 8,225 |
| | — |
| 1,552 |
| | 874 |
| 9,777 |
| 10,651 |
| (510 | ) | GA | 2015 | (6,515 | ) | 874 |
| 8,225 |
| | — |
| 1,554 |
| | 874 |
| 9,779 |
| 10,653 |
| (850 | ) |
| Homewood Suites Seattle Downtown | WA | 2015 | (52,632 | ) | 12,580 |
| 41,011 |
| | — |
| 4,499 |
| | 12,580 |
| 45,510 |
| 58,090 |
| (1,891 | ) | WA | 2015 | (50,926 | ) | 12,580 |
| 41,011 |
| | — |
| 4,698 |
| | 12,580 |
| 45,709 |
| 58,289 |
| (3,158 | ) |
| Hampton Inn Champaign Urbana | IL | 2015 | (16,967 | ) | 2,206 |
| 17,451 |
| | — |
| — |
| | 2,206 |
| 17,451 |
| 19,657 |
| (844 | ) | IL | 2015 | (16,228 | ) | 2,206 |
| 17,451 |
| | — |
| — |
| | 2,206 |
| 17,451 |
| 19,657 |
| (1,305 | ) |
| Hampton Inn East Lansing | MI | 2015 | (10,681 | ) | 3,219 |
| 10,101 |
| | — |
| 205 |
| | 3,219 |
| 10,306 |
| 13,525 |
| (519 | ) | MI | 2015 | (10,247 | ) | 3,219 |
| 10,101 |
| | — |
| 1,233 |
| | 3,219 |
| 11,334 |
| 14,553 |
| (805 | ) |
| Hilton Garden Inn Louisville East | KY | 2015 | (15,059 | ) | 1,022 |
| 16,350 |
| | 1 |
| 139 |
| | 1,023 |
| 16,489 |
| 17,512 |
| (803 | ) | KY | 2015 | (14,474 | ) | 1,022 |
| 16,350 |
| | 1 |
| 139 |
| | 1,023 |
| 16,490 |
| 17,513 |
| (1,241 | ) |
| Residence Inn Jacksonville Airport | FL | 2015 | (5,697 | ) | 1,451 |
| 6,423 |
| | — |
| 2,187 |
| | 1,451 |
| 8,610 |
| 10,061 |
| (522 | ) | FL | 2015 | (5,503 | ) | 1,451 |
| 6,423 |
| | — |
| 2,264 |
| | 1,451 |
| 8,687 |
| 10,138 |
| (894 | ) |
| TownePlace Suites Savannah Midtown | GA | 2015 | (10,339 | ) | 1,502 |
| 7,827 |
| | — |
| — |
| | 1,502 |
| 7,827 |
| 9,329 |
| (402 | ) | GA | 2015 | (10,041 | ) | 1,502 |
| 7,827 |
| | — |
| 373 |
| | 1,502 |
| 8,200 |
| 9,702 |
| (621 | ) |
| 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 | ) | TX | 2015 | (18,558 | ) | 10,444 |
| 20,710 |
| | 6 |
| 2,817 |
| | 10,449 |
| 23,527 |
| 33,976 |
| (1,916 | ) |
| Courtyard San Diego Carlsbad | CA | 2015 | (18,868 | ) | 5,080 |
| 14,007 |
| | 9 |
| 46 |
| | 5,090 |
| 14,053 |
| 19,143 |
| (725 | ) | CA | 2015 | (18,176 | ) | 5,080 |
| 14,007 |
| | 9 |
| 115 |
| | 5,090 |
| 14,123 |
| 19,213 |
| (1,120 | ) |
| 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 | ) | TX | 2015 | (13,332 | ) | 1,774 |
| 9,798 |
| | (8 | ) | 310 |
| | 1,765 |
| 10,108 |
| 11,873 |
| (786 | ) |
| SpringHill Suites Asheville | NC | 2015 | (14,284 | ) | 2,149 |
| 9,930 |
| | — |
| 57 |
| | 2,149 |
| 9,988 |
| 12,137 |
| (490 | ) | NC | 2015 | (13,833 | ) | 2,149 |
| 9,930 |
| | — |
| 613 |
| | 2,149 |
| 10,543 |
| 12,692 |
| (760 | ) |
| Hampton Inn College Station | | TX | 2015 | (13,327 | ) | 3,306 |
| 10,523 |
| | — |
| 539 |
| | 3,306 |
| 11,063 |
| 14,369 |
| (815 | ) |
| Courtyard Flagstaff | | AZ | 2015 | (25,550 | ) | 5,258 |
| 24,313 |
| | — |
| 385 |
| | 5,258 |
| 24,697 |
| 29,955 |
| (1,535 | ) |
| DoubleTree Baton Rouge | | LA | 2015 | (14,420 | ) | 1,497 |
| 14,777 |
| | — |
| 1,971 |
| | 1,497 |
| 16,748 |
| 18,245 |
| (1,198 | ) |
HOSPITALITY INVESTORS TRUST, INC.
Real Estate and Accumulated Depreciation
Schedule III
December 31, 20162017
(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 | ) | LA | 2015 | (3,965 | ) | 971 |
| 3,391 |
| | (151 | ) | (650 | ) | | 820 |
| 2,741 |
| 3,561 |
| — |
|
| Hampton Inn Medford | OR | 2015 | (8,556 | ) | 1,245 |
| 10,353 |
| | — |
| — |
| | 1,245 |
| 10,353 |
| 11,598 |
| (365 | ) | OR | 2015 | (9,450 | ) | 1,245 |
| 10,353 |
| | — |
| 107 |
| | 1,245 |
| 10,459 |
| 11,704 |
| (658 | ) |
| Hampton Inn Fort Wayne Southwest | IN | 2015 | (8,898 | ) | 1,242 |
| 10,511 |
| | — |
| — |
| | 1,242 |
| 10,512 |
| 11,754 |
| (425 | ) | IN | 2015 | (10,780 | ) | 1,242 |
| 10,511 |
| | — |
| 202 |
| | 1,242 |
| 10,713 |
| 11,955 |
| (767 | ) |
| Hampton Inn & Suites El Paso Airport | TX | 2015 | (13,347 | ) | 1,641 |
| 18,733 |
| | — |
| — |
| | 1,641 |
| 18,733 |
| 20,374 |
| (713 | ) | TX | 2015 | (13,440 | ) | 1,641 |
| 18,733 |
| | — |
| 12 |
| | 1,641 |
| 18,745 |
| 20,386 |
| (1,285 | ) |
| Residence Inn Fort Wayne Southwest | IN | 2015 | (10,609 | ) | 1,267 |
| 12,136 |
| | — |
| 8 |
| | 1,267 |
| 12,144 |
| 13,411 |
| (429 | ) | IN | 2015 | (10,920 | ) | 1,267 |
| 12,136 |
| | — |
| 25 |
| | 1,267 |
| 12,161 |
| 13,428 |
| (772 | ) |
| SpringHill Suites Baton Rouge South | LA | 2015 | (4,449 | ) | 1,131 |
| 5,744 |
| | — |
| 44 |
| | 1,131 |
| 5,788 |
| 6,919 |
| (216 | ) | LA | 2015 | (4,830 | ) | 1,131 |
| 5,744 |
| | — |
| 136 |
| | 1,131 |
| 5,880 |
| 7,011 |
| (395 | ) |
| SpringHill Suites Flagstaff | AZ | 2015 | (10,951 | ) | 1,641 |
| 14,283 |
| | — |
| 61 |
| | 1,641 |
| 14,344 |
| 15,985 |
| (567 | ) | AZ | 2015 | (15,375 | ) | 1,641 |
| 14,283 |
| | — |
| 456 |
| | 1,641 |
| 14,739 |
| 16,380 |
| (1,020 | ) |
| TownePlace Suites Baton Rouge South | LA | 2015 | (4,791 | ) | 1,055 |
| 6,173 |
| | — |
| 17 |
| | 1,055 |
| 6,190 |
| 7,245 |
| (257 | ) | LA | 2015 | (6,440 | ) | 1,055 |
| 6,173 |
| | — |
| 17 |
| | 1,055 |
| 6,190 |
| 7,245 |
| (464 | ) |
| Courtyard Columbus Downtown | OH | 2015 | (21,051 | ) | 2,367 |
| 25,191 |
| | — |
| 61 |
| | 2,367 |
| 25,252 |
| 27,619 |
| (726 | ) | OH | 2015 | (18,830 | ) | 2,367 |
| 25,191 |
| | — |
| 61 |
| | 2,367 |
| 25,252 |
| 27,619 |
| (1,399 | ) |
| Hilton Garden Inn Monterey | CA | 2015 | (19,333 | ) | 6,110 |
| 27,713 |
| | — |
| — |
| | 6,110 |
| 27,713 |
| 33,823 |
| (1,131 | ) | CA | 2015 | (30,600 | ) | 6,110 |
| 27,713 |
| | — |
| — |
| | 6,110 |
| 27,713 |
| 33,823 |
| (2,101 | ) |
| Hyatt House Atlanta Cobb Galleria | GA | 2015 | (21,230 | ) | 4,386 |
| 22,777 |
| | — |
| 12 |
| | 4,386 |
| 22,788 |
| 27,174 |
| (673 | ) | GA | 2015 | (16,520 | ) | 4,386 |
| 22,777 |
| | — |
| 11 |
| | 4,386 |
| 22,788 |
| 27,174 |
| (1,295 | ) |
| Hyatt Place Chicago Schaumburg | IL | 2015 | (6,637 | ) | 1,519 |
| 9,582 |
| | — |
| 57 |
| | 1,519 |
| 9,639 |
| 11,158 |
| (414 | ) | IL | 2015 | (4,510 | ) | 1,519 |
| 9,582 |
| | — |
| 1,519 |
| | 1,519 |
| 11,101 |
| 12,620 |
| (768 | ) |
| Fairfield Inn & Suites Spokane | WA | 2016 | (8,964 | ) | 1,732 |
| 10,750 |
| | — |
| — |
| | 1,733 |
| 10,749 |
| 12,482 |
| (275 | ) | WA | 2016 | (7,420 | ) | 1,733 |
| 10,750 |
| | — |
| 3 |
| | 1,733 |
| 10,752 |
| 12,485 |
| (576 | ) |
| Fairfield Inn & Suites Denver | CO | 2016 | (11,620 | ) | 1,429 |
| 15,675 |
| | — |
| — |
| | 1,430 |
| 15,675 |
| 17,105 |
| (405 | ) | CO | 2016 | (15,260 | ) | 1,429 |
| 15,675 |
| | — |
| 98 |
| | 1,430 |
| 15,773 |
| 17,203 |
| (848 | ) |
| Springhill Suites Denver | CO | 2016 | (8,632 | ) | 941 |
| 10,870 |
| | — |
| 49 |
| | 941 |
| 10,918 |
| 11,859 |
| (310 | ) | CO | 2016 | (12,075 | ) | 941 |
| 10,870 |
| | — |
| 2,065 |
| | 941 |
| 12,934 |
| 13,875 |
| (648 | ) |
| Hampton Inn Ft. Collins | CO | 2016 | (5,976 | ) | 641 |
| 5,578 |
| | — |
| — |
| | 641 |
| 5,577 |
| 6,218 |
| (176 | ) | CO | 2016 | (5,600 | ) | 641 |
| 5,578 |
| | — |
| 57 |
| | 641 |
| 5,634 |
| 6,275 |
| (368 | ) |
| Fairfield Inn & Suites Bellevue | WA | 2016 | (22,244 | ) | 18,769 |
| 14,182 |
| | — |
| — |
| | 18,769 |
| 14,182 |
| 32,951 |
| (438 | ) | WA | 2016 | (20,798 | ) | 18,769 |
| 14,182 |
| | — |
| 59 |
| | 18,769 |
| 14,240 |
| 33,009 |
| (916 | ) |
| Hilton Garden Inn Ft. Collins | CO | 2016 | (12,948 | ) | 1,331 |
| 17,606 |
| | — |
| — |
| | 1,331 |
| 17,605 |
| 18,936 |
| (480 | ) | CO | 2016 | (13,090 | ) | 1,331 |
| 17,606 |
| | — |
| 206 |
| | 1,331 |
| 17,812 |
| 19,143 |
| (1,006 | ) |
| Total | | $(1,709,101) | $340,043 | $1,756,484 | | $ | (224 | ) | $82,110 | | $339,819 | $1,838,594 | $2,178,414 | $(92,848) | |
| Courtyard Jackson Ridgeland | | MS | 2017 | (3,520 | ) | 1,994 |
| 6,603 |
| | — |
| — |
| | 1,994 |
| 6,603 |
| 8,597 |
| (195 | ) |
| Residence Inn Jackson Ridgeland | | MS | 2017 | (8,260 | ) | 949 |
| 11,764 |
| | — |
| 2 |
| | 949 |
| 11,767 |
| 12,716 |
| (222 | ) |
| Homewood Suites Jackson Ridgeland | | MS | 2017 | (6,150 | ) | 1,571 |
| 7,181 |
| | — |
| — |
| | 1,571 |
| 7,181 |
| 8,752 |
| (144 | ) |
| Staybridge Suites Jackson | | MS | 2017 | (3,640 | ) | 996 |
| 5,915 |
| | — |
| — |
| | 996 |
| 5,915 |
| 6,911 |
| (130 | ) |
| Fairfield Inn & Suites Germantown | | TN | 2017 | (3,640 | ) | 1,046 |
| 3,316 |
| | — |
| — |
| | 1,046 |
| 3,316 |
| 4,362 |
| (72 | ) |
| Residence Inn Germantown | | TN | 2017 | (5,810 | ) | 1,326 |
| 6,784 |
| | — |
| — |
| | 1,326 |
| 6,784 |
| 8,110 |
| (133 | ) |
HOSPITALITY INVESTORS TRUST, INC.
Real Estate and Accumulated Depreciation
Schedule III
December 31, 2017
(dollar amounts in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Courtyard Germantown | TN | 2017 | (8,680 | ) | 1,851 |
| 8,844 |
| | (41 | ) | — |
| | 1,809 |
| 8,844 |
| 10,653 |
| (172 | ) |
| | | | | | | | | | | | | | |
| | | | $(1,747,117) | $346,146 | $1,791,985 | | $ | (4,495 | ) | $129,411 | | $341,651 | $1,921,396 | $2,263,047 | $(147,328) |
| |
| (1) | The tax basis of aggregate land, buildings and improvements as of December 31, 20162017 is $2,138,616,972.$2,214,397,402 (unaudited). |
| |
| (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 years ended December 31, 2014(1)2015 to December 31, 2016:2017:
| | | | | 2016 | | 2015 | | 2014(1) | | | 2017 | | 2016 | | 2015 |
| Land, buildings and improvements, at cost: | | | | | | | | | | | | | |
| Balance at January 1 | | $ | 2,047,831 |
| | $ | 93,237 |
| | $ | 89,666 |
| | | 2,178,413 |
| | $ | 2,047,831 |
| | $ | 93,237 |
|
| Additions: | | | | | | | | | | | | | |
| Acquisitions | | 99,727 |
| | 1,917,101 |
| | — |
| | | 60,141 |
| | 99,726 |
| | 1,917,101 |
|
| Capital improvements | | 43,030 |
| | 37,493 |
| | 3,571 |
| | | 58,793 |
| | 43,030 |
| | 37,493 |
|
| Deductions: | | | | | | | | | | | | | |
Held for Sale (1) | | | (5,826 | ) | | — |
| | — |
|
| Dispositions | | (9,744 | ) | | — |
| | — |
| | | (11,360 | ) | | (9,744 | ) | | — |
|
| Impairment of depreciable assets | | (2,430 | ) | | — |
| | — |
| | | (17,114 | ) | | (2,430 | ) | | — |
|
| Balance at December 31 | | $ | 2,178,414 |
| | $ | 2,047,831 |
| | $ | 93,237 |
| | | $ | 2,263,047 |
| | $ | 2,178,413 |
| | $ | 2,047,831 |
|
| | | |
| | | | | | | | | |
| | |
| Accumulated depreciation and amortization: | | |
| | | | | | | | | |
| | |
| Balance at January 1 | | $ | (39,252 | ) | | $ | (1,569 | ) | | $ | — |
| | | (92,848 | ) | | $ | (39,252 | ) | | $ | (1,569 | ) |
| Depreciation expense | | (54,377 | ) | | (37,683 | ) | | (1,569 | ) | | | (57,890 | ) | | (54,377 | ) | | (37,683 | ) |
| Accumulated depreciation: | | | | | | | | | | | | | |
Held for Sale (1) | | | 550 |
| | | | |
| Dispositions and other | | 781 |
| | | | | | | 2,860 |
| | 781 |
| | |
| Balance at December 31 | | $ | (92,848 | ) | | $ | (39,252 | ) | | $ | (1,569 | ) | | | $ | (147,328 | ) | | $ | (92,848 | ) | | $ | (39,252 | ) |
| |
(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. |
(1) As of December 31, 2017, the Company had one hotel classified as held for sale.