Chatham Lodging Trust222 Lakeview Avenue, Suite 200West Palm Beach, FL 33401561.802.4477WWW.CHATHAMLODGINGTRUST.COM2015Annual ReportCHATHAM LODGING TRUST | 2015 ANNUAL REPORT Locations
SEATTLE (5%)
MINNESOTA (2%)
PORTLAND, ME (2%)
EXETER, NH (1%)
MASSACHUSETTS (5%)
CONNECTICUT (1%)
NEW YORK (6%)
PENNSYLVANIA (5%)
WASHINGTON, D.C. (5%)
SILICON VALLEY (24%)
DENVER (5%)
LOS ANGELES (7%)
SAN DIEGO (13%)
NASHVILLE (1%)
DALLAS (3%)
HOUSTON (7%)
SAN ANTONIO (3%)
SAVANNAH, GA (3%)
ORLANDO (1%)
FORT LAUDERDALE (3%)
Chatham Lodging Trust is a self-advised, publicly-traded real estate invest-
ment trust focused primarily on investing in upscale extended-stay hotels and premium-
branded, select-service hotels. Our high quality hotels are located in major markets
with high barriers to entry, near primary demand generators for both business and
leisure guests. Our primary objective is to generate attractive returns for our sharehold-
ers through investing in hotel properties at prices that provide strong returns on invested
capital, paying meaningful dividends and generating long-term value appreciation.
Note: Figures are rounded to the nearest whole percentage and therefore may not reflect the exact
percentage. MSA/State reflects % of total undepreciated cost basis as of December 31, 2015.
Dear Shareholder,
Although 2015 was a challenging year for virtually all publicly
traded lodging real estate trust investors, fundamentals
within lodging remained favorable and Chatham achieved
many significant accomplishments:
• increased our annual dividend 29 percent to $1.20 per
share from $0.93 per share, marking the fifth consecu-
tive year of dividend increases
• solidified our balance sheet for the long-term, success-
fully closing on a new, unsecured $250 million senior
revolving credit facility that can be expanded to $400
million and matures in late 2020
• advanced adjusted EBITDA 50 percent
• grew adjusted FFO 59 percent and adjusted FFO per
share 20 percent
Jeffrey H. Fisher
Chairman, Chief Executive Officer and President
Most experts rated 2015 as a very successful year for the
hospitality industry, creating frustration regarding a share
price that did not reflect that performance. Nonetheless, we
continue to remain focused on our long-term goal to be
the leading lodging REIT focused on investing in premium-
• raised approximately $121 million in a common share
branded, upscale, extended-stay and select-service hotels.
equity offering in early 2015, using proceeds to reduce
As a REIT, we are guided by the fact that investors look
leverage and partially fund four outstanding acquisitions
to Chatham as a long-term provider of dividends since
• acquired four high-quality hotels in San Diego and Los
Angeles, Calif., Boston, Mass., and Fort Lauderdale,
Fla., for approximately $190 million, increasing our hotel
investments by approximately 16 percent and expand-
ing our wholly owned portfolio room count by 11 percent
dividends historically have been the primary driver of REIT
returns. We take that responsibility seriously.
Long-term success starts with asset quality, and we
have assembled a superior quality portfolio of 38 hotels.
Since late 2013, we have invested almost $850 million into
hotel acquisitions and a minority interest in two $1 billion
• realized a gain of $3.6 million on the sale of our 5 percent
joint ventures. Our hotel acquisitions were focused pri-
joint venture interest in the Residence Inn by Marriott
marily on markets serving the technology and medical
Torrance, Calif., and rewarded our investors with a
industries because of the high job growth and positive
special dividend of $0.08 per share in January 2016.
long-term outlook in those sectors. Approximately
50 percent of our hotel investments are in California and
1
Washington state based on invested dollars, specifically
estimates demand growth will rise 2.3 percent and
in key markets like Silicon Valley, San Diego, Los Angeles
supply growth will increase 1.7 percent in 2016.
(Marina del Rey) and Seattle (Bellevue), positioning
Our recently acquired hotels drove our overall portfolio
Chatham to benefit from continued economic expansion
RevPAR growth due in large part to our management
which has been concentrated on the West Coast.
company’s ability to significantly enhance revenues and
Second, critical to Chatham’s long-term success is a
margins. Our acquisition strategy focuses on acquiring
solid capital structure. Our balance sheet is pristine, with
hotels in markets where RevPAR growth is projected to
long-term debt locked in at very low rates and our new
be higher than our current portfolio. During 2015, we
unsecured credit facility enhancing our credit position
acquired four hotels in San Diego, Los Angeles (Marina
while lowering borrowing costs.
del Rey), Boston and Fort Lauderdale, all very strong
Third, we are producing significant cash flow because
lodging markets. RevPAR at the four acquired hotels rose
Chatham’s operating margins are the best among all
5.9 percent for the year, and we expect RevPAR for these
lodging REITs. We believe we have a best-in-class plat-
hotels to grow at a similar rate in 2016. The nine hotels
form given our affiliation with Island Hospitality, which
acquired in 2014 generated very impressive RevPAR
manages all but two of our wholly-owned hotels and
growth of 8.9 percent, benefitting from enhanced reve-
81 of the 95 hotels within our joint venture investments.
nue management strategies.
Higher operating margins drive higher earnings and cash
RevPAR at our four Silicon Valley hotels grew 10.0 per-
available for distribution to shareholders.
cent to $182 with occupancy of approximately 84 percent
in 2015. Demand for Residence Inn rooms in the market
Operating Performance
remains strong with a continued positive growth outlook.
We achieved excellent operating performance results
After careful analysis, we are moving forward with the room
in our wholly-owned portfolio of 38 hotels comprising
expansion and public space upgrades at three of our
5,678 rooms in 2015.
four hotels in the Valley with completion of the tower in
We acquire hotels in high demand growth markets in
Mt. View in the 2016 second quarter. The two Sunnyvale
in-fill locations where land costs or land availability con-
expansions will commence later in 2016 with completion
strain new supply. This creates an excellent opportunity
by the end of 2017. We project that these expansions will
for our owned portfolio to achieve high absolute Revenue
generate very attractive returns in one of the best lodging
per Available Room (RevPAR). For our portfolio, RevPAR at
markets in the country.
our 38 hotels rose 5.8 percent to $131 in 2015, driven by
As asset managers, we work closely with Island
an increase in average daily rate of 5.7 percent. RevPAR
Hospitality to continuously pursue strategies aimed at
growth was 8.2 percent in 2014, 4.6 percent in 2013 and
increasing margins and driving higher profits. During
8 percent in 2012.
2015, we enhanced operating margins 160 basis points
Industry-wide RevPAR growth was 6.3 percent in 2015,
to a very healthy 49.9 percent. Our hotel EBITDA margins
and within Chatham’s upscale segment, RevPAR growth
improved 130 basis points to 43.1 percent. As RevPAR
was 5.6 percent, which historically is strong growth.
growth is expected to slow somewhat in this phase of the
Fundamental supply/demand remained highly favorable
economic cycle, we are well prepared to adjust quickly to
in 2015 in the owner’s favor with demand increasing 2.9
changing market conditions because of our great platform
percent versus a modest 1.1 percent rise in room supply.
with Island Hospitality and their seasoned experience, which
New supply remains well below historical levels, creating
we believe will enable us to maintain premium RevPAR
a favorable outlook for 2016. Smith Travel Research
market share and raise same store operating margins.
2
Adjusted EBITDA rose 50 percent to $126.5 million,
and the weighted average maturity date for our fixed rate
adjusted FFO grew 59 percent to $87.6 million from $55.1
debt is January 2024.
million, and adjusted FFO per share advanced 20 percent
During 2015, we opportunistically accessed the equity
to $2.29 per share from $1.91 per share, driven by rising
markets to raise $121 million via an equity offering with
margins, acquisitions and lower debt service costs.
Barclays and raised a small amount of funds through our
Acquisitions
“Dividend Reinvestment and Stock Purchase Plans.” The
proceeds were used to partially fund our four outstanding
Public lodging REITs saw much slower acquisition activity
acquisitions during the year.
in 2015. Chatham followed the strong acquisition year of
Equally important, we completed a new $250 million
2014, when it purchased $500 million of hotel real estate,
senior unsecured revolving credit facility during the fourth
with the acquisition of four high-quality hotels for approxi-
quarter. The facility size was expanded $75 million with
mately $190 million in 2015. Although the volume was
an option to expand another $150 million while decreas-
lower, we did increase our hotel investments by approxi-
ing our borrowing costs by approximately 85 basis points
mately 16 percent and expand our wholly owned portfolio
based on our current leverage level. It also provides
room count by 11 percent. The four high quality hotels,
us the flexibility to acquire up to $75 million of our own
comprising 560 rooms, are:
shares if we were to implement a repurchase program.
• 240-room Residence Inn by Marriott San Diego
Downtown Gaslamp Quarter
With a maturity date of late 2020 on our new credit facil-
ity, and only $14 million of debt maturing between the
date of this letter and January 2023, we have a solid
• 81-room Residence Inn by Marriott Boston
capital structure.
(Dedham), Mass.
• 105-room Residence Inn by Marriott Fort Lauderdale
Joint Ventures
Intracoastal/Il Lugano
In December, we sold our interests in the Residence Inn
by Marriott Torrance, Calif., and realized a gain on the
• 134-room Hilton Garden Inn Marina del Rey, Calif.
sale of approximately $3.6 million which generated a rate
These outstanding hotels in some of the best lodging
markets in the country are textbook additions to our
expanding portfolio. The demand for lodging in these
markets remains strong, and RevPAR growth there is
expected to outperform national averages in 2016. These
hotels are located in major markets and benefit from
substantial corporate demand generators, and three of
these hotels will benefit from consistent leisure demand.
Solid Balance Sheet and Capital Structure
Despite the significant acquisition growth, our balance
sheet remains in excellent condition with our leverage
ratio a healthy 41 percent, down from 44 percent a year
ago. The average interest rate on our debt is 4.4 percent,
of return of almost 100 percent. Our Board of Trustees
declared a special, one-time common dividend of $0.08
per share, rewarding our shareholders and unlocking
value for them through the monetization of our minority
investment.
We invested $50 million in 2014 for an approximate 10
percent interest in two joint ventures with NorthStar Realty
Finance, which owns an aggregate of 95 hotels compris-
ing 12,498 rooms. The two JV transactions provide us
with partial ownership in approximately $2 billion of
hotels. These investments generate excellent returns and
provides us the opportunity to leverage the infrastructure
required for the much larger platform to Chatham’s bene-
fit. The two JVs comprise approximately 11 percent of
3
our adjusted FFO per share in 2015 and produced out-
successful year in 2016. We estimate our 2016 RevPAR
standing returns, generating an approximate 17 percent
will rise 3 to 4 percent to approximately $136. Based on
levered return in 2015 based on the cash distributions we
the mid-point of our 2016 guidance, our best-in-class
received during the year.
operating margins are estimated to rise approximately
20 basis points from 43.1 percent to 43.3 percent, our
Significant Dividend Increase
adjusted EBITDA and our adjusted FFO per share are
Given the quality of acquisitions made in 2015, along with
projected to increase 9 percent to $138.4 million and
the prospect for continued earnings growth due to higher
$2.50 per share, respectively.
operating margins and a solid balance sheet, our Board
We continue to build shareholder value through growth
of Trustees increased our monthly dividend once again.
in FFO per share and dividend payouts. Our portfolio is
After a 25 percent increase to our monthly dividend in
in great physical condition. We have one of the highest
2015, our Board of Trustees approved in February 2016
quality, select-service and upscale, extended-stay invest-
another 10 percent increase in our monthly dividend from
ment portfolios in the hotel REIT space. With the first of
$0.10 per share to $0.11 per share. On an annualized
the Silicon Valley expansions in Mt. View set to be com-
basis, the dividend will increase $0.12 to $1.32 per share.
pleted in the 2016 second quarter and the two Sunnyvale
This will be our sixth consecutive year in which we have
locations estimated to be completed in late 2017, we
raised our dividend.
expect to continue driving earnings growth higher even if
We have stated since our IPO that we would increase
there are few accretive acquisition opportunities available.
our dividend in tandem with growth in cash flow, EBITDA
Our management teams at Chatham, as well as Island
and adjusted FFO per share. Our 2016 dividend per share
Hospitality, have thrived through many cycles, and as this
of $1.30 will represent approximately 52 percent of
cycle matures, our platform is very well positioned to
projected 2016 adjusted FFO per share based on the
deliver value to our shareholders. We will continue to
midpoint of our guidance, so the increase is healthy,
pursue our goal of building Chatham into the premier,
supportable and prudent.
extended-stay, select-service hotel REIT.
Thank you for your support. We truly appreciate it.
Outlook Remains Healthy for 2016
Two leading industry forecasters, STR, Inc., and CBRE
Sincerely,
Hotels currently estimate RevPAR growth of 5.0 percent
and 6.1 percent, respectively, for 2016. Most lodging
companies (REITs and C-Corps) are projecting RevPAR
growth within a range of 2 to 5 percent. The same fore-
casters estimate new supply growth will be approximately
1.8 percent in 2016, though a challenge lies in the fact
that supply growth within the upscale segment (where
Jeffrey H. Fisher
Chairman, Chief Executive Officer and President
most of our properties are categorized) is projected to be
approximately 5 percent.
Full-year contribution from acquisitions made in 2015,
good RevPAR growth and rising margins from our
comparable hotels is expected to drive us to another
March 3, 2016
4
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2015
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-34693
CHATHAM LODGING TRUST
(Exact Name of Registrant as Specified in Its Charter)
Maryland
(State or Other Jurisdiction of
Incorporation or Organization)
222 Lakeview Avenue, Suite 200
West Palm Beach, Florida
(Address of Principal Executive Offices)
27-1200777
(I.R.S. Employer
Identification No.)
33401
(Zip Code)
(561) 802-4477
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Shares of Beneficial Interest, par value $0.01 per share
Name of Each Exchange on Which Registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
No
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
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter
Yes
period that the registrant was required to submit and post such files).
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) 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 the Form 10-K.
Yes
No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
(Do not check if a smaller reporting company)
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
The aggregate market value of the 38,306,743 common shares of beneficial interest held by non-affiliates of the registrant was $1,013,979,487.21 based
on the closing sale price on the New York Stock Exchange for such common shares of beneficial interest as of June 30, 2015.
The number of common shares of beneficial interest outstanding as of February 29, 2016 was 38,338,183.
Portions of the registrant's Definitive Proxy Statement for its 2016 Annual Meeting of Shareholders (to be filed with the Securities and Exchange
Commission on or before April 29, 2016) are incorporated by reference into this Annual Report on Form 10-K in response to Part III hereof.
DOCUMENTS INCORPORATED BY REFERENCE
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TABLE OF CONTENTS
PART I.
Business
Item 1.
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Properties
Legal Proceedings
Item 3.
Item 4. Mine Safety Disclosures
PART II.
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Selected Financial Data
Item 6.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Item 8.
Consolidated Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9.
Item 9A Controls and Procedures
Item 9B. Other Information
PART III.
Item 10. Trustees, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Trustee Independence
Item 14. Principal Accountant Fees and Services
Item 15. Exhibits and Financial Statement Schedules
PART IV
2
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934 as amended (the "Exchange Act"), and
as such may involve known and unknown risks, uncertainties, assumptions and other factors which may cause our actual
results, performance or achievements to be materially different from future results, performance or achievements expressed or
implied by such forward-looking statements. Forward-looking statements, which are based on certain assumptions and describe
our future plans, strategies and expectations, are generally identified by our use of words, such as "intend," "plan," "may,"
"should," "will," "project," "estimate," "anticipate," "believe," "expect," "continue," "potential," "opportunity," or similar
expressions, whether in the negative or affirmative. These forward-looking statements include information about possible or
assumed future results of our business, financial condition, liquidity, results of operations, plans and objectives. Statements
regarding the following subjects, among others, are forward-looking by their nature:
•
•
•
•
•
•
•
•
•
•
our business and investment strategy;
our forecasted operating results;
completion of hotel acquisitions;
our ability to obtain future financing arrangements;
our expected leverage levels;
our understanding of our competition;
market and lodging industry trends and expectations;
our investment in joint ventures;
anticipated capital expenditures; and
our ability to maintain our qualification as a REIT for federal income tax purposes.
The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance,
taking into account all information available to us at the time the forward-looking statements are made. These beliefs,
assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us. If a
change occurs, our business, prospects, financial condition, liquidity and results of operations may vary materially from those
expressed in our forward-looking statements. You should carefully consider these risks when you make an investment decision
concerning our securities. Additionally, the following factors could cause actual results to vary from our forward-looking
statements:
•
•
•
•
•
•
•
•
•
•
•
the factors included in this report, including those set forth under the sections titled “Business,” Risk Factors” and
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in other reports
that we file with the United States Securities and Exchange Commission, or SEC, or in other documents that we
publicly disseminate;
general volatility of the financial markets and the market price of our securities;
performance of the lodging industry in general;
changes in our business or investment strategy;
availability, terms and deployment of capital;
availability of and our ability to attract and retain qualified personnel;
our leverage levels;
our capital expenditures;
changes in our industry and the markets in which we operate, interest rates or the general U.S. or international
economy;
our ability to maintain our qualification as a REIT for federal income tax purposes; and
the degree and nature of our competition.
All forward-looking statements speak only as of the date of this report or, in the case of any document incorporated by
reference, the date of that document. All subsequent written and oral forward-looking statements attributable to us or any
person acting on our behalf are qualified by the cautionary statements in this section. We undertake no obligation to update or
publicly release any revisions to forward-looking statements to reflect events, circumstances or changes in expectations after
the date of this report, except as required by law.
3
Item 1. Business
Overview
PART I
Chatham Lodging Trust (“we,” “us” or the “Company”) was formed as a Maryland real estate investment trust on
October 26, 2009. We elected to be taxed as a real estate investment trust for federal income tax purposes (a "REIT")
commencing with our 2010 taxable year. The Company is internally-managed and was organized to invest primarily in
upscale extended-stay and premium-branded select-service hotels.
We had no operations prior to the consummation of our initial public offering ("IPO") in April 2010. The net proceeds
from our share offerings are contributed to Chatham Lodging, L.P., our operating partnership (the “Operating Partnership”), in
exchange for partnership interests. Substantially all of the Company’s assets are held by, and all of its operations are conducted
through, the Operating Partnership. Chatham Lodging Trust is the sole general partner of the Operating Partnership and owns
100% of the common units of limited partnership interest in the Operating Partnership ("common units"). Certain of the
employees of the Company hold vested and unvested long-term incentive plan units in the Operating Partnership ("LTIP
Units"), which are presented as non-controlling interests on our consolidated balance sheets.
From its inception through December 31, 2015, the Company has completed the following offerings of its common
shares of beneficial interest, $0.01 par value per share ("common shares"):
Type of Offering (1)
Date
Shares Issued
Price per
Share
Gross Proceeds
(in thousands)
8,625,000 $
20.00 $
172,500 $
Net Proceeds
(in thousands)
158,700
Initial public offering
Private placement offering (1)
Follow-on common share offering
Over-allotment option
4/21/2010
4/21/2010
2/8/2011
2/8/2011
500,000
4,000,000
600,000
Follow-on common share offering
1/14/2013
3,500,000
Over-allotment option
1/31/2013
92,677
Follow-on common share offering
6/18/2013
4,500,000
Over-allotment option
6/28/2013
475,823
Follow-on common share offering
9/30/2013
3,250,000
Over-allotment option
10/11/2013
487,500
Follow-on common share offering
9/24/2014
6,000,000
Over-allotment option
9/24/2014
900,000
Follow-on common share offering
1/27/2015
3,500,000
Over-allotment option
1/27/2015
525,000
36,956,000
20.00
16.00
16.00
14.70
14.70
16.35
16.35
18.35
18.35
21.85
21.85
30.00
30.00
10,000
64,000
9,600
51,400
1,400
73,600
7,800
59,600
8,900
131,100
19,700
105,000
15,750
730,350 $
$
10,000
60,300
9,100
48,400
1,300
70,000
7,400
56,700
8,500
125,600
18,900
103,300
15,500
693,700
(1) Excludes any shares issued pursuant to the Company's ATM Plan or DRSPP (each as defined below).
(2) The Company sold 500,000 common shares to Jeffrey H. Fisher, the Company's Chairman, President and Chief
Executive Officer ("Mr. Fisher") in a private placement concurrent with the closing of its IPO.
In January 2014, the Company established a $25 million dividend reinvestment and stock purchase plan ("DRSPP").
Under the DRSPP, shareholders may purchase additional common shares by reinvesting some or all of the cash dividends
received on the Company's common shares. Shareholders may also make optional cash purchases of the Company's common
shares subject to certain limitations detailed in the prospectus for the DRSPP. As of December 31, 2015 and 2014, respectively,
we had issued 5,595 and 2,083 shares under the DRSPP at a weighted average price of $25.00 and $24.38 per share,
respectively. As of December 31, 2015, there were common shares having a maximum aggregate sales price of approximately
$24.9 million available for issuance under the DRSPP.
4
In January 2014, the Company established an At the Market Equity Offering ("ATM Plan") whereby, from time to
time, we may publicly offer and sell up to $50 million of our common shares by means of ordinary brokers' transactions on the
New York Stock Exchange (the "NYSE"), in negotiated transactions or in transactions that are deemed to be "at the market"
offerings as defined in Rule 415 under the Securities Act, with Cantor Fitzgerald & Co. ("Cantor") acting as sales agent. On
January 13, 2015, the Company entered into a sales agreement with Barclays Capital Inc. (“Barclays”) to add Barclays as an
additional sales agent under the Company’s ATM Plan. As of December 31, 2015 and 2014, respectively, we had issued
880,820 and 880,820 shares under the ATM Plan at a weighted average price of $23.54 per share in addition to the offerings
discussed above. As of December 31, 2015, there were common shares having a maximum aggregate sales price of
approximately $29.3 million available for issuance under the ATM Plan.
As of December 31, 2015, the Company owned 38 hotels with an aggregate of 5,678 rooms located in 15 states and
the District of Columbia. As of December 31, 2015, the Company also (i) held a 10.3% noncontrolling interest in a joint
venture (the “NewINK JV”) with NorthStar Realty Finance Corp. ("NorthStar"), which was formed in the second quarter of
2014 to acquire 47 hotels from a joint venture (the "Innkeepers JV") between the Company and Cerberus Capital Management
(“Cerberus”), comprising an aggregate of 6,097 rooms and (ii) held a 10.0% noncontrolling interest in a separate joint venture
(the "Inland JV") with NorthStar, which was formed in the fourth quarter of 2014 to acquired 48 hotels from Inland American
Real Estate Trust, Inc. ("Inland"), comprising an aggregate of 6,401 rooms. The Company sold its 5.0% noncontrolling interest
in a joint venture (the "Torrance JV") with Cerberus that owned the 248-room Residence Inn by Marriott in Torrance, CA on
December 30, 2015. We sometimes use the term, "JV's", which refers collectively to, for the period prior to December 31,
2015, the NewINK JV, Inland JV and Torrance JV and, for the period subsequent to December 30, 2015, the NewINK JV and
the Inland JV.
To qualify as a REIT, the Company cannot operate its hotels. Therefore, the Operating Partnership and its subsidiaries
lease our wholly owned hotels to taxable REIT subsidiary lessees (“TRS Lessees”), which are wholly owned by one of the
Company’s taxable REIT subsidiary (“TRS”) holding companies. The Company indirectly (i) owns its 10.3% interest in 47 of
the NewINK JV hotels, (ii) owns its 10% interest in 48 of the Inland JV hotels and (iii) owned its 5% interest in the Torrance
JV, which was sold on December 30, 2015, through the Operating Partnership. All of the NewINK JV hotels and Inland JV
hotels are and the Torrance JV hotel was leased to TRS Lessees, in which the Company indirectly owns noncontrolling interests
through one of its TRS holding companies. Each hotel is leased to a TRS Lessee under a percentage lease that provides for
rental payments equal to the greater of (i) a fixed base rent amount or (ii) a percentage rent based on hotel room revenue. The
initial term of each of the TRS leases is 5 years. Lease revenue from each TRS Lessee is eliminated in consolidation.
The TRS Lessees have entered into management agreements with third-party management companies that provide
day-to-day management for the hotels. As of December 31, 2015, Island Hospitality Management Inc. (“IHM”), which was
51% owned by Mr. Fisher and 45% owned by affiliates of NorthStar Asset Management Group, Inc., managed 36 of the
Company’s wholly owned hotels and Concord Hospitality Enterprises Company ("Concord") managed two of the Company’s
wholly owned hotels. As of December 31, 2015, all of the NewINK JV hotels were managed by IHM. As of December 31,
2015, 34 of the Inland JV hotels are managed by IHM and 14 hotels are managed by Marriott International, Inc. ("Marriott").
The Torrance JV hotel was managed by Marriott.
As of December 31, 2015, our wholly owned hotels include upscale extended-stay hotels that operate under the
Residence Inn by Marriott® brand (fifteen hotels) and Homewood Suites by Hilton® brand (nine hotels), as well as premium-
branded select-service hotels that operate under the Courtyard by Marriott® brand (four hotels), the Hampton Inn or Hampton
Inn and Suites by Hilton® brand (three hotels), the Hilton Garden Inn by Hilton® brand (three hotels), the SpringHill Suites by
Marriott® brand (two hotels) and the Hyatt Place® brand (two hotels).
We primarily invest in upscale extended-stay hotels such as Homewood Suites by Hilton® and Residence Inn by
Marriott®. Upscale extended-stay hotels typically have the following characteristics:
• principal customer base includes business travelers who are on extended assignments and corporate relocations;
• services and amenities include complimentary breakfast and evening hospitality hour, high-speed internet access, in-
room movie channels, limited meeting space, daily linen and room cleaning service, 24-hour front desk, guest
grocery services, and an on-site maintenance staff; and
• physical facilities include large suites, quality construction, full separate kitchens in each guest suite, quality room
furnishings, pool, and exercise facilities.
5
We also invest in premium-branded select-service hotels such as Courtyard by Marriott®, Hampton Inn®, Hampton Inn
and Suites by Hilton®, Hyatt Place®, Hilton Garden Inn by Hilton® and SpringHill Suites by Marriott®. The service and
amenity offerings of these hotels typically include complimentary breakfast or a smaller for pay dining option, high-speed
internet access, local calls, in-room movie channels, and daily linen and room cleaning service.
The following sets forth certain information with respect to our 38 wholly-owned hotels at December 31, 2015:
Property
Location
Management
Company
Date of
Acquisition
Year
Opened
Number of
Rooms
Purchase Price
Purchase Price
per Room
Mortgage Debt
Balance
Homewood Suites by Hilton
Boston-Billerica/ Bedford/
Burlington
Homewood Suites by Hilton
Minneapolis-Mall of America
Homewood Suites by Hilton
Nashville-Brentwood
Homewood Suites by Hilton
Dallas-Market Center
Homewood Suites by Hilton
Hartford-Farmington
Homewood Suites by Hilton
Orlando-Maitland
Billerica, Massachusetts
Bloomington, Minnesota
Brentwood, Tennessee
Dallas, Texas
Farmington, Connecticut
Maitland, Florida
Hampton Inn & Suites Houston-
Medical Center
Houston, Texas
IHM
IHM
IHM
IHM
IHM
IHM
IHM
Courtyard Altoona
Altoona, Pennsylvania
Springhill Suites Washington
Washington, Pennsylvania
Concord
Concord
Residence Inn Long Island
Holtsville
Holtsville, New York
Residence Inn White Plains
White Plains, New York
Residence Inn New Rochelle
New Rochelle, New York
Homewood Suites by Hilton
Carlsbad (North San Diego County)
Carlsbad, California
Residence Inn Garden Grove
Garden Grove, California
Residence Inn Mission Valley
San Diego, California
Homewood Suites by Hilton San
Antonio River Walk
San Antonio, Texas
Residence Inn Washington DC
Washington, DC
Residence Inn Tysons Corner
Vienna, Virginia
Hampton Inn Portland Downtown
Portland, Maine
Courtyard Houston
Houston, Texas
Hyatt Place Pittsburgh North Shore
Pittsburgh, Pennsylvania
Hampton Inn Exeter
Exeter, New Hampshire
Hilton Garden Inn Denver Tech
Denver, Colorado
Residence Inn Bellevue
Bellevue, Washington
Springhill Suites Savannah
Savannah, Georgia
Residence Inn Silicon Valley I
Sunnyvale, CA
Residence Inn Silicon Valley II
Sunnyvale, CA
Residence Inn San Mateo
San Mateo, CA
Residence Inn Mountain View
Mountain View, CA
Hyatt Place Cherry Creek
Courtyard Addison
Glendale, CO
Addison, TX
Courtyard West University Houston
Houston, TX
Residence Inn West University
Houston
Houston, TX
Hilton Garden Inn Burlington
Burlington, MA
Residence Inn San Diego Gaslamp
San Diego, CA
Residence Inn Dedham
Dedham, MA
Residence Inn Il Lugano
Fort Lauderdale, FL
Hilton Garden Inn Marina del Rey
Marina del Rey, CA
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
4/23/2010
4/23/2010
4/23/2010
4/23/2010
4/23/2010
4/23/2010
7/2/2010
8/24/2010
8/24/2010
8/3/2010
9/23/2010
10/5/2010
11/3/2010
7/14/2011
7/14/2011
7/14/2011
7/14/2011
7/14/2011
12/27/2012
2/5/2013
6/17/2013
8/9/2013
9/26/2013
10/31/2013
12/5/2013
6/9/2014
6/9/2014
6/9/2014
6/9/2014
8/29/2014
11/17/2014
11/17/2014
11/17/2014
11/17/2014
2/25/2015
7/17/2015
8/17/2015
9/17/2015
1999
1998
1998
1998
1999
2000
1997
2001
2000
2004
1982
2000
2008
2003
2003
1996
1974
2001
2011
2010
2010
2010
1999
2008
2009
1983
1985
1985
1985
1987
2000
2004
2004
1975
2009
2008
2013
1998
147
144
121
137
121
143
120
105
86
124
134
127
145
200
192
146
103
121
125
197
178
111
180
231
160
231
248
160
112
194
176
100
120
179
240
81
105
134
$12.5 million
$18.0 million
$11.3 million
$10.7 million
$11.5 million
$9.5 million
$16.5 million
$11.3 million
$12.0 million
$21.3 million
$21.2 million
$21.0 million
$32.0 million
$43.6 million
$52.5 million
$32.5 million
$29.4 million
$37.0 million
$28.0 million
$34.8 million
$40.0 million
$15.2 million
$27.9 million
$71.8 million
$39.8 million
$92.8 million
$102.0 million
$72.7 million
$56.4 million
$32.0 million
$24.1 million
$20.1 million
$29.4 million
$33.0 million
$90.0 million
$22.0 million
$33.5 million
$45.05 million
Total
5.678
$1,314.4 million
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
85,714
$16.2 million
125,000
93,388
78,102
95,041
66,433
137,500
107,619
139,535
171,774
159,398
169,355
220,690
218,000
273,438
222,603
280,000
305,785
229,508
176,395
224,719
136,937
155,000
316,883
248,438
401,776
411,103
454,097
503,869
164,948
137,178
201,481
245,363
184,392
375,000
271,605
319,048
336,194
—
—
—
—
—
$18.3 million
$6.0 million
—
—
—
$14.5 million
$20.0 million
$34.0 million
$29.6 million
$16.9 million
—
$23.1 million
—
$19.1 million
$23.3 million
—
—
$46.9 million
$30.0 million
$64.8 million
$70.7 million
$48.6 million
$37.9 million
—
—
—
—
—
—
—
—
$22.5 million
231,489
$542.3 million
6
Financial Information About Industry Segments
We evaluate all of our hotels as a single industry segment because all of our hotels have similar economic
characteristics and provide similar services to similar types of customers. Accordingly, we do not report segment information.
Business Strategy
Our primary objective is to generate attractive returns for our shareholders through investing in hotel properties
(whether wholly owned or through a joint venture) at prices that provide strong returns on invested capital, paying dividends
and generating long-term value appreciation. We believe we can create long-term value by pursuing the following strategies:
• Disciplined acquisition of hotel properties: We invest primarily in premium-branded upscale extended-stay and
select-service hotels with a focus on the 25 largest metropolitan markets in the United States. We focus on acquiring
hotel properties at prices below replacement cost in markets that have strong demand generators and where we
expect demand growth will outpace new supply. We also seek to acquire properties that we believe are
undermanaged or undercapitalized. We currently do not intend to engage in new hotel development.
• Opportunistic hotel repositioning: We employ value-added strategies, such as re-branding, renovating, expanding or
changing management, when we believe such strategies will increase the operating results and values of the hotels
we acquire.
• Aggressive asset management: Although as a REIT we cannot operate our hotels, we proactively manage our third-
party hotel managers in seeking to maximize hotel operating performance. Our asset management activities seek to
ensure that our third-party hotel managers effectively utilize franchise brands' marketing programs, develop effective
sales management policies and plans, operate properties efficiently, control costs, and develop operational initiatives
for our hotels that increase guest satisfaction. As part of our asset management activities, we regularly review
opportunities to reinvest in our hotels to maintain quality, increase long-term value and generate attractive returns on
invested capital.
• Flexible selection of hotel management companies: We are flexible in our selection of hotel management companies
and select managers that we believe will maximize the performance of our hotels. We utilize independent
management companies, including IHM, a hotel management company 51% owned by Mr. Fisher and 45% owned
by affiliates of NorthStar Asset Management Group, Inc., that currently manages 36 of our wholly owned hotels, all
of the hotels owned by the NewINK JV and 34 hotels owned by the Inland JV. We believe this strategy increases the
universe of potential acquisition opportunities we can consider because many hotel properties are encumbered by
long-term management contracts.
• Selective investment in hotel debt: We may consider selectively investing in debt collateralized by hotel property if
we believe we can foreclose on or acquire ownership of the underlying hotel property in the relative near term. We
do not intend to invest in any debt where we do not expect to gain ownership of the underlying property or to
originate any debt financing.
We plan to maintain a prudent capital structure and intend to maintain our leverage over the long term at a ratio of net
debt to investment in hotels (at cost) (defined as our initial acquisition price plus the gross amount of any subsequent capital
investment and excluding any impairment charges) at a level that will be similar to the level at which we currently operate. A
subsequent decrease in hotel property values will not necessarily cause us to repay debt to comply with this target. Our debt
coverage ratios currently are favorable and, as a result, we are comfortable in this leverage range and believe we have the
capacity and flexibility to take advantage of acquisition opportunities as they arise. At December 31, 2015, our leverage ratio
was approximately 41 percent, which decreased from 44 percent at December 31, 2014. Over time, we intend to finance our
growth with free cash flow, debt and issuances of common shares and/or preferred shares. Our debt may include mortgage debt
collateralized by our hotel properties and unsecured debt.
When purchasing hotel properties, we may issue common units in our Operating Partnership as full or partial
consideration to sellers who may desire to take advantage of tax deferral on the sale of a hotel or participate in the potential
appreciation in value of our common shares.
Competition
We face competition for investments in hotel properties from institutional pension funds, private equity investors,
REITs, hotel companies and others who are engaged in hotel investments. Some of these entities have substantially greater
financial and operational resources than we have or may be willing to use higher leverage. This competition may increase the
bargaining power of property owners seeking to sell, reduce the number of suitable investment opportunities available to us and
increase the cost of acquiring our targeted hotel properties.
7
The lodging industry is highly competitive. Our hotels compete with other hotels for guests in each market in which
they operate. Competitive advantage is based on a number of factors, including location, convenience, brand affiliation, room
rates, range of services and guest amenities or accommodations offered and quality of customer service. Competition is often
specific to the individual markets in which our hotels are located and includes competition from existing and new hotels.
Competition could adversely affect our occupancy rates, our average daily rates ("ADR") and revenue per available room
(“RevPAR”), and may require us to provide additional amenities or make capital improvements that we otherwise would not
have to make, which may reduce our profitability.
Seasonality
Demand for our hotels is affected by recurring seasonal patterns. Generally, we expect that we will have lower
revenue, operating income and cash flow in the first and fourth quarters and higher revenue, operating income and cash flow in
the second and third quarters. These general trends are, however, influenced by overall economic cycles and the geographic
locations of our hotels. To the extent that cash flow from operations is insufficient during any quarter, due to temporary or
seasonal fluctuations in revenue, we expect to utilize cash on hand or borrowings under our credit facility to pay expenses, debt
service or to make distributions to our equity holders.
Regulation
Our properties are subject to various covenants, laws, ordinances and regulations, including regulations relating to
common areas and fire and safety requirements. We believe each of our hotels has the necessary permits and approvals to
operate its business, and each is adequately covered by insurance.
Americans with Disabilities Act
Our properties must comply with Title III of the Americans with Disabilities Act of 1990 ("ADA") to the extent that
such properties are "public accommodations" as defined by the ADA. Under the ADA, all public accommodations must meet
federal requirements related to access and use by disabled persons. The ADA may require removal of structural barriers to
access by persons with disabilities in certain public areas of our properties where such removal is readily achievable. Although
we believe that the properties in which we own interests (including the properties owned by the JV's) substantially comply with
present requirements of the ADA, we have not conducted a comprehensive audit or investigation of all of these properties to
determine compliance, and one or more properties may not be fully compliant with the ADA.
In March 2012, a substantial number of changes to the Accessibility Guidelines under the ADA took effect. The new
guidelines caused us to renovate some of our hotel properties and to incur costs to become fully compliant.
If we or any of our joint ventures are required to make substantial modifications to our wholly owned or joint venture
hotel properties, whether to comply with the ADA or other changes in governmental rules and regulations, our financial
condition, results of operations, the market price of our common shares and our ability to make distributions to our
shareholders could be adversely affected. The obligation to make readily achievable accommodations is an ongoing one, and
we will continue to assess our properties and to make alterations as appropriate.
Environmental Regulations
Under various federal, state and local laws, ordinances and regulations, an owner of real property may be liable for the
costs of removal or remediation of certain hazardous or toxic substances on or in such property. Such laws often impose such
liability without regard to whether the owner knew of or was responsible for, the presence of such hazardous or toxic
substances. The cost of any required remediation and the owner's liability therefore as to any property are generally not limited
under such laws and could exceed the value of the property and/or the aggregate assets of the owner. The presence of such
substances, or the failure to properly remediate contamination from such substances, may adversely affect the owner's ability to
sell the real estate or to borrow funds using such property as collateral, which could have an adverse effect on our return from
such investment.
Furthermore, various court decisions have established that third parties may recover damages for injury caused by
release of hazardous substances and for property contamination. For instance, a person exposed to asbestos while working at or
staying in a hotel may seek to recover damages if he or she suffers injury from the asbestos. Lastly, some of these
environmental issues restrict the use of a property or place conditions on various activities. One example is laws that require a
business using chemicals to manage them carefully and to notify local officials if regulated spills occur.
8
Although it is our policy to require an acceptable Phase I environmental survey for all real property in which we invest
prior to our investment, such surveys are limited in scope. As a result, there can be no assurance that a Phase I environmental
survey will uncover any or all hazardous or toxic substances on a property prior to our investment in that property. We cannot
assure you that:
• there are not existing environmental liabilities related to our properties of which we are not aware;
• future laws, ordinances or regulations will not impose material environmental liability; or
• the current environmental condition of a hotel will not be affected by the condition of properties in the vicinity of the
hotel (such as the presence of leaking underground storage tanks) or by third parties unrelated to us.
Tax Status
We elected to be taxed as a REIT for federal income tax purposes commencing with our short taxable year ended
December 31, 2010 under the Internal Revenue Code of 1986, as amended (the “Code”). Our qualification as a REIT depends
upon our ability to meet, on a continuing basis, through actual investment and operating results, various complex requirements
under the Code relating to, among other things, the sources of our gross income, the composition and values of our assets, our
distribution levels and the diversity of ownership of our shares of beneficial interest. We believe that we are organized in
conformity with the requirements for qualification as a REIT under the Code and that our current and intended manner of
operation will enable us to meet the requirements for qualification and taxation as a REIT for federal income tax purposes.
As a REIT, we generally will not be subject to federal income tax on our REIT taxable income that we distribute
currently to our shareholders. Under the Code, REITs are subject to numerous organizational and operational requirements,
including a requirement that they distribute each year at least 90% of their taxable income, determined without regard to the
deduction for dividends paid and excluding any net capital gains. If we fail to qualify for taxation as a REIT in any taxable year
and do not qualify for certain statutory relief provisions, our income for that year will be taxed at regular corporate rates, and
we will be disqualified from taxation as a REIT for the four taxable years following the year during which we ceased to qualify
as a REIT. Even if we qualify as a REIT for federal income tax purposes, we may still be subject to state and local taxes on our
income and assets and to federal income and excise taxes on our undistributed income. Additionally, any income earned by our
TRS Lessees will be fully subject to federal, state and local corporate income tax.
Hotel Management Agreements
The management agreements with Concord have an initial ten-year term that expire on February 28, 2017 and will
renew automatically for successive one-year terms unless terminated by the TRS Lessee or the manager by written notice to the
other party no later than 90 days prior to the then current term’s expiration date. The management agreements may be
terminated for cause, including the failure of the managed hotel to meet specified operating performance levels. If the
Company were to terminate the management agreements during the first nine years of the term, other than for breach or default
by the manager, the Company would be responsible for paying termination fees to the manager. Base management fees under
the management agreements with Concord are calculated as a percentage of the hotel's gross room revenue.
The management agreements with IHM have an initial term of five years and will automatically renew for two
successive five-year periods unless IHM provides written notice no later than 90 days prior to the then current term's expiration
date of their intent not to renew. The IHM management agreements provide for early termination at the Company’s option upon
sale of any IHM-managed hotel for no termination fee, with six months advance notice. The IHM management agreements may
be terminated for cause, including the failure of the managed hotel to meet specified performance levels. Base management
fees are calculated as a percentage of the hotel's gross room revenue. If certain financial thresholds are met or exceeded, an
incentive management fee is calculated as 10% of the hotel's net operating income less fixed costs, base management fees and a
specified return threshold. The incentive management fee is capped at 1% of gross hotel revenues for the applicable
calculation.
9
Terms of our management agreements for our 38 wholly owned hotels are as follows (dollars are not in thousands):
Management
Company
Base
Management
Fee
Monthly
Accounting
Fee
Monthly
Revenue
Management
Fee
Incentive
Management
Fee Cap
Property
Courtyard Altoona
Springhill Suites Washington
Concord
Concord
Homewood Suites by Hilton Boston-Billerica/ Bedford/ Burlington IHM
Homewood Suites by Hilton Minneapolis-Mall of America
Homewood Suites by Hilton Nashville-Brentwood
Homewood Suites by Hilton Dallas-Market Center
Homewood Suites by Hilton Hartford-Farmington
Homewood Suites by Hilton Orlando-Maitland
IHM
IHM
IHM
IHM
IHM
Homewood Suites by Hilton Carlsbad (North San Diego County)
IHM
Hampton Inn & Suites Houston-Medical Center
Residence Inn Long Island Holtsville
Residence Inn White Plains
Residence Inn New Rochelle
Residence Inn Garden Grove
Residence Inn Mission Valley
Homewood Suites by Hilton San Antonio River Walk
Residence Inn Washington DC
Residence Inn Tysons Corner
Hampton Inn Portland Downtown
Courtyard Houston
Hyatt Place Pittsburgh North Shore
Hampton Inn Exeter
Hilton Garden Inn Denver Tech
Residence Inn Bellevue
Springhill Suites Savannah
Residence Inn Silicon Valley I
Residence Inn Silicon Valley II
Residence Inn San Mateo
Residence Inn Mountain View
Hyatt Place Cherry Creek
Courtyard Addison
Courtyard West University Houston
Residence Inn West University Houston
Hilton Garden Inn Burlington
Residence Inn San Diego Gaslamp
Hilton Garden Inn Marina del Rey
Residence Inn Dedham
Residence Inn Il Lugano
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
10
4.0% $
1,211 $
4.0%
2.0%
2.0%
2.0%
2.0%
2.0%
2.0%
3.0%
3.0%
3.0%
3.0%
3.0%
2.5%
2.5%
2.5%
2.5%
2.5%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
991
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,500
1,200
1,500
1,200
1,200
1,200
1,200
1,200
1,200
1,500
1,500
1,500
1,200
1,500
1,500
1,500
1,200
1,500
—
—
550
550
550
550
550
550
—
—
—
—
—
—
—
—
—
—
550
550
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
—
—
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
Management fees totaled approximately $8.7 million, $6.1 million and $3.8 million, respectively, for the years ended
December 31, 2015, 2014 and 2013. Incentive management fees paid to IHM for the years ended December 31, 2015, 2014
and 2013 were $0.3 million, $0.2 million and $0.1 million, respectively. There have been no incentive management fees paid
to Concord.
11
Hotel Franchise Agreements
The fees associated with the franchise agreements are calculated on the specified percentage of the hotel's gross room
revenue. Terms of the Company's franchise agreements for its 38 wholly owned hotels as of December 31, 2015 are as follows:
Property
Franchise Company
Franchise/
Royalty Fee
Marketing/
Program Fee
Expiration
4.0%
4.0%
4.0%
4.0%
4.0%
4.0%
4.0%
5.0%
5.5%
5.0%
5.5%
5.5%
5.5%
5.0%
5.0%
4.0%
5.5%
5.0%
6.0%
5.5%
5.0%
6.0%
5.5%
5.5%
5.0%
5.5%
5.5%
5.5%
5.5%
Homewood Suites by Hilton Boston-Billerica/ Bedford/ Burlington Promus Hotels, Inc.
Homewood Suites by Hilton Minneapolis-Mall of America
Promus Hotels, Inc.
Homewood Suites by Hilton Nashville-Brentwood
Homewood Suites by Hilton Dallas-Market Center
Homewood Suites by Hilton Hartford-Farmington
Homewood Suites by Hilton Orlando-Maitland
Promus Hotels, Inc.
Promus Hotels, Inc.
Promus Hotels, Inc
Promus Hotels, Inc.
Homewood Suites by Hilton Carlsbad (North San Diego County)
Promus Hotels, Inc.
Hampton Inn & Suites Houston-Medical Center
Hampton Inns Franchise LLC
Courtyard Altoona
Springhill Suites Washington
Residence Inn Long Island Holtsville
Residence Inn White Plains
Residence Inn New Rochelle
Residence Inn Garden Grove
Residence Inn Mission Valley
Marriott International, Inc.
Marriott International, Inc.
Marriott International, Inc.
Marriott International, Inc.
Marriott International, Inc.
Marriott International, Inc.
Marriott International, Inc.
Homewood Suites by Hilton San Antonio River Walk
Promus Hotels, Inc.
Residence Inn Washington DC
Residence Inn Tysons Corner
Hampton Inn Portland Downtown
Courtyard Houston
Marriott International, Inc.
Marriott International, Inc.
Hampton Inns Franchise LLC
Marriott International, Inc.
Hyatt Place Pittsburgh North Shore
Hyatt Hotels, LLC
Hampton Inn Exeter
Hilton Garden Inn Denver Tech
Residence Inn Bellevue
Springhill Suites Savannah
Residence Inn Silicon Valley I
Residence Inn Silicon Valley II
Residence Inn San Mateo
Residence Inn Mountain View
Hyatt Place Cherry Creek
Courtyard Addison
Courtyard West University Houston
Residence Inn West University Houston
Hilton Garden Inn Burlington
Residence Inn San Diego Gaslamp
Hilton Garden Inn Marina del Rey
Residence Inn Dedham
Residence Inn Il Lugano
Hampton Inns Franchise LLC
Hilton Garden Inns Franchise LLC
Marriott International, Inc.
Marriott International, Inc.
Marriott International, Inc.
Marriott International, Inc.
Marriott International, Inc.
Marriott International, Inc.
Hyatt Hotels, LLC
3% to 5%
Marriott International, Inc.
Marriott International, Inc.
Marriott International, Inc.
Hilton Garden Inns Franchise LLC
Marriott International, Inc.
5.5%
5.5%
6.0%
5.5%
6.0%
Hilton Franchise Holding LLC
3% to 5.5%
Marriott International, Inc.
6%
Marriott International, Inc.
3% to 6.0%
4.0%
4.0%
4.0%
4.0%
4.0%
4.0%
4.0%
4.0%
2.0%
2.5%
2.5%
2.5%
2.5%
2.5%
2.5%
4.0%
2.5%
2.5%
4.0%
2.0%
3.5%
4.0%
4.3%
2.5%
2.5%
2.5%
2.5%
2.5%
2.5%
3.5%
2.0%
2.0%
2.0%
4.3%
2.5%
4.3%
2.5%
2.5%
2025
2025
2025
2025
2025
2025
2028
2020
2030
2030
2025
2030
2030
2031
2031
2026
2033
2031
2032
2030
2030
2031
2028
2033
2033
2029
2029
2029
2029
2034
2029
2029
2024
2029
2035
2030
2030
2045
Franchise and marketing/program fees totaled approximately $21.2 million, $15.1 million $9.4 million, respectively,
for the years ended December 31, 2015, 2014 and 2013.
12
Ground Leases
The Courtyard Altoona hotel is subject to a ground lease with an expiration date of April 30, 2029 with an extension
option by the Company of up to 12 additional terms of five years each. Monthly payments are determined by the quarterly
average room occupancy of the hotel. Rent is equal to approximately $8,000 per month when monthly occupancy is less than
85% and can increase up to approximately $20,000 per month if occupancy is 100%, with minimum rent increased by two and
one-half percent (2.5%) on an annual basis.
The Residence Inn San Diego Gaslamp hotel is subject to a ground lease with an expiration of January 31, 2065 with
extension options of up to 3 additional terms of ten years each. Monthly payments are currently $40,000 per month and
increase 10% every 5 years. The hotel is subject to supplemental rent payments annually calculated as 5% of gross revenues
during the applicable lease year minus 12 times the monthly base rent scheduled for the lease year.
The Residence Inn New Rochelle hotel, is subject to an air rights lease and a garage lease, each of which expires on
December 1, 2104. The lease agreements with the City of New Rochelle cover the space above the parking garage that is
occupied by the hotel as well as 128 parking spaces in a parking garage that is attached to the hotel. The annual base rent for
the garage lease is the hotel’s proportionate share of the city’s adopted budget for the operations, management and maintenance
of the garage and established reserves to fund for the cost of capital repairs. Aggregate rent for 2015 under these leases
amounted to approximately $31,000 per quarter.
The Hilton Garden Inn Marina del Rey hotel is subject to a ground lease with an expiration of December 31, 2067.
Minimum monthly payments are currently $43,000 per month and a percentage rent payment less the minimum rent is due in
arrears equal to 5% to 25% of gross income based on the type of income.
The Residence Inn Il Lugano hotel land is owned by the Company and is the lessee to an adjacent dock subject to a
renewable submerged land lease with an expiration of April 1, 2016. Renewal of the lease is at the sole option of the lessor. In
the event the Company is in full compliance with the terms of the lease, the lessor is required to begin the renewal process. The
annual lease payment is $2,000.
The Company entered into a new corporate office lease in September 2015. The lease is for a term of 11 years and
includes a 12-month rent abatement period and certain tenant improvement allowances. The Company has an option to renew
the lease for up to two successive terms of five years each. The Company shares the space with related parties and will be
reimbursed for the pro-rata share of rentable space occupied by the related parties.
Future minimum rental payments under the terms of all non-cancellable operating ground leases and the office lease
under which the Company is the lessee are expensed on a straight-line basis regardless of when payments are due. The
following is a schedule of the minimum future payments required under the ground, air rights, submerged land and garage
leases and office lease as of December 31, 2015 and for each of the next four calendar years and thereafter (dollars in
thousands):
2016
2017
2018
2019
2020
Thereafter
Total
$
$
Other Leases(1)
Office Lease
Amount
1,213 $
1,215
1,217
1,220
1,267
70,727
76,859 $
231
745
772
792
812
4,995
8,347
(1) Includes minimum future payments due under ground, air rights, submerged land and garage leases.
Employees
As of February 29, 2016, we had 47 employees, 39 of which are shared with or allocated to the NewINK JV, Inland JV
and an entity which is 2.5% owned by Mr. Fisher. All persons employed in the day-to-day operations of our hotels are
employees of the management companies engaged by our TRS Lessees to operate such hotels. None of our employees is
represented by a collective bargaining agreement, however, certain employees of IHM are represented under a collective
bargaining agreement.
13
Available Information
Our Internet website is www.chathamlodgingtrust.com. We make available free of charge through our website our
annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, Section 16 reports on Forms 3, 4
and 5 and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as
reasonably practicable after such documents are electronically filed with, or furnished to, the SEC. In addition, our website
includes corporate governance information, including the charters for committees of our Board of Trustees, our Corporate
Governance Guidelines, Conflict of Interest Policy and our Code of Business Conduct. This information is available in print to
any shareholder who requests it by writing to Investor Relations, Chatham Lodging Trust, 222 Lakeview Avenue, Suite 200,
West Palm Beach, FL 33401. The information on our website is not, and shall not be deemed to be, a part of this report or
incorporated into any other filings that we make with the SEC.
14
Item 1A. Risk Factors
Our business faces many risks. The risks described below may not be the only risks we face. Additional risks that we
do not yet know of or that we currently believe are immaterial may also impair our business operations. If any of the events or
circumstances described in the following risk factors actually occurs, our business, financial condition or results of operations
could suffer, our ability to make cash distributions to our shareholders could be impaired and the trading price of our common
shares could decline. You should know that many of the risks described may apply to more than just the subsection in which we
grouped them for the purpose of this presentation.
Risks Related to Our Business
Our investment policies are subject to revision from time to time at our Board of Trustees' discretion, which could diminish
shareholder returns below expectations.
Our investment policies may be amended or revised from time to time at the discretion of our Board of Trustees,
without a vote of our shareholders. Such discretion could result in investments that may not yield returns consistent with
investors' expectations.
We depend on the efforts and expertise of our key executive officers whose continued service is not guaranteed.
We depend on the efforts and expertise of our chief executive officer, as well as our other senior executives, to execute
our business strategy. The loss of their services, and our inability to find suitable replacements, could have an adverse effect on
our business.
If we are unable to successfully manage our growth, our operating results and financial condition could be adversely
affected.
Our ability to grow our business depends upon our senior executive officers' business contacts and their ability to
successfully hire, train, supervise and manage additional personnel. We may not be able to hire and train sufficient personnel or
develop management, information and operating systems suitable for our expected growth. If we are unable to manage any
future growth effectively, our operating results and financial condition could be adversely affected.
Our future growth depends on obtaining new financing and if we cannot secure financing in the future, our growth will be
limited.
The success of our growth strategy depends on access to capital through use of excess cash flow, borrowings or
subsequent issuances of common shares or other securities. Acquisitions of new hotel properties will require significant
additional capital and existing hotels (including those owned through joint ventures) require periodic capital improvement
initiatives to remain competitive. We may not be able to fund acquisitions or capital improvements solely from cash provided
from our operating activities because we must distribute at least 90% of our REIT taxable income (determined before the
deduction for dividends paid and excluding any net capital gains) each year to satisfy the requirements for qualification as a
REIT for federal income tax purposes. As a result, our ability to fund capital expenditures for acquisitions through retained
earnings is very limited. Our ability to grow through acquisitions of hotels will be limited if we cannot obtain satisfactory debt
or equity financing, which will depend on capital markets conditions. We cannot assure you that we will be able to obtain
additional equity or debt financing or that we will be able to obtain such financing on favorable terms.
We may be unable to invest proceeds from offerings of our securities.
We will have broad authority to invest the net proceeds of any offering of our securities in any real estate investments
that we may identify in the future, and we may use those proceeds to make investments with which you may not agree. In
addition, our investment policies may be amended or revised from time to time at the discretion of our Board of Trustees,
without a vote of our shareholders. These factors will increase the uncertainty, and thus the risk, of investing in our common
shares. Our failure to apply the net proceeds of any offering effectively or to find suitable hotel properties to acquire in a timely
manner or on acceptable terms could result in returns that are substantially below expectations or result in losses.
15
Until appropriate investments can be identified, we may invest the net proceeds of any offering of our securities in
interest-bearing short-term securities or money-market accounts that are consistent with our intention to qualify as a REIT.
These investments are expected to provide a lower net return than we seek to achieve from our hotel properties. We may be
unable to invest the net proceeds on acceptable terms, or at all, which could delay shareholders from receiving an appropriate
return on their investment. We cannot assure you that we will be able to identify properties that meet our investment criteria,
that we will successfully consummate any investment opportunities we identify, or that investments we may make will generate
income or cash flow.
We must rely on third-party management companies to operate our hotels in order to qualify as a REIT under the Code and,
as a result, we have less control than if we were operating the hotels directly.
In order for us to qualify as a REIT under the Code, third parties must operate our hotels. We lease each of our hotels
to our TRS Lessees. Our TRS Lessees, in turn, have entered into management agreements with third party management
companies to operate our hotels. While we expect to have some input on operating decisions for those hotels leased by our TRS
Lessees and operated under management agreements, we have less control than if we were managing the hotels ourselves. Even
if we believe that our hotels are not being operated efficiently, we may not be able to require an operator to change the way it
operates our hotels. If this is the case, we may decide to terminate the management agreement and potentially incur costs
associated with the termination. Additionally, Mr. Fisher, our chief executive officer, controls IHM, a hotel management
company that manages 36 of our hotels, all of the 47 hotels owned by the NewINK JV, and 34 of the hotels owned by the
Inland JV, and may manage additional hotels that we acquire in the future. See "There are conflicts of interest between us and
affiliates owned by our Chief Executive Officer" below.
Our management agreements could adversely affect the sale or financing of hotel properties and, as a result, our operating
results and ability to make distributions to our shareholders could suffer.
While we would prefer to enter into flexible management contracts that will provide us with the ability to replace hotel
managers on relatively short notice and with limited cost, we may enter into, or acquire properties subject to, management
contracts that contain more restrictive covenants. For example, the terms of some management agreements may restrict our
ability to sell a property unless the purchaser is not a competitor of the manager and assumes the related management
agreement and meets specified other conditions. Also, the terms of a long-term management agreement encumbering our
properties may reduce the value of the property. If we enter into or acquire properties subject to any such management
agreements, we may be precluded from taking actions that would otherwise be in our best interest or could cause us to incur
substantial expense, which could adversely affect our operating results and our ability to make distributions to shareholders.
Moreover, the management agreements that we use in connection with hotels managed by IHM were not negotiated on an
arm's-length basis due to Mr. Fisher's control of IHM and therefore may not contain terms as favorable to us as we could obtain
in an arm's-length transaction with a third party. See "There are conflicts of interest between us and affiliates owned by our
Chief Executive Officer" below.
The management of the hotels in our portfolio is currently concentrated in one hotel management company.
As of December 31, 2015, IHM managed 36 of our 38 wholly owned hotels, as well as all of the 47 hotels owned by
the NewINK JV and 34 of the 48 hotels owned by the Inland JV. As a result, a substantial portion of our revenues is generated
by hotels managed by IHM. This significant concentration of operational risk in one hotel management company makes us
more vulnerable economically than if our hotel management was more diversified among several hotel management
companies. Any adverse developments in IHM’s business and affairs, financial strength or ability to operate our hotels
efficiently and effectively could have a material adverse effect on our business, financial condition, results of operations and
our ability to make distributions to our shareholders. We cannot provide assurance that IHM will satisfy its obligations to us or
effectively and efficiently operate our hotel properties.
16
Our franchisors could cause us to expend additional funds on upgraded operating standards, which may reduce cash
available for distribution to shareholders.
Our hotels operate under franchise agreements, and we may become subject to the risks that are found in concentrating
our hotel properties in one or several franchise brands. Our hotel operators must comply with operating standards and terms
and conditions imposed by the franchisors of the hotel brands under which our hotels operate. Pursuant to certain of the
franchise agreements, certain upgrades are required approximately every six years, and the franchisors may also impose
upgraded or new brand standards, such as substantially upgrading the bedding, enhancing the complimentary breakfast or
increasing the value of guest awards under its ‘frequent guest' program, which can add substantial expense for the hotel. The
franchisors also may require us to make certain capital improvements to maintain the hotel in accordance with system
standards, the cost of which can be substantial and may reduce cash available for distribution to our shareholders.
Our franchisors may cancel or fail to renew our existing franchise licenses, which could adversely affect our operating
results and our ability to make distributions to shareholders.
Our franchisors periodically inspect our hotels to confirm adherence to the franchisors' operating standards. The
failure of a hotel to maintain standards could result in the loss or cancellation of a franchise license. We rely on our hotel
managers to conform to operational standards. In addition, when the term of a franchise license expires, the franchisor has no
obligation to issue a new franchise license. The loss of a franchise license could have a material adverse effect on the
operations or the underlying value of the affected hotel because of the loss of associated name recognition, marketing support
and centralized reservation systems provided by the franchisor. The loss of a franchise license or adverse developments with
respect to a franchise brand under which our hotels operate could also have a material adverse effect on our financial condition,
results of operations and cash available for distribution to shareholders.
Fluctuations in our financial performance, capital expenditure requirements and excess cash flow could adversely affect
our ability to make and maintain distributions to our shareholders.
As a REIT, we are required to distribute at least 90% of our REIT taxable income each year to our shareholders
(determined before the deduction for dividends paid and excluding any net capital gains). In the event of downturns in our
operating results and financial performance or unanticipated capital improvements to our hotels (including capital
improvements that may be required by franchisors or joint venture partners), we may be unable to declare or pay distributions
to our shareholders, or maintain our then-current dividend rate. The timing and amount of distributions are in the sole discretion
of our Board of Trustees, which considers, among other factors, our financial performance, debt service obligations and
applicable debt covenants (if any), and capital expenditure requirements. We cannot assure you we will generate sufficient cash
in order to continue to fund distributions.
Among the factors which could adversely affect our results of operations and distributions to shareholders are
reductions in hotel revenues; increases in operating expenses at the hotels leased to our TRS Lessees; increased debt service
requirements, including those resulting from higher interest rates on variable rate indebtedness; cash demands from the joint
ventures and capital expenditures at our hotels, including capital expenditures required by the franchisors of our hotels, and
unknown liabilities, such as environmental claims. Hotel revenue can decrease for a number of reasons, including increased
competition from new hotels and decreased demand for hotel rooms. These factors can reduce both occupancy and room rates
at hotels and could directly affect us negatively by:
• reducing the hotel revenue that we recognize with respect to hotels leased to our TRS Lessees; and
• correspondingly reducing the profits (or increasing the loss) of hotels leased to our TRS Lessees. We may be
unable to reduce many of our expenses in tandem with revenue declines, (or we may choose not to reduce
them for competitive reasons), and certain expenses may increase while our revenue declines.
17
Future debt service obligations could adversely affect our overall operating results or cash flow and may require us to
liquidate our properties, which could adversely affect our ability to make distributions to our shareholders and our share
price.
We plan to maintain a prudent capital structure and intend to maintain our leverage over the long term at a ratio of net
debt to investment in hotels (at cost) (defined as our initial acquisition price plus the gross amount of any subsequent capital
investment and excluding any impairment charges) at a level that will be similar to the level at which we currently operate. A
subsequent decrease in hotel property values will not necessarily cause us to repay debt to comply with this limitation. Our debt
coverage ratios currently are favorable and, as a result, we are comfortable at this leverage ratio and believe we have the
capacity and flexibility to take advantage of acquisition opportunities as they arise. As a result, we may be able to incur
substantial additional debt, including secured debt, in the future. Incurring additional debt could subject us to many risks,
including the risks that:
• operating cash flow will be insufficient to make required payments of expenses, principal and interest;
• our leverage may increase our vulnerability to adverse economic and industry conditions;
• we may be required to dedicate a substantial portion of our cash flow from operations to payments on our
debt, thereby reducing cash available for distribution to our shareholders, funds available for operations and
capital expenditures, future business opportunities or other purposes;
• the terms of any refinancing will not be as favorable as the terms of the debt being refinanced; and
• the terms of our debt may limit our ability to make distributions to our shareholders.
If we violate covenants in our debt agreements, we could be required to repay all or a portion of our indebtedness
before maturity at a time when we might be unable to arrange financing for such repayment on attractive terms, if at all.
If we are unable to repay our debt obligations in the future, we may be forced to refinance debt or dispose of or encumber
our assets, which could adversely affect distributions to shareholders.
If we do not have sufficient funds to repay our outstanding debt at maturity or before maturity in the event we breach
our debt agreements and our lenders exercise their right to accelerate repayment, we may be required to refinance the debt
through additional debt or additional equity financings. Covenants applicable to our existing and future debt could impair our
planned investment strategy and, if violated, result in a default. If we are unable to refinance our debt on acceptable terms, we
may be forced to dispose of hotel properties on disadvantageous terms, potentially resulting in losses. We have placed
mortgages on certain of our hotel properties, have assumed mortgages on other hotels we acquired and may place additional
mortgages on certain of our hotels to secure other debt. To the extent we cannot meet any future debt service obligations, we
will risk losing some or all of our hotel properties that are pledged to secure our obligations to foreclosure.
Interest expense on our debt may limit our cash available to fund our growth strategies and shareholder distributions.
Higher interest rates could increase debt service requirements on debt under our credit facility and any floating rate
debt that we incur in the future and could reduce the amounts available for distribution to our shareholders, as well as reduce
funds available for our operations, future business opportunities, or other purposes. Interest expense on our credit facility is
based on floating interest rates.
Failure to hedge effectively against interest rate changes may adversely affect our results of operations and our ability to
make shareholder distributions.
We may obtain in the future one or more forms of interest rate protection, such as swap agreements, interest rate cap
contracts or similar agreements, to hedge against the possible negative effects of interest rate fluctuations. However, such
hedging implies costs and we cannot assure you that any hedging will adequately relieve the adverse effects of interest rate
increases or that counterparties under these agreement will honor their obligations thereunder. Furthermore, any such hedging
agreements would subject us to the risk of incurring significant non-cash losses on our hedges due to declines in interest rates if
our hedges were not considered effective under applicable accounting standards.
18
Joint venture investments that we make could be adversely affected by our lack of sole decision-making authority, our
reliance on joint venture partners' financial condition and disputes between us and our joint venture partners.
We are co-investors with NorthStar in each of the NewINK JV and Inland JV, which own 47 and 48 hotels,
respectively, and we may invest in additional joint ventures in the future. We may not be in a position to exercise sole decision-
making authority regarding the properties owned through the JVs or other joint ventures that we may invest in. Investments in
joint ventures may, under certain circumstances, involve risks not present when a third party is not involved, including reliance
on our joint venture partners and the possibility that joint venture partners might become bankrupt or fail to fund their share of
required capital contributions, thus exposing us to liabilities in excess of our share of the investment. Joint venture partners may
have business interests or goals that 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 partner would have full control over the partnership or joint venture. Any disputes that
may arise between us and our joint venture partners may result in litigation or arbitration that would increase our expenses and
prevent our officers and/or trustees from focusing their time and effort on our business. Consequently, actions by, or disputes
with, our joint venture partners might result in subjecting properties owned by the partnership or joint venture to additional risk.
In addition, we may in certain circumstances be liable for the actions of our third-party partners.
It may be difficult for us to exit a joint venture after an impasse with our co-venturer.
In our joint ventures, there will be a potential risk of impasse in some joint venture decisions because our approval and
the approval of each co-venturer will be required for some decisions. The types of decisions that would require the approval of
each co-venturer would be determined under the joint venture agreement between the parties, but those types of decisions are
likely to include borrowing above a certain level or disposing of assets. In any joint venture, we may have the right to buy our
co-venturer’s interest or to sell our own interest on specified terms and conditions in the event of an impasse regarding a sale.
However, it is possible that neither party will have the funds necessary to complete such a buy-out. In addition, we may
experience difficulty in locating a third-party purchaser for our joint venture interest and in obtaining a favorable sale price for
the interest. As a result, it is possible that we may not be able to exit the relationship if an impasse develops. In addition, there
is no limitation under our declaration of trust and bylaws as to the amount of funds that we may invest in joint ventures.
Accordingly, we may invest a substantial amount of our funds in joint ventures, which ultimately may not be profitable as a
result of disagreements with or among our co-venturers.
The Company does not have sole control of the JVs and may be required to contribute additional capital in the event of a
capital call.
The Company’s ownership interests in the JVs are subject to change in the event that we or NorthStar calls for
additional capital contributions to a JV that is necessary for the conduct of business, including contributions to fund costs and
expenses related to capital expenditures. NorthStar may also approve certain actions by the JVs in which it participates without
the Company’s consent, including certain property dispositions conducted at arm’s length, certain actions related to the
restructuring of the JVs and the removal of the Company as managing member in the event the Company fails to fulfill its
material obligations under the joint venture agreement.
Our Operating Partnership acts as guarantor under certain debt obligations of the JVs.
In connection with certain non-recourse mortgage loans on certain of the properties owned by the JVs, our Operating
Partnership could be required to repay portions of this indebtedness, up to an amount commensurate with our ownership
interests in those JVs, in connection with certain customary non-recourse carve-out provisions such as environmental
conditions, misuse of funds and material misrepresentations.
19
We may from time to time make distributions to our shareholders in the form of our common shares, which could result in
shareholders incurring tax liability without receiving sufficient cash to pay such tax.
Although we have no current intention to do so, we may, if possible, in the future distribute taxable dividends that are
payable in cash or common shares at the election of each shareholder. Taxable shareholders receiving such dividends will be
required to include the full amount of the dividend as ordinary income to the extent of our current and accumulated earnings
and profits for federal income tax purposes. As a result, shareholders may be required to pay income taxes with respect to such
dividends in excess of the cash dividends received. If a U.S. shareholder sells the common shares that it receives as a dividend
in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the dividend,
depending on the market price of our shares at the time of the sale. Furthermore, with respect to certain non-U.S. shareholders,
we may be required to withhold federal income tax with respect to such dividends, including in respect of all or a portion of
such dividend that is payable in common shares. In addition, if a significant number of our shareholders determine to sell
common shares in order to pay taxes owed on dividends, it may put downward pressure on the trading price of our common
shares.
Our conflict of interest policy may not be successful in eliminating the influence of future conflicts of interest that may arise
between us and our trustees, officers and employees.
We have adopted a policy that any transaction, agreement or relationship in which any of our trustees, officers or
employees has a direct or indirect pecuniary interest must be approved by a majority of our disinterested trustees. Other than
this policy, however, we have not adopted and may not adopt additional formal procedures for the review and approval of
conflict of interest transactions generally. As such, our policies and procedures may not be successful in eliminating the
influence of conflicts of interest.
There are conflicts of interest between us and affiliates owned by our Chief Executive Officer.
Our Chief Executive Officer, Mr. Fisher, owned 51% and affiliates of NorthStar Asset Management Group, Inc. owned
45% of IHM, a hotel management company that manages 36 of our wholly owned hotels, all of the 47 hotels owned by the
NewINK JV and 34 of the hotels owned by the Inland JV all as of December 31, 2015, and may manage additional hotels that
we acquire or own (wholly or through a joint venture) in the future. Because Mr. Fisher is our Chief Executive Officer and
controls IHM, conflicts of interest may arise between us and Mr. Fisher as to whether and on what terms new management
contracts will be awarded to IHM, whether and on what terms management agreements will be renewed upon expiration of
their terms, enforcement of the terms of the management agreements and whether hotels managed by IHM will be sold.
Risks Related to the Lodging Industry
The lodging industry has experienced significant declines in the past and failure of the lodging industry to exhibit
improvement may adversely affect our ability to execute our business strategy.
The performance of the lodging industry has historically been closely linked to the performance of the general
economy and, specifically, growth in U.S. gross domestic product, or GDP. It is also sensitive to business and personal
discretionary spending levels. Declines in corporate budgets and consumer demand due to adverse general economic
conditions, risks affecting or reducing travel patterns, lower consumer confidence or adverse political conditions can lower the
revenues and profitability of our future hotel properties and therefore the net operating profits of our TRSs.
A substantial part of our business strategy is based on the belief that the lodging markets in which we invest will
continue to experience improving economic fundamentals in the future. We cannot predict the extent to which lodging industry
fundamentals will continue to improve. In the event conditions in the industry do not continue to improve as we expect, or
deteriorate, our ability to execute our business strategy would be adversely affected, which could adversely affect our financial
condition, results of operations, the market price of our common shares and our ability to make distributions to our
shareholders.
20
Our ability to make distributions to our shareholders may be affected by various operating risks common in the lodging
industry.
Hotel properties are subject to various operating risks common to the hotel industry, many of which are beyond our
control, including:
• competition from other hotel properties in the markets in which we and our joint ventures operate, some of which
may have greater marketing and financial resources;
• an over-supply or over-building of hotel properties in the markets in which we and our joint ventures operate, which
could adversely affect occupancy rates and revenues;
• dependence on business and commercial travelers and tourism;
• increases in energy costs and other expenses and factors affecting travel, which may affect travel patterns and reduce
the number of business and commercial travelers and tourists;
• increases in operating costs due to inflation and other factors that may not be offset by increased room rates;
• necessity for periodic capital reinvestment to repair and upgrade hotel properties;
• changes in interest rates and in the availability, cost and terms of debt financing;
• changes in governmental laws and regulations, fiscal policies and zoning ordinances and the related costs of
compliance with laws and regulations, fiscal policies and ordinances;
• unforeseen events beyond our control, such as terrorist attacks, travel related health concerns including pandemics
and epidemics such as H1N1 influenza (swine flu), avian bird flu, SARS and Zika virus, political instability, regional
hostilities, imposition of taxes or surcharges by regulatory authorities, travel related accidents and unusual weather
patterns, including natural disasters such as hurricanes, tsunamis, earthquakes, wildfires and flooding;
• disruptions to the operations of our hotels caused by organized labor activities, including strikes, work stoppages or
slow downs;
• adverse effects of a downturn in the economy or in the hotel industry; and
• risk generally associated with the ownership of hotel properties and real estate, as we discuss in detail below.
These factors could reduce the net operating profits of our TRSs and the rental income we receive from our TRS
Lessees, which in turn could adversely affect our ability to make distributions to our shareholders.
Competition for acquisitions may reduce the number of properties we can acquire.
We compete for hotel investment opportunities with competitors that may have a different tolerance for risk or have
substantially greater financial resources than are available to us. This competition may generally limit the number of hotel
properties that we are able to acquire and may also increase the bargaining power of hotel owners seeking to sell, making it
more difficult for us to acquire hotel properties on attractive terms, or at all.
Competition for guests may lower our hotels' revenues and profitability.
The upscale extended-stay and mid-price segments of the hotel business are highly competitive. Our hotels and those
of our JVs compete on the basis of location, room rates and quality, service levels, reputation, and reservation systems, among
many other factors. Competitors may have substantially greater marketing and financial resources than our operators or us.
New hotels create new competitors, in some cases without corresponding increases in demand for hotel rooms. The result in
some cases may be lower revenue, which would result in lower cash available for distribution to our shareholders.
21
The seasonality of the hotel industry may cause fluctuations in our quarterly revenues that cause us to borrow money to
fund distributions to our shareholders.
Certain hotel properties we own or acquire in the future (wholly or through joint ventures) have business that is
seasonal in nature. This seasonality can be expected to cause quarterly fluctuations in revenues. Quarterly earnings may be
adversely affected by factors outside our control, including weather conditions and poor economic factors. As a result, we may
have to enter into short-term borrowings in order to offset these fluctuations in revenue and to make distributions to our
shareholders.
The cyclical nature of the lodging industry may cause the return on our investments to be substantially less than we expect.
The lodging industry is cyclical in nature. Fluctuations in lodging demand and, therefore, operating performance, are
caused largely by general economic and local market conditions, which subsequently affects levels of business and leisure
travel. In addition to general economic conditions, new hotel room supply is an important factor that can affect the lodging
industry's performance and overbuilding has the potential to further exacerbate the negative impact of an economic recession.
Room rates and occupancy, and thus RevPAR, tend to increase when demand growth exceeds supply growth. Decline in
lodging demand, or a continued growth in lodging supply, could result in returns that are substantially below expectations or
result in losses, which could have a material adverse effect on our business, financial condition, results of operations and our
ability to make distributions to our shareholders.
Due to our concentration in hotel investments, a downturn in the lodging industry would adversely affect our operations
and financial condition.
Our entire business is related to the hotel industry. Therefore, a downturn in the hotel industry, in general, will have a
material adverse effect on our revenues, net operating profits and cash available for distribution to our shareholders.
The ongoing need for capital expenditures at our hotel properties may adversely affect our business, financial condition and
results of operations and limit our ability to make distributions to our shareholders.
Hotel properties have an ongoing need for renovations and other capital improvements, including replacements, from
time to time, of furniture, fixtures and equipment. The franchisors of our hotels and those of our JVs also require periodic
capital improvements as a condition of keeping the franchise licenses. In addition, our lenders require us to set aside amounts
for capital improvements to our hotel properties. These capital improvements may give rise to the following risks:
• possible environmental problems;
• construction cost overruns and delays;
• possibility that revenues will be reduced temporarily while rooms or restaurants offered are out of service due
to capital improvement projects;
• a possible shortage of available cash to fund capital improvements and the related possibility that financing
for these capital improvements may not be available on affordable terms;
• uncertainties as to market demand or a loss of market demand after capital improvements have begun; and
• disputes with franchisors/managers regarding compliance with relevant management/franchise agreements.
The costs of all these capital improvements could adversely affect our business, financial condition, results of
operations and cash available for distribution to our shareholders.
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The increasing use of Internet travel intermediaries by consumers may adversely affect our profitability.
Some of our hotel rooms are booked through Internet travel intermediaries. As Internet bookings increase, these
intermediaries may be able to obtain higher commissions, reduced room rates or other significant contract concessions from us
and our management companies. Moreover, some of these Internet travel intermediaries are attempting to offer hotel rooms as a
commodity, by increasing the importance of price and general indicators of quality (such as "three-star downtown hotel") at the
expense of brand identification. These agencies hope that consumers will eventually develop brand loyalties to their
reservations system rather than to the brands under which our properties are franchised. Although most of the business for our
hotels is expected to be derived from traditional channels, if the amount of sales made through Internet intermediaries increases
significantly, room revenues may flatten or decrease and our profitability may be adversely affected.
We and our hotel managers rely on information technology in our operations, and any material failure, inadequacy,
interruption or security failure of that technology could harm our business.
We and our hotel managers rely on information technology networks and systems, including the Internet, to process,
transmit and store electronic information, and to manage or support a variety of business processes, including financial
transactions and records, personal identifying information, reservations, billing and operating data. We purchase some of our
information technology from vendors, on whom our systems depend. We rely on commercially available systems, software,
tools and monitoring to provide security for processing, transmission and storage of confidential customer information, such as
individually identifiable information, including information relating to financial accounts. Although we have taken steps to
protect the security of our information systems and the data maintained in those systems, it is possible that our safety and
security measures will not be able to prevent the systems’ improper functioning or damage, or the improper access or disclosure
of personally identifiable information such as in the event of cyber attacks. Security breaches, including physical or electronic
break-ins, computer viruses, attacks by hackers and similar breaches, can create system disruptions, shutdowns or unauthorized
disclosure of confidential information. Any failure to maintain proper function, security and availability of our information
systems could interrupt our operations, damage our reputation, subject us to liability claims or regulatory penalties and could
have a material adverse effect on our business, financial condition and results of operations and our ability to make
distributions to our shareholders.
Future terrorist attacks or changes in terror alert levels could adversely affect travel and hotel demand.
Previous terrorist attacks and subsequent terrorist alerts have adversely affected the U.S. travel and hospitality
industries over the past several years, often disproportionately to the effect on the overall economy. The impact that terrorist
attacks in the U.S. or elsewhere could have on domestic and international travel and our business in particular cannot be
determined but any such attacks or the threat of such attacks could have a material adverse effect on our business, financial
condition and results of operations and our ability to finance our business, to insure our properties and to make distributions to
our shareholders.
We may assume liabilities in connection with the acquisition of hotel properties, including unknown liabilities, which, if
significant, could adversely affect our business.
We may assume existing liabilities in connection with the acquisition of hotel properties, some of which may be
unknown or unquantifiable. Unknown liabilities might include liabilities for cleanup or remediation of undisclosed
environmental conditions, claims of hotel guests, vendors or other persons dealing with the seller of a particular hotel property,
tax liabilities, employment-related issues and accrued but unpaid liabilities whether incurred in the ordinary course of business
or otherwise. If the magnitude of such unknown liabilities is high, they could adversely affect our business, financial condition,
results of operations and our ability to make distributions to our shareholders.
Uninsured and underinsured losses could adversely affect our operating results and our ability to make distributions to our
shareholders.
We maintain comprehensive insurance on each of our hotel properties, including liability, terrorism, fire and extended
coverage, of the type and amount customarily obtained for or by hotel property owners. There can be no assurance that such
coverage will continue to be available at reasonable rates. Various types of catastrophic losses, like earthquakes and floods and
losses from foreign terrorist activities such as those on September 11, 2001 or losses from domestic terrorist activities such as
the Oklahoma City bombing, may not be insurable or may not be insurable on reasonable economic terms. Lenders may require
such insurance and failure to obtain such insurance could constitute a default under loan agreements. Depending on our access
to capital, liquidity and the value of the properties securing the affected loan in relation to the balance of the loan, a default
could have a material adverse effect on our results of operations and ability to obtain future financing.
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In the event of a substantial loss, insurance coverage may not be sufficient to cover the full current market value or
replacement cost of the lost investment. Should an uninsured loss or a loss in excess of insured limits occur, we could lose all or
a portion of the capital we invested in a hotel property, as well as the anticipated future revenue from that particular hotel. In
that event, we might nevertheless remain obligated for any mortgage debt or other financial obligations related to the property.
Inflation, changes in building codes and ordinances, environmental considerations and other factors might also keep us from
using insurance proceeds to replace or renovate a hotel after it has been damaged or destroyed. Under those circumstances, the
insurance proceeds we receive might be inadequate to restore our economic position on the damaged or destroyed property.
Noncompliance with environmental laws and governmental regulations could adversely affect our operating results and our
ability to make distributions to shareholders.
Under various federal, state and local laws, ordinances and regulations, an owner of real property may be liable for the
costs of removal or remediation of certain hazardous or toxic substances on or in such property. Such laws often impose such
liability without regard to whether the owner knew of or was responsible for, the presence of such hazardous or toxic
substances. The cost of any required remediation and the owner's liability therefore as to any property are generally not limited
under such laws and could exceed the value of the property and/or the aggregate assets of the owner. The presence of such
substances, or the failure to properly remediate contamination from such substances, may adversely affect our or our joint
venture's ability to sell the real estate or to borrow funds using such property as collateral, which could have an adverse effect
on our return from such investment. Moreover, the presence of such substance or the failure to properly mediate such
substances could adversely affect our operation results and our ability to make distributions to our shareholders.
Furthermore, various court decisions have established that third parties may recover damages for injury caused by
release of hazardous substances and for property contamination. For instance, a person exposed to asbestos while working at or
staying in a hotel may seek to recover damages if he or she suffers injury from the asbestos. Lastly, some of these
environmental issues restrict the use of a property or place conditions on various activities. One example is laws that require a
business using chemicals to manage them carefully and to notify local officials if regulated spills occur.
Although it is our policy to require an acceptable Phase I environmental survey for all real property in which we invest
prior to our investment, such surveys are limited in scope. As a result, there can be no assurance that a Phase I environmental
survey will uncover any or all hazardous or toxic substances on a property prior to our investment in that property. We cannot
assure you:
• that are no existing liabilities related to our properties of which we are not aware;
• that future laws, ordinances or regulations will not impose material environmental liability; or
• that the current environmental condition of a hotel will not be affected by the condition of properties in the
vicinity of the hotel (such as the presence of leaking underground storage tanks) or by third parties unrelated
to us.
Compliance with the ADA and other changes in governmental rules and regulations could substantially increase our cost of
doing business and adversely affect our operating results and our ability to make distributions to our shareholders.
Our hotel properties are subject to the ADA. Under the ADA, all places of public accommodation are required to meet
certain federal requirements related to access and use by disabled persons. Although we intend to continue to acquire assets that
are substantially in compliance with the ADA, we may incur additional costs of complying with the ADA at the time of
acquisition and from time-to-time in the future to stay in compliance with any changes in the ADA. A number of additional
federal, state and local laws exist that also may require modifications to our investments, or restrict certain further renovations
thereof, with respect to access thereto by disabled persons. Additional legislation may impose further burdens or restrictions on
owners with respect to access by disabled persons. If we were required to make substantial modifications at our properties to
comply with the ADA or other changes in governmental rules and regulations, our ability to make expected distributions to our
shareholders could be adversely affected.
In March 2012, a substantial number of changes to the Accessibility Guidelines under the ADA took effect. The new
guidelines caused some of our hotel properties to incur costs to become fully compliant.
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If we are required to make substantial modifications to our hotel properties, whether to comply with the ADA or other
changes in governmental rules and regulations, our financial condition, results of operations, the market price of our common
shares and our ability to make distributions to our shareholders could be adversely affected. The obligation to make readily
achievable accommodations is an ongoing one, and we will continue to assess our properties and to make alterations as
appropriate.
General Risks Related to Real Estate Industry
Illiquidity of real estate investments could significantly impede our ability to respond to adverse changes in the performance
of our hotel properties and adversely affect our financial condition.
Because real estate investments are relatively illiquid, our ability to promptly sell one or more hotel properties in our
portfolio in response to changing economic, financial and investment conditions may be limited. The real estate market is
affected by many factors that are beyond our control, including:
• adverse changes in international, national, regional and local economic and market conditions;
• changes in interest rates and in the availability, cost and terms of debt financing;
• changes in governmental laws and regulations, fiscal policies and zoning ordinances and the related costs of
compliance with laws and regulations, fiscal policies and ordinances;
• the ongoing need for capital improvements, particularly in older structures;
• changes in operating expenses; and
• civil unrest, acts of God, including earthquakes, wildfires, tornadoes, hurricanes, floods and other natural
disasters, which may result in uninsured losses, and acts of war or terrorism.
We may seek to sell hotel properties owned by us or any of the JVs in the future. There can be no assurance that we
will be able to sell any hotel property on acceptable terms.
If financing for hotel properties is not available or is not available on attractive terms, it will adversely impact the
ability of third parties to buy our hotels. As a result, we or our JVs may hold hotel properties for a longer period than we would
otherwise desire and may sell hotels at a loss.
We may be required to expend funds to correct defects or to make improvements before a hotel property can be sold.
We cannot assure you that we will have funds available to correct those defects or to make those improvements. In acquiring a
hotel property, we may agree to lock-out provisions that materially restrict us from selling that property for a period of time or
impose other restrictions, such as a limitation on the amount of debt that can be placed or repaid on that property. These factors
and any others that would impede our ability to respond to adverse changes in the performance of our properties could have a
material adverse effect on our operating results and financial condition, as well as our ability to make distributions to our
shareholders.
Increases in our property taxes would adversely affect our ability to make distributions to our shareholders.
Hotel properties are subject to real and personal property taxes. These taxes may increase as tax rates change and as
the properties are assessed or reassessed by taxing authorities. In particular, our property taxes could increase following our
hotel purchases as the acquired hotels are reassessed. If property taxes increase, our financial condition, results of operations
and our ability to make distributions to our shareholders could be materially and adversely affected.
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Our hotel properties may contain or develop harmful mold, which could lead to liability for adverse health effects and costs
of remediating the problem.
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 mold to which hotel guests or
employees could be exposed at any of the properties in which we own an interest could require us to undertake a costly
remediation program to contain or remove the mold from the affected property, which could be costly. In addition, exposure to
mold by guests or employees, management company employees or others could expose us to liability if property damage or
health concerns arise.
Risks Related to Our Organization and Structure
Our rights and the rights of our shareholders to take action against our trustees and officers are limited, which could limit
your recourse in the event of actions not in your best interests.
Under Maryland law generally, a trustee is required to perform his or her duties in good faith, in a manner he or she
reasonably believes to be in our best interests and with the care that an ordinarily prudent person in a like position would use
under similar circumstances. Under Maryland law, trustees are presumed to have acted with this standard of care. In addition,
our declaration of trust limits the liability of our trustees and officers to us and our shareholders for money damages, except for
liability resulting from:
• actual receipt of an improper benefit or profit in money, property or services; or
• active and deliberate dishonesty by the trustee or officer that was established by a final judgment as being material to
the cause of action adjudicated.
Our bylaws obligate us to indemnify our trustees and officers for actions taken by them in those capacities to the
maximum extent permitted by Maryland law. Our bylaws require us to indemnify each trustee or officer, to the maximum
extent permitted by Maryland law, in the defense of any proceeding to which he or she is made, or threatened to be made, a
party by reason of his or her service to us. In addition, we may be obligated to advance the defense costs incurred by our
trustees and officers. As a result, we and our shareholders may have more limited rights against our trustees and officers than
might otherwise exist absent the current provisions in our declaration of trust and bylaws or that might exist with other
companies.
Provisions of Maryland law may limit the ability of a third party to acquire control of our Company and may result in
entrenchment of management and diminish the value of our common shares.
Certain provisions of the Maryland General Corporation Law ("MGCL") applicable to Maryland real estate
investment trusts may have the effect of inhibiting a third party from making a proposal to acquire us or of impeding a change
of control under circumstances that otherwise could provide our common shareholders with the opportunity to realize a
premium over the then-prevailing market price of such shares, including:
• "Business combination" provisions that, subject to limitations, prohibit certain business combinations
between us and an "interested shareholder" (defined generally as any person who beneficially owns 10% or
more of the voting power of our shares) or an affiliate of any interested shareholder for five years after the
most recent date on which the shareholder becomes an interested shareholder, and thereafter imposes special
appraisal rights and special shareholder voting requirements on these combinations; and
• "Control share" provisions that provide that our "control shares" (defined as shares which, when aggregated
with other shares controlled by the shareholder, entitle the shareholder to exercise one of three increasing
ranges of voting power in electing trustees) acquired in a "control share acquisition" (defined as the direct or
indirect acquisition of ownership or control of "control shares") have no voting rights except to the extent
approved by our shareholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast
on the matter, excluding all interested shares.
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Additionally, Title 3, Subtitle 8 of the MGCL permits our Board of Trustees, without shareholder approval and
regardless of what is currently provided in our declaration of trust or bylaws, to implement certain takeover defenses, including,
but not limited to, the adoption of a classified board. In November 2013, our Board of Trustees opted in to Subtitle 8 and
adopted a classified board structure in order to protect shareholders value in the wake of what our Board considered to be an
unsolicited and inadequate proposal to acquire us. Although our Board subsequently took action in April 2015 to opt back out
of the provisions of Subtitle 8 and declassified our Board of Trustees, there can be no assurance that we will not opt back in to
Subtitle 8 again in the future. These provisions may have the effect of inhibiting a third party from making an acquisition
proposal for our company or of delaying, deferring or preventing a change in control of our company under the circumstances
that otherwise could provide our common shareholders with the opportunity to realize a premium over the then current market
price.
Provisions of our declaration of trust may limit the ability of a third party to acquire control of our Company and may result
in entrenchment of management and diminish the value of our common shares.
Our declaration of trust authorizes our Board of Trustees to issue up to 500,000,000 common shares and up to
100,000,000 preferred shares. In addition, our Board of Trustees may, without shareholder approval, amend our declaration of
trust to increase the aggregate number of our shares or the number of shares of any class or series that we have the authority to
issue and to classify or reclassify any unissued common shares or preferred shares and to set the preferences, rights and other
terms of the classified or reclassified shares. As a result, our Board of Trustees may authorize the issuance of additional shares
or establish a series of common or preferred shares that may have the effect of delaying or preventing a change in control of our
company, including transactions at a premium over the market price of our shares, even if shareholders believe that a change of
control is in their interest.
Failure to make required distributions would subject us to tax.
In order for federal corporate income tax not to apply to earnings that we distribute, each year we must distribute to
our shareholders at least 90% of our REIT taxable income, determined before the deductions for dividends paid and excluding
any net capital gain. To the extent that we satisfy this distribution requirement, but distribute less than 100% of our taxable
income, we will be subject to federal corporate income tax on our undistributed REIT taxable income. In addition, we will be
subject to a 4% nondeductible excise tax if the actual amount that we pay out to our shareholders in a calendar year is less than
a minimum amount specified under the Code. Our only source of funds to make these distributions comes from distributions
that we will receive from our Operating Partnership. Accordingly, we may be required to borrow money, sell assets or make
taxable distributions of our capital shares or debt securities, to enable us to pay out enough of our REIT taxable income to
satisfy the distribution requirement and to avoid federal corporate income tax and the 4% nondeductible excise tax in a
particular year.
Failure to qualify as a REIT, or failure to remain qualified as a REIT, would subject us to federal income tax and
potentially to state and local taxes.
We elected to be taxed as a REIT for federal income tax purposes. However, qualification as a REIT involves the
application of highly technical and complex provisions of the Code, for which only a limited number of judicial and
administrative interpretations exist. Even an inadvertent or technical mistake could jeopardize our REIT qualification. Our
qualification as a REIT depends on our satisfaction of certain asset, income, organizational, distribution, shareholder ownership
and other requirements on a continuing basis.
Moreover, new tax legislation, administrative guidance or court decisions, in each instance potentially applicable with
retroactive effect, could make it more difficult or impossible for us to qualify as a REIT. If we were to fail to qualify as a REIT
in any taxable year, we would be subject to federal income tax, including any applicable alternative minimum tax, on our
taxable income at regular corporate rates, and distributions to shareholders would not be deductible by us in computing our
taxable income. We may also be subject to state and local taxes if we fail to qualify as a REIT. Any such corporate tax liability
could be substantial and would reduce the amount of cash available for distribution to our shareholders, which in turn could
have an adverse impact on the value of our shares of beneficial interest. If, for any reason, we failed to qualify as a REIT and
we were not entitled to relief under certain Code provisions, we would be unable to elect REIT status for the four taxable years
following the year during which we ceased to so qualify, which would negatively impact the value of our common shares.
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Our TRS Lessee structure subjects us to the risk of increased hotel operating expenses that could adversely affect our
operating results and our ability to make distributions to our shareholders.
Our leases with our TRS Lessees require our TRS Lessees to pay rent based in part on revenues from our hotels. Our
operating risks include decreases in hotel revenues and increases in hotel operating expenses, which would adversely affect our
TRS Lessees' ability to pay rent due under the leases, including but not limited to the increases in wage and benefit costs, repair
and maintenance expenses, energy costs, property taxes, insurance costs and other operating expenses.
Increases in these operating expenses can have a significant adverse impact on our financial condition, results of
operations, the market price of our common shares and our ability to make distributions to our shareholders.
Our TRS structure increases our overall tax liability.
Our TRS Lessees are subject to federal, state and local income tax on their taxable income, which consists of the
revenues from the hotel properties leased by our TRS Lessees, net of the operating expenses for such hotel properties and rent
payments to us. Accordingly, although our ownership of our TRS Lessees allows us to participate in the operating income from
our hotel properties in addition to receiving rent, that operating income is fully subject to income tax. The after-tax net income
of our TRS Lessees is available for distribution to us.
Our ownership of TRSs is limited and our transactions with our TRSs will cause us to be subject to a 100% penalty tax on
certain income or deductions if those transactions are not conducted on arm's-length terms.
A REIT may own up to 100% of the stock of one or more TRSs. A TRS may hold assets and earn income that would
not be qualifying assets or income if held or earned directly by a REIT, including gross operating income from hotels that are
operated by eligible independent contractors pursuant to hotel management agreements. Both the subsidiary and the REIT must
jointly elect to treat the subsidiary as a TRS. A corporation of which a TRS directly or indirectly owns more than 35% of the
voting power or value of the stock will automatically be treated as a TRS. Overall, no more than 25% (or 20% for taxable years
ending after December 31, 2017) of the value of a REIT's gross assets may consist of stock or securities of one or more TRSs.
In addition, the TRS rules limit the deductibility of interest paid or accrued by a TRS to its parent REIT to assure that the TRS
is subject to an appropriate level of corporate taxation. The rules also impose a 100% excise tax on certain transactions between
a TRS and its parent REIT that are not conducted on an arm's-length basis.
Our TRSs are subject to federal, foreign, state and local income tax on their taxable income, and their after-tax net
income is available for distribution to us but is not required to be distributed to us. We believe that the aggregate value of the
stock and securities of our TRSs is and will continue to be less than 25% (or 20% for taxable years ending after December 31,
2017) of the value of our total gross assets (including our TRS stock and securities). Furthermore, we will monitor the value of
our respective investments in our TRSs for the purpose of ensuring compliance with TRS ownership limitations. In addition,
we will scrutinize all of our transactions with our TRSs to ensure that they are entered into on arm's-length terms to avoid
incurring the 100% excise tax described above. There can be no assurance, however, that we will be able to comply with the
25% (or 20%) limitations discussed above or to avoid application of the 100% excise tax discussed above.
If our leases with our TRS Lessees are not respected as true leases for federal income tax purposes, we would fail to qualify
as a REIT.
To qualify as a REIT, we are required to satisfy two gross income tests, pursuant to which specified percentages of our
gross income must be passive income, such as rent. For the rent paid pursuant to the hotel leases with our TRS Lessees, which
should constitute substantially all of our gross income, to qualify for purposes of the gross income tests, the leases must be
respected as true leases for federal income tax purposes and must not be treated as service contracts, joint ventures or some
other type of arrangement. We have structured our leases, and intend to structure any future leases, so that the leases will be
respected as true leases for federal income tax purposes, but there can be no assurance that the Internal Revenue Service
("IRS") will agree with this characterization, not challenge this treatment or that a court would not sustain such a challenge. If
the leases were not respected as true leases for federal income tax purposes, we would not be able to satisfy either of the two
gross income tests applicable to REITs and likely would fail to qualify for REIT status.
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Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends.
The maximum tax rate applicable to "qualified dividend income" payable to U.S. shareholders taxed at individual rates
is 20%. Dividends payable by REITs, however, generally are not eligible for the reduced rates. The more favorable rates
applicable to regular corporate qualified dividends could cause investors who are taxed at individual rates to perceive
investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay
dividends, which could adversely affect the value of the shares of REITs, including our common shares.
If our hotel managers do not qualify as "eligible independent contractors," we would fail to qualify as a REIT.
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. We lease substantially all of our hotels to our TRS Lessees. A TRS Lessee will not be
treated as a "related party tenant," and will not be treated as directly operating a lodging facility to the extent the TRS Lessee
leases properties from us that are managed by an "eligible independent contractor." In addition, our TRS holding companies
will fail to qualify as “taxable REIT subsidiaries” if they lease or own a lodging facility that is not managed by an “eligible
independent contractor.”
If our hotel managers do not qualify as "eligible independent contractors," we would fail to qualify as a REIT. Each of
the hotel management companies that enters into a management contract with our TRS Lessees must qualify as an "eligible
independent contractor" under the REIT rules in order for the rent paid to us by our TRS Lessees to be qualifying income for
our REIT income test requirements and for our TRS holding companies to qualify as “taxable REIT subsidiaries”. Among other
requirements, in order to qualify as an eligible independent contractor a manager must not own more than 35% of our
outstanding shares (by value) and no person or group of persons can own more than 35% of our outstanding shares and the
ownership interests of the manager, taking into account only owners of more than 5% of our shares and, with respect to
ownership interests in such managers that are publicly traded, only holders of more than 5% of such ownership interests.
Complex ownership attribution rules apply for purposes of these 35% thresholds. Although we intend to monitor ownership of
our shares by our property managers and their owners, there can be no assurance that these ownership levels will not be
exceeded.
Our ownership limitations may restrict or prevent you from engaging in certain transfers of our common shares.
In order to satisfy the requirements for REIT qualification, no more than 50% in value of our outstanding shares may
be owned, directly or indirectly, by five or fewer individuals (as defined in the Code to include certain entities) at any time
during the last half of each taxable year. To assist us in satisfying the requirements for our REIT qualification, our declaration
of trust contains an ownership limit on each class and series of our shares. Under applicable constructive ownership rules, any
common shares owned by certain affiliated owners generally will be added together for purposes of the common share
ownership limit, and any shares of a given class or series of preferred shares owned by certain affiliated owners generally will
be added together for purposes of the ownership limit on such class or series.
If anyone transfers shares in a way that would violate the ownership limit, or prevent us from qualifying as a REIT
under the federal income tax laws, those shares instead will be transferred to a trust for the benefit of a charitable beneficiary
and will be either redeemed by us or sold to a person whose ownership of the shares will not violate the ownership limit. If this
transfer to a trust fails to prevent such a violation or our continued qualification as a REIT, then the initial intended transfer
shall be null and void from the outset. The intended transferee of those shares will be deemed never to have owned the shares.
Anyone who acquires shares in violation of the ownership limit or the other restrictions on transfer in our declaration of trust
bears the risk of suffering a financial loss when the shares are redeemed or sold if the market price of our shares falls between
the date of purchase and the date of redemption or sale.
Complying with REIT requirements may limit our ability to hedge effectively and may cause us to incur tax liabilities.
The REIT provisions of the Code substantially limit our ability to hedge our liabilities. Any income from a hedging
transaction we enter into to manage risk of interest rate changes with respect to borrowings made or to be made to acquire or
carry real estate assets does not constitute "gross income" for purposes of the 75% or 95% gross income tests applicable to
REITs. To the extent that we enter into other types of hedging transactions, the income from those transactions is likely to be
treated as non-qualifying income for purposes of both of the gross income tests. As a result of these rules, we intend to limit our
use of advantageous hedging techniques or implement those hedges through a TRS. This could increase the cost of our hedging
activities because our TRSs 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 our TRSs will generally not provide any tax benefit, except
for being carried forward against future taxable income in the TRSs.
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The ability of our Board of Trustees to revoke our REIT qualification without shareholder approval may cause adverse
consequences to our shareholders.
Our declaration of trust provides that our Board of Trustees may revoke or otherwise terminate our REIT election,
without the approval of our shareholders, if it determines that it is no longer in our best interest to continue to qualify as a
REIT. If we cease to qualify as a REIT, we would become subject to federal income tax on our taxable income and would no
longer be required to distribute most of our taxable income to our shareholders, which may have adverse consequences on our
total return to our shareholders.
The ability of our Board of Trustees to change our major policies may not be in our shareholders’ interest.
Our Board of Trustees determines our major policies, including policies and guidelines relating to our acquisitions,
leverage, financing, growth, operations and distributions to shareholders and our continued qualification as a REIT. Our board
may amend or revise these and other policies and guidelines from time to time without the vote or consent of our shareholders.
Accordingly, our shareholders will have limited control over changes in our policies and those changes could adversely affect
our financial condition, results of operations, the market price of our common shares and our ability to make distributions to
our shareholders.
If we fail to maintain an effective system of internal controls, we may not be able to accurately determine our financial
results or prevent fraud. As a result, our investors could lose confidence in our reported financial information, which could
harm our business and the market value of our common shares.
Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. We
may in the future discover areas of our internal controls that need improvement. Section 404 of the Sarbanes-Oxley Act of 2002
requires us to evaluate and report on our internal controls over financial reporting and have our independent auditors annually
issue their opinion on our internal control over financial reporting. As we grow our business and acquire new hotel properties,
directly or through joint ventures, with existing internal controls that may not be consistent with our own, our internal controls
will become more complex, and we will require significantly more resources to ensure our internal controls remain effective. If
we or our independent auditors discover a material weakness, the disclosure of that fact, even if quickly remedied, could reduce
the market value of our common shares. In particular, we will need to establish, or cause our third party hotel managers to
establish, controls and procedures to ensure that hotel revenues and expenses are properly recorded at our hotels. The existence
of any material weakness or significant deficiency would require management to devote significant time and incur significant
expense to remediate any such material weaknesses or significant deficiencies and management may not be able to remediate
any such material weaknesses or significant deficiencies in a timely manner. Any such failure could cause investors to lose
confidence in our reported financial information and adversely affect the market value of our common shares or limit our
access to the capital markets and other sources of liquidity.
Complying with REIT requirements may cause us to forego otherwise attractive opportunities or liquidate otherwise
attractive investments.
To qualify as a REIT for federal income tax purposes, we must continually satisfy tests concerning, among other
things, the sources of our income, the nature and diversification of our assets, the amounts we distribute to our shareholders and
the ownership of our shares of beneficial interest. In order to meet these tests, we may be required to forego investments we
might otherwise make. Thus, compliance with the REIT requirements may hinder our performance.
30
In particular, we must ensure that at the end of each calendar quarter, at least 75% of the value of our gross assets
consists of cash, cash items, government securities and qualified real estate assets. The remainder of our investment in
securities (other than government securities, securities that constitute qualified real estate assets and securities of our TRSs)
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 gross assets
(other than government securities, securities that constitute qualified real estate assets and securities of our TRSs) can consist of
the securities of any one issuer, no more than 25% of the value of our assets can consist of debt of "public offered REITs" that
is not secured by real property, and no more than 25% (or 20% for taxable years beginning after December 31, 2017 of the
value of our total gross assets can be represented by the securities of one or more TRSs. 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 otherwise attractive investments. These actions could have the effect of reducing
our income and amounts available for distribution to our shareholders.
We have not established a minimum distribution payment level and we may be unable to generate sufficient cash flows from
our operations to make distributions to our shareholders at any time in the future.
We are generally required to distribute to our shareholders at least 90% of our REIT taxable income each year for us to
qualify as a REIT under the Code, which requirement we currently intend to satisfy. To the extent we satisfy the 90%
distribution requirement but distribute less than 100% of our REIT taxable income, we will be subject to federal corporate
income tax on our undistributed taxable income. We have not established a minimum distribution payment level, and our ability
to make distributions to our shareholders may be adversely affected by the risk factors described in this Form 10-K. Subject to
satisfying the requirements for REIT qualification, we intend over time to make regular distributions to our shareholders. Our
Board of Trustees has the sole discretion to determine the timing, form and amount of any distributions to our shareholders.
Our Board of Trustees makes determinations regarding distributions based upon, among other factors, our historical and
projected results of operations, financial condition, cash flows and liquidity, satisfaction of the requirements for REIT
qualification and other tax considerations, capital expenditure and other expense obligations, debt covenants, contractual
prohibitions or other limitations and applicable law and such other matters as our Board of Trustees may deem relevant from
time to time. Among the factors that could impair our ability to make distributions to our shareholders are:
• our inability to realize attractive returns on our investments;
• unanticipated expenses that reduce our cash flow or non-cash earnings;
• decreases in the value of the underlying assets; and
• the fact that anticipated operating expense levels may not prove accurate, as actual results may vary from
estimates.
As a result, no assurance can be given that we will be able to continue to make distributions to our shareholders or that
the level of any distributions we do make to our shareholders will achieve a market yield or increase or even be maintained
over time, any of which could materially and adversely affect the market price of our common shares. Distributions could be
dilutive to our financial results and may constitute a return of capital to our investors, which would have the effect of reducing
each shareholder's basis in its common shares. We also could use borrowed funds or proceeds from the sale of assets to fund
distributions.
In addition, distributions that we make to our shareholders are generally taxable to our shareholders as ordinary
income. However, a portion of our distributions may be designated by us as long-term capital gains to the extent that they are
attributable to capital gain income recognized by us or may constitute a return of capital to the extent that they exceed our
earnings and profits as determined for tax purposes. A return of capital is not taxable, but has the effect of reducing the basis of
a shareholder's investment in our common shares.
31
Our senior unsecured revolving credit facility may limit our ability to pay dividends on common shares.
Under our senior unsecured revolving credit facility, our distributions may not exceed the greater of (i) 95% of
adjusted funds from operations (as defined in our senior unsecured revolving credit facility) for the preceding four-quarter
period or (ii) the amount required for us to qualify and maintain our status as a REIT. As a result, if we do not generate
sufficient adjusted funds from operations during the four quarters preceding any common share dividend payment date, we
would not be able to pay dividends to our common shareholders consistent with our past practice without causing a default
under our senior unsecured revolving credit facility. In the event of a default under our senior unsecured revolving credit
facility, we would be unable to borrow under our senior unsecured revolving credit facility and any amounts we have borrowed
thereunder could become due and payable.
The market price of our equity securities may vary substantially, which may limit your ability to liquidate your investment.
The trading prices of equity securities issued by REITs have historically been affected by changes in market interest
rates. One of the factors that may influence the price of our shares in public trading markets is the annual yield from
distributions on our common or preferred shares as compared to yields on other financial instruments. An increase in market
interest rates, or a decrease in our distributions to shareholders, may lead prospective purchasers of our shares to demand a
higher annual yield, which could reduce the market price of our equity securities.
Other factors that could affect the market price of our equity securities include the following:
• actual or anticipated variations in our quarterly results of operations;
• changes in market valuations of companies in the hotel or real estate industries;
• changes in expectations of future financial performance or changes in estimates of securities analysts;
• fluctuations in stock market prices and volumes;
• issuances of common shares or other securities in the future;
• the addition or departure of key personnel; and
• announcements by us or our competitors of acquisitions, investments or strategic alliances or changes thereto.
Because we have a smaller equity market capitalization compared to some other hotel REITs and our common shares
may trade in low volumes, the stock market price of our common shares may be susceptible to fluctuation to a greater extent
than companies with larger market capitalization. As a result, your ability to liquidate your investment in our company may be
limited.
The number of shares available for future sale could adversely affect the market price of our common shares.
We cannot predict the effect, if any, of future sales of common shares, or the availability of common shares for future
sale, on the market price of our common shares. Sales of substantial amounts of common shares (including shares issued to our
trustees and officers), or the perception that these sales could occur, may adversely affect prevailing market prices for our
common shares.
We also may issue from time to time additional common shares or common units in our Operating Partnership in
connection with the acquisition of properties and we may grant demand or piggyback registration rights in connection with
these issuances. Sales of substantial amounts of our common shares or the perception that these sales could occur may
adversely affect the prevailing market price for our common shares or may impair our ability to raise capital through a sale of
additional equity securities. Our Equity Incentive Plan provides for grants of equity based awards up to an aggregate of
3,000,000 common shares and we may seek to increase shares available under our Equity Incentive Plan in the future.
32
Future offerings of debt or equity securities ranking senior to our common shares or incurrence of debt (including under
our credit facility) may adversely affect the market price of our common shares.
If we decide to issue debt or equity securities in the future ranking senior to our common shares or otherwise incur
indebtedness (including under our credit facility), it is possible that these securities or indebtedness will be governed by an
indenture or other instrument containing covenants restricting our operating flexibility and limiting our ability to make
distributions to our shareholders. Additionally, any convertible or exchangeable securities that we issue in the future may have
rights, preferences and privileges, including with respect to distributions, more favorable than those of our common shares and
may result in dilution to owners of our common shares. Because our decision to issue debt or equity securities in any future
offering or otherwise incur indebtedness 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 or financings, any of which could reduce the market
price of our common shares and dilute the value of our common shares.
Item 1B. Unresolved Staff Comments
None.
33
Item 2. Properties
The following table sets forth certain operating information for our 38 wholly owned hotels as of December 31, 2015:
Property
Location
Management
Company
Date of
Acquisition
Year
Opened
Number of
Rooms
Purchase
Price
Homewood Suites by Hilton Boston-
Billerica/ Bedford/ Burlington
Billerica, Massachusetts
Homewood Suites by Hilton
Minneapolis-Mall of America
Homewood Suites by Hilton
Nashville-Brentwood
Bloomington, Minnesota
Brentwood, Tennessee
Homewood Suites by Hilton Dallas-
Market Center
Dallas, Texas
Homewood Suites by Hilton
Hartford-Farmington
Homewood Suites by Hilton
Orlando-Maitland
Hampton Inn & Suites Houston-
Medical Center
Farmington, Connecticut
Maitland, Florida
Houston, Texas
IHM
IHM
IHM
IHM
IHM
IHM
IHM
4/23/2010
4/23/2010
4/23/2010
4/23/2010
4/23/2010
4/23/2010
7/2/2010
Courtyard Altoona
Altoona, Pennsylvania
Concord
8/24/2010
Springhill Suites Washington
Washington, Pennsylvania
Concord
8/24/2010
Residence Inn Long Island Holtsville
Holtsville, New York
Residence Inn White Plains
White Plains, New York
Residence Inn New Rochelle
New Rochelle, New York
Homewood Suites by Hilton
Carlsbad (North San Diego County)
Carlsbad, California
Residence Inn Garden Grove
Garden Grove, California
Residence Inn Mission Valley
San Diego, California
Homewood Suites by Hilton San
Antonio River Walk
San Antonio, Texas
Residence Inn Washington DC
Washington, DC
Residence Inn Tysons Corner
Vienna, Virginia
Hampton Inn Portland Downtown
Portland, Maine
Courtyard Houston
Houston, Texas
Hyatt Place Pittsburgh North Shore
Pittsburgh, Pennsylvania
Hampton Inn Exeter
Exeter, New Hampshire
Hilton Garden Inn Denver Tech
Denver, Colorado
Residence Inn Bellevue
Bellevue, Washington
Springhill Suites Savannah
Savannah, Georgia
Residence Inn Silicon Valley I
Sunnyvale, CA
Residence Inn Silicon Valley II
Sunnyvale, CA
Residence Inn San Mateo
San Mateo, CA
Residence Inn Mountain View
Mountain View, CA
Hyatt Place Cherry Creek
Glendale, CO
Courtyard Addison
Addison, TX
Courtyard West University Houston
Houston, TX
Residence Inn West University
Houston
Houston, TX
Hilton Garden Inn Burlington
Burlington, MA
Residence Inn San Diego Gaslamp
San Diego, CA
Residence Inn Dedham
Dedham, MA
Residence Inn Il Lugano
Fort Lauderdale, FL
Hilton Garden Inn Marina del Rey
Marina del Rey, CA
Total
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
8/3/2010
9/23/2010
10/5/2010
11/3/2010
7/14/2011
7/14/2011
7/14/2011
7/14/2011
7/14/2011
12/27/2012
2/5/2013
6/17/2013
8/9/2013
9/26/2013
10/31/2013
12/5/2013
6/9/2014
6/9/2014
6/9/2014
6/9/2014
8/29/2014
11/17/2014
11/17/2014
11/17/2014
11/17/2014
2/25/2015
7/17/2015
8/17/2015
9/17/2015
34
1999
1998
1998
1998
1999
2000
1997
2001
2000
2004
1982
2000
2008
2003
2003
1996
1974
2001
2011
2010
2010
2010
1999
2008
2009
1983
1985
1985
1985
1987
2000
2004
2004
1975
2009
2008
2013
1998
147
144
121
137
121
143
120
105
86
124
134
127
145
200
192
146
103
121
125
197
178
111
180
231
160
231
248
160
112
194
176
100
120
179
240
81
105
134
$12.5 million
$18.0 million
$11.3 million
$10.7 million
$11.5 million
$9.5 million
$16.5 million
$11.3 million
$12.0 million
$21.3 million
$21.2 million
$21.0 million
$32.0 million
$43.6 million
$52.5 million
$32.5 million
$29.4 million
$37.0 million
$28.0 million
$34.8 million
$40.0 million
$15.2 million
$27.9 million
$71.8 million
$39.8 million
$92.8 million
$102.0 million
$72.7 million
$56.4 million
$32.0 million
$24.1 million
$20.1 million
$29.4 million
$33.0 million
$90.0 million
$22.0 million
$33.5 million
$45.05 million
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
Purchase
Price per
Room
Mortgage Debt
Balance
85,714
$16.2 million
125,000
93,388
78,102
95,041
66,433
—
—
—
—
—
137,500
$18.3 million
107,619
$6.0 million
139,535
171,774
159,398
—
—
—
169,355
$14.5 million
220,690
$20.0 million
218,000
$34.0 million
273,438
$29.6 million
222,603
$16.9 million
280,000
—
305,785
$23.1 million
229,508
—
176,395
$19.1 million
224,719
$23.3 million
136,937
155,000
—
—
316,883
$46.9 million
248,438
$30.0 million
401,776
$64.8 million
411,103
$70.7 million
454,097
$48.6 million
503,869
$37.9 million
164,948
137,178
201,481
245,363
184,392
375,000
271,605
319,048
—
—
—
—
—
—
—
—
336,194
$22.51 million
5,678
$1,314.4 million
$
231,489
$542.3 million
We lease our headquarters at 222 Lakeview Avenue, Suite 200, West Palm Beach, FL 33401. The lease for our
headquarters has an initial term that expires in 2026 and the Company has an option to renew the lease for up to two successive
terms of five years each. The Courtyard Altoona hotel is subject to a ground lease with an expiration of April 30, 2029. The
Company has an option of up to 12 additional terms of five years each. In connection with the Residence Inn New Rochelle
hotel, there are an air rights lease and garage lease that each expire on December 1, 2104. The Residence Inn San Diego
Gaslamp hotel is subject to a ground lease with an expiration of January 31, 2065. The Hilton Garden Inn Marina del Rey hotel
is subject to a ground lease with an expiration of December 31, 2067. The Residence Inn Il Lugano hotel is subject to a
submerged land lease with an expiration of April 1, 2016. Renewal of the submerged land lease is at the sole option of the
lessor. In the event the Company is in full compliance with the terms of the submerged land lease, the lessor is required to
begin the renewal process.
Item 3. Legal Proceedings
Dollar amounts presented in this Item 1 are in thousands, except per share data.
The nature of the operations of the Company's hotels exposes those hotels, the Company and the Operating
Partnership to the risk of claims and litigation in the normal course of their business. An affiliate of the Company is currently a
defendant, along with IHM, in a class action lawsuit pending in the San Diego County Superior Court. Two class action
lawsuits were filed on April 25, 2012 and February 27, 2013, respectively, and were subsequently consolidated on November 8,
2013 under the title Martinez et al v. Island Hospitality Management, Inc., et al. Case No. 37-2012-00096221-CU-OE-CTL.
The class action relates to fifteen hotels operated by IHM in the state of CA and owned by affiliates of the Company, the
NewINK JV, the Innkeepers JV, and/or certain third parties. Both complaints in the now consolidated lawsuit allege various
wage and hour law violations including unpaid off-the-clock work, failure to provide meal breaks and failure to provide rest
breaks. The plaintiffs seek injunctive relief, money damages, penalties, and interest. We are defending our case vigorously. As
of December 31, 2015, included in accounts payable and expenses is $171, which represents an estimate of our exposure to the
litigation and is also estimated as the maximum possible loss that the Company may incur.
Item 4. Mine Safety Disclosures
Not applicable.
35
Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Market Information
Our common shares began trading on the NYSE, on April 16, 2010 under the symbol "CLDT". The closing price of
our common shares on the NYSE on December 31, 2015 was $20.48 per share. The following table sets forth, for the periods
indicated, the high and low closing sales prices per share reported on the NYSE as traded and the cash dividends declared per
share:
2015
First quarter
Second quarter
Third quarter
Fourth Quarter
2014
First quarter
Second quarter
Third quarter
Fourth Quarter
High
Low
Dividends
$
31.60 $
28.02 $
29.86
28.69
24.28
26.47
21.09
20.40
0.30
0.30
0.30
0.38(1)
High
Low
Dividends
$
21.30 $
19.85 $
22.95
23.41
29.61
20.21
21.08
22.75
0.21
0.24
0.24
0.24
(1) Includes a special dividend payment of $0.08 per share that was authorized by our Board of Trustees on December
31, 2015 and paid on January 29, 2016 to shareholders of record on January 15, 2016.
The Company's Board of Trustees has authorized a monthly dividend payment of $0.10 per share for each month in
the first quarter of 2016. The January 2016 monthly dividend was paid on February 26, 2016 to shareholders of record on
January 29, 2016.
Shareholder Information
On January 31, 2016, there were 104 registered holders of record of our common shares. This figure does not include
beneficial owners who hold shares in nominee name. However, because many of our common shares are held by brokers and
other institutions, we believe that there are many more beneficial holders of our common shares than record holders. In order
to comply with certain requirements related to our qualification as a REIT, our charter, subject to certain exceptions, limits the
number of common shares that may be owned by any single person or affiliated group to 9.8% of our outstanding common
shares.
Value of
initial
investment at
December 31,
2010
Value of
initial
investment at
December 31,
2011
Value of
initial
investment at
December 31,
2012
Value of
initial
investment at
December 31,
2013
Value of
initial
investment at
December 31,
2014
Value of
initial
investment at
December 31,
2015
Chatham Lodging Trust
Russell 2000 Index
FTSE NAREIT All
Equity REIT Index
FTSE NAREIT
Lodging/Resorts Index
$
$
$
$
100.00
100.00
100.00
$
$
$
66.11
95.82
107.28
$
$
$
99.66
111.49
128.89
$
$
$
138.79
154.78
133.02
$
$
$
204.78
162.35
169.14
$
$
$
151.73
155.18
173.01
100.00
$
85.69
$
96.43
$
122.64
$
162.50
$
122.82
36
The above graph provides a comparison of the cumulative total return on our common shares from December 31, 2010
to the NYSE closing price per share on December 31, 2015 with the cumulative total return on the Russell 2000 Index (the
“Russell 2000”), the FTSE NAREIT All Equity REIT Index (the “NAREIT All Equity”) and the NAREIT Lodging/Resorts
Index (the “NAREIT Lodging”). The total return values were calculated assuming a $100 investment on December 31, 2010
with reinvestment of all dividends in (i) our common shares, (ii) the Russell 2000, (iii) the NAREIT All Equity and (iv) the
NAREIT Lodging. The total return values include any dividends paid during the period.
Distribution Information
In order to maintain our qualification as a REIT, we must make distributions to our shareholders each year in an amount
equal to at least:
•
•
90% of our REIT taxable income determined without regard to the dividends paid deduction and excluding net capital
gains; plus
90% of the excess of our net income from foreclosure property over the tax imposed on such income by the Code;
minus
• Any excess non-cash income (as defined in the Code).
37
The following table sets forth information regarding the declaration, payment and income tax characterization of
regular distributions by the Company on its common shares for the years ended December 31, 2015 and 2014, respectively:
2015
Month to which
distribution relates
Record Date
Payment Date
Common Share
Distribution amount
Ordinary Income
Capital Gain
1/30/2015
2/27/2015
3/31/2015
4/30/2015
5/29/2015
6/30/2015
7/31/2015
8/31/2015
9/30/2015
10/30/2015
11/30/2015
12/31/2015
2/27/2015 $
0.10 $
0.094 $
3/27/2015
4/24/2015
5/29/2015
6/26/2015
7/31/2015
8/28/2015
9/25/2015
10/30/2015
11/27/2015
12/28/2015
1/29/2016
0.10
0.10
0.10
0.10
0.10
0.10
0.10
0.10
0.10
0.10
0.10
0.094
0.094
0.094
0.094
0.094
0.094
0.094
0.094
0.094
0.094
0.094
$
1.20 $
1.128 $
0.006
0.006
0.006
0.006
0.006
0.006
0.006
0.006
0.006
0.006
0.006
0.006
0.072
January
February
March
April
May
June
July
August
September
October
November
December
2014
Month to which
distribution relates
Record Date
Payment Date
Common Share
Distribution amount
Ordinary Income
Capital Gain
January
February
March
April
May
June
July
August
September
October
November
December
1/31/2014
2/28/2014
3/31/2014
4/30/2014
5/30/2014
6/30/2014
7/31/2014
8/29/2014
9/30/2014
10/31/2014
11/28/2014
12/31/2014
2/28/2014 $
0.07 $
0.069 $
3/28/2014
4/25/2014
5/30/2014
6/27/2014
7/25/2014
8/29/2014
9/26/2014
10/31/2014
11/28/2014
12/26/2014
1/30/2015
0.07
0.07
0.08
0.08
0.08
0.08
0.08
0.08
0.08
0.08
0.08
0.069
0.069
0.078
0.078
0.078
0.078
0.078
0.078
0.078
0.078
0.078
$
0.93 $
0.909 $
0.001
0.001
0.001
0.002
0.002
0.002
0.002
0.002
0.002
0.002
0.002
0.002
0.021
A special dividend payment of $0.08 per share was authorized by the Board of Trustees, declared on December 31,
2015 and paid on January 29, 2016 to shareholders of record on January 15, 2016. This special dividend will be taxable to
shareholders in 2016 and is not included in the table above for 2015.
38
Equity Compensation Plan Information
The following table provides information, as of December 31, 2015, relating to our Equity Incentive Plan pursuant to
which grants of common share options, share awards, share appreciation rights, performance units, LTIP units and other equity-
based awards options may be granted from time to time.
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
Equity compensation plans approved by security
holders¹
Equity compensation plans not approved by
security holders
Total
—
—
—
—
—
—
2,013,791
—
2,013,791
¹ Our Equity Incentive Plan was approved by our company's sole trustee and our company's sole shareholder prior to
completion of our IPO. The plan was amended and restated as of May 17, 2013 by our Board of Trustees to increase the
maximum number of shares available under the plan to 3,000,000 shares. The amended and restated plan was approved by our
shareholders at our 2013 annual meeting of shareholders.
Issuer Purchases of Equity Securities
We do not currently have a repurchase plan or program in place. However, we do provide employees, who have been
issued restricted common shares, the option of forfeiting shares to us to satisfy the minimum statutory tax withholding
requirements on the date their shares vest. Once shares are forfeited, they are not eligible to be reissued. There were 763 and
867 common shares forfeited in the years ended December 31, 2015 and 2014, respectively, related to such repurchases.
39
Item 6. Selected Financial Data
The following tables present selected historical financial information as of and for the years ended December 31,
2015, 2014, 2013, 2012 and 2011. The selected historical financial information as of and for the years ended December 31,
2015, 2014, 2013, 2012 and 2011 has been derived from our audited consolidated financial statements. The selected historical
financial data should be read in conjunction with "Management’s Discussion and Analysis of Financial Condition and Results
of Operations," and the financial statements and notes thereto, both included in this Annual Report on Form 10-K.
Year Ended
Year Ended
Year Ended
Year Ended
Year Ended
December 31,
2015
December 31,
2014
December 31,
2013
December 31,
2012
December 31,
2011
(In thousands, except share and per-share data)
Statement of Operations Data:
Total revenue
$
276,950
$
197,216
$
126,228
$
100,464
$
73,096
Hotel operating expenses
Depreciation and amortization
Property taxes, ground rent and insurance
General and administrative
Hotel property acquisition costs and other charges
Reimbursed costs from unconsolidated real estate
entities
Total operating expenses
Operating income
Interest and other income
Interest expense, including amortization of deferred
fees
Loss on early extinguishment of debt
Income (loss) from unconsolidated real estate
entities
Net gain from remeasurement and sales of
investment in unconsolidated real estate entities
Income before income tax expense
Income tax expense
Net income (loss)
Net income attributable to non-controlling interest
Net income (loss) attributable to common
shareholders
Income (loss) per Common Share - Basic:
Net income (loss) attributable to common
shareholders
Income (loss) per Common Share - Diluted:
Net income (loss) attributable to common
shareholders
Weighted average number of common shares
outstanding:
$
$
$
$
136,994
100,961
48,981
18,581
11,677
1,451
3,743
221,427
55,523
264
(27,924)
(412)
34,710
12,624
9,852
10,381
1,992
170,520
26,696
108
(21,354)
(184)
68,596
18,249
8,915
8,131
3,341
1,635
108,867
17,361
132
(11,580)
(933)
55,030
14,273
7,088
7,565
236
1,622
85,814
14,650
55
(14,641)
—
42,167
11,971
5,321
5,802
7,706
—
72,967
129
22
(8,190)
—
2,411
(3,830)
(1,874)
(1,439)
(997)
3,576
33,438
(260)
65,750
67,186
(105)
—
3,106
(124)
—
(1,375)
(75)
33,178
$
67,081
$
2,982
$
(1,450) $
(212)
(208)
—
—
—
(9,036)
(69)
(9,105)
—
32,966
$
66,873
$
2,982
$
(1,450) $
(9,105)
0.87
$
2.32
$
0.13
$
(0.12) $
(0.69)
0.86
$
2.30
$
0.13
$
(0.12) $
(0.69)
Basic
Diluted
37,917,871
38,322,285
28,531,094
28,846,724
21,035,892
21,283,831
13,811,691
13,811,691
13,280,149
13,280,149
Other Data:
Net cash provided by operating activities
Net cash used in investing activities
Net cash provided by financing activities
Cash dividends declared per common share
49,306
(452,988)
414,538
0.93
31,571
(235,190)
203,344
0.84
14,885
(13,036)
(2,033)
0.78
8,946
(112,523)
103,489
0.70
81,842
(182,363)
106,480
1.28
40
As of
As of
As of
As of
As of
December 31,
2015
December 31,
2014
December 31,
2013
December 31,
2012
December 31,
2011
(In thousands)
Balance Sheet Data:
Investment in hotel properties, net
$
1,258,452
$
1,096,425
$
652,877 $
426,074
$
402,815
Cash and cash equivalents
Restricted cash
Investment in unconsolidated real estate entities
Hotel receivables (net of allowance for doubtful
accounts)
Deferred costs, net
Prepaid expenses and other assets
Total assets
Mortgage debt
Revolving credit facility
Accounts payable and accrued expenses
Distributions in excess of investments of
unconsolidated real estate entities
Distributions payable
Total liabilities
Total shareholders’ equity
Noncontrolling Interest in Operating
Partnership
$
$
21,036
19,273
23,618
4,433
8,034
5,052
15,077
12,030
28,152
3,601
7,514
2,300
4,221
4,605
774
2,455
7,113
1,879
4,496
2,949
13,362
2,098
6,312
1,930
4,680
5,299
36,003
2,057
6,350
1,502
1,339,898
$
1,165,099
$
673,924 $
457,221
$
458,706
542,292
$
527,721
$
222,063 $
159,746
$
161,440
65,580
25,100
2,703
7,221
642,896
692,871
22,500
20,042
—
2,884
573,147
588,537
50,000
12,799
1,576
1,950
288,388
383,369
79,500
8,488
—
2,875
250,609
205,001
67,500
10,184
—
2,464
241,588
216,090
4,131
3,415
2,167
1,611
1,028
Total liabilities and equity
$
1,339,898
$
1,165,099
$
673,924 $
457,221
$
458,706
41
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
Dollar amounts presented in this Item 7 are in thousands, except per share data.
Chatham Lodging Trust (“we,” “us” or the “Company”) was formed as a Maryland real estate investment trust on
October 26, 2009. The Company is internally-managed and was organized to invest primarily in upscale extended-stay and
premium-branded select-service hotels. The Company has elected to be taxed as a real estate investment trust for federal
income tax purposes ("REIT").
The Company had no operations prior to the consummation of its IPO. The net proceeds from our share offerings are
contributed to Chatham Lodging, L.P., our operating partnership (the “Operating Partnership”), in exchange for partnership
interests. Substantially all of the Company’s assets are held by, and all operations are conducted through, the Operating
Partnership. The Company is the sole general partner of the Operating Partnership and owns 100% of the common units of
limited partnership interest in the Operating Partnership ("common units"). Certain of the Company’s employees hold vested
and unvested long-term incentive plan units in the Operating Partnership ("LTIP units"), which are presented as non-controlling
interests on our consolidated balance sheets.
From inception through December 31, 2015, the Company has completed the following offerings of its common
shares:
Type of Offering (1)
Date
Shares Issued
Price per Share
Gross Proceeds
(in thousands)
Net Proceeds
(in thousands)
Initial public offering
Private placement offering (2)
Follow-on common share offering
Over-allotment option
4/21/2010
4/21/2010
2/8/2011
2/8/2011
Follow-on common share offering
1/14/2013
Over-allotment option
1/31/2013
Follow-on common share offering
6/18/2013
Over-allotment option
6/28/2013
Follow-on common share offering
9/30/2013
Over-allotment option
10/11/2013
Follow-on common share offering
9/24/2014
Over-allotment option
9/24/2014
Follow-on common share offering
1/27/2015
Over-allotment option
1/27/2015
8,625,000 $
20.00 $
172,500 $
158,700
500,000
4,000,000
600,000
3,500,000
92,677
4,500,000
475,823
3,250,000
487,500
6,000,000
900,000
3,500,000
525,000
36,956,000
20.00
16.00
16.00
14.70
14.70
16.35
16.35
18.35
18.35
21.85
21.85
30.00
30.00
$
10,000
64,000
9,600
51,400
1,400
73,600
7,800
59,600
8,900
131,100
19,700
105,000
15,750
730,350 $
10,000
60,300
9,100
48,400
1,300
70,000
7,400
56,700
8,500
125,600
18,900
103,300
15,500
693,700
(1) Excludes any shares issued pursuance to the Company's ATM Plan or DRSPP.
(2) The Company sold 500,000 common shares to Jeffrey H. Fisher, the Company’s Chairman, President and Chief
Executive Officer (“Mr. Fisher”) in a private placement concurrent with its IPO.
As of December 31, 2015, the Company owned 38 hotels with an aggregate of 5,678 rooms located in 15 states and
the District of Columbia. The Company also (i) held a 10.3% noncontrolling interest in a joint venture (the “NewINK JV”)
with NorthStar Realty Finance Corp. ("NorthStar"), which was formed in the second quarter of 2014 to acquire 47 hotels from
a joint venture (the "Innkeepers JV") between the Company and Cerberus Capital Management (“Cerberus”), comprising an
aggregate of 6,097 rooms and (ii) held a 10.0% noncontrolling interest in a separate joint venture (the "Inland JV") with
NorthStar, which was formed in the fourth quarter of 2014 to acquire 48 hotels from Inland American Real Estate Trust, Inc.
("Inland"), comprising an aggregate of 6,401 rooms, The Company sold its 5.0% noncontrolling interest in a joint venture (the
"Torrance JV") with Cerberus that owned the 248-room Residence Inn by Marriott in Torrance, CA on December 30, 2015. We
sometimes use the term, "JV's", which refers collectively to, for the period prior to December 31, 2015, the NewINK JV, Inland
JV and Torrance JV and, for the period subsequent to December 30, 2015, the NewINK JV and the Inland JV.
42
To qualify as a REIT, the Company cannot operate its hotels. Therefore, the Operating Partnership and its subsidiaries
lease the Company's wholly owned hotels to taxable REIT subsidiary lessees (“TRS Lessees”), which are wholly owned by one
of the Company’s taxable REIT subsidiary (“TRS”) holding companies. The Company indirectly (i) owns its 10.3% interest in
47 of the NewINK JV hotels, (ii) 10% interest in 48 of the Inland JV hotels and (iii) owned its 5% interest in the Torrance JV,
which was sold on December 30, 2015, through the Operating Partnership. All of the NewINK JV hotels and Inland JV hotels
are, and the Torrance JV hotel was leased to TRS Lessees, in which the Company indirectly owns or owned as applicable,
noncontrolling interests through one of its TRS holding companies. Each hotel is leased to a TRS Lessee under a percentage
lease that provides for rental payments equal to the greater of (i) a fixed base rent amount or (ii) a percentage rent based on
hotel room revenue. The initial term of each of the TRS leases is 5 years. Lease revenue from each TRS Lessee is eliminated in
consolidation.
The TRS Lessees have entered into management agreements with third-party management companies that provide
day-to-day management for the hotels. As of December 31, 2015, Island Hospitality Management Inc. (“IHM”), which was
51% owned by Mr. Fisher and 45% owned by affiliates of NorthStar Asset Management Group, Inc., managed 36 of the
Company’s wholly owned hotels and Concord Hospitality Enterprises Company ("Concord") managed two of the Company’s
wholly owned hotels. As of December 31, 2015, all of the NewINK JV hotels were managed by IHM. As of December 31,
2015, 34 of the Inland JV hotels are managed by IHM and 14 hotels are managed by Marriott International, Inc. ("Marriott").
The Torrance JV hotel was managed by Marriott.
Financial Condition and Operating Performance Metrics
We measure financial condition and hotel operating performance by evaluating financial metrics and measures such
as:
Funds From Operations (“FFO”),
• Revenue Per Available Room (“RevPAR”),
• Average Daily Rate (“ADR”),
• Occupancy percentage,
•
• Adjusted FFO,
• Earnings before interest, taxes, depreciation and amortization (“EBITDA”),
• Adjusted EBITDA, and
• Hotel EBITDA.
We evaluate the hotels in our portfolio and potential acquisitions using these metrics to determine each hotel’s
contribution toward providing income to our shareholders through increases in distributable cash flow and increasing long-term
total returns through appreciation in the value of our common shares. RevPAR, ADR and occupancy are hotel industry
measures commonly used to evaluate operating performance. RevPAR, which is calculated as total room revenue divided by
total number of available rooms, is an important metric for monitoring hotel operating performance, and more specifically hotel
revenue.
See “Non-GAAP Financial Measures” for a discussion of our use of FFO, Adjusted FFO, EBITDA, Adjusted EBITDA
and Hotel EBITDA and a reconciliation of FFO, Adjusted FFO, EBITDA, Adjusted EBITDA and Hotel EBITDA to net income
or loss, measurements recognized by generally accepted accounting principles in the United States (“GAAP”).
43
Results of Operations
Industry outlook
We believe that the hotel industry’s performance is correlated to the performance of the economy overall, and
specifically key economic indicators such as GDP growth, employment trends, corporate travel and corporate profits. We
expect a continuing improvement in the performance of the hotel industry in 2016 as GDP is currently forecast to grow
approximately 2.3% in 2016. As reported by Smith Travel Research, monthly industry RevPAR has been higher year over year
since March 2010, so we are into the sixth year of RevPAR growth in what some believe will be a longer cycle than those
experienced in the past due to the fact that new room supply is forecast to grow only moderately. As a comparison, from 1992
to 2000, the industry saw nine consecutive years of RevPAR growth and from 2003 to 2007 the industry saw five consecutive
years of RevPAR growth. As reported by Smith Travel Research, industry RevPAR grew 5.4% in 2013, 8.3% in 2014 and
6.3% in 2015, respectively, compared to the same periods in the respective prior years. Primary hotel franchisor Marriott is
projecting 2016 RevPAR growth in North America in a range of 3% to 5%. We are currently projecting RevPAR at our hotels
to grow 3% to 4% in 2016 with ADR comprising all of our RevPAR growth.
Comparison of the year ended December 31, 2015 (“2015”) to the year ended December 31, 2014 (“2014”)
Results of operations for the year ended December 31, 2015 include the operating activities of our 38 wholly owned
hotels and our investments in the NewINK JV, Inland JV and Torrance JV. The Torrance JV was sold on December 30, 2015.
We owned 34 hotels at December 31, 2014 and our investments in NewINK JV, Inland JV, and Torrance JV as well as the
Innkeepers JV, which was owned until June 9, 2014. Accordingly, the comparisons below are influenced by the fact that four
wholly owned hotels were owned by us for only a portion of the year ended December 31, 2015. We acquired one hotel in San
Diego, CA on February 25, 2015, one hotel in Dedham, MA on July 17, 2015, one hotel in Ft. Lauderdale, FL on August 17,
2015 and one hotel in Marina del Rey, CA on September 17, 2015. Nine wholly owned hotels and the NewINK JV and Inland
JV were owned by us for only a portion of the year ended December 31, 2014. We acquired our 10.3% interest in NewINK JV
as well as the Innkeepers JV (which is comprised of 47 of the 51 hotels owned by the Innkeepers JV) on June 9, 2014, we
acquired four hotels in the Silicon Valley, CA area on June 9, 2014 from the Innkeepers JV, we acquired one hotel in Glendale,
CO on August 29, 2014, and we acquired four hotels and our 10% interest in the Inland JV on November 17, 2014.
Revenue
Revenue, which consists primarily of room, food and beverage and other operating revenues from our wholly owned
hotels, was as follows for the periods indicated (dollars in thousands):
Room
Food and beverage
Other
Cost reimbursements from unconsolidated real estate entities
Year ended
December 31,
2015
258,137
$
December 31,
2014
$
184,926
5,536
9,534
3,743
2,764
7,534
1,992
Total revenue
$
276,950
$
197,216
% Change
39.6%
100.3%
26.5%
87.9%
40.4%
Total revenue was $276,950 for the year ended December 31, 2015 compared to total revenue of $197,216 for the
2014 period. Total revenue related to the nine hotels acquired during 2014 contributed $51,470 of the increase, while the four
hotels acquired during 2015 contributed $19,686 of the increase. Since all of our hotels are select service or limited service
hotels, room revenue is the primary revenue source as these hotels do not have significant food and beverage revenue or large
group conference facilities. Room revenue was $258,137 and $184,926 for the years ended December 31, 2015 and 2014,
respectively, with $48,938 of this increase attributable to the nine hotels acquired in 2014 and $17,551 attributable to the four
hotels acquired in 2015. The remaining $6,722 of the increase relating to properties owned for all of 2015 and 2014, which
represents a 3.6% increase over 2014.
44
As reported by Smith Travel Research, industry RevPAR for the years ended December 31, 2015 and 2014 increased
6.3% and 8.3%, respectively, as compared to the years ended December 31, 2014 and 2013. RevPAR at our wholly owned
hotels increased 5.8% and 8.2%, respectively, in the 2015 and 2014 periods as compared to the respective prior year periods,
regardless of ownership.
Since room revenue is the primary component of total revenue, our revenue results are dependent on maintaining and
improving hotel occupancy and ADR at our hotels. Occupancy, ADR, and RevPAR results for the 38 wholly owned hotels are
presented in the following table in each period to reflect operation of the hotels regardless of our ownership interest during the
periods presented:
Occupancy
ADR
RevPAR
For the year ended
December 31, 2015
For the year ended
December 31, 2014
$
$
81.6%
161.00
131.41
$
$
81.6%
152.29
124.22
The RevPAR increase of 5.8% was primarily attributable to an increase in ADR of 5.7%.
Food and beverage revenue was $5,536 and $2,764 for the years ended December 31, 2015 and 2014, respectively.
For 2015, $1,744 of the increase relates to the hotels acquired in 2014 and $567 relates to the 4 hotels acquired in 2015. Food
and beverage revenue increased due to the Hyatt Place Cherry Creek and Hilton Garden Inn Burlington hotels acquired in 2014
and the Residence Inn San Diego Gaslamp, Hilton Garden Inn Marina del Rey and Residence Inn Il Lugano hotels acquired in
2015 that have food and beverage operations. Most of our other hotels have limited for sale food and beverage activities.
Other operating revenue, comprised of meeting room, gift shop, in-room movie and other ancillary amenities revenue,
was $9,534 and $7,534 for the years ended December 31, 2015 and 2014, respectively. Total other operating revenue related to
the nine hotels acquired in 2014 contributed $788 of the increase, while the four hotels acquired in 2015 contributed $1,569 of
the increase.
Cost reimbursements from unconsolidated real estate entities, comprised of payroll costs at the Innkeepers JV (from
January 1, 2014 to June 8, 2014), NewINK JV (from June 9, 2014 to December 31, 2015) and Inland JV (from November 17,
2014 to December 31, 2015) where the Company is the employer and an entity which is 2.5% owned by Mr. Fisher (from
August 1, 2014 to December 31, 2015), were $3,743 and $1,992 for the years ended December 31, 2015 and 2014,
respectively. The increase is due to additional employees hired during 2015 and shared office expenses. These cost
reimbursements were offset by the reimbursed costs from unconsolidated real estate entities included in operating expenses.
45
Hotel Operating Expenses
Hotel operating expenses consisted of the following for the periods indicated (dollars in thousands):
Year ended
December 31,
2015
December 31,
2014
% Change
Hotel operating expenses:
Room
Food and beverage expense
Telephone expense
Other expense
General and administrative
Franchise and marketing fees
Advertising and promotions
Utilities
Repairs and maintenance
Management fees
Insurance
$
50,165
$
37,516
4,127
1,708
2,467
21,101
21,240
5,040
9,464
11,722
8,742
1,218
1,966
1,304
2,056
16,265
15,110
3,676
7,269
8,705
6,096
998
Total hotel operating expenses
$
136,994
$
100,961
33.7%
109.9%
31.0%
20.0%
29.7%
40.6%
37.1%
30.2%
34.7%
43.4%
22.0%
35.7%
Hotel operating expenses increased $36,033 to $136,994 for the year ended December 31, 2015 from $100,961 for the
year ended December 31, 2014. Overall, total hotel operating expenses increased 35.7%, which is consistent with the increase
in revenue from the new hotels as well as from increased revenue at our other hotels. The increase in total hotel operating
expenses attributable to the nine hotels acquired in 2014 is $24,245 while the four hotels acquired in 2015 contributed $9,340
to the increase. Excluding those hotels, total hotel operating expenses increased $2,448 or 2.8%, which is less than the increase
in revenue. Consequently, the margins for our portfolio of hotels owned during the entirety of both the 2015 and 2014 periods
expanded in 2015.
Room expenses, which are the most significant component of hotel operating expenses, increased $12,649 from
$37,516 in 2014 to $50,165 in 2015. Total room expenses related to the nine hotels acquired in 2014 contributed $8,559 to the
increase, while the four hotels acquired in 2015 contributed $3,398 to the increase. Excluding those hotels, room expenses
increased $692 or 2.1%, due primarily to increased hotel employee compensation and benefits.
The remaining hotel operating expenses increased $23,384 or 36.9%, from $63,445 in 2014 to $86,829 in 2015. The
number of rooms for the year increased from 5,115 in 2014 to 5,675 rooms in 2015 due to acquisitions. The increase
attributable to the nine hotels acquired in 2014 is $15,656 while the four hotels acquired in 2015 contributed $5,942 to the
increase. Food and beverage expense increased due to the Hyatt Place Cherry Creek and Hilton Garden Inn Burlington hotels
acquired in 2014 and the Residence Inn San Diego Gaslamp, Hilton Garden Inn Marina del Rey and Residence Inn Il Lugano
hotels acquired in 2015 that have food and beverage operations. Most of our other hotels have limited for sale food and
beverage activities.
Depreciation and Amortization
Depreciation and amortization expense increased $14,271 million from $34,710 for the year ended December 31, 2014
to $48,981 for the year ended December 31, 2015. The increase attributable to the nine hotels acquired in 2014 is $10,860,
while the increase attributable to the four hotels acquired in 2015 is $3,694. Excluding these hotels, depreciation and
amortization decreased $283. Depreciation is recorded on our assets generally 40 years for buildings, 20 years for land
improvements, 15 years for building improvements and one to ten years for hotel furniture, fixtures and equipment from the
date of acquisition on a straight-line basis. Depreciable lives of hotel furniture, fixtures and equipment are generally between
the date of acquisition and the expected date furniture, fixtures and equipment will be replaced. Amortization of franchise fees
is recorded on a straight-line basis over the term of the respective franchise agreement.
46
Property Taxes and Insurance
Total property taxes and insurance expenses increased $5,957 from $12,624 for the year ended December 31, 2014 to
$18,581 for the year ended December 31, 2015. The increase related to the nine hotels acquired in 2014, which contributed
$2,982 of the increase, and the four hotels acquired in 2015, which contributed $2,385 of the increase. The remaining increase
of $590, or 5.5%, for the remaining hotels is due to incremental increases in values and assessments.
General and Administrative
General and administrative expenses principally consist of employee-related costs, including base payroll, bonuses
and amortization of restricted stock and awards of LTIP units. These expenses also include corporate operating costs,
professional fees and trustees’ fees. Total general and administrative expenses (excluding amortization of stock based
compensation of $2,835 and $2,470 for the years ended December 31, 2015 and 2014, respectively) increased $1,510, or
20.5%, to $8,842 in 2015 from $7,382 in 2014, with the increase due to higher employee compensation of $914 in 2015
associated with additional employees and incentive compensation, a $369 increase in professional fees, and a $155 increase in
office expenses.
Hotel Property Acquisition Costs and Other Charges
Hotel property acquisition costs decreased $8,930 from $10,381 for the year ended December 31, 2014 to $1,451 for
the year ended December 31, 2015. Expenses during 2014 related primarily to our portion of the expenses related to the
recapitalization and sale of the Innkeepers JV, and our acquisition of the four Silicon Valley hotels, the Hyatt Place Cherry
Creek hotel and the four Inland hotels. Acquisition-related costs are expensed when incurred. The Company incurred other
charges of $700 in 2015 related to our acquisition of the Residence Inn San Diego Gaslamp, Residence Inn Dedham ,
Residence Inn Il Lugano and Hilton Garden Inn Marina del Rey hotels and $372 related to legal fees for a class action lawsuit
filed in the State of California.
Reimbursed Costs from Unconsolidated Real Estate Entities
Reimbursed costs from unconsolidated real estate entities, comprised of corporate payroll costs of the Innkeepers JV,
NewINK JV and Inland JV and an entity which is 2.5% owned by Mr. Fisher, where the Company is the employer, were $3,743
and $1,992 for the years ended December 31, 2015 and 2014, respectively. Reimbursement costs increased due to an increase
in the number of employees and shared office expenses. These reimbursed costs were offset by the cost reimbursements from
unconsolidated real estate entities included in revenues.
Interest and Other Income
Interest on cash and cash equivalents and other income increased $156 from $108 for the year ended December 31,
2014 to $264 for the year ended December 31, 2015. Of the $156 increase, $150 is related to services provided to NorthStar.
Interest Expense, Including Amortization of Deferred Fees
Interest expense increased $6,570, or 30.8%, from $21,354 for the year ended December 31, 2014 to $27,924 for the
year ended December 31, 2015. Interest expense is comprised of the following (dollars in thousands):
Year ended
December 31, 2015
December 31, 2014
% Change
Mortgage debt interest
Credit facility interest
Other fees
Amortization of deferred financing costs
Total
25,105
$
574
637
1,608
27,924
$
17,748
1,588
485
1,533
21,354
41.5 %
(63.9)%
31.3 %
4.9 %
30.8 %
$
$
47
The increase in interest expense for the year ended December 31, 2015 is primarily due to interest expense of $7,810
on loans issued during or subsequent to the first half of 2014 having a principal balance of $329,075, including the four new
loans having an aggregate principal balance of $222,000 on the four Silicon Valley hotels issued on June 9, 2014, the $30,000
loan on the Savannah hotel issued on July 2, 2014, the $16,225 and $19,950 loans on the Homewood Suites by Hilton Billerica
and Homewood Suites by Hilton Carlsbad hotels, respectively, each issued on November 25, 2014, the $18,300 loan on the
Hampton Inn and Suites Houston Medical hotel issued on December 17, 2014 and the $22,600 loan on the Hilton Garden Inn
Marina del Rey hotel assumed on September 17, 2015. The increase was partially offset by $195 on the Springhill Suites
Washington, PA hotel loan that was paid off in March 2015 and lower costs for the Residence Inn Garden Grove hotel loan of
$126 due to refinancing the loan at a lower rate. The increase in deferred financing costs relates to the new loans issued during
or subsequent to the year ended December 31, 2015. Interest expense on the Company's revolving credit facilities decreased
due to lower utilization for the year ended December 31, 2015 as compared to year ended December 31, 2014.
Loss on Early Extinguishment of Debt
Loss on early extinguishment of debt increased $228 from a loss of $184 for the year ended December 31, 2014
compared to a loss of $412 for the year ended December 31, 2015 due to refinancing one loan in 2014 and entering into a new
unsecured revolving credit agreement in November 2015 which replaced the previous secured revolving credit agreement.
Income or (loss) from Unconsolidated Real Estate Entities
Income or (loss) from unconsolidated real estate entities increased $6,241 from a loss of $3,830 for the year ended
December 31, 2014 to a gain of $2,411 for the year ended December 31, 2015. The majority of the increase is due primarily to
the adjustment for the amortization of the basis difference of the carrying amount of the investment in the Company's share of
partner's capital of the NewINK JV (see note 5) of $600, compared to $335 in 2014, income on the Inland JV of $787, which
was not owned until November 14, 2014 and income on NewINK JV of $887, compared to losses in 2014 on the Innkeepers
JV, NewINK JV and Inland JV of $436, $1,573 and $2,264, respectively.
Gain on Sale from Unconsolidated Real Estate Entities
Gain on sale from unconsolidated real estate entities decreased $62,174 from a gain of $65,750 for the year ended
December 31, 2014 to a gain of $3,576 for the year ended December 31, 2015. The decrease is due to the sale of the
Innkeepers JV to NewINK JV in 2014, partially offset by the sale of the Torrance JV in 2015.
Income Tax Expense
Income tax expense decreased $155 from an expense of $105 for the year ended December 31, 2014 to an expense of
$260 for the year ended December 31, 2015. We are subject to income taxes based on the taxable income of our TRS holding
companies at a combined federal and state tax rate of approximately 40%.
Net Income
Net income was $33,178 for the year ended December 31, 2015, compared to net income of $67,081 for the year
ended December 31, 2014. The decrease in our net income was due to the factors discussed above.
Material Trends or Uncertainties
We are not aware of any material trends or uncertainties, favorable or unfavorable, that may be reasonably anticipated
to have a material impact on either the capital resources or the revenues or income to be derived from the acquisition and
operation of properties, loans and other permitted investments, other than those referred to in this section and the risk factors
identified in the “Risk Factors” section of this Annual Report on Form 10-K.
48
Comparison of the year ended December 31, 2014 (“2014”) to the year ended December 31, 2013 (“2013”)
Results of operations for the year ended December 31, 2014 include the operating activities of our 34 wholly owned
hotels and our investments in the NewINK JV, Inland JV and the Torrance JV as well as the Innkeepers JV. We owned 25
hotels at December 31, 2013, a 10.3% joint venture interest in the Innkeepers JV and a 5% joint venture interest in the Torrance
JV. Accordingly, the comparisons below are influenced by the fact that nine wholly owned hotels and the NewINK JV and
Inland JV were owned by us for only a portion of the year ended December 31, 2014. We acquired our 10.3% interest in
NewINK JV (which comprises 47 of the 51 hotels owned by the Innkeepers JV) on June 9, 2014, we acquired four hotels in the
Silicon Valley, CA area on June 9, 2014 from the Innkeepers JV, we acquired one hotel in Glendale, CO on August 29, 2014,
and we acquired four hotels and our 10% interest in the Inland JV on November 17, 2014.
Revenues
Revenue, which consists primarily of the room, food and beverage and other operating revenues from our hotels, was
as follows for the periods indicated (dollars in thousands):
Room
Food and beverage
Other
Cost reimbursements from unconsolidated real estate entities
Years Ended
December 31,
2014
184,926
$
December 31,
2013
$
118,169
2,764
7,534
1,992
1,311
5,113
1,635
Total revenue
$
197,216
$
126,228
% Change
56.5%
110.8%
47.3%
21.8%
56.2%
Total revenue was $197,216 for the year ended December 31, 2014 compared to total revenue of $126,228 for 2013
period. Total revenue related to the six hotels acquired during 2013 contributed $30,274 of the increase and nine hotels
acquired during 2014 contributed $31,277 of the increase. Since all of our hotels are select service or limited service hotels,
room revenue is the primary revenue source as these hotels do not have significant food and beverage revenue or large group
conference facilities. Room revenue was $184,926 and $118,169 for the years ended December 31, 2014 and 2013,
respectively, with $27,465 of this increase attributable to the six hotels acquired in 2013 and $30,659 attributable to the nine
hotels acquired in 2014. When excluding these 15 hotels, the remaining $8,633 increase represents a 7.2% increase over 2013.
As reported by Smith Travel Research, industry RevPAR for the years ended December 31, 2014 and 2013 increased
8.3% and 5.4%, respectively, as compared to the respective prior years period December 31, 2015. RevPAR at our wholly
owned hotels increased 8.2% and 4.6%, respectively, in the 2014 and 2013 periods as compared to the respective prior periods.
Our RevPAR performance in the year ended December 31, 2013 was adversely impacted by renovations that occurred at our
Washington, D.C. hotel, which operated without a brand for most of 2013 until it was rebranded to a Residence Inn by Marriott
on September 20, 2013. Excluding the Residence Inn Washington D.C. hotel, RevPAR was up 6.3% for the year ended
December 31, 2013 as compared to the year ended December 31, 2012.
Since room revenue is the primary component of total revenue, our revenue results are dependent on maintaining and
improving hotel occupancy and ADR at our hotels. Occupancy, ADR, and RevPAR results for the 34 wholly owned hotels are
presented in the following table in each period to reflect operation of the hotels regardless of our ownership interest during the
period presented. Operations at the Hyatt Place Cherry Creek hotel did not begin until October 2013 and, for this reason, have
been excluded from the results below:
Occupancy
ADR
RevPAR
For the year ended
December 31, 2014
For the year ended
December 31, 2013
$
$
81.6%
150.64
122.91
$
$
79.9%
141.72
113.21
The 8.6% increase in RevPAR was attributable to an increase in ADR of 6.3% and an increase in occupancy of 2.1%.
49
Food and beverage revenue was $2,764 and $1,311 for the years ended December 31, 2014 and 2013, respectively.
For 2014, $1,114 of the increase relates to the Hyatt Place Pittsburgh North Shore, Courtyard Houston and Hilton Garden Inn
Denver Tech hotels, which were acquired in 2013, and $216 relates to the Hyatt Place Cherry Creek and Hilton Garden Inn
Burlington hotels, which were acquired in 2014.
Other operating revenue, comprised of meeting room, gift shop, in-room movie and other ancillary amenities revenue,
was $7,534 and $5,113 for the years ended December 31, 2014 and 2013, respectively. Total other operating revenue related to
the six hotels acquired in 2013 contributed $1,608 of the increase and the nine hotels acquired in 2014 contributed $323 of the
increase. The remaining $490 increase is attributable to increased occupancy at the 19 comparable hotels.
Cost reimbursements from unconsolidated real estate entities, comprised of payroll costs at the Innkeepers JV (from
January 1, 2013 to June 8, 2014), NewINK JV (from June 9, 2014 to December 31, 2014) and Inland JV (from November 17,
2014 to December 31, 2014) where the Company is the employer and an entity which is 2.5% owned by Mr. Fisher (from
August 1, 2014 to December 31, 2014), were $1,992 and $1,635 for the years ended December 31, 2014 and 2013,
respectively. The increase is due to additional employees hired during 2014. These cost reimbursements were offset by the
reimbursed costs from unconsolidated real estate entities included in operating expenses.
Hotel Operating Expenses
Hotel operating expenses consisted of the following for the periods indicated (dollars in thousands):
Years Ended
December 31,
2014
December 31,
2013
% Change
Hotel operating expenses:
Room
Food and beverage expense
Telephone expense
Other expense
General and administrative
Franchise and marketing fees
Advertising and promotions
Utilities
Repairs and maintenance
Management fees
Insurance
$
37,516
$
25,709
1,966
1,304
2,056
16,265
15,110
3,676
7,269
8,705
6,096
998
944
899
1,580
11,529
9,394
2,782
4,955
6,310
3,752
742
Total hotel operating expenses
$
100,961
$
68,596
45.9%
108.3%
45.1%
30.1%
41.1%
60.8%
32.1%
46.7%
38.0%
62.5%
34.5%
47.2%
Hotel operating expenses increased $32,365 to $100,961 for the year ended December 31, 2014 from $68,596 for the
year ended December 31, 2013. Overall, total hotel operating expenses increased 47.2%, which is consistent with the increase
in revenue from the new hotels as well as from increased occupancy at our other hotels. The increase in total hotel operating
expenses attributable to the six hotels acquired in 2013 is $15,504 while the nine hotels acquired in 2014 contributed $12,939
to the increase. Excluding those hotels, total hotel operating expenses increased $3,922 or 6.6%, which is less than the increase
in revenue. Consequently our margins for our portfolio of hotels owned during the entirety of both the 2014 and 2013 periods
expanded in 2014.
Room expenses, which are the most significant component of hotel operating expenses, increased $11,807 from
$25,709 in 2013 to $37,516 in 2014. Total room expenses related to the six hotels acquired in 2013 contributed $5,569 of the
increase and the nine hotels acquired in 2014 contributed $4,527 to the increase. Excluding those hotels, room expenses
increased $1,711 or 7.5%, due primarily to increased hotel employee compensation and benefits.
50
The remaining hotel operating expenses increased $20,558 or 47.9%, from $42,887 in 2013 to $63,445 in 2014, which
increase is consistent with the 42.3% increase in the number of rooms owned in 2014 compared to 2013. The number of rooms
owned for the year increased from 3,591 in 2013 to 5,115 rooms in 2014 due to acquisitions. The increase attributable to the
six hotels acquired in 2013 is $9,935 while the nine hotels acquired in 2014 contributed $8,412 to the increase. Food and
beverage expense increased due to the Pittsburgh, Courtyard Houston and Denver Tech hotels that were acquired in 2013 and
the Cherry Creek and Burlington hotels acquired in 2014 that have food and beverage operations. Most of our other hotels
have limited for sale food and beverage activities.
Depreciation and Amortization
Depreciation and amortization expense increased $16,461 from $18,249 million for the year ended December 31, 2013
to $34,710 for the year ended December 31, 2014. The increase attributable to the six hotels acquired in 2013 is $5,241, while
the increase attributable to the nine hotels acquired in 2014 is $9,628. Depreciation is recorded on our assets generally over 40
years for buildings, 20 years for land improvements, 15 years for building improvements and one to ten years for hotel
furniture, fixtures and equipment from the date of acquisition on a straight-line basis. Depreciable lives of hotel furniture,
fixtures and equipment are generally between the date of acquisition and the expected date furniture, fixtures and equipment
will be replaced. Amortization of franchise fees is recorded on a straight-line basis over the term of the respective franchise
agreement.
Property Taxes and Insurance
Total property taxes and insurance expenses increased $3,709 from $8,915 for the year ended December 31, 2013 to
$12,624 for the year ended December 31, 2014. The increase related primarily to the six hotels acquired in 2013, which
contributed $1,662 of the increase, while the nine hotels acquired in 2014 contributed $1,629 of the increase. The remaining
increase of $418, or 10.8%, for the remaining hotels is due to incremental increase in values and assessments.
General and Administrative
General and administrative expenses principally consist of employee-related costs, including base payroll, bonuses
and amortization of restricted stock and awards of LTIP units. These expenses also include corporate operating costs,
professional fees and trustees’ fees. Total general and administrative expenses (excluding amortization of stock based
compensation of $2,470 and $2,086 for the years ended December 31, 2014 and 2013, respectively) increased $1,337, or
23.3%, to $7,382 in 2014 from $6,045 in 2013. The increase was due to higher employee compensation of $992 in 2014
associated with additional employees and incentive compensation and a $345 increase in franchise and state taxes.
Hotel Property Acquisition Costs and Other Charges
Hotel property acquisition costs increased $7,040 from $3,341 for the year ended December 31, 2013 to $10,381 for
the year ended December 31, 2014. Expenses during 2014 related primarily to our portion of the expenses related to the
recapitalization and sale of the Innkeepers JV, and our acquisitions of the four Silicon Valley hotels, the Hyatt Place Cherry
Creek hotel and the four Inland hotels. Acquisition-related costs are expensed when incurred. The Company incurred other
charges of $1,916 in 2014 related to matters associated with the unsolicited offer from Blue Mountain Capital Management and
matters related to its proxy settlement agreement with the HG Vora Group. The expense is primarily comprised of attorney's
fees of $1,066 and financial advisory expenses of $850.
Reimbursed Costs from Unconsolidated Real Estate Entities
Reimbursed costs from unconsolidated real estate entities, comprised of corporate payroll costs at the Innkeepers JV,
NewINK JV, the Inland JV and an entity which is 2.5% owned by Mr. Fisher, where the Company is the employer, were $1,992
and $1,635 for the year ended December 31, 2014 and 2013, respectively. These costs are offset by the cost reimbursements
from unconsolidated real estate entities included in revenues. These cost reimbursements were offset by the reimbursed costs
from unconsolidated real estate entities included in revenues.
Interest and Other Income
Interest on cash and cash equivalents and other income decreased $24 from $132 for the year ended December 31,
2013 to $108 for the year ended December 31, 2014.
51
Interest Expense, Including Amortization of Deferred Fees
Interest expense increased $9,774 or 84.4% from $11,580 for the year ended December 31, 2013 to $21,354 for the
year ended December 31, 2014 due to the 102.2% increase in debt outstanding from the year ended December 31, 2013 to the
year ended December 31, 2014. Borrowings increased significantly to fund a portion of the $462,594 of acquisitions made
during 2014. Interest expense is comprised of the following (dollars in thousands):
Mortgage debt interest
Credit facility interest
Other fees
Amortization of deferred financing costs
Total
Years Ended
December 31,
2014
December 31,
2013
% Change
$
$
17,748
$
1,588
485
1,533
21,354
$
8,639
1,593
258
1,090
11,580
105.4 %
(0.3)%
88.0 %
40.6 %
84.4 %
The increase in interest expense for the year ended December 31, 2014 as compared to the year ended December 31,
2013, is due to interest expense of $6,681 on $306,475 of loans issued in 2014, including the four new loans with an aggregate
principal balance of $222,000 secured by the four Silicon Valley hotels and new loans having an initial aggregate principal
balance of $84,475 secured by the Savannah, Billerica, Houston Medical Center and Carlsbad hotels. Lower credit facility
interest is due to a decrease in the weighted average interest rate to 2.66% in 2014 from 2.78% in 2013. The increase in
amortization of deferred financing costs relates to the new loans issued in 2014.
Loss on Early Extinguishment of Debt
Loss on early extinguishment of debt decreased $749 from a loss of $933 for the year ended December 31, 2013
compared to a loss of $184 for the year ended December 31, 2014 due to refinancing or paying off four loans in 2013 and one
loan in 2014.
Loss from Unconsolidated Real Estate Entities
Loss from unconsolidated real estate entities increased $1,956 from a loss of $1,874 for the year ended December 31,
2013 to a loss of $3,830 for the year ended December 31, 2014. The majority of the increase is due to losses associated with
the acquisition of an interest in the Inland JV of $2,206, which included $2,196 of acquisition costs during the fourth quarter of
2014.
Gain on Sale from Unconsolidated Real Estate Entities
Gain on sale from unconsolidated real estate entities increased $65,750 from 2013. The increase is due to the sale of
the Innkeepers JV to NewINK JV.
Income Tax Expense
Income tax expense decreased $19 from an expense of $124 for the year ended December 31, 2013 to an expense of
$105 for the year ended December 31, 2014. We are subject to income taxes based on the taxable income of our TRS holding
companies at a combined federal and state tax rate of approximately 40%.
Net Income
Net income was $67,081 for the year ended December 31, 2014, compared to a net income of $2,982 for the year
ended December 31, 2013. The increase in our net income was due to the factors discussed above.
52
Material Trends or Uncertainties
We are not aware of any material trends or uncertainties, favorable or unfavorable, that may be reasonably
anticipated to have a material impact on either the capital resources or the revenues or income to be derived from the
acquisition and operation of properties, loans and other permitted investments, other than those referred to in this section and
the risk factors identified in the “Risk Factors” section of this Annual Report on this Form 10-K.
Non-GAAP Financial Measures
We consider the following non-GAAP financial measures useful to investors as key supplemental measures of our
operating performance: (1) FFO, (2) Adjusted FFO, (3) EBITDA, (4) Adjusted EBITDA and (5) Hotel EBITDA. These non-
GAAP financial measures should be considered along with, but not as alternatives to, net income or loss as prescribed by
GAAP as a measure of our operating performance.
FFO, Adjusted FFO, EBITDA, Adjusted EBITDA and Hotel EBITDA do not represent cash generated from
operating activities under GAAP and should not be considered as alternatives to net income or loss, cash flows from operations
or any other operating performance measure prescribed by GAAP. FFO, Adjusted FFO, EBITDA, Adjusted EBITDA and Hotel
EBITDA are not measures of our liquidity, nor are FFO, Adjusted FFO, EBITDA, Adjusted EBITDA or Hotel EBITDA
indicative of funds available to fund our cash needs, including our ability to make cash distributions. These measurements do
not reflect cash expenditures for long-term assets and other items that have been and will be incurred. FFO, Adjusted FFO,
EBITDA, Adjusted EBITDA and Hotel EBITDA may include funds that may not be available for management’s discretionary
use due to functional requirements to conserve funds for capital expenditures, property acquisitions, and other commitments
and uncertainties.
We calculate FFO in accordance with standards established by the National Association of Real Estate Investment
Trusts ("NAREIT"), which defines FFO as net income or loss (calculated in accordance with GAAP), excluding gains or losses
from sales of real estate, impairment write-downs, the cumulative effect of changes in accounting principles, plus depreciation
and amortization (excluding amortization of deferred financing costs), and after adjustments for unconsolidated partnerships
and joint ventures following the same approach. We believe that the presentation of FFO provides useful information to
investors regarding our operating performance because it measures our performance without regard to specified non-cash items
such as real estate depreciation and amortization, gain or loss on sale of real estate assets and certain other items that we believe
are not indicative of the performance of our underlying hotel properties. We believe that these items are more representative of
our asset base and our acquisition and disposition activities than our ongoing operations, and that by excluding the effects of
the items, FFO is useful to investors in comparing our operating performance between periods and between REITs that report
FFO using the NAREIT definition.
We calculate Adjusted FFO by further adjusting FFO for certain additional items that are not in NAREIT’s
definition of FFO, including hotel property acquisition costs and other charges, losses on the early extinguishment of debt and
similar items related to our unconsolidated real estate entities that we believe do not represent recurring operations. We believe
that Adjusted FFO provides investors with another financial measure that may facilitate comparisons of operating performance
between periods and between REITs that make similar adjustments to FFO.
53
The following is a reconciliation of net income to FFO and Adjusted FFO for the years ended December 31, 2015,
2014 and 2013 (in thousands, except share data):
For the year ended
December 31,
2015
2014
2013
Funds From Operations (“FFO”):
Net income
Noncontrolling interest
$
$
33,178
(212)
67,081
(208)
Net gain from remeasurement and sales of investment in
unconsolidated real estate entities
Loss on the sale of assets within the unconsolidated real
estate entity
Depreciation
Adjustments for unconsolidated real estate entity items
FFO attributed to common shareholders
Hotel property acquisition costs and other charges
Loss on early extinguishment of debt
Adjustments for unconsolidated real estate entity items
Adjusted FFO attributed to common shareholders
$
Weighted average number of common shares
(3,576)
(65,750)
—
48,784
7,458
85,632
1,451
412
104
87,599
$
1
34,579
4,902
40,605
10,381
184
3,932
55,102
$
2,982
—
—
252
18,162
5,055
26,451
3,341
933
964
31,689
Basic
Diluted
37,917,871
28,531,094
21,035,892
38,322,285
28,846,724
21,283,831
Diluted per share count may differ from GAAP per share count when FFO or Adjusted FFO is positive. Unvested
restricted shares and unvested LTIP units that could potentially dilute basic earnings per share in the future would not be
included in the computation of diluted loss per share for the periods where a loss has been recorded because they would have
been anti-dilutive for the periods presented.
We calculate EBITDA for purposes of the credit facility debt covenants as net income or loss excluding: (1) interest
expense; (2) provision for income taxes, including income taxes applicable to sale of assets; (3) depreciation and amortization;
and (4) unconsolidated real estate entity items including interest, depreciation and amortization excluding gains or losses from
sales of real estate. We believe EBITDA is useful to investors in evaluating our operating performance because it helps
investors compare our operating performance between periods and between REITs by removing the impact of our capital
structure (primarily interest expense) and asset base (primarily depreciation and amortization) from our operating results. In
addition, we use EBITDA as one measure in determining the value of hotel acquisitions and dispositions.
We calculate Adjusted EBITDA by further adjusting EBITDA for certain additional items, including hotel property
acquisition costs and other charges, gains or losses on the sale of real estate, losses on the early extinguishment of debt,
amortization of non-cash share-based compensation and similar items related to our unconsolidated real estate entities which
we believe are not indicative of the performance of our underlying hotel properties entities. We believe that Adjusted EBITDA
provides investors with another financial measure that may facilitate comparisons of operating performance between periods
and between REITs that report similar measures.
54
The following is a reconciliation of net income to EBITDA and Adjusted EBITDA for the years ended December 31,
2015, 2014 and 2013 (in thousands):
Earnings Before Interest, Taxes, Depreciation and
Amortization (“EBITDA”):
Net income
Interest expense
Income tax expense
Depreciation and amortization
Adjustments for unconsolidated real estate entity items
Noncontrolling interest
EBITDA
Hotel property acquisition costs and other charges
Loss on early extinguishment of debt
Adjustments for unconsolidated real estate entity items
Net gain from remeasurement and sales of investment in
unconsolidated real estate entities
Loss on the sale of assets within the unconsolidated real
estate entity
Share based compensation
Adjusted EBITDA
For the year ended
December 31,
2015
2014
2013
$
33,178
$
67,081
$
2,982
27,924
260
48,981
15,081
(212)
125,212
1,451
412
136
21,354
105
34,710
10,211
(208)
133,253
10,381
184
4,053
(3,576)
(65,750)
—
1
2,835
$ 126,470
$
2,469
84,591
$
11,580
124
18,249
10,934
—
43,869
3,341
933
964
—
252
2,086
51,445
We present Hotel EBITDA because we believe it is useful to investors in comparing our hotel operating performance
between periods and comparing our Hotel EBITDA margins to those of our peer companies. Hotel EBITDA represents the
results of operations for our wholly owned hotels only.
The following is a presentation of Hotel EBITDA for the years ended December 31, 2015, 2014 and 2013 (in
thousands):
Net income
Add:
Interest expense
Income tax expense
Depreciation and amortization
General and administrative
Hotel property acquisition costs and other charges
Loss from unconsolidated real estate entities
Loss on early extinguishment of debt
Less:
Interest and other income
Income from unconsolidated real estate entities
Net gain from remeasurement and sales of investment in
unconsolidated real estate entities
For the year ended
December 31,
2015
2014
33,178
27,924
260
48,981
11,677
1,451
—
412
(264)
(2,411)
67,081
21,354
105
34,710
9,852
10,381
3,830
184
(108)
—
2013
2,982
11,580
124
18,249
8,131
3,341
1,874
933
(132)
—
(3,576)
(65,750)
—
Hotel EBITDA
$ 117,632
$ 81,639
$ 47,082
55
Although we present FFO, Adjusted FFO, EBITDA, Adjusted EBITDA and Hotel EBITDA because we believe they
are useful to investors in comparing our operating performance between periods and between REITs that report similar
measures, these measures have limitations as analytical tools. Some of these limitations are:
•
•
•
FFO, Adjusted FFO, EBITDA, Adjusted EBITDA and Hotel EBITDA do not reflect our cash expenditures or
future requirements, for capital expenditures or contractual commitments;
FFO, Adjusted FFO, EBITDA, Adjusted EBITDA and Hotel EBITDA do not reflect changes in, or cash
requirements for, our working capital needs;
FFO, Adjusted FFO, EBITDA, Adjusted EBITDA and Hotel EBITDA do not reflect funds available to make
cash distributions;
• EBITDA, Adjusted EBITDA and Hotel EBITDA do not reflect the significant interest expense, or the cash
requirements necessary to service interest or principal payments, on our debts;
• Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may
need to be replaced in the future, and FFO, Adjusted FFO, EBITDA, Adjusted EBITDA and Hotel EBITDA do
not reflect any cash requirements for such replacements;
• Non-cash compensation is and will remain a key element of our overall long-term incentive compensation
package, although we exclude it as an expense when evaluating our ongoing operating performance for a
particular period using Adjusted EBITDA;
• Adjusted FFO, Adjusted EBITDA and Hotel EBITDA do not reflect the impact of certain cash charges
(including acquisition transaction costs) that result from matters we consider not to be indicative of the
underlying performance of our hotel properties; and
• Other companies in our industry may calculate FFO, Adjusted FFO, EBITDA, Adjusted EBITDA and Hotel
EBITDA differently than we do, limiting their usefulness as a comparative measure.
In addition, FFO, Adjusted FFO, EBITDA, Adjusted EBITDA and Hotel EBITDA do not represent cash generated
from operating activities as determined by GAAP and should not be considered as alternatives to net income or loss, cash flows
from operations or any other operating performance measure prescribed by GAAP. FFO, Adjusted FFO, EBITDA, Adjusted
EBITDA and Hotel EBITDA are not measures of our liquidity. Because of these limitations, FFO, Adjusted FFO, EBITDA,
Adjusted EBITDA and Hotel EBITDA should not be considered in isolation or as a substitute for performance measures
calculated in accordance with GAAP. We compensate for these limitations by relying primarily on our GAAP results and using
FFO, Adjusted FFO, EBITDA, Adjusted EBITDA and Hotel EBITDA only supplementally. Our consolidated financial
statements and the notes to those statements included elsewhere are prepared in accordance with GAAP.
56
Sources and Uses of Cash
Our principal sources of cash include net cash from operations and proceeds from debt and equity issuances. Our
principal uses of cash include acquisitions, capital expenditures, operating costs, corporate expenditures, interest costs and debt
repayments and distributions to equity holders.
As of December 31, 2015 and December 31, 2014, we had cash and cash equivalents of approximately $21,036 and
$15,077, respectively. As of December 31, 2015, we are required to maintain at least a total of $10,000 of unrestricted cash and
cash equivalents under certain non-recourse covenant guarantees related to debt in the NewINK JV and the Inland JV.
Additionally, we had $184,420 available under our $250,000 senior unsecured revolving credit facility as of December 31,
2015.
For the year ended December 31, 2015, net cash flows provided by operations were $81,842, driven by net income of
$33,178, offset by $53,834 of non-cash items, including $50,587 of depreciation and amortization, $412 of the extinguishment
of debt and $2,835 of share-based compensation expense. Also offset by $2,411 related to the income from unconsolidated
entities and a net gain from the sale of interests in unconsolidated real estate entities of $3,576. In addition, changes in
operating assets and liabilities due to the timing of cash receipts, payment for real estate taxes, payments of corporate
compensation and payments from our hotels resulted in net cash inflow of $817. Net cash flows used in investing activities
were $182,363, primarily related to the purchase of the Residence Inn San Diego Gaslamp, Residence Inn Dedham, Residence
Inn Il Lugano and Hilton Garden Inn Marina del Rey hotels for $169,447, capital improvements on our 38 wholly owned hotels
of $20,331, $5,488 related to required escrow deposits included in restricted cash, reduced by distributions of $12,903 received
from unconsolidated real estate entities and distributions from the sale of the Torrance JV. Net cash flows provided by financing
activities were $106,480, comprised of net proceeds of $120,839 raised from our issuance of common shares in our January
2015 underwritten public offering and through our dividend reinvestment and share purchase plan ("DRSPP"), net borrowing
on our unsecured credit facility of $43,080, principal payments or payoffs on mortgage debt of $7,999, payments of deferred
financing and offering costs of $4,154, repurchase of vested common shares of $22 and distributions to shareholders and LTIP
unit holders of $45,264.
For the year ended December 31, 2014, net cash flows provided by operations were $49,306, driven by net income of
$67,081, offset by $42,730 of non-cash items, including $36,242 of depreciation and amortization, $184 of the extinguishment
of debt, $2,471 of share-based compensation expense and $3,830 related to the loss from unconsolidated entities, offset by a net
gain from the sale of interests in unconsolidated real estate entities of $65,750. In addition, changes in operating assets and
liabilities due to the timing of cash receipts, payment for real estate taxes, payments of corporate compensation and payments
from our hotels resulted in net cash inflow of $5,248. Net cash flows used in investing activities were $452,988, primarily
related to the purchase of the four Silicon Valley hotels, the Cherry Creek hotel and the four hotels acquired from Inland for
$404,737, investment in the Inland JV of $27,948, capital improvements on our 34 wholly owned hotels of $14,931, $7,425
related to required escrow deposits included in restricted cash, reduced by distributions of $2,053 received from unconsolidated
real estate entities. Net cash flows provided by financing activities were $414,538, comprised of proceeds from the issuance of
new mortgage loans of $340,475, net proceeds of $150,816 raised from our September 2014 follow-on common share
offerings, $20,736 raised from our ATM Plan, net repayments on our secured credit facility of $27,500, principal payments or
payoffs on mortgage debt of $34,817, payments of deferred financing and offering costs of $8,647, distributions to shareholders
and LTIP unit holders of $26,507 and repurchases of vested common shares of $18.
For the year ended December 31, 2013, net cash and net cash inflows provided by operations were $31,571, driven by
net income of $2,982, non-cash expenses of $24,293, changes in operating assets and liabilities in net cash inflow of $4,296.
Net cash flows used in investing activities were $235,190, primarily related to the purchase of the Courtyard Houston,
Pittsburgh, Exeter, Denver Tech, Bellevue and Savannah hotels for $229,646, capital improvements on our 25 wholly owned
hotels of $16,178, investment in the Torrance JV of $1,649, $1,656 related to required escrow deposits of restricted cash,
reduced by distributions of $13,939 from unconsolidated real estate entities. Net cash flows provided by financing activities
were $203,344, comprised primarily of net proceeds of $192,363 raised from our January, June and September 2013
underwritten public offerings of common shares, and proceeds from the issuance of new mortgage loans of $164,613, offset by
net repayments on our secured credit facility of $29,500, principal payments or payoffs on mortgage debt of $102,296,
payments of deferred financing costs of $2,405 and distributions to shareholders of $19,424.
57
We paid regular quarterly dividends and distributions on common shares and LTIP units beginning with the third
quarter of 2010 through 2012. In January 2013, we changed our dividend payment frequency from a quarterly dividend to a
monthly dividend. We declared total dividends of $0.07 per common share and LTIP unit for each month of 2013. We declared
total dividends of $0.07 per common share and LTIP unit for the first three months of 2014. In April 2014, we changed the
monthly dividend and distribution from $0.07 to $0.08 per common share and LTIP unit, which we maintained for the
remainder of 2014. We declared total dividends of $0.10 per common share and LTIP unit for each month in 2015. In
December 2015, we declared a special dividend of $0.08 per common share and LTIP unit payable in January 2016. On
January 29, 2016, we paid an aggregate of $6,947 in dividends on our common shares and distributions on our LTIP units
attributable to the December 2015 monthly dividend and the January 2016 special dividend.
Liquidity and Capital Resources
We plan to maintain a prudent capital structure and intend to maintain our leverage over the long term at a ratio of net
debt to investment in hotels (at cost) (defined as our initial acquisition price plus the gross amount of any subsequent capital
investment and excluding any impairment charges) at a level that will be similar to the level at which we currently operate. A
subsequent decrease in hotel property values will not necessarily cause us to repay debt to comply with this limitation. Our
debt coverage ratios currently are favorable and, as a result, we are comfortable in this leverage range and believe we have the
capacity and flexibility to take advantage of acquisition opportunities as they arise. At December 31, 2015, our leverage ratio
was approximately 41 percent, which decreased from 44 percent at December 31, 2014. Over time, we intend to finance our
growth with free cash flows, debt and issuances of common shares or units, preferred shares or units and debt. Our debt may
include mortgage debt collateralized by our hotel properties and unsecured debt.
At December 31, 2015 and 2014, we had $65,580 and $22,500, respectively, in borrowings under our revolving credit
facilities. At December 31, 2015, the maximum borrowing availability under our senior unsecured revolving credit facility was
$250,000. We also had mortgage debt on individual hotels aggregating $542,292 and $527,721 at December 31, 2015 and
2014, respectively.
On November 25, 2015, Chatham Lodging Trust (the "Company"), as parent guarantor, as borrower, entered into a
new senior unsecured revolving credit agreement with the lenders party thereto, Barclays Bank PLC, Citigroup Global Markets
Inc., Regions Capital Markets and U.S. Bank National Association as joint lead arrangers, Barclays Bank PLC as
administrative agent, Regions Bank as syndication agent and Citibank, N.A. and U.S. Bank National Association as co-
documentation agents (the “New Credit Agreement”). The New Credit Agreement has an initial maturity date of November 25,
2019, which may be extended for an additional year upon the payment of applicable fees and satisfaction of certain customary
conditions. In connection with the entry into the New Credit Agreement, the Company and the Operating Partnership
terminated the Amended and Restated Credit Agreement, dated as of November 5, 2012, as amended, among the Company, the
Operating Partnership, the lenders party thereto, Barclays Capital Inc. and Regions Capital Markets as joint lead arrangers,
Barclays Bank PLC as administrative agent, Regions Bank as syndication agent, Credit Agricole Corporate and Investment
Bank, UBS Securities and US Bank National Association as co-documentation agents (the "Existing Credit Agreement"), which
was composed of a senior secured revolving credit facility that provided borrowing capacity of up to $175,000. Proceeds under
the New Credit Agreement were used to repay outstanding borrowings under the Existing Credit Agreement. The new senior
unsecured revolving credit facility includes limitations on the extent of allowable distributions from the Operating Partnership
to the Company not to exceed the greater of 95% of adjusted FFO and the minimum amount of distributions required for the
Company to maintain its REIT status. Other key terms are as follows:
Borrowing Capacity:
Accordion feature:
Interest rate:
Unused fee:
Maximum leverage ratio:
Minimum fixed charge coverage ratio:
Up to $250 million
Increase borrowing capacity by up to
additional $150 million
Floating rate based on LIBOR plus155-230
basis points, based on leverage ratio
20 basis points if less than 50% unused, 30
basis points if more than 50% unused
60%
1.5x
58
The senior unsecured revolving credit facility contains representations, warranties, covenants, terms and conditions
customary for transactions of this type, including a maximum leverage ratio, a minimum fixed charge coverage ratio and
minimum net worth financial covenants, limitations on (i) liens, (ii) incurrence of debt, (iii) investments, (iv) distributions, and
(v) mergers and asset dispositions, covenants to preserve corporate existence and comply with laws, covenants on the use of
proceeds of the senior unsecured revolving credit facility and default provisions, including defaults for non-payment, breach of
representations and warranties, insolvency, non-performance of covenants, cross-defaults and guarantor defaults. We were in
compliance with all financial covenants under the new Credit Agreement at December 31, 2015.
In January 2014, we established a $25 million dividend reinvestment and stock purchase plan ("DRSPP"). Under the
DRSPP, shareholders may purchase additional common shares by reinvesting some or all of the cash dividends received on the
Company's common shares. Shareholders may also make optional cash purchases of the Company's common shares subject to
certain limitations detailed in the prospectus for the DRSPP. As of December 31, 2015 and 2014, respectively, we had issued
5,595 and 2,083 shares under the DRSPP at a weighted average price of $25.00 and $24.38 per share, respectively. As of
December 31, 2015, there were common shares having a maximum aggregate sales price of approximately $24,900 available
for issuance under the DRSPP.
In January 2014, the Company established an At the Market Equity Offering ("ATM Plan") whereby, from time to
time, we may publicly offer and sell up to $50 million of our common shares by means of ordinary brokers' transactions on the
New York Stock Exchange (the "NYSE"), in negotiated transactions or in transactions that are deemed to be "at the market"
offerings as defined in Rule 415 under the Securities Act, with Cantor Fitzgerald & Co. ("Cantor") acting as sales agent. On
January 13, 2015, the Company entered into a sales agreement with Barclays Capital Inc. (“Barclays”) to add Barclays as an
additional sales agent under the Company’s ATM Plan. As of December 31, 2015 and 2014, respectively, we had issued
880,820 and 880,820 shares under the ATM Plan at a weighted average price of $23.54 per share in addition to the offerings
discussed above. As of December 31, 2015, there were common shares having a maximum aggregate sales price of
approximately $29,300 available for issuance under the ATM Plan.
We expect to meet our short-term liquidity requirements generally through net cash provided by operations, existing
cash balances and, if necessary, short-term borrowings under our credit facility or through the encumbrance of any
unencumbered hotels. We believe that our net cash provided by operations will be adequate to fund operating obligations, pay
interest on any borrowings and fund dividends in accordance with the requirements for qualification as a REIT under the Code.
We expect to meet our long-term liquidity requirements, such as hotel property acquisitions and debt maturities or repayments
through additional long-term secured and unsecured borrowings, the issuance of additional equity or debt securities or the
possible sale of existing assets.
We intend to continue to invest in hotel properties as suitable opportunities arise. We intend to finance our future
investments with free cash flow, the net proceeds from additional issuances of common and preferred shares, issuances of
common units in our Operating Partnership or other securities, borrowings or asset sales. The success of our acquisition
strategy depends, in part, on our ability to access additional capital through other sources. There can be no assurance that we
will continue to make investments in properties that meet our investment criteria. Additionally, we may choose to dispose of
certain hotels as a means to provide liquidity.
59
Capital Expenditures
We intend to maintain each hotel property in good repair and condition and in conformity with applicable laws and
regulations and in accordance with the franchisor’s standards and any agreed-upon requirements in our management and loan
agreements. After we acquire a hotel property, we may be required to complete a property improvement plan (“PIP”) in order to
be granted a new franchise license for that particular hotel property. PIPs are intended to bring the hotel property up to the
franchisor’s standards. Certain of our loans require that we escrow for property improvement purposes, at the hotels
collateralizing these loans, amounts up to 5% of gross revenue from such hotels. We intend to spend amounts necessary to
comply with any reasonable loan or franchisor requirement and otherwise to the extent that such expenditures are in the best
interest of the hotel. To the extent that we spend more on capital expenditures than is available from our operations, we intend
to fund those capital expenditures with available cash and borrowings under our senior unsecured revolving credit facility.
For the years ended December 31, 2015 and 2014, we invested approximately $20,726 and $15,264, respectively, on
capital projects in our hotels. We expect to invest approximately $19,000 on capital improvements to our existing hotels in
2016, including improvements required under any brand required PIP.
The Company is planning to develop and expand its Silicon Valley hotels it acquired in June 2014. The expansions
are expected to include a new lobby and public spaces in each location. As part of this expansion, the Company is currently
moving forward with the 32-room expansion of the Residence Inn Mountain View and we expect to commence the expansions
of the two Sunnyvale Residence Inns in late 2016. There is no time table for the San Mateo Residence Inn project. While we
do not have final budgets for these projects, we currently anticipate that total expenditures will be approximately $80 to $85
million.
Related Party Transactions
We have entered into transactions and arrangements with related parties that could result in potential conflicts of
interest. See “Risks Related to Our Business” and Note 13, “Related Party Transactions”, to our consolidated financial
statements included in this Annual Report on Form 10-K.
Contractual Obligations
The following table sets forth our contractual obligations as of December 31, 2015, and the effect these obligations are
expected to have on our liquidity and cash flow in future periods (in thousands). We had no material off-balance sheet
arrangements at December 31, 2015 other than non-recourse debt associated with the NewINK JV and Inland JV as discussed
below.
Payments Due by Period
Contractual Obligations
Corporate office lease
Revolving credit facility, including interest (1)
Ground leases
Property loans, including interest (1)
Total
$
$
Total
8,347
74,496
81,854
721,781
Less Than
One Year
One to Three
Years
Three to Five
Years
More Than Five
Years
$
231
1,819
1,213
34,971
$
1,517
3,638
2,432
58,924
$
1,604
69,039
2,487
65,573
4,995
—
75,722
562,313
$
886,478
$
38,234
$
66,511
$
138,703
$
643,030
(1) Does not reflect paydowns or additional borrowings under the revolving credit facility after December 31, 2015. Interest payments are based
on the interest rate in effect as of December 31, 2015. See Note 6, “Debt” to our consolidated financial statements for additional information
relating to our property loans.
In addition, we pay management and franchise fees to our hotel management companies and franchisors based on the
revenues of our hotels.
60
The Company’s ownership interests in the NewINK JV and Inland JV are subject to change in the event that either we
or NorthStar calls for additional capital contributions to the respective JVs, as applicable, necessary for the conduct of that JV's
business, including contributions to fund costs and expenses related to capital expenditures. We manage the NewINK and
Inland and will receive a promote interest in the applicable JV if it meets certain return thresholds. NorthStar and Cerberus may
also approve certain actions by their respective JV or JVs without the Company’s consent, including certain property
dispositions conducted at arm’s length, certain actions related to the restructuring of the respective JVs and removal of the
Company as managing member in the event the Company fails to fulfill its material obligations under the respective joint
venture agreements.
In connection with certain non-recourse mortgage loans in the NewINK JV or Inland JV, our Operating Partnership
could require us to repay our pro rata share of portions of each respective JV's indebtedness in connection with certain
customary non-recourse carve-out provisions such as environmental conditions, misuse of funds and material
misrepresentations.
Inflation
Operators of hotels, in general, possess the ability to adjust room rates daily to reflect the effects of inflation.
However, competitive pressures may limit the ability of our management companies to raise room rates.
Critical Accounting Policies
We consider the following policies critical because they require estimates about matters that are inherently uncertain,
involve various assumptions and require management judgment. The preparation of the consolidated financial statements in
conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and
liabilities at the balance sheet date and the reported amounts of revenues and expenses during the reporting period. Actual results
may differ from these estimates and assumptions.
Investment in Hotel Properties
We allocate the purchase prices of hotel properties acquired based on the fair value of the acquired real estate, furniture,
fixtures and equipment, identifiable intangible assets and assumed liabilities. In making estimates of fair value for purposes of
allocating the purchase price, we utilize a number of sources of information that are obtained in connection with the acquisition
of a hotel property, including valuations performed by independent third parties and information obtained about each hotel property
resulting from pre-acquisition due diligence. Hotel property acquisition costs, such as transfer taxes, title insurance, environmental
and property condition reviews, and legal and accounting fees, are expensed in the period incurred.
Our hotel properties are carried at cost and are depreciated using the straight-line method over the estimated useful lives
of the assets, generally 40 years for buildings, 20 years for land improvements, 15 years for building improvements and one to
seven years for furniture, fixtures and equipment. Renovations and/or replacements at the hotel properties that improve or extend
the life of the assets are capitalized and depreciated over their useful lives, while repairs and maintenance are expensed as incurred.
Upon the sale or retirement of property and equipment, the cost and related accumulated depreciation are removed from the
Company’s accounts and any resulting gain or loss is recognized in the consolidated statements of operations.
Our hotel properties are reviewed for impairment whenever events or changes in circumstances indicate that the carrying
value of the hotel properties may not be recoverable. Events or circumstances that may cause a review include, but are not limited
to, adverse changes in the demand for lodging at the properties due to declining national or local economic conditions and/or new
hotel construction in markets where the hotels are located. When this conditions exist, management will perform an analysis to
determine if the estimated undiscounted future cash flows, without interest charges, from operations and the proceeds from the
ultimate disposition of a hotel property exceed its carrying value. If the estimated undiscounted future cash flows are less than the
carrying amount, an adjustment to reduce the carrying amount to the related hotel property's estimated fair market value is recorded
and an impairment loss recognized. As of December 31, 2015 and 2014, we had no hotels that were impaired.
61
For properties the Company considers held for sale, depreciation and amortization are no longer recorded and the
value the properties is recorded at the lower of depreciated cost or fair value, less costs to sell. If circumstances arise that were
previously considered unlikely, and, as a result, the Company decides not to sell a property previously classified as held for
sale, the Company will reclassify such property as held and used. Such property is measured at the lower of its carrying amount
(adjusted for any depreciation and amortization expense that would have been recognized had the property been continuously
classified as held and used) or fair value at the date of the subsequent decision not to sell. The Company classifies properties as
held for sale when all criteria within the Financial Accounting Standards Board's ("FASB") guidance on the impairment or
disposal of long-lived assets are met. As of December 31, 2015, we had no hotel properties held for sale.
Investment in Unconsolidated Real Estate Entities
If it is determined that the Company does not have a controlling interest in a joint venture, either through its financial
interest in a variable investment entity ("VIE") or in a voting interest entity, the equity method of accounting is used if the company
has the ability to exercise significant influence. Under this method, the investment, originally recorded at cost, is adjusted to
recognize the Company’s share of net earnings or losses of the affiliates as they occur rather than as dividends or other distributions
are received, advances to and commitments for the investee.
Investment in unconsolidated real estate entities are accounted for under the equity method of accounting and the Company
records its equity in earnings or losses under the hypothetical liquidation of book value (“HLBV”) method of accounting due to
the structures and the preferences we receive on the distributions from the joint ventures pursuant to the joint venture agreements.
Under this method, the Company recognizes income and loss in each period based on the change in liquidation proceeds we would
receive from a hypothetical liquidation of our investment based on depreciated book value. Therefore, income or loss may be
allocated disproportionately as compared to the ownership percentages due to specified preferred return rate thresholds and may
be more or less than actual cash distributions received and more or less than what the Company may receive in the event of an
actual liquidation. In the event a basis difference is created between the carrying amount of the Company's share of partner's
capital, the resulting amount is allocated based on the assets of the investee and, if assigned to depreciable or amortizable assets,
then amortized as a component of income (loss) from unconsolidated real estate entities.
The Company periodically reviews the carrying value of its investment in unconsolidated joint ventures to determine if
circumstances indicate impairment to the carrying value of the investment that is other than temporary. When an impairment
indicator is present, the Company will estimate the fair value of the investment. The Company’s estimate of fair value takes into
consideration factors such as expected future operating income, trends and prospects, as well as other factors. This determination
requires significant estimates by management, including the expected cash flows to be generated by the assets owned and operated
by the joint venture. To the extent impairment has occurred, the loss will be measured as the excess of the carrying amount over
the fair value of the Company’s investment in the unconsolidated joint venture.
Revenue Recognition
Revenue from hotel operations is recognized when rooms are occupied and when services are provided. Revenue consists
of amounts derived from hotel operations, including sales from room, meeting room, gift shop, in-room movie and other ancillary
amenities. Sales, use, occupancy, and similar taxes are collected and presented on a net basis (excluded from revenues) in the
accompanying consolidated statements of operations.
Share-Based Compensation
We measure compensation expense for the restricted share awards based upon the fair market value of our common shares
at the date of grant. The Company measures compensation expense for the LTIP and Class A Performance units based upon the
Monte Carlo approach using volatility, dividend yield and a risk free interest rate in the valuation. Compensation expense is
recognized on a straight-line basis over the vesting period and is included in general and administrative expense in the accompanying
consolidated statement of operations. We pay dividends on vested and nonvested restricted shares, except for performance-based
shares for which dividends on unvested shares are not paid until these shares are vested. The Company has also issued Class A
Performance LTIP units from time to time as part of its compensation plan. Prior to vesting, holders of Class A Performance LTIP
Units will not be entitled to vote their Class A Performance LTIP units. In addition, under the terms of the Class A Performance
LTIP units, a holder of a Class A Performance LTIP unit will generally (i) be entitled to receive 10% of the distributions made on
a common unit of the Operating Partnership during the period prior to vesting of such Class A Performance LTIP unit (the “Pre-
Vesting Distributions”), (ii) be entitled, upon the vesting of such Class A Performance LTIP unit, to receive a special one-time
“catch-up” distribution equal to the aggregate amount of distributions that were paid on a common unit during the period prior to
vesting of such Class A Performance LTIP unit minus the aggregate amount of Pre-Vesting Distributions paid on such Class A
62
Performance LTIP unit, and (iii) be entitled, following the vesting of such Class A Performance LTIP unit, to receive the same
amount of distributions paid on a common unit of the Operating Partnership.
Income Taxes
We elected to be taxed as a REIT for federal income tax purposes commencing with our 2010 taxable year. In order to
qualify as a REIT under the Code, we must meet certain organizational and operational requirements, including a requirement
to distribute at least 90% of our annual REIT taxable income to our shareholders (which is computed without regard to the
dividends paid deduction or net capital gain and which does not necessarily equal net income as calculated in accordance with
GAAP). As a REIT, we generally will not be subject to federal income tax to the extent we currently distribute our taxable
income to our shareholders. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax on our
taxable income at regular corporate income tax rates and generally will not be permitted to qualify for treatment as a REIT for
federal income tax purposes for the four taxable years following the year during which qualification is lost unless the IRS
grants us relief under certain statutory provisions. Such an event could materially adversely affect our net income and net cash
available for distribution to shareholders. However, we believe we have been organized and that we operate in such a manner as
to qualify for treatment as a REIT.
Recently Issued Accounting Standards
On May 28, 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an
entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to
customers. ASU No. 2014-09 will replace most existing revenue recognition guidance under GAAP when it becomes effective.
The standard permits the use of either the retrospective or cumulative effect transition method. In July 2015, the FASB voted to
defer the effective date to January 1, 2018 with early adoption beginning January 1, 2017. The Company is evaluating the effect
that ASU No. 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet
selected a transition method nor has it determined the effect of the standard on its financial statements.
In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entities Ability to Continue
as a Going Concern, which requires management to perform interim and annual assessments of an entity's ability to continue
within one year of the date the financial statements are issued and provides guidance on determining when and how to disclose
going concern uncertainties in the financial statements. Certain disclosures will be required if conditions give rise to substantial
doubt about an entity's ability to continue as a going concern. This guidance is effective for the Company on January 1, 2017
and will not have an impact on the Company's financial position, results of operations or cash flows.
In February 2015, the FASB issued ASU No. 2015-02, Amendments to the Consolidation Analysis, which requires
amendments to both the VIE and voting models. The amendments (i) rescind the indefinite deferral of certain aspects of
accounting standards relating to consolidations and provide a permanent scope exception for registered money market funds
and similar unregistered money market funds, (ii) modify the identification of variable interest (fees paid to a decision maker or
service provider), the VIE characteristics for a limited partnership or similar entity and primary beneficiary determinations
under the VIE model, and (iii) eliminate the presumption within the current voting model that a general partner controls a
limited partnership or similar entity. The new guidance is effective for annual reporting periods, and interim periods within
those annual periods, beginning after December 15, 2015 with early adoption permitted. The amendments may be applied using
either a modified retrospective or full retrospective approach. The new standard will be effective for the Company on January
1, 2016 and will not have a material impact on the Company's financial position, results of operations or cash flows.
On April 7, 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs, which
requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the debt
liability. This standard is effective for fiscal years beginning after December 15, 2015 with early adoption permitted and will be
applied on a retrospective basis. Supplemental to ASU 2015-03, on August 16, 2015, the FASB issued Accounting Standards
Update 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit
Arrangements -Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting, which
clarifies that debt issuance costs attributable to line-of-credit arrangements can be presented as an asset and amortized ratably
over the life of the revolving debt arrangement, regardless of whether there is an outstanding balance thereunder. This
methodology is consistent with the Company’s historical treatment of such costs. The new standard will be effective for the
Company on January 1, 2016 and will not have a material impact on the Company's financial position, results of operations or
cash flows.
63
In September 2015, the FASB issued ASU No. 2015-16, Simplifying the Accounting for Measurement-Period
Adjustments, which eliminates the requirement to restate prior period financial statements for measurement period adjustments.
The new guidance requires an entity to recognize the adjustments to provisional amounts identified during the measurement
period in the reporting period in which the adjustments are determined. In addition, the adjustments must be disclosed by
income statement line item either on the face of the income statement or in the footnotes as if the adjustment to the provisional
amounts had been recorded as of the acquisition date. The amendment is effective prospectively for interim and annual periods
beginning after December 15, 2015, with early adoption permitted for financial statements that have not been issued. We do not
expect the new standard will have a significant impact on our consolidated financial statements.
64
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Dollar amounts presented in this Item 7A are in thousands, except per share data.
We may be exposed to interest rate changes primarily as a result of our assumption of long-term debt in connection
with our acquisitions. Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings
and cash flows and to lower overall borrowing costs. To achieve these objectives, we will seek to borrow primarily at fixed
rates or variable rates with the lowest margins available and, in some cases, with the ability to convert variable rates to fixed
rates. With respect to variable rate financing, we will assess interest rate risk by identifying and monitoring changes in interest
rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities.
The Company estimates the fair value of its fixed rate debt by discounting the future cash flows of each instrument at
estimated market rates. Rates take into consideration general market conditions, maturity and fair value of the underlying
collateral. The estimated fair value of the Company’s fixed rate debt at December 31, 2015 and December 31, 2014 was
$522,904 and $542,538, respectively.
At December 31, 2015, our consolidated debt was comprised of floating and fixed interest rate debt. The fair value of
our fixed rate debt indicates the estimated principal amount of debt having the same debt service requirements that could have
been borrowed at the date presented, at then current market interest rates. The following table provides information about the
maturities of our financial instruments that are sensitive to changes in interest rates (in thousands):
Floating rate:
Debt
Average interest rate (1)
Fixed rate:
Debt
2016
2017
2018
2019
2020
Thereafter
Total
Fair Value
—
—
—
—
—
—
— $ 65,580
—
1.93%
— $ 65,580
—
1.93%
$ 65,574
Average interest rate
5.49%
4.76%
4.69%
4.68%
4.67%
4.65%
4.67%
$9,868
$4,302
$5,374
$ 7,340
$ 9,899
$505,508
$542,291
$522,713
(1) Weighted average LIBOR of 0.27% plus a margin of 1.65% at December 31, 2015.
We estimate that a hypothetical 100 basis points increase in the variable interest rate would result in additional interest
expense of approximately $655 annually. This assumes that the amount outstanding under our floating rate debt remains
$65,580, the balance as of December 31, 2015.
65
Item 8. Consolidated Financial Statements and Supplementary Data
See our Consolidated Financial Statements and the Notes thereto beginning at page F-1 included in Item 15, which are
incorporated herein by reference.
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
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief
Financial Officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures
pursuant to Exchange Act Rule 13a-15(b) as of the end of the period covered by this report. Based on that evaluation, our Chief
Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures were effective to
provide reasonable assurance that information required to be disclosed by us in reports we file or submit under 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 to allow timely decisions regarding required
disclosure.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during the last fiscal quarter
that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. A
company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31,
2015. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in “Internal Control-Integrated Framework” (2013 framework). Based on our assessment,
management has concluded that, as of December 31, 2015, our internal control over financial reporting is effective, based on
those criteria.
The effectiveness of our internal control over financial reporting as of December 31, 2015, has been audited by
PricewaterhouseCoopers LLP, an independent registered certified public accounting firm, as stated in their report, which
appears on page F-2 of this Annual Report on Form 10-K.
Item 9B. Other Information
None.
66
Item 10. Trustees, Executive Officers and Corporate Governance
Part III
The information required by this item is incorporated by reference to the Company's Proxy Statement for the 2016
Annual Meeting of Shareholders to be held on May 19, 2016.
Item 11. Executive Compensation
The information required by this item is incorporated by reference to the Company's Proxy Statement for the 2016
Annual Meeting of Shareholders to be held on May 19, 2016.
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 the Company's Proxy Statement for the 2016
Annual Meeting of Shareholders to be held on May 19, 2016.
Item 13. Certain Relationships and Related Transactions, and Trustee Independence
The information required by this item is incorporated by reference to the Company's Proxy Statement for the 2016
Annual Meeting of Shareholders to be held on May 19, 2016.
Item 14. Principal Accountant Fees and Services
The information required by this item is incorporated by reference to the Company's Proxy Statement for the 2016
Annual Meeting of Shareholders to be held on May 19, 2016.
67
Item 15, Exhibits and Financial Statement Schedules
PART IV
1.
Financial Statements
Included herein at pages F-1 through F-7
2.
Financial Statement Schedules
The following financial statement schedule is included herein at page F-39:
Schedule III - Real Estate and Accumulated Depreciation
Individual financial statements of entities accounted for by the equity method that qualify as significant subsidiaries
2(a).
for the year ended December 31, 2015 have either been included as an exhibit herein or it has been determined that inclusion of
such financial statements is not required at this time. Audited financial statements of INK Acquisitions LLC and Affiliates and
IHP I Owner JV, LLC and Affiliates, will be filed as an exhibit to an amended Form 10-K within 90 days of their December 31,
2015 fiscal year end.
All other schedules for which provision is made in Regulation S-X are either not required to be included herein under the
related instructions or are inapplicable or the related information is included in the footnotes to the applicable financial
statement and, therefore, have been omitted.
3. Exhibits
A list of exhibits required to be filed as part of this report on Form 10-K is set forth in the Exhibit Index, which immediately
follows this item and is incorporated by reference herein.
68
Exhibit
Number
Description of Exhibit
EXHIBIT INDEX
3.1
3.2
10.1*
10.2*
10.3*
10.4*
10.5*
10.6*
10.7*
10.8*
10.9*
10.10*
10.11*
10.12*
10.13*
10.14*
10.15*
10.16*
10.17*
10.18*
10.19*
10.20*
10.21*
10.22*
10.23*
10.24*
10.25*
Articles of Amendment and Restatement of Chatham Lodging Trust
Second Amended and Restated Bylaws of Chatham Lodging Trust(1)
Chatham Lodging Trust Equity Incentive Plan, Amended and Restated as of May 17, 2013 (2)
Employment Agreement between Chatham Lodging Trust and Jeffrey H. Fisher
Employment Agreement between Chatham Lodging Trust and Peter Willis
Employment Agreement between Chatham Lodging Trust and Dennis M. Craven
Employment Agreement between Chatham Lodging Trust and Jeremy Wegner(3)
First Amendment to Employment Agreement of Peter Willis dated January 30, 2015(4)
First Amendment to Employment Agreement of Dennis Craven dated January 30, 2015(4)
Form of Indemnification Agreement between Chatham Lodging Trust and its officers and trustees(5)
Form of LTIP Unit Vesting Agreement(5)
Form of Share Award Agreement for Trustees(5)
Form of Share Award Agreement for Officers(6)
Share Award Agreement, dated as of May 17, 2013, between Chatham Lodging Trust and Jeffrey H. Fisher
(Performance-Based Share Awards)(7)
Share Award Agreement, dated as of May 17, 2013, between Chatham Lodging Trust and Dennis M.
Craven (Performance-Based Share Awards)(7)
Share Award Agreement, dated as of May 17, 2013, between Chatham Lodging Trust and Peter Willis
(Performance-Based Share Awards)(7)
Share Award Agreement, dated as of January 31, 2014, between Chatham Lodging Trust and Jeffrey H.
Fisher(8)
Share Award Agreement, dated as of January 31, 2014, between Chatham Lodging Trust and Dennis M.
Craven(8)
Share Award Agreement, dated as of January 31, 2014, between Chatham Lodging Trust and Peter Willis(8)
Share Award Agreement, dated as of January 31, 2014, between Chatham Lodging Trust and Jeffrey H.
Fisher (Performance-Based Share Awards) (8)
Share Award Agreement, dated as of January 31, 2014, between Chatham Lodging Trust and Dennis M.
Craven (Performance-Based Share Awards) (8)
Share Award Agreement, dated as of January 31, 2014, between Chatham Lodging Trust and Peter Willis
(Performance-Based Share Awards) (8)
Share Award Agreement, dated as of January 30, 2015, between Chatham Lodging Trust and Jeffrey H.
Fisher(9)
Share Award Agreement, dated as of January 30, 2015, between Chatham Lodging Trust and Dennis M.
Craven(9)
Share Award Agreement, dated as of January 30, 2015, between Chatham Lodging Trust and Peter Willis(9)
Share Award Agreement, dated as of January 30, 2015, between Chatham Lodging Trust and Jeffrey H.
Fisher (Performance-Based Share Awards) (9)
Share Award Agreement, dated as of January 30, 2015, between Chatham Lodging Trust and Dennis M.
Craven (Performance-Based Share Awards) (9)
69
10.26*
10.27*
10.28*
10.29*
10.30*
10.31
10.32
10.33
10.34
10.35
10.36
10.37
10.38
10.39
10.40
10.41
10.42*
10.43*
12.1
21.1
23.1
31.1
31.2
32.1
Share Award Agreement, dated as of January 30, 2015, between Chatham Lodging Trust and Peter Willis
(Performance-Based Share Awards) (9)
Share Award Agreement, dated as of June 1, 2015, between Chatham Lodging Trust and Jeremy Wegner(10)
LTIP Unit Award Agreement, dated as of June 1, 2015, between Chatham Lodging Trust, Chatham
Lodging, L.P. and Jeffrey Fisher (Outperformance Plan) (11)
LTIP Unit Award Agreement, dated as of June 1, 2015, between Chatham Lodging Trust, Chatham
Lodging, L.P. and Dennis Craven (Outperformance Plan) (12)
LTIP Unit Award Agreement, dated as of June 1, 2015, between Chatham Lodging Trust, Chatham
Lodging, L.P. and Peter Willis (Outperformance Plan) (13)
Agreement of Limited Partnership of Chatham Lodging, L.P.(5)
First Amendment to the Agreement of Limited Partnership of Chatham Lodging, L.P.(10)
Form of IHM Hotel Management Agreement(5)
Third Amended and Restated Limited Liability Company Agreement of INK Acquisition LLC, dated as of
June 9, 2014, by and between Platform Member-T, LLC and Chatham Lodging, L.P.(14)
Second Amended and Restated Limited Liability Company Agreement of INK Acquisition III, LLC, dated
as of June 9, 2014, by and between Platform Member Holdings-T Cam2, LLC and Chatham TRS Holding,
Inc.(14)
Loan Agreement, dated as of June 9, 2014, between Grand Prix Sili II, LLC, as borrower, and JP Morgan
Chase Bank, National Association, as lender.(14)
Sales Agreement, dated January 31, 2014, by and among Chatham Lodging Trust, Chatham Lodging, L.P.
and Cantor Fitzgerald & Co.(15)
Limited Liability Company Agreement of IHP I Owner JV, LLC, dated as of November 17, 2014, by and
between Platform Member II-T, LLC and Chatham IHP, LLC.(16)
Limited Liability Company Agreement of IHP I Owner OPs JV, LLC, dated as of November 17, 2014, by
and between Platform Member Holdings II-T Cam2, LLC and Chatham TRS Holding, Inc.(16)
Sales Agreement, dated January 13, 2015 by and among Chatham Lodging Trust, Chatham Lodging, L.P.
and Barclays Capital Inc.(17)
Credit Agreement, dated as of November 25, 2015, among Chatham Lodging Trust, Chatham Lodging,
L.P., the lenders party thereto and Barclays Bank PLC, as administrative agent(18)
Form of 2016 Time-Based LTIP Unit Award Agreement
Form of 2016 Performance-Based LTIP Unit Award Agreement.
Statement of computation of ratio of earnings to fixed charges and preferred share dividends
List of Subsidiaries of Chatham Lodging Trust
PricewaterhouseCoopers LLP Consent to include Report on Financial Statements of Chatham Lodging
Trust
Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange
Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange
Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS**
XBRL Instance Document
101.SCH**
XBRL Taxonomy Extension Schema Document
101.CAL**
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF**
XBRL Taxonomy Extension Definition Linkbase Document
70
101.LAB**
XBRL Taxonomy Extension Label Linkbase Document
101.PRE**
XBRL Taxonomy Extension Presentation Linkbase Document
* Denotes management contract or compensation plan or arrangement in which trustees or officers are eligible to participate.
** Submitted electronically herewith. Attached as Exhibit 101 to this report are the following documents formatted in XBRL
(Extensible Business Reporting Language): (i) Consolidated Balance Sheets at December 31, 2015 and 2014; (ii)
Consolidated Statements of Operations for the years ended December 31, 2015, 2014 and 2013; (iii) Consolidated
Statements of Equity for the years ended December 31, 2015, 2014 and 2013; (iv) Consolidated Statements of Cash Flows
for the years ended December 31, 2015, 2014 and 2013; and (v) Notes to the Consolidated Financial Statements.
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)
(15)
(16)
(17)
(18)
Incorporated by reference to the Registrant's Current Report on Form 8-K filed with the SEC on April 21,
2015 (File No. 001-34693).
Incorporated by reference to the Registrant's Definitive Proxy Statement on Schedule 14A filed on April
15, 2013 (File No. 001-34693).
Incorporated by reference to the Registrant’s Current Report on Form 8-K filed with the SEC on May 5,
2015 (File No. 001-34693).
Incorporated by reference to the Registrant's Current Report on Form 8-K filed with the SEC on February
5, 2015 (File No. 001-34693).
Incorporated by reference to Amendment No. 4 to the Registrant’s Registration Statement on Form S-11
filed with the SEC on February 12, 2010 (File No. 333-162889).
Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q filed with the SEC on August
13, 2010 (File No. 001-34693).
Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q filed with the SEC on August
8, 2013 (File No. 001-34693).
Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on May
9, 2014 (File No. 001-34693).
Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q filed with the SEC on May 8,
2015 (File No. 001-34693).
Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q filed with the SEC on August
6, 2015 (File No. 001-34693).
Incorporated by reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q filed with the
SEC on August 6, 2015 (File No. 001-34693).
Incorporated by reference to Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q filed with the
SEC on August 6, 2015 (File No. 001-34693).
Incorporated by reference to Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q filed with the
SEC on August 6, 2015 (File No. 001-34693).
Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q filed with the SEC on August
11, 2014 (File No. 001-34693).
Incorporated by reference to the Registrant's Current Report on Form 8-K filed with the SEC on January
31, 2014 (File No. 001-34693).
Incorporated by reference to the Registrant's Current Report on Form 8-K filed with the SEC on
November 20, 2014 (File No. 001-34693).
Incorporated by reference to the Registrant's Current Report on Form 8-K filed with the SEC on January
15, 2015 (File No. 001-34693).
Incorporated by reference to the Registrant’s Current Report on Form 8-K filed with the SEC on
November 30, 2015 (File No. 001-34693).
71
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.
SIGNATURE
Dated:
February 29, 2016
CHATHAM LODGING TRUST
/s/ JEFFREY H. FISHER
Jeffrey H. Fisher
Chairman of the Board, President and Chief
Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE
TITLE
DATE
/s/ JEFFREY H. FISHER
Jeffrey H. Fisher
/s/ JEREMY B. WEGNER
Jeremy B. Wegner
Chairman of the Board, President and Chief Executive Officer
(Principal Executive Officer)
February 29, 2016
Senior Vice President and Chief Financial Officer (Principal
Financial and Accounting Officer)
February 29, 2016
/s/ MILES BERGER
Trustee
Miles Berger
/s/ THOMAS J. CROCKER
Trustee
Thomas J. Crocker
/s/ JACK P. DEBOER
Trustee
Jack P. DeBoer
/s/ GLEN R. GILBERT
Trustee
Glen R. Gilbert
/s/ C. GERALD GOLDSMITH Trustee
C. Gerald Goldsmith
/s/ ROBERT PERLMUTTER Trustee
Robert Perlmutter
/s/ ROLF E. RUHFUS
Trustee
Rolf E. Ruhfus
/s/ JOEL F. ZEMANS
Trustee
Joel F. Zemans
72
February 29, 2016
February 29, 2016
February 29, 2016
February 29, 2016
February 29, 2016
February 29, 2016
February 29, 2016
February 29, 2016
CHATHAM LODGING TRUST
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Certified Public Accounting Firm
Consolidated Balance Sheets at December 31, 2015 and 2014
Consolidated Statements of Operations for the years ended December 31, 2015, 2014 and 2013
Consolidated Statements of Equity for the years ended December 31, 2015, 2014 and 2013
Consolidated Statements of Cash Flows for the years ended December 31, 2015, 2014 and 2013
Notes to Consolidated Financial Statements
Financial Statement Schedule
Schedule III - Real Estate and Accumulated Depreciation at December 31, 2015
Page No.
F-2
F-3
F-4
F-5
F-6
F-8
F-39
F-1
Report of Independent Registered Certified Public Accounting Firm
To the Board of Trustees and Shareholders of Chatham Lodging Trust
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of
equity and of cash flows present fairly, in all material respects, the financial position of Chatham Lodging Trust and its
subsidiaries at December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2015 in conformity with accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all
material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these
financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for
its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal
Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial
statements, on the financial statement schedule, and on the Company's internal control over financial reporting based on our
integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement and whether effective internal control over financial
reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal
control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the
risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based
on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and
procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions
and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Fort Lauderdale, Florida
February 29, 2016
F-2
CHATHAM LODGING TRUST
Consolidated Balance Sheets
(In thousands, except share and per share data)
Assets:
Investment in hotel properties, net
Cash and cash equivalents
Restricted cash
Investment in unconsolidated real estate entities
Hotel receivables (net of allowance for doubtful accounts of $95 and $71,
respectively)
Deferred costs, net
Prepaid expenses and other assets
Total assets
Liabilities and Equity:
Mortgage debt
Revolving credit facility
Accounts payable and accrued expenses
Distributions and losses in excess of investments of unconsolidated real estate
entities
Distributions payable
Total liabilities
Commitments and contingencies
Equity:
Shareholders’ Equity:
Preferred shares, $0.01 par value, 100,000,000 shares authorized and unissued at
December 31, 2015 and 2014
Common shares, $0.01 par value, 500,000,000 shares authorized; 38,308,937
and 34,173,691 shares issued and outstanding at December 31, 2015 and 2014,
respectively
Additional paid-in capital
Accumulated deficit
Total shareholders’ equity
Noncontrolling Interests:
Noncontrolling interest in operating partnership
Total equity
Total liabilities and equity
December 31,
2015
December 31,
2014
$
1,258,452
$
1,096,425
21,036
19,273
23,618
4,433
8,034
5,052
1,339,898
542,292
65,580
25,100
2,703
7,221
$
$
15,077
12,030
28,152
3,601
7,514
2,300
1,165,099
527,721
22,500
20,042
—
2,884
642,896
573,147
$
$
—
—
379
719,773
(27,281)
692,871
4,131
697,002
339
599,318
(11,120)
588,537
3,415
591,952
$
1,339,898
$
1,165,099
The accompanying notes are an integral part of these consolidated financial statements.
F-3
CHATHAM LODGING TRUST
Consolidated Statements of Operations
(In thousands, except share and per share data)
Revenue:
Room
Food and beverage
Other
Cost reimbursements from unconsolidated real estate entities
Total revenue
Expenses:
Hotel operating expenses:
Room
Food and beverage
Telephone
Other hotel operating
General and administrative
Franchise and marketing fees
Advertising and promotions
Utilities
Repairs and maintenance
Management fees
Insurance
Total hotel operating expenses
Depreciation and amortization
Property taxes, ground rent and insurance
General and administrative
Hotel property acquisition costs and other charges
Reimbursable costs from unconsolidated real estate entities
Total operating expenses
Operating income
Interest and other income
Interest expense, including amortization of deferred fees
Loss on early extinguishment of debt
Income (loss) from unconsolidated real estate entities
Net gain from remeasurement and sales of investment in
unconsolidated real estate entities
Income before income tax expense
Income tax expense
Net income
Net income attributable to non-controlling interest
Net income attributable to common shareholders
Income per Common Share - Basic:
Net income attributable to common shareholders (Note 10)
Income per Common Share - Diluted:
Net income attributable to common shareholders (Note 10)
Weighted average number of common shares outstanding:
$
$
$
For the year ended
December 31,
2015
2014
2013
$
$
258,137
5,536
9,534
3,743
276,950
$
184,926
2,764
7,534
1,992
197,216
118,169
1,311
5,113
1,635
126,228
50,165
4,127
1,708
2,467
21,101
21,240
5,040
9,464
11,722
8,742
1,218
136,994
48,981
18,581
11,677
1,451
3,743
221,427
55,523
264
(27,924)
(412)
2,411
3,576
33,438
(260)
33,178
(212)
32,966
0.87
0.86
$
$
$
37,516
1,966
1,304
2,056
16,265
15,110
3,676
7,269
8,705
6,096
998
100,961
34,710
12,624
9,852
10,381
1,992
170,520
26,696
108
(21,354)
(184)
(3,830)
65,750
67,186
(105)
67,081
(208)
66,873
2.32
2.30
$
$
$
25,709
944
899
1,580
11,529
9,394
2,782
4,955
6,310
3,752
742
68,596
18,249
8,915
8,131
3,341
1,635
108,867
17,361
132
(11,580)
(933)
(1,874)
—
3,106
(124)
2,982
—
2,982
0.13
0.13
Basic
Diluted
37,917,871
38,322,285
28,531,094
28,846,724
21,035,892
21,283,831
The accompanying notes are an integral part of these consolidated financial statements.
F-4
CHATHAM LODGING TRUST
Consolidated Statements of Equity
(In thousands, except share and per share data)
Common Shares
Shares
Amount
Additional
Paid - In
Capital
Accumulated
Deficit
Total
Shareholders’
Equity
Noncontrolling
Interest in
Operating
Partnership
Total
Equity
Balance, January 1, 2013
13,908,907
$
137
$ 240,355
$
(35,491) $
205,001
$
1,611
$206,612
Issuance of shares pursuant to Equity
Incentive Plan
Issuance of shares, net of offering costs of
$10,388
Issuance of restricted time-based shares
Issuance of performance based shares
Repurchase of common shares
Amortization of share based compensation
Dividends declared on common shares
($0.84 per share)
Distributions declared on LTIP units
($0.84 per unit)
Reallocation of noncontrolling interest
Net income
22,536
—
337
12,306,000
124
192,239
40,829
17,731
(445)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(7)
966
—
—
10
—
—
—
—
—
—
—
337
—
337
192,363
— 192,363
—
—
(7)
966
—
—
—
—
—
(7)
782
1,748
(18,283)
(18,283)
— (18,283)
—
—
—
10
2,982
2,982
(216)
(10)
—
(216)
—
2,982
Balance, December 31, 2013
26,295,558
$
261
$ 433,900
$
(50,792) $
383,369
$
2,167
$385,536
Issuance of shares pursuant to Equity
Incentive Plan
16,542
Issuance of shares, net of offering costs of
$7,153
7,782,903
Issuance of restricted time-based shares
Issuance of performance based shares
Repurchase of common shares
Amortization of share based compensation
Dividends declared on common shares
($0.93 per share)
Distributions declared on LTIP units
($0.93 per unit)
Reallocation of noncontrolling interest
Net income
48,213
31,342
(867)
—
—
—
—
—
—
78
—
—
—
—
—
—
—
—
337
164,321
—
—
(18)
1,275
—
—
(497)
—
—
—
—
—
—
—
337
—
337
164,399
— 164,399
—
—
(18)
—
—
—
—
—
(18)
1,275
783
2,058
(27,201)
(27,201)
— (27,201)
—
—
—
(497)
66,873
66,873
(240)
497
208
(240)
—
67,081
Balance, December 31, 2014
34,173,691
$
339
$ 599,318
$
(11,120) $
588,537
$
3,415
$591,952
Issuance of shares pursuant to Equity
Incentive Plan
14,113
Issuance of shares, net of offering costs of
$2,042
4,028,512
Issuance of restricted time-based shares
Issuance of performance based shares
Repurchase of common shares
Amortization of share based compensation
Dividends declared on common shares
($1.28 per share)
Distributions declared on LTIP units
($1.28 per unit)
Reallocation of noncontrolling interest
Net income
December 31, 2015
49,110
44,274
(763)
—
—
—
—
—
—
40
—
—
—
—
—
—
—
—
412
118,757
—
—
(22)
1,594
—
—
(286)
—
—
—
—
—
—
—
412
—
412
118,797
— 118,797
—
—
(22)
—
—
—
—
—
(22)
1,594
691
2,285
(49,127)
(49,127)
— (49,127)
—
—
32,966
(27,281)
—
(286)
32,966
692,871
(473)
286
212
(473)
—
33,178
4,131
697,002
38,308,937
379
719,773
The accompanying notes are an integral part of these consolidated financial statements.
F-5
CHATHAM LODGING TRUST
Consolidated Statements of Cash Flows
(In thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation
Amortization of deferred franchise fees
Amortization of deferred financing fees included in interest expense
Net gain from remeasurement and sales of investment in unconsolidated
real estate entities
Loss on early extinguishment of debt
Loss on write-off of deferred franchise fee
Share based compensation
(Income) loss from unconsolidated real estate entities
Changes in assets and liabilities:
Hotel receivables
Deferred costs
Prepaid expenses and other assets
Accounts payable and accrued expenses
Net cash provided by operating activities
Cash flows from investing activities:
Improvements and additions to hotel properties
Acquisition of hotel properties, net of cash acquired
Distributions from unconsolidated entities
Investment in unconsolidated real estate entities
Restricted cash
Net cash used in investing activities
Cash flows from financing activities:
Borrowings on revolving credit facility
Repayments on revolving credit facility
Payments on debt
Proceeds from the issuance of debt
Principal prepayment of mortgage debt
Payments of financing costs
Payment of offering costs
Proceeds from issuance of common shares
In-substance repurchase of vested common shares
Distributions-common shares/units
Net cash provided by financing activities
Net change in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
Supplemental disclosure of cash flow information:
Cash paid for interest
Cash paid for income taxes
-Continued-
F-6
For the year ended
December 31,
2015
2014
2013
$
33,178
$
67,081
$
2,982
48,784
197
1,606
(3,576)
412
—
2,835
(2,411)
(318)
(580)
(2,277)
3,992
81,842
(20,331)
(169,447)
12,903
—
(5,488)
(182,363)
131,580
(88,500)
(3,239)
—
(4,760)
(2,112)
(2,042)
120,839
(22)
(45,264)
106,480
5,959
15,077
21,036
25,508
160
$
$
$
34,579
131
1,532
(65,750)
184
—
2,471
3,830
243
(754)
(118)
5,877
49,306
(14,931)
(404,737)
2,053
(27,948)
(7,425)
(452,988)
250,000
(277,500)
(2,631)
340,475
(32,186)
(1,585)
(7,062)
171,552
(18)
(26,507)
414,538
10,856
4,221
15,077
18,296
220
$
$
$
18,162
87
1,088
—
933
64
2,085
1,874
(68)
(493)
338
4,519
31,571
(16,178)
(229,646)
13,939
(1,649)
(1,656)
(235,190)
234,000
(263,500)
(2,166)
164,613
(100,130)
(2,405)
(10,388)
202,751
(7)
(19,424)
203,344
(275)
4,496
4,221
10,169
77
$
$
$
Supplemental disclosure of non-cash investing and financing information:
On January 15, 2015, the Company issued 14,113 shares to its independent trustees pursuant to the Company’s Equity
Incentive Plan as compensation for services performed in 2014. On January 15, 2014, the Company issued 16,542 shares to its
independent trustees pursuant to the Company’s Equity Incentive Plan as compensation for services performed in 2013. On
January 15, 2013, the Company issued 22,536 shares to its independent trustees pursuant to the Company's Equity Incentive
Plan as compensation for services performed in 2012.
As of December 31, 2015, the Company had accrued distributions payable of $7,221. These distributions were paid on
January 30, 2015 except for $277 related to accrued but unpaid distributions on unvested performance based shares (See Note
11). As of December 31, 2014, the Company had accrued distributions payable of $2,884. These distributions were paid on
January 31, 2014 except for $129 related to accrued but unpaid distributions on unvested performance based shares. As of
December 31, 2013, the Company had accrued distributions payable of $1,950. These distributions were paid on January 25,
2013 except for $92 thousand related to accrued but unpaid distributions on unvested performance based shares.
Accrued share based compensation of $550, $413 and $337 is included in accounts payable and accrued expenses as of
December 31, 2015, 2014 and 2013.
Accrued capital improvements of $1,233, $865 and $323 are included in accounts payable and accrued expenses as of
December 31, 2015, 2014, and 2013 respectively.
At December 31, 2013, there were costs of $91 included in deferred costs related to offerings completed in 2014. During
2014, the Company wrote-off $397 of deferred loan costs and $213 of accumulated amortization on a loan that was paid off.
During 2015, the Company wrote-off $1,539 of deferred loan costs and $1,127 of accumulated amortization related to the
Company's senior secured revolving credit facility.
For the year ended December 31, 2015, the Company assumed the mortgage on the purchase of the Marina del Rey hotel
of $22,569.
The Innkeepers JV transaction (see note 5) partially resulted in a non-cash transaction whereby the Company's previously
held joint venture deficit interest in the four Silicon Valley hotels of approximately $6.9 million was recorded as part of the
Company's acquisition in the Silicon Valley hotels and related net gain from remeasurement and sale of investment.
The accompanying notes are an integral part of these consolidated financial statements.
F-7
CHATHAM LODGING TRUST
Notes to the Consolidated Financial Statements
(Dollar amounts in thousands, except share and per share data)
1.
Organization
Chatham Lodging Trust (“we,” “us” or the “Company”) was formed as a Maryland real estate investment trust on
October 26, 2009. The Company is internally-managed and was organized to invest primarily in upscale extended-stay and
premium-branded select-service hotels. The Company has elected to be treated as a real estate investment trust for federal
income tax purposes ("REIT").
The Company had no operations prior to the consummation of its initial public offering ("IPO") in April 2010. The
net proceeds from our share offerings are contributed to Chatham Lodging, L.P., our operating partnership (the “Operating
Partnership”), in exchange for partnership interests. Substantially all of the Company’s assets are held by, and all operations are
conducted through, the Operating Partnership. The Company is the sole general partner of the Operating Partnership and owns
100% of the common units of limited partnership interest in the Operating Partnership ("common units"). Certain of the
Company’s executive officers hold vested and unvested long-term incentive plan units in the Operating Partnership ("LTIP
units"), which are presented as non-controlling interests on our consolidated balance sheets.
As of December 31, 2015, the Company owned 38 hotels with an aggregate of 5,678 (unaudited) rooms located in 15
states and the District of Columbia. As of December 31, 2015, the Company also (i) held a 10.3% noncontrolling interest in a
joint venture (the “NewINK JV”) with NorthStar Realty Finance Corp ("NorthStar"), which was formed in the second quarter
of 2014 to acquire 47 hotels from a joint venture (the "Innkeepers JV") between the Company and Cerberus Capital
Management (“Cerberus”), comprising an aggregate of 6,097 (unaudited) rooms, (ii) held a 10.0% noncontrolling interest in a
separate joint venture (the "Inland JV") with NorthStar, which was formed in the fourth quarter of 2014 to acquire 48 hotels
from Inland American Real Estate Trust, Inc. ("Inland"), comprising an aggregate of 6,401 (unaudited) rooms. The Company
sold its 5.0% noncontrolling interest in a joint venture (the "Torrance JV") with Cerberus that owns the 248-room (unaudited)
Residence Inn by Marriott in Torrance, CA on December 30, 2015. We sometimes use the term, "JV's", which refers
collectively to, for the period prior to December 31, 2015, the NewINK JV, Inland JV and Torrance JV and, for the period
subsequent to December 30, 2015, the NewINK JV and the Inland JV.
To qualify as a REIT, the Company cannot operate its hotels. Therefore, the Operating Partnership and its subsidiaries
lease the Company's wholly owned hotels to taxable REIT subsidiary lessees (“TRS Lessees”), which are wholly owned by one
of the Company’s taxable REIT subsidiary (“TRS”) holding companies. The Company indirectly (i) owns its 10.3% interest in
47 of the NewINK JV hotels, (ii) 10% interest in 48 of the Inland JV hotels and (iii) owned its 5.0% interest in the Torrance JV,
which was sold on December 30, 2015, through the Operating Partnership. All of the NewINK JV hotels and Inland JV hotels
are, and the Torrance JV hotel was, are leased to TRS Lessees, in which the Company indirectly owns, or owned, as applicable,
noncontrolling interests through one of its TRS holding companies. Each hotel is leased to a TRS Lessee under a percentage
lease that provides for rental payments equal to the greater of (i) a fixed base rent amount or (ii) a percentage rent based on
hotel room revenue. The initial term of each of the TRS leases is 5 years. Lease revenue from each TRS Lessee is eliminated in
consolidation.
The TRS Lessees have entered into management agreements with third-party management companies that provide
day-to-day management for the hotels. As of December 31, 2015, Island Hospitality Management Inc. (“IHM”), which was
51% owned by Mr. Fisher and 45% owned by affiliates of NorthStar Asset Management Group, Inc., managed 36 of the
Company’s wholly owned hotels and Concord Hospitality Enterprises Company managed two of the Company’s wholly owned
hotels. As of December 31, 2015, all of the NewINK JV hotels were managed by IHM. As of December 31, 2015, 34 of the
Inland JV hotels are managed by IHM and 14 hotels are managed by Marriott International, Inc. ("Marriott"). The Torrance JV
hotel was managed by Marriott.
2.
Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements and related notes have been prepared in accordance with U.S.
generally accepted accounting principles (“GAAP”) and in conformity with the rules and regulations of the Securities and
Exchange Commission (“SEC”). These consolidated financial statements, in the opinion of management, include all
adjustments considered necessary for a fair presentation of the consolidated balance sheets, consolidated statements of
operations, consolidated statements of equity, and consolidated statements of cash flows for the periods presented.
F-8
The consolidated financial statements include all of the accounts of the Company and its wholly owned subsidiaries.
All intercompany balances and transactions are eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of and disclosures of contingent assets and liabilities at the balance sheet date and
the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The Company’s financial instruments include cash and cash equivalents, restricted cash, hotel receivables, accounts
payable and accrued expenses, distributions payable and debt. Due to their relatively short maturities, the carrying values reported
in the consolidated balance sheets for these financial instruments approximate fair value except for debt, the fair value of which
is separately disclosed in Note 6.
Investment in Hotel Properties
The Company allocates the purchase prices of hotel properties acquired through a business combination based on the
fair value of the acquired real estate, furniture, fixtures and equipment, identifiable intangible assets and assumed liabilities. In
making estimates of fair value for purposes of allocating the purchase price, the Company utilizes a number of sources of information
that are obtained in connection with the acquisition of a hotel property, including valuations performed by independent third parties
and information obtained about each hotel property resulting from pre-acquisition due diligence. Hotel property acquisition costs,
such as transfer taxes, title insurance, environmental and property condition reviews, and legal and accounting fees are expensed
in the period incurred.
The Company’s investment in hotel properties are carried at cost and are depreciated using the straight-line method over
the estimated useful lives of the assets, generally 40 years for buildings, 20 years for land improvements, 15 years for building
improvements and one to ten years for furniture, fixtures and equipment. Renovations and/or replacements at the hotel properties
that improve or extend the life of the assets are capitalized and depreciated over their useful lives, while repairs and maintenance
are expensed as incurred. Upon the sale or retirement of property and equipment, the cost and related accumulated depreciation
are removed from the Company’s accounts and any resulting gain or loss is recognized in the consolidated statements of operations.
The Company will periodically review its hotel properties for impairment whenever events or changes in circumstances
indicate that the carrying value of the hotel properties may not be recoverable. Events or circumstances that may cause a review
include, but are not limited to, adverse changes in the demand for lodging at the properties due to declining national or local
economic conditions and/or new hotel construction in markets where the hotels are located. When such conditions exist,
management will perform an analysis to determine if the estimated undiscounted future cash flows, without interest charges, from
operations and the proceeds from the ultimate disposition of a hotel property exceed its carrying value. If the estimated undiscounted
future cash flows are less than the carrying amount, an adjustment to reduce the carrying amount to the related hotel property's
estimated fair market value is recorded and an impairment loss recognized. As of December 31, 2015, 2014 and 2013, there were
no hotel properties impaired.
For properties the Company considers held for sale, depreciation and amortization are no longer recorded and the value
the properties is recorded at the lower of depreciated cost or fair value, less costs to sell. If circumstances arise that were previously
considered unlikely, and, as a result, the Company decides not to sell a property previously classified as held for sale, the Company
will reclassify such property as held and used. Such property is measured at the lower of its carrying amount (adjusted for any
depreciation and amortization expense that would have been recognized had the property been continuously classified as held and
used) or fair value at the date of the subsequent decision not to sell. The Company classifies properties as held for sale when all
criteria within the Financial Accounting Standards Board's ("FASB") guidance on the impairment or disposal of long-lived assets
are met. As of December 31, 2015, the Company had no hotel properties held for sale.
Investment in Unconsolidated Real Estate Entities
If it is determined that the Company does not have a controlling interest in a joint venture, either through its financial
interest in a variable investment entity ("VIE") or in a voting interest entity, but does have the ability to exercise significant
influence the equity method of accounting is used. Under this method, the investment, originally recorded at cost, is adjusted to
recognize the Company’s share of net earnings or losses of the affiliates as they occur rather than as dividends or other distributions
are received, advances to and commitments for the investee.
F-9
Investment in unconsolidated real estate entities are accounted for under the equity method of accounting and the Company
records its equity in earnings or losses under the hypothetical liquidation of book value (“HLBV”) method of accounting due to
the structures and the preferences we receive on the distributions from our joint ventures pursuant to the respective joint venture
agreements for those joint ventures. Under this method, the Company recognizes income and loss in each period based on the
change in liquidation proceeds it would receive from a hypothetical liquidation of its investment based on depreciated book value.
Therefore, income or loss may be allocated disproportionately as compared to the ownership percentages due to specified preferred
return rate thresholds and may be more or less than actual cash distributions received and more or less than what the Company
may receive in the event of an actual liquidation. In the event a basis difference is created between the carrying amount of the
Company's share of partner's capital, the resulting amount is allocated based on the assets of the investee and, if assigned to
depreciable or amortizable assets, then amortized as a component of income (loss) from unconsolidated real estate entities.
The Company periodically reviews the carrying value of its investment in unconsolidated joint ventures to determine if
circumstances indicate impairment to the carrying value of the investment that is other than temporary. When an impairment
indicator is present, the Company will estimate the fair value of the investment. The Company’s estimate of fair value takes into
consideration factors such as expected future operating income, trends and prospects, as well as other factors. This determination
requires significant estimates by management, including the expected cash flows to be generated by the assets owned and operated
by the joint venture. To the extent impairment has occurred and is other than temporary, the loss will be measured as the excess
of the carrying amount over the fair value of the Company’s investment in the unconsolidated joint venture.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand, demand deposits with financial institutions and short term liquid
investments with an original maturity of three months or less. Cash balances in individual banks may exceed federally insurable
limits.
Restricted Cash
Restricted cash represents purchase price deposits held in escrow for potential hotel acquisitions under contract and
escrows for reserves such as reserves for capital expenditures, property taxes or insurance that are required pursuant to the
Company’s loans or hotel management agreements. Restricted cash on the accompanying consolidated balance sheet at
December 31, 2015 and 2014 is $19,273 and $12,030, respectively.
Hotel Receivables
Hotel receivables consist of amounts owed by guests staying in the hotels and amounts due from business and group
customers. An allowance for doubtful accounts is provided and maintained at a level believed to be adequate to absorb estimated
probable losses. At December 31, 2015 and 2014, the allowance for doubtful accounts was $95 and $71, respectively.
F-10
Deferred Costs
Deferred costs consist of franchise agreement fees for the Company’s hotels, loan costs related to the Company’s senior
unsecured revolving credit facility and mortgage loans and costs related to the Company’s share offerings or share plans.
Deferred costs consisted of the following at December 31, 2015 and 2014 (in thousands):
December 31, 2015
December 31, 2014
Loan costs
Franchise fees
Less accumulated amortization
Deferred costs, net
$
$
8,447
$
3,474
11,921
(3,887)
8,034
$
10,717
2,969
13,686
(6,172)
7,514
Loan costs are recorded at cost and amortized over the term of the loan applying the effective interest rate method.
Franchise fees are recorded at cost and amortized over a straight-line basis over the term of the franchise agreements. Other deferred
costs relate to potential share offerings and are recorded as a reduction in additional paid-in capital as shares are sold. For the
years ended December 31, 2015, 2014 and 2013, amortization expense related to franchise fees of $196, $131 and $87, respectively,
is included in depreciation and amortization. Amortization expense related to loan costs of $1,606, $1,532 and $1,088 for the
years ended December 31, 2015, 2014 and 2013, respectively, is included in interest expense in the consolidated statements of
operations.
Prepaid Expenses and Other Assets
The Company’s prepaid expenses and other assets consist of prepaid insurance, prepaid property taxes, deposits and hotel
supplies inventory.
Distributions and Losses in Excess of Investments in Unconsolidated Real Estate Entities
At times, certain of the Company’s investments in unconsolidated entities share of cumulative allocated losses and cash
distributions received exceeds its cumulative allocated share of income and equity contributions. Although the Company typically
does not make any guarantees of its investments in unconsolidated real estate entities other than certain customary non-recourse
carve-out provisions, due to potential penalties along with potential upside financial returns, the Company generally intends to
make any required capital contributions to maintain its ownership percentage and as such will record its share of cumulative
allocated losses and cash distributions below zero. As a result, the carrying value of certain investments in unconsolidated entities
is negative. Unconsolidated entities with negative carrying values are included in cash distributions and losses in excess of
investments in unconsolidated entities in the Company’s Consolidated Balance Sheets.
Revenue Recognition
Revenue from hotel operations is recognized when rooms are occupied and when services are provided. Revenue consists
of amounts derived from hotel operations, including sales from room, meeting room, gift shop, in-room movie and other ancillary
amenities. Sales, use, occupancy, and similar taxes are collected and presented on a net basis (excluded from revenue) in the
accompanying consolidated statements of operations.
F-11
Share-Based Compensation
The Company measures compensation expense for the restricted share awards based upon the fair market value of its
common shares at the date of grant. The Company measures compensation expense for the LTIP and Class A Performance units
based upon the Monte Carlo approach using volatility, dividend yield and a risk free interest rate in the valuation. Compensation
expense is recognized on a straight-line basis over the vesting period and is included in general and administrative expense in the
accompanying consolidated statement of operations. The Company pays dividends on vested and non-vested restricted shares,
except for performance-based shares, for which dividends on unvested shares are not paid until those shares are vested. The
Company has also issued Class A Performance LTIP units from time to time as part of its compensation practices. Prior to vesting,
holders of Class A Performance LTIP Units will not be entitled to vote their Class A Performance LTIP units. In addition, under
the terms of the Class A Performance LTIP units, a holder of a Class A Performance LTIP unit will generally (i) be entitled to
receive 10% of the distributions made on a common unit of the Operating Partnership during the period prior to vesting of such
Class A Performance LTIP unit (the “Pre-Vesting Distributions”), (ii) be entitled, upon the vesting of such Class A Performance
LTIP unit, to receive a special one-time “catch-up” distribution equal to the aggregate amount of distributions that were paid on
a common unit during the period prior to vesting of such Class A Performance LTIP unit minus the aggregate amount of Pre-
Vesting Distributions paid on such Class A Performance LTIP unit, and (iii) be entitled, following the vesting of such Class A
Performance LTIP unit, to receive the same amount of distributions paid on a common unit of the Operating Partnership.
Earnings Per Share
A two class method is used to determine earnings per share. Basic earnings per share ("EPS") is computed by dividing
net income (loss) available for common shareholders, adjusted for dividends on unvested share grants, by the weighted average
number of common shares outstanding for the period. Diluted EPS is computed by dividing net income (loss) available for common
shareholders, adjusted for dividends or distributions, on unvested share grants and LTIP units, by the weighted average number
of common shares outstanding plus potentially dilutive securities such as share grants or shares issuable in the event of conversion
of common units. No adjustment is made for shares that are anti-dilutive during the period. The Company’s restricted share awards
and LTIP units that are subject solely to time-based vesting conditions are entitled to receive dividends or distributions on the
Company's common shares or the Operating Partnership's common units, respectively, if declared. In addition, dividends on the
Class A Performance LTIP units are paid the equivalent of 10% of the declared dividends on the Company's common shares. The
rights to these dividends or distributions declared are non-forfeitable. As a result, the unvested restricted shares and LTIP units
that are subject solely to time-based vesting conditions, as well as 10% of the unvested Class A Performance LTIP units, qualify
as participating securities requiring the allocation of earnings under the two-class method to calculate EPS. The percentage of
earnings allocated to these participating securities is based on the proportion of the weighted average of these outstanding
participating securities to the sum of the basic weighted average common shares outstanding and the weighted average of these
outstanding participating securities. Basic EPS is then computed by dividing income less earnings allocable to these participating
securities by the basic weighted average number of shares outstanding. Diluted EPS is computed similar to basic EPS, except the
weighted average number of shares outstanding is increased to include the effect of potentially dilutive securities.
Income Taxes
The Company elected to be taxed as a REIT for federal income tax purposes. In order to qualify as a REIT under the
Internal Revenue Code of 1986, as amended, the Company must meet certain organizational and operational requirements, including
a requirement to distribute at least 90% of its annual REIT taxable income to its shareholders (which is computed without regard
to the dividends paid deduction or net capital gain and which does not necessarily equal net income as calculated in accordance
with GAAP). As a REIT, the Company generally will not be subject to federal income tax to the extent the Company distributes
its REIT taxable income to its shareholders. If the Company fails to qualify as a REIT in any taxable year, the Company will be
subject to federal income tax on its REIT taxable income at regular corporate income tax rates and generally will not be permitted
to qualify for treatment as a REIT for federal income tax purposes for the four taxable years following the year during which
qualification is lost unless the IRS grants the Company relief under certain statutory provisions.
F-12
The Company leases its wholly owned hotels to TRS Lessees, which are wholly owned by the Company’s taxable REIT
subsidiaries (each, a “TRS”) which, in turn are wholly owned by the Operating Partnership. Additionally, the Company indirectly
(i) owns its interest in the hotels owned by the NewINK JV (47 hotels) and the Inland JV (48 hotels) and (ii) owned its interest in
the Torrance JV, which was sold on December 30, 2015, through the Operating Partnership. All of the NewINK JV hotels and
Inland JV hotels are, and the Torrance JV hotel was leased to TRS Lessees in which the Company indirectly owns, or owned, as
applicable, noncontrolling interests through one of its TRS holding companies. Each TRS is subject to federal and state income
taxes and the Company accounts for taxes, where applicable, in accordance with the provisions of Financial Accounting Standards
Board Accounting Standards Codification 740 using the asset and liability method which recognizes deferred tax assets and
liabilities for future tax consequences arising from differences between financial statement carrying amounts and income tax bases.
As of December 31, 2015, the Company is no longer subject to U.S federal income tax examinations for years before
2013 and with few exceptions to state examinations before 2013. The Company evaluates whether a tax position of the Company
is more likely than not to be sustained upon examination, including resolution of any related appeals or litigation processes, based
on the technical merits of the position. For tax positions meeting the more likely than not threshold, the tax amount recognized in
the financial statements is reduced by the largest benefit that has a greater than fifty percent likelihood of being realized upon
ultimate settlement with the relevant taxing authority. The Company has reviewed its tax positions for open tax years and has
concluded no provisions for income taxes is required in the Company's consolidated financial statements as of December 31, 2015.
Interest and penalties related to uncertain tax benefits, if any, in the future will be recognized as operating expense.
During the first quarter of 2015, management was notified that one of the Company's TRS's was going to be examined
by the State of Florida Department of Revenue for the tax years ended December 31, 2009 through 2013. The examination
remains open. The Company believes that it does not need to record a liability related to all matters contained in the tax
periods open to examination. However, should the Company experience an unfavorable outcome in the State of Florida matter,
such an outcome could have a material impact on its results of operations, financial position, and cash flows. Although the
timing of the income tax audit resolutions and negotiations with taxing authorities is highly uncertain, the Company does not
anticipate a significant change to the total amount of unrecognized income tax benefits within the next 12 months.
Organizational and Offering Costs
The Company expensed organizational costs as incurred. Offering costs, which include selling commissions, are recorded
as a reduction in additional paid-in capital in shareholders’ equity as shares are sold. For offering costs incurred prior to potential
share offerings, these costs are initially recorded in deferred costs on the balance sheet and then recorded as a reduction to additional
paid-in capital as shares are sold through the subsequent share offering. As of December 31, 2015 and 2014, the Company had
$0 and $0 recorded in deferred costs related to deferred offering costs, respectively.
Segment Information
Management evaluates the Company's hotels as a single industry segment because all of the hotels have similar economic
characteristics and provide similar services to similar types of customers.
Recently Issued Accounting Standards
On May 28, 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an
entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to
customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The
new standard is effective for the Company on January 1, 2017. Early application is not permitted. The standard permits the use
of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will
have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method
nor has it determined the effect of the standard on its financial statements.
In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entities Ability to Continue
as a Going Concern, which requires management to perform interim and annual assessments of an entities ability to continue
within one year of the date the financial statements are issued and provides guidance on determining when and how to disclose
going concern uncertainties in the financial statements. Certain disclosures will be required if conditions give rise to
substantial doubt about an entity's ability to continue as a going concern. This guidance is effective for the Company on
January 1, 2017 and will not have an impact on the Company's financial position, results of operations or cash flows.
F-13
In February 2015, the FASB issued ASU 2015-02 Amendments to the Consolidation Analysis, which requires
amendments to both the VIE and voting models. The amendments (i) rescind the indefinite deferral of certain aspects of
accounting standards relating to consolidations and provide a permanent scope exception for registered money market funds
and similar unregistered money market funds, (ii) modify the identification of variable interests (fees paid to a decision maker
or service provider), the VIE characteristics for a limited partnership or similar entity and primary beneficiary determination
under the VIE model, and (iii) eliminate the presumption within the current voting model that a general partner controls a
limited partnership or similar entity. The new guidance is effective for annual reporting periods, and interim periods within
those annual periods, beginning after December 15, 2015 with early adoption permitted. The amendments may be applied using
either a modified retrospective or full retrospective approach. The new standard will be effective for the Company on January
1, 2016 and will not have a material impact on the Company's financial position, results of operations or cash flows.
On April 7, 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs, which
requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the debt
liability. This standard is effective for fiscal years beginning after December 15, 2015 with early adoption permitted and will be
applied on a retrospective basis. Supplemental to ASU 2015-03, on August 16, 2015, the FASB issued Accounting Standards
Update 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit
Arrangements -Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting, which
clarifies that debt issuance costs attributable to line-of-credit arrangements can be presented as an asset and amortized ratably
over the life of the revolving debt arrangement, regardless of whether there is an outstanding balance thereunder. This
methodology is consistent with the Company’s historical treatment of such costs. The new standard will be effective for the
Company on January 1, 2016 and will not have a material impact on the Company's financial position, results of operations or
cash flows.
In September 2015, the FASB issued ASU 2015-16, Simplifying the Accounting for Measurement-Period
Adjustments, which eliminates the requirement to restate prior period financial statements for measurement period adjustments.
The new guidance requires an entity to recognize the adjustments to provisional amounts identified during the measurement
period in the reporting period in which the adjustments are determined. In addition, the adjustments must be disclosed by
income statement line item either on the face of the income statement or in the footnotes as if the adjustment to the provisional
amounts had been recorded as of the acquisition date. The amendment is effective prospectively for interim and annual periods
beginning after December 15, 2015, with early adoption permitted for financial statements that have not been issued. We do not
expect the new standard will have a significant impact on our consolidated financial statements.
F-14
3.
Acquisition of Hotel Properties
Hotel Purchase Price Allocation
The allocation of the purchase price of each of the hotels acquired by the Company in 2015 and 2014, based on the
fair value on the date of its acquisition, was (in thousands):
Acquisition date
Number of rooms (unaudited)
Land
Building and improvements
Furniture, fixtures and equipment
Cash
Restricted cash
Accounts receivable
Deferred costs, net
Prepaid expenses and other assets
Mortgage debt
Accounts payable and accrued expenses
Net assets acquired
Less: Fair value of interest in the Silicon
Valley Hotels and NewINK JV
Net assets acquired, net of cash
Silicon
Valley
Hotels
Cherry
Creek
Hotels
Inland 4
Pack Hotels
Gaslamp
Dedham
Ft.
Lauderdale
Marina del
Rey
Total
6/914
8/29/2014
11/17/2014
2/25/2015
7/17/2015
8/17/2015
9/17/2015
751
194
575
240
81
104
134
2,079
$
149,565 $
3,700 $
12,923 $
— $
4,230 $
9,200 $
— $ 179,618
159,391
26,300
92,414
89,040
17,304
24,048
43,210
451,707
14,897
2,000
1,404
960
466
252
1,340
21,319
25
—
959
—
289
—
—
1
—
56
—
17
—
11
—
374
56
—
(62)
(686)
3
—
81
—
278
—
(204)
2
—
47
—
3
—
2
—
32
—
40
—
6
1,755
30
43
217
50
1,755
1,579
43
900
(22,569)
(22,569)
(10)
(279)
(67)
(1,308)
$
325,126 $
32,012 $
106,496 $
90,158 $
22,042 $
33,295 $
23,965 $ 633,094
(58,860)
—
—
—
—
—
— (58,860)
$
266,241 $
32,011 $
106,485 $
90,155 $
22,040 $
33,293 $
23,959 $ 574,184
The value of the assets acquired was primarily based on a sales comparison approach (for land) and a depreciated
replacement cost approach (for building and improvements and furniture, fixtures and equipment). The sales comparison
approach uses inputs of recent land sales in the respective hotel markets. The depreciated replacement cost approach uses
inputs of both direct and indirect replacement costs using a nationally recognized authority on replacement cost information as
well as the age, square footage and number of rooms of the respective assets. The Company incurred acquisition costs of
$1,451, $10,381 and $3,341, respectively, during the years ended December 31, 2015, 2014 and 2013.
The amount of revenue and operating income from the hotels acquired in 2015 from their respective date of
acquisition through December 31, 2015 is as follows (in thousands):
Revenue
Operating Income
Residence Inn San Diego Gaslamp
Residence Inn Dedham, MA
Residence Inn Ft. Lauderdale, FL
Hilton Garden Inn Marina del Rey, CA
Total
$
$
12,670
1,995
2,132
2,500
19,297
$
$
6,850
1,043
863
1,200
9,956
F-15
Pro Forma Financial Information (unaudited)
The following condensed pro forma financial information presents the unaudited results of operations as if the
acquisition of the hotels acquired during the years ended December 31, 2015, 2014 or 2013 had taken place on January 1, 2014,
2013 and 2012, respectively. Since the acquisition of the Cherry Creek hotel was not material, the pro forma numbers
presented below do not include the operating results of the Cherry Creek hotel prior to the acquisition date. Supplemental pro
forma earnings were adjusted to exclude $704, $7,234 and $1,667, respectively, of acquisition-related costs incurred in the
years ended December 31, 2015, 2014 and 2013. Supplemental pro forma earnings for the years ended December 2014 and
2013, respectively, were adjusted to include these charges from 2015 and 2014. The unaudited pro forma results have been
prepared for comparative purposes only and are not necessarily indicative of what actual results of operations would have been
had the acquisitions taken place on January 1, 2014, 2013 or 2012, respectively, nor do they purport to represent the results of
operations for future periods (in thousands, except share and per share data).
For the year ended
December 31,
2015
292,908
32,137
0.85
0.84
$
$
$
$
2014
271,321
22,013
0.58
0.57
$
$
$
$
2013
216,239
72,477
1.91
1.89
$
$
$
$
Pro forma total revenue
Pro forma net income
Pro forma income per share:
Basic
Diluted
Weighted average common shares
outstanding
Basic
Diluted
37,917,871
38,322,285
37,917,871
38,322,285
37,917,871
38,322,285
As a result of the properties being treated as acquired as of January 1, 2013 and 2014, the Company assumed
approximately 38,308,937 shares were issued as of January 1, 2013 to fund the acquisition of the properties. Consequently, the
weighted average shares outstanding was adjusted to reflect the treatment of these assumed additional shares as issued
outstanding as of the beginning of the periods presented.
4.
Investment in Hotel Properties
Investment in hotel properties as of December 31, 2015 and 2014 consisted of the following (in thousands):
Land and improvements
Building and improvements
Furniture, fixtures and equipment
Renovations in progress
Less: accumulated depreciation
Investment in hotel properties, net
December 31, 2015
274,543
$
December 31, 2014
261,108
$
1,031,649
63,542
8,829
1,378,563
(120,111)
1,258,452
$
844,396
61,186
6,574
1,173,264
(76,839)
1,096,425
$
F-16
5.
Investment in Unconsolidated Entities
On April 17, 2013, the Company acquired a 5.0% interest in the Torrance JV with Cerberus for $1,649. The Torrance
JV acquired the 248-room (unaudited) Residence Inn by Marriott in Torrance, CA for $31,000. The Company accounts for this
investment under the equity method. During the years ended December 31, 2015 and 2014, the Company received cash
distributions from the Torrance JV as follows (in thousands):
For the year ended
December 31,
2015
2014
Cash generated from other activities and excess cash
Total
$
$
185
185
$
$
100
100
On December 30, 2015, the Torrance JV completed the sale of the 248-room (unaudited) Residence Inn by Marriott in
Torrance, CA for $51,750 to BRE Torrance Holdco LLC ("BRE"). The gain from the Company's promote interest in the
Torrance JV was approximately $3,576.
The Company owned a 10.3% interest in the Innkeepers JV, which owned 51 hotels comprising an aggregate of 6,845
rooms until June 9, 2014. The Company accounted for this investment under the equity method. During the years ended
December 31, 2015 and 2014, the Company received cash distributions from the Innkeepers JV as follows (in thousands):
Cash generated from other activities and excess cash
Total
For the year ended
December 31,
2015
2014
$
$
— $
— $
411
411
On June 9, 2014, the Innkeepers JV completed the sale of 47 of the 51-hotels owned by the Innkeepers JV to the
NewINK JV NorthStar owns an 89.7% interest and the Company owns a 10.3% interest in the NewINK JV. The remaining
four hotels that were part of the 51-hotel Innkeeper's JV portfolio, each of which is a Residence Inn hotel located in Silicon
Valley, CA ("Silicon Valley Hotels"), were purchased by the Company (see note 3). The Company accounts for its investment
in the NewINK JV under the equity method. The remeasurement gain of the Company's interest in the four Silicon Valley
Hotels as a result of the step acquisition was approximately $18,800 and the net gain from the Company's promote interest in
the Innkeepers JV was approximately $47,000 (which was credited toward the purchase of the Silicon Valley Hotels), resulting
in a total gain of $65,750 from the transaction. For tax purposes, the Company's gain resulting from this transaction was rolled
tax deferred between the basis of the Company's investment in the NewINK JV and the Company's basis in the four Silicon
Valley Hotels. As of December 31, 2015 and December 31, 2014, the Company's share of partners' capital in the NewINK JV
is approximately $14,015 and $19,012, respectively, and the total difference between the carrying amount of the investment and
the Company's share of partners' capital is approximately $16,718 and $17,319 (for which the basis difference related to
amortizing assets is being recognized over the life of the related assets as a basis difference adjustment).
F-17
During the years ended December 31, 2015 and 2014, the Company received cash distributions from the NewINK JV
as follows (in thousands):
Cash generated from other activities and excess cash
Total
$
$
5,884
5,884
$
$
1,542
1,542
For the year ended
December 31,
2015
2014
On November 17, 2014, the Company acquired a 10.0% interest in Inland JV. NorthStar owns a 90.0% interest in the
Inland JV. The Company accounts for this investment under the equity method. During the years ended December 31, 2015
and 2014, the Company received cash distributions from the Inland JV as follows (in thousands):
Cash generated from other activities and excess cash $
Total
$
2,845
2,845
$
$
—
—
For the year ended
December 31,
2015
2014
The Company’s ownership interests in the JVs are subject to change in the event that either the Company or NorthStar
calls for additional capital contributions to the respective JVs necessary for the conduct of business, including contributions to
fund costs and expenses related to capital expenditures. The Company could be required under its unconditional guaranty to
repay portions of the debt of the JV's. The Company manages the JVs and will receive a promote interest in each applicable JV
if it meets certain return thresholds for such JV. NorthStar may also approve certain actions by the JVs without the Company’s
consent, including certain property dispositions conducted at arm’s length, certain actions related to the restructuring of the
applicable JV and removal of the Company as managing member in the event the Company fails to fulfill its material
obligations under the applicable joint venture agreement.
The Company's investments in the NewInk JV, the Inland JV and the Torrance JV are $(2,703), $23,618 and $0,
respectively, at December 31, 2015. The following tables sets forth the total assets, liabilities, equity and components of net
income (loss), including the Company’s share, related to all JVs for the years ended December 31, 2015, 2014 and 2013 (in
thousands):
Balance Sheet
Assets
Investment in hotel properties, net
Other assets
Total Assets
Liabilities
Mortgages and notes payable
Other Liabilities
Total Liabilities
Equity
Chatham Lodging Trust
Joint Venture Partner
Total Equity
December 31, 2015
December 31, 2014
December 31, 2013
$
$
$
1,857,497
206,894
2,064,391
$
$
1,907,928
261,311
2,169,239
$
$
1,657,000
$
1,677,159
$
35,807
1,692,807
34,929
1,712,088
37,633
333,951
371,584
45,470
411,681
457,151
874,058
114,034
988,092
969,023
19,211
988,234
(802)
660
(142)
988,092
Total Liabilities and Equity $
2,064,391
$
2,169,239
$
F-18
Statement of Operations
Revenue
Total hotel operating expenses
Operating income
Net income (loss) from continuing operations
Loss on sale of hotels
Net income (loss)
Income (loss) allocable to the Company
Basis difference adjustment
Total income (loss) from unconsolidated real estate
entities attributable to Chatham
For the year ended
December 31,
2015
497,698
290,123
207,575
19,241
$
$
$
— $
19,241
1,811
600
2,411
$
$
$
$
$
$
$
$
$
$
$
$
$
2014
290,419
166,849
123,570
$
(40,018) $
(5) $
(40,023) $
2013
271,224
151,823
119,401
(14,376)
(2,730)
(17,106)
(4,165) $
$
335
(1,874)
—
(3,830) $
(1,874)
F-19
6.
Debt
Certain of the Company’s loans are collateralized by first-mortgage liens on certain properties. The mortgages are
non-recourse except for instances of fraud or misapplication of funds. Debt consisted of the following (in thousands):
Loan/Collateral
Senior Unsecured Revolving Credit Facility (1)
SpringHill Suites by Marriott Washington, PA (7)
Courtyard by Marriott Altoona, PA (9)
Residence Inn by Marriott New Rochelle, NY
Residence Inn by Marriott San Diego, CA
Homewood Suites by Hilton San Antonio, TX
Residence Inn by Marriott Vienna, VA
Courtyard by Marriott Houston, TX
Hyatt Place Pittsburgh, PA
Residence Inn by Marriott Bellevue, WA
Residence Inn by Marriott Garden Grove, CA (2)
Residence Inn by Marriott Silicon Valley I, CA (3)
Residence Inn by Marriott Silicon Valley II, CA (3)
Residence Inn by Marriott San Mateo, CA (3)
Residence Inn by Marriott Mountain View, CA (3)
SpringHill Suites by Marriott Savannah, GA (4)
Hilton Garden Inn Marina del Rey, CA (8)
Homewood Suites by Hilton Billerica, MA (5)
Homewood Suite by Hilton Carlsbad, CA (5)
Interest
Rate
Maturity Date
12/31/15
Property
Carrying
Value
Balance Outstanding as of
December 31,
2015
December 31,
2014
1.93% November 25, 2019
$
— $
65,580
$
22,500
5.84%
5.96%
April 1, 2015
April 1, 2016
5.75% September 1, 2021
4.66% February 6, 2023
4.59% February 6, 2023
4.49% February 6, 2023
4.19%
4.65%
4.97%
4.79%
4.64%
4.64%
4.64%
4.64%
4.62%
4.68%
May 6, 2023
July 6, 2023
December 6, 2023
April 6, 2024
July 1, 2024
July 1, 2024
July 1, 2024
July 1, 2024
July 6, 2024
July 6, 2024
4.32% December 6, 2024
4.32% December 6, 2024
11,209
10,138
20,847
45,678
33,781
31,824
31,231
36,940
70,981
41,957
86,416
94,492
68,315
54,790
38,213
44,155
11,547
28,397
15,299
—
5,954
14,496
29,555
16,880
23,124
19,123
23,268
46,907
34,000
64,800
70,700
48,600
37,900
30,000
22,510
16,225
19,950
18,300
4,760
6,172
14,832
30,062
17,174
23,534
19,475
23,657
47,580
34,000
64,800
70,700
48,600
37,900
30,000
—
16,225
19,950
18,300
Hampton Inn & Suites Houston Medical Cntr., TX (6)
4.25%
January 6, 2025
Total
$ 776,210
$
607,872
$
550,221
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
The interest rate for the senior unsecured revolving credit facility is variable and based on LIBOR plus an applicable
margin ranging from 1.55% to 2.3%.
On March 21, 2014, the Company refinanced the mortgage for the Residence Inn Garden Grove hotel. The new loan
has a 10-year term and a 30-year amortization payment schedule but is interest only for the first 12 months. The
Company incurred $184 in costs for the early extinguishment of debt related to the old loan.
On June 9, 2014, the Company obtained 4 new mortgage loans secured by first mortgages on the Silicon Valley I,
Silicon Valley II, San Mateo and Mountain View hotels, respectively. The new loans have 10-year terms and 30-year
amortization payment schedules but are interest only for the first 60 months.
On July 2, 2014, the Company obtained a new mortgage loan secured by a first mortgage on the Springhill Suites
Savannah hotel. The loan has a 10-year term and a 30-year amortization payment schedule but is interest only for the
first 60 months.
On November 25, 2014, the Company obtained 2 new mortgage loans secured by first mortgages on each of the
Homewood Suites by Hilton Billerica and Homewood Suites by Hilton Carlsbad hotels. The loans have 10-year terms
and 30-year amortization payment schedules but are interest only for the first 36 months.
On December 17, 2014, the Company obtained a new mortgage loan secured by a first mortgage on the Hampton Inn
and Suites by Hilton Houston Medical Center hotel. The loan has a 10-year term, a 30-year amortization payment
schedule but is interest only for the first 36 months.
On March 31, 2015, the Company paid off the loan secured by the SpringHill Suites by Marriott Washington, PA
hotel, due April 1, 2015.
On September 17, 2015, the Company assumed the mortgage loan secured by a first mortgage on the Hilton Garden
Inn Marina del Rey hotel. The loan has a 10-year term, a 30-year amortization payment schedule.
On January 4, 2016, the Company paid off the loan secured by the Courtyard by Marriott Altoona, PA hotel, due April
1, 2016.
F-20
On November 25, 2015, Company, as parent guarantor, and as borrower, entered into a new unsecured revolving credit
agreement with the lenders party thereto, Barclays Bank PLC, Citigroup Global Markets Inc., Regions Capital Markets and
U.S. Bank National Association as joint lead arrangers, Barclays Bank PLC as administrative agent, Regions Bank as
syndication agent and Citibank, N.A. and U.S. Bank National Association as co-documentation agents (the “New Credit
Agreement”). The New Credit Agreement has an initial maturity date of November 25, 2019, which may be extended for an
additional year upon the payment of applicable fees and satisfaction of certain customary conditions. In connection with the
entry into the New Credit Agreement, the Company and the Operating Partnership terminated the Amended and Restated Credit
Agreement, dated as of November 5, 2012, as amended, among the Company, the Operating Partnership, the lenders party
thereto, Barclays Capital Inc. and Regions Capital Markets as joint lead arrangers, Barclays Bank PLC as administrative agent,
Regions Bank as syndication agent, Credit Agricole Corporate and Investment Bank, UBS Securities and US Bank National
Association as co-documentation agents (the "Existing Credit Agreement"), which was composed of a secured revolving credit
facility that provided borrowing capacity of up to $175,000. Proceeds under the New Credit Agreement were used to repay
outstanding borrowings under the Existing Credit Agreement. The senior unsecured revolving credit facility includes
limitations on the extent of allowable distributions from the operating partnership to the Company not to exceed the greater of
95% of adjusted funds from operations and the minimum amount of distributions required for the Company to maintain its
REIT status. Other key terms are as follows:
Borrowing Capacity:
Accordion feature:
Interest rate:
Unused fee:
Maximum leverage ratio:
Minimum fixed charge coverage ratio:
Up to $250,000
Increase borrowing capacity by up to
additional $150,000
Floating rate based on LIBOR plus 155-230
basis points, based on leverage ratio
20 basis points if less than 50% unused, 30
basis points if more than 50% unused
60%
1.5x
At December 31, 2015 and 2014, the Company had $65,580 and $22,500, respectively, of outstanding borrowings
under its revolving credit facilities. At December 31, 2015, the maximum borrowing availability under the senior unsecured
revolving credit facility was $250,000.
The Company estimates the fair value of its fixed rate debt, which is all of the Company's mortgage loans, by
discounting the future cash flows of each instrument at estimated market rates. Rates take into consideration general market
conditions, quality and estimated value of collateral and maturity of debt with similar credit terms and are classified within
level 3 of the fair value hierarchy. The estimated fair value of the Company’s fixed rate debt as of December 31, 2015 and
2014 was $522,713 and $542,538, respectively.
The Company estimates the fair value of its variable rate debt by taking into account general market conditions and
the estimated credit terms it could obtain for debt with a similar maturity and that is classified within level 3 of the fair value
hierarchy. As of December 31, 2015, the Company’s only variable rate debt is under its senior unsecured revolving credit
facility. The estimated fair value of the Company’s variable rate debt as of December 31, 2015 and 2014 was $65,574 and
$22,500, respectively.
As of December 31, 2015, the Company was in compliance with all of its financial covenants. At December 31, 2015,
the Company’s consolidated fixed charge coverage ratio was 3.51. Future scheduled principal payments of debt obligations as
of December 31, 2015, for each of the next five calendar years and thereafter are as follows (in thousands):
2016
2017
2018
2019
2020
Thereafter
Total
F-21
Amount
9,868
4,302
5,374
7,340
75,479
505,509
607,872
$
$
7.
Income Taxes
The Company’s TRSs are subject to federal and state income taxes. The Company’s TRSs are structured under two
TRS holding companies, which are referred to as TRS 1 and TRS 2, which are treated separately for income tax purposes.
The components of income tax expense for the following periods are as follows (in thousands):
Current:
Federal
State
Current tax expense
Deferred:
Federal
State
Deferred tax expense
Total tax expense
For the year ended
December 31,
2014
2013
2015
$
$
$
129
131
260
—
—
—
260
$
$
$
82
27
109
(3)
(1)
(4)
105
$
$
$
93
30
123
—
1
1
124
The difference between income tax expense and the amount computed by applying the statutory federal income tax
rate to the combined income of the Company's TRSs before taxes were as follows (in thousands):
Book income (loss) before income taxes
Statutory rate of 34% applied to pre-tax income
Effect of state and local income taxes, net of federal tax benefit
Provision to return and deferred adjustment
Permanent adjustments and other
Change in valuation allowance
Total expense
For the year ended
December 31,
2015
2014
2,384
810
97
211
140
(998)
260
$
$
$
(520)
(178)
(14)
40
—
257
105
2013
(2,080)
(707)
(82)
118
—
795
124
$
$
$
$
$
$
Effective tax rate
10.91%
(20.19)%
(5.96)%
F-22
At December 31, 2015, TRS 1 had a gross deferred tax asset associated with future tax deductions of $284. TRS 1 has
continued to record a full valuation allowance equal to 100% of the gross deferred tax asset due to the uncertainty of realizing
the benefit of its deferred assets due to the cumulative taxable losses incurred by TRS 1 since its inception. TRS 2 has a gross
deferred tax asset of $0 as of December 31, 2015 and no valuation allowance has been recorded in connection with the gross
deferred tax assets of TRS 2 for December 31, 2015 and 2014. Accordingly, the net deferred tax asset of the Company solely
relates to the deferred tax assets generated by TRS 2 during the years ended December 31, 2015 and 2014. The tax effect of
each type of temporary difference and carry forward that gives rise to the deferred tax asset as of December 31, 2015 and 2014
are as follows (in thousands):
Deferred tax assets:
Allowance for doubtful accounts
Other
Valuation allowance
Current deferred tax asset
Non-current
Total book to tax difference in partnership
Net operating loss
Valuation allowance
Non-current deferred tax asset
Net deferred tax asset
$
$
$
$
$
For the year ended
December 31,
2015
2014
36
$
489
(240)
285
$
(356) $
130
(59)
(285) $
— $
28
230
(248)
10
(165)
1,214
(1,049)
—
10
F-23
8.
Dividends Declared and Paid
The Company declared regular common share dividends of $1.20 per share and distributions on LTIP units of $1.20
per unit for the year ended December 31, 2015. The dividends and distributions and their tax characterization were as follows:
January
February
March
1st Quarter 2015
April
May
June
2nd Quarter 2015
July
August
September
3rd Quarter 2015
October
November
December
4th Quarter 2015
Total 2015
Record
Date
Payment
Date
Common
Share
Distribution
Amount
LTIP
Unit
Distribution
Amount
Ordinary
Income
Capital Gain
1/30/2015
2/27/2015
$
2/27/2015
3/27/2015
3/31/2015
4/24/2015
4/30/2015
5/29/2015
5/29/2015
6/26/2015
6/30/2015
7/31/2015
7/31/2015
8/28/2015
8/31/2015
9/25/2015
9/30/2015
10/30/2015
$
$
$
$
$
$
10/30/2015
11/27/2015 $
11/30/2015
12/28/2015
12/31/2015
1/29/2016
$
$
$
0.10
0.10
0.10
0.30
0.10
0.10
0.10
0.30
0.10
0.10
0.10
0.30
0.10
0.10
0.10
0.30
1.20
$
$
$
$
$
$
$
$
$
$
$
0.10
0.10
0.10
0.30
0.10
0.10
0.10
0.30
0.10
0.10
0.10
0.30
0.10
0.10
0.10
0.30
1.20
$
0.094
$
0.094
0.094
0.282
0.094
0.094
0.094
0.282
0.094
0.094
0.094
0.282
0.094
0.094
0.094
0.282
1.128
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
0.006
0.006
0.006
0.018
0.006
0.006
0.006
0.018
0.006
0.006
0.006
0.018
0.006
0.006
0.006
0.018
0.072
F-24
January
February
March
1st Quarter 2014
April
May
June
2nd Quarter 2014
July
August
September
3rd Quarter 2014
October
November
December
4th Quarter 2014
Total 2014
Record
Date
Payment
Date
Common
Share
Distribution
Amount
LTIP
Unit
Distribution
Amount
Ordinary
Income
Capital Gain
1/31/2014
2/28/2014
$
2/28/2014
3/28/2014
3/31/2014
4/25/2014
4/30/2014
5/30/2014
5/30/2014
6/27/2014
6/30/2014
7/25/2014
7/31/2014
8/29/2014
8/29/2014
9/26/2014
9/30/2014
10/31/2014
$
$
$
$
$
$
10/31/2014
11/28/2014 $
11/28/2014
12/26/2014
12/31/2014
1/30/2015
$
$
$
0.07
0.07
0.07
0.21
0.08
0.08
0.08
0.24
0.08
0.08
0.08
0.24
0.08
0.08
0.08
0.24
0.93
$
$
$
$
$
$
$
$
$
$
$
0.07
0.07
0.07
0.21
0.08
0.08
0.08
0.24
0.08
0.08
0.08
0.24
0.08
0.08
0.08
0.24
0.93
$
0.069
$
0.069
0.069
0.207
0.078
0.078
0.078
0.234
0.078
0.078
0.078
0.234
0.078
0.078
0.078
0.234
0.909
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
0.001
0.001
0.001
0.003
0.002
0.002
0.002
0.006
0.002
0.002
0.002
0.006
0.002
0.002
0.002
0.006
0.021
For the year ended December 31, 2015, approximately 94.0% of the distributions paid to stockholders were considered
ordinary income and approximately 6.0% were considered capital gains. For the year ended December 31, 2014,
approximately 97.7% of the distributions paid to stockholders were considered ordinary income and approximately 2.3% were
considered a return of capital for federal income tax purposes. A special dividend payment of $0.08 per share was authorized
by the Company's Board of Trustees and declared by the Company on December 31, 2015. This special dividend was paid on
January 29, 2016 to shareholders of record on January 15, 2016 and will be taxable to shareholders in 2016.
F-25
9.
Shareholders' Equity
Common Shares
The Company is authorized to issue up to 500,000,000 common shares of beneficial interest, $.01 par value per share
("common shares"). Each outstanding common share entitles the holder to one vote on all matters submitted to a vote of
shareholders. Holders of the Company’s common shares are entitled to receive dividends when authorized by the Company's
Board of Trustees. As of December 31, 2015, 38,308,937 common shares were outstanding.
Common share offerings of the Company consisted of the following from inception through December 31, 2015:
Type of Offering (1)
Date
Shares Issued
Price per
Share
Gross Proceeds
(in thousands)
Net Proceeds (in
thousands)
8,625,000 $
20.00 $
172,500 $
158,700
Initial public offering
Private placement offering (2)
Follow-on common share offering
Over-allotment option
4/21/2010
4/21/2010
2/8/2011
2/8/2011
500,000
4,000,000
600,000
Follow-on common share offering
1/14/2013
3,500,000
Over-allotment option
1/31/2013
92,677
Follow-on common share offering
6/18/2013
4,500,000
Over-allotment option
6/28/2013
475,823
Follow-on common share offering
9/30/2013
3,250,000
Over-allotment option
10/11/2013
487,500
Follow-on common share offering
9/24/2014
6,000,000
Over-allotment option
9/24/2014
900,000
Follow-on common share offering
1/27/2015
3,500,000
Over-allotment option
1/27/2015
525,000
36,956,000
20.00
16.00
16.00
14.70
14.70
16.35
16.35
18.35
18.35
21.85
21.85
30.00
30.00
10,000
64,000
9,600
51,400
1,400
73,600
7,800
59,600
8,900
131,100
19,700
105,000
15,750
730,350 $
$
10,000
60,300
9,100
48,400
1,300
70,000
7,400
56,700
8,500
125,600
18,900
103,300
15,500
693,700
(1) Excludes any shares issued pursuant to the Company's ATM Plan or DRSPP (each as defined below).
(2) The Company sold 500,000 common shares to Jeffrey H. Fisher, the Company’s Chairman, President and Chief
Executive Officer (“Mr. Fisher”) in a private placement concurrent with its IPO.
In January 2014, we established a $25 million dividend reinvestment and stock purchase plan ("DRSPP"). Under the
DRSPP, shareholders may purchase additional common shares by reinvesting some or all of the cash dividends received on the
Company's common shares. Shareholders may also make optional cash purchases of the Company's common shares subject to
certain limitations detailed in the prospectus for the DRSPP. As of December 31, 2015 and 2014, respectively, we had issued
5,595 and 2,083 shares under the DRSPP at a weighted average price of $25.00 and $24.38 per share, respectively. As of
December 31, 2015, there were common shares having a maximum aggregate sales price of approximately $24.9 million
available for issuance under the DRSPP.
In January 2014, the Company established an At the Market Equity Offering ("ATM Plan") whereby, from time to
time, the Company may publicly offer and sell up to $50 million of its common shares by means of ordinary brokers'
transactions on the New York Stock Exchange (the "NYSE"), in negotiated transactions or in transactions that are deemed to be
"at the market" offerings as defined in Rule 415 under the Securities Act, with Cantor Fitzgerald & Co. acting as sales agent.
On January 13, 2015, the Company entered into a sales agreement with Barclays Capital Inc. (“Barclays”) to add Barclays as
an additional sales agent under the Company’s ATM Plan. As of December 31, 2015 and 2014, respectively, we had issued
880,820 and 880,820 shares under the ATM Plan at a weighted average price of $23.54 per share. As of December 31, 2015,
there were common shares having a maximum aggregate sales price of approximately $29.3 million available for issuance
under the ATM Plan.
F-26
During the years ended December 31, 2015 and 2014, the Company withheld 763 and 867, respectively, common shares
that had vested to executives in accordance with the Equity Incentive Plan at a value of $29.35 and $20.63, respectively, per share
to meet the minimum statutory tax withholding requirements of the executive which were directly remitted by the Company to
the appropriate taxing jurisdiction. Once shares are forfeited, they are not eligible to be reissued. The price per share is determined
by using the closing price of the common shares the day before they are withheld.
Preferred Shares
The Company is authorized to issue up to 100,000,000 preferred shares, $.01 par value per share. No preferred shares
were outstanding at December 31, 2015.
Operating Partnership Units
Holders of common units in the Operating Partnership, if and when issued, will have certain redemption rights, which
will enable the unit holders to cause the Operating Partnership to redeem their units in exchange for, at the Company’s option,
cash per unit equal to the market price of the Company’s common shares at the time of redemption or for the Company’s
common shares on a one-for-one basis. The number of shares issuable upon exercise of the redemption rights will be adjusted
upon the occurrence of share splits, mergers, consolidations or similar pro-rata share transactions, which otherwise would have
the effect of diluting the ownership interests of limited partners or shareholders. As of December 31, 2015 and 2014, there were
no Operating Partnership common units held by unaffiliated third parties.
At December 31, 2015 and 2014, an aggregate of 257,775 and 257,775 LTIP units, respectively, a special class of
operating partnership units, were held by executive officers. The LTIP units receive per unit distributions equal to the per share
distribution paid on common shares. Upon the closing of the Company's equity offering on September 30, 2013, the Company
determined that a revaluation event occurred, as defined in the Internal Revenue Code of 1986, as amended, and 26,250 LTIP
units of one of the officers of the Company achieved full parity with the common units of the Operating Partnership with
respect to liquidating distributions and all other purposes. All of these LTIP units have vested. As of June 4, 2014, the
Company determined that a revaluation event occurred, as defined in the Internal Revenue Code of 1986, as amended, and
231,525 LTIP units of the other two officers of the Company achieved full parity with the common units of the Operating
Partnership with respect to liquidating distributions and all other purposes. All of the units that have reached parity have vested
as of December 31, 2015. Accordingly, these LTIP units will be allocated their pro-rata share of the Company's net income
(loss).
At December 31, 2015 and 2014, an aggregate of 183,300 and 0 Class A Performance LTIP units, respectively, were
held by executive officers. Prior to vesting, holders of Class A Performance LTIP Units will not be entitled to vote their Class
A Performance LTIP units. In addition, under the terms of the Class A Performance LTIP units, a holder of a Class A
Performance LTIP unit will generally (i) be entitled to receive 10% of the distributions made on a common unit of the
Operating Partnership during the period prior to vesting of such Class A Performance LTIP unit (the “Pre-Vesting
Distributions”), (ii) be entitled, upon the vesting of such Class A Performance LTIP unit, to receive a special one-time “catch-
up” distribution equal to the aggregate amount of distributions that were paid on a common unit during the period prior to
vesting of such Class A Performance LTIP unit minus the aggregate amount of Pre-Vesting Distributions paid on such Class A
Performance LTIP unit, and (iii) be entitled, following the vesting of such Class A Performance LTIP unit, to receive the same
amount of distributions paid on a common unit of the Operating Partnership.
F-27
10.
Earnings Per Share
The two class method is used to determine earnings per share because unvested restricted shares and unvested LTIP
units are considered to be participating shares. Unvested restricted shares, unvested long-term incentive plan units and unvested
Class A Performance units that could potentially dilute basic earnings per share in the future would not be included in the
computation of diluted loss per share, for the periods where a loss has been recorded, because they would have been anti-
dilutive for the periods presented. The following is a reconciliation of the amounts used in calculating basic and diluted net
income per share (in thousands, except share and per share data):
For the year ended
December 31,
2015
2014
2013
Numerator:
Net income
Dividends paid on unvested shares and LTIP units
Undistributed earnings allocated to unvested shares and LTIP units
Net income attributable to common shareholders
Denominator:
Weighted average number of common shares - basic
Effect of dilutive securities:
Unvested shares
Weighted average number of common shares - diluted
$
$
$
$
32,966
(151)
— $
32,815
$
$
66,873
(216)
(324) $
$
66,333
2,982
(294)
—
2,688
37,917,871
28,531,094
21,035,892
404,414
315,630
247,939
38,322,285
28,846,724
21,283,831
Basic income per Common Share:
Net income attributable to common shareholders per weighted average
common share
Diluted income per Common Share:
Net income attributable to common shareholders per weighted average
common share
$
$
0.87
$
2.32
$
0.13
0.86
$
2.30
$
0.13
11.
Equity Incentive Plan
The Company maintains its Equity Incentive Plan to attract and retain independent trustees, executive officers and
other key employees and service providers. The Equity Incentive Plan provides for the grant of options to purchase common
shares, share awards, share appreciation rights, performance units, LTIP units and other equity-based awards. The Equity
Incentive Plan was amended and restated as of May 17, 2013 to increase the maximum number of shares available under the
Equity Incentive Plan to 3,000,000 shares. Share awards under this plan generally vest over three to five years, though
compensation for the Company’s independent trustees includes shares granted that vest immediately. The Company pays
dividends on unvested shares and units, except for performance-based shares, for which dividends on unvested performance-
based shares are not paid until those shares are vested and Class A Performance LTIP units, for which dividends are paid based
on 10% of the declared amount until the Class A Performance LTIP units vest, at which time the remaining 90% of the
dividends is paid. Certain awards may provide for accelerated vesting if there is a change in control. As of December 31, 2015,
there were 2,013,791 common shares available for issuance under the Equity Incentive Plan.
F-28
Restricted Share Awards
A summary of the restricted shares granted to executive officers that have not fully vested pursuant to the Equity
Incentive Plan as of December 31, 2015 are:
Award Type
2013 Time-based Awards
2013 Performance-based Awards
2014 Time-based Awards
2014 Performance-based Awards
2015 Time-based Awards
2015 Performance-based Awards
2015 Time-based Awards
Award Date
Total Shares
Granted
1/29/2013
5/17/2013
1/31/2014
1/31/2014
1/30/2015
1/30/2015
6/1/2015
40,829
40,829
48,213
38,805
40,161
36,144
8,949
Vested as of
December 31, 2015
27,222
27,222
16,071
12,935
—
—
—
Time-based shares will vest over a three-year period. The performance-based shares will be issued and vest over a
three-year period only if and to the extent that long-term performance criteria established by the Board of Trustees are met and
the recipient remains employed by the Company through the vesting date.
The Company measures compensation expense for time-based vesting restricted share awards based upon the fair
market value of its common shares at the date of grant. For the performance-based shares granted in 2013, 2014 and 2015,
compensation expense is based on a valuation of $10.93, $13.17 and $21.21, respectively, per performance share granted,
which takes into account that some or all of the awards may not vest if long-term performance criteria are not met during the
vesting period.
The grant date fair value of the performance awards were determined using a Monte Carlo simulation method with the
following assumptions:
Performance Award
Grant Date
Volatility
Dividend Yield
Risk Free Interest
Rate
5/17/2013
1/31/2014
1/30/2015
35%
27%
29%
—%
—%
—%
0.43%
0.71%
0.84%
Compensation expense is recognized on a straight-line basis over the vesting period and is included in general and
administrative expense in the accompanying consolidated statements of operations. The Company pays dividends on non-
vested time-based restricted shares. Dividends for performance-based shares are accrued and paid annually only if and to the
extent that long-term performance criteria established by the Board of Trustees are met and the recipient remains employed by
the Company on the vesting date.
F-29
A summary of the Company’s restricted share awards for the years ended December 31, 2015, 2014 and 2013 is as
follows:
December 31, 2015
December 31, 2014
December 31, 2013
Number of
Shares
Weighted -
Average Grant
Date Fair
Value
Number of
Shares
Weighted -
Average Grant
Date Fair
Value
Number of
Shares
Weighted -
Average Grant
Date Fair
Value
Non-vested at beginning of the
period
Granted
Vested
Non-vested at end of the period
179,641
85,254
(94,415)
170,480
$
$
14.92
26.59
13.80
21.38
158,035
87,018
(65,412)
179,641
$
$
12.39
17.46
12.17
14.92
140,077
81,658
(63,700)
158,035
$
$
12.70
13.43
14.39
12.39
As of December 31, 2015 and 2014, there were $2,131 and $1,458, respectively, of unrecognized compensation costs
related to restricted share awards. As of December 31, 2015, these costs were expected to be recognized over a weighted–
average period of approximately 1.8 years. For the years ended December 31, 2015, 2014 and 2013, the Company recognized
approximately $1,594, $1,275 and $966, respectively, of expense related to the restricted share awards. This expense is
included in general and administrative expenses in the accompanying consolidated statements of operations.
Long-Term Incentive Plan Units
LTIP units are a special class of partnership interests in the Operating Partnership which may be issued to eligible
participants for the performance of services to or for the benefit of the Company. Under the Equity Incentive Plan, each LTIP
unit issued is deemed equivalent to an award of one common share thereby reducing the availability for other equity awards on
a one-for-one basis. The Company does not receive a tax deduction for the value of any LTIP units granted to employees.
Excluding Class A Performance LTIP units, which are discussed below and have specific distribution provisions relating to that
specific class of LTIP units. LTIP units, whether vested or not, receive the same per unit profit distributions as other
outstanding units of the Operating Partnership, which profit distribution will generally equal per share dividends on the
Company’s common shares. Initially, LTIP units have a capital account balance of zero, and do not have full parity with
common units with respect to liquidating distributions. The Operating Partnership will revalue its assets upon the occurrence of
certain specified events and any increase in valuation will be allocated first to the holders of LTIP units to equalize the capital
accounts of such holders with the capital accounts of the Operating Partnership unit holders. If such parity is reached, vested
LTIP units may be converted by the holder, at any time, into an equal number of common units in the Operating Partnership,
which may be redeemed, at the option of the holder, for cash or at the Company’s option an equivalent number of the
Company’s common shares.
On April 21, 2010, the Company’s Operating Partnership granted 246,960 LTIP units to the Company’s executive
officers pursuant to the Equity Incentive Plan, all of which are accounted for in accordance with FASB Codification Topic
(“ASC”) 718, “Stock Compensation”. On September 9, 2010, the Company’s Operating Partnership granted 26,250 LTIP units
to the Company’s then new Chief Financial Officer and 15,435 LTIP units granted to the Company’s former Chief Financial
Officer were forfeited. These LTIP units vest ratably over a five years period beginning on the date of grant. All of these LTIP
units have vested.
F-30
On June 1, 2015, the Company's Operating Partnership granted 183,300 Class A Performance LTIP units, as
recommended by the Compensation Committee of the Board (the “Compensation Committee”), pursuant to a long-term, multi-
year performance plan (the “Outperformance Plan”). The awards granted pursuant to the Outperformance Plan are subject to
two separate performance measurements, with 60% of the award (the "Absolute Award") based solely on the Company's total
shareholder return ("TSR") (the "Absolute TSR Component") and 40% of the award (the "Relative Award") measured by the
Company's TSR (the "Relative TSR Component") relative to the other companies (the "Index Companies") that were
constituents of the SNL US REIT Hotel Index (the "Index") during the entire measurement period. Under the Absolute TSR
Component, 37.5% of the Absolute Award is earned if the Company achieves a 25% TSR over the measurement period. That
percentage increases on a linear basis with the full Absolute Award being earned at a 50% TSR over the measurement period.
For TSR performance below 25%, no portion of the Absolute Award will be earned. Under the Relative TSR Component,
37.5% of the Relative Award is earned if the Company is at the 50th percentile of the Index Companies at the end of the
measurement period. That percentage increases on a linear basis with the full Relative Award earned if the Company is at the
75th percentile of the Index Companies at the end of the measurement period. If the Company is below the 50th percentile of
the Index Companies at the end of the measurement period, no portion of the Relative Award will be earned. Compensation
expense is based on an estimated value of $14.13 per Class A Performance LTIP unit, which takes into account that some or all
of the awards may not vest if long-term performance criteria are not met during the vesting period. Awards earned under the
Outperformance Plan will vest 50% at the end of the three-year measurement period on June 1, 2018 and 25% each on the one-
year and two-year anniversaries of the end of the three-year measurement period, or June 1, 2019 and 2020, respectively, and
provided that the recipient remains employed by the Company through the vesting dates. In the event of a Change in Control
(as defined in the executive officers’ employment agreements), Outperformance Plan awards will be earned contingent upon the
attainment of a pro rata TSR hurdle for the Absolute Award and achievement of the relative TSR percentile for the Relative
Award based upon the in-place formula and using the Change of Control as the end of measurement period. Vesting continues
to apply to awards earned upon a Change of Control, subject to full acceleration upon termination without cause or resignation
for good reason within 18 months of the Change of Control. Prior to vesting, holders of Class A Performance LTIP Units will
not be entitled to vote their Class A Performance LTIP units. In addition, under the terms of the Class A Performance LTIP
units, a holder of a Class A Performance LTIP unit will generally (i) be entitled to receive 10% of the distributions made on a
common unit of the Operating Partnership during the period prior to vesting of such Class A Performance LTIP unit (the “Pre-
Vesting Distributions”), (ii) be entitled, upon the vesting of such Class A Performance LTIP unit, to receive a special one-time
“catch-up” distribution equal to the aggregate amount of distributions that were paid on a common unit during the period prior
to vesting of such Class A Performance LTIP unit minus the aggregate amount of Pre-Vesting Distributions paid on such Class
A Performance LTIP unit, and (iii) be entitled, following the vesting of such Class A Performance LTIP unit, to receive the
same amount of distributions paid on a common unit of the Operating Partnership.
The LTIP units’ fair value was determined using a Monte Carlo approach. In determining the discounted value of the
LTIP units, the Company considered the inherent uncertainty that the LTIP units would never reach parity with the other common
units of the Operating Partnership and thus have an economic value of zero to the grantee. Additional factors considered in reaching
the assumptions of uncertainty included discounts for illiquidity; expectations for future dividends; limited or no operating history
as of the date of the grant; significant dependency on the efforts and services of our executive officers and other key members of
management to implement the Company's business plan; available acquisition opportunities; and economic environment and
conditions.
The grant date fair value of the performance LTIP awards were determined using a Monte Carlo simulation method
with the following assumptions (based on the three year risk free U.S. Treasury yield over the measurement period of the LTIP
awards):
Performance Award
Grant Date
6/1/2015
Volatility
Dividend Yield
Risk Free Interest
Rate
26%
4.5%
0.95%
F-31
The Company recorded $691, $783 and $783 in compensation expense related to the LTIP units for years ended
December 31, 2015, 2014 and 2013, respectively. As of December 31, 2015 and 2014, there was $2,166 and $267,
respectively, of total unrecognized compensation cost related to LTIP units. This cost is expected to be recognized over
approximately 3.2 years, which represents the weighted average remaining vesting period of the LTIP units. Upon the closing
of the Company's equity offering on September 30, 2013, the Company determined that a revaluation event occurred, as
defined in the Internal Revenue Code of 1986, as amended, and 26,250 LTIP units of one of the officers of the Company
achieved full parity with the common units of the Operating Partnership with respect to liquidating distributions and all other
purposes. All of these LTIP units have vested as of December 31, 2015. As of June 4, 2014, the Company determined that a
revaluation event occurred, as defined in the Internal Revenue Code of 1986, as amended, and 231,525 LTIP units of the other
two officers of the Company achieved full parity with the common units of the Operating Partnership with respect to
liquidating distributions and all other purposes. All of the LTIP units that have reached parity have vested as of December 31,
2015. Accordingly, these LTIP units were allocated their pro-rata share of the Company's net income.
Board of Trustee Share Compensation
For 2015, each independent trustee was compensated $100 for their services. For 2014, 2013 and 2012, each
independent trustee was compensated $75 for their services. Each trustee may elect to receive up to 100% of their
compensation in the form of shares, but must receive at least 50% in the form of shares. In January 2015, 2014 and 2013, the
Company issued 14,113, 16,542 and 22,536 common shares, respectively, to its independent trustees as compensation for
services performed in 2014, 2013 and 2012, respectively. The quantity of shares was calculated based on the average of the
closing price for the Company’s common shares on the NYSE for the last ten trading days preceding the reporting date. On
January 15, 2016, the Company distributed 26,488 common shares to its independent trustees for services performed in 2015.
12.
Commitments and Contingencies
Litigation
The nature of the operations of the Company's hotels exposes those hotels, the Company and the Operating
Partnership to the risk of claims and litigation in the normal course of their business. An affiliate of the Company is currently a
defendant, along with IHM, in a class action lawsuit pending in the San Diego County Superior Court. Two class action
lawsuits were filed on April 25, 2012 and February 27, 2013, respectively, and were subsequently consolidated on November 8,
2013 under the title Martinez et al v. Island Hospitality Management, Inc., et al. Case No. 37-2012-00096221-CU-OE-CTL.
The class action relates to fifteen hotels operated by IHM in the state of California and owned by affiliates of the Company, the
NewINK JV, the Innkeepers JV, and/or certain third parties. Both complaints in the now consolidated lawsuit allege various
wage and hour law violations including unpaid off-the-clock work, failure to provide meal breaks and failure to provide rest
breaks. The plaintiffs seek injunctive relief, money damages, penalties, and interest. We are defending our case vigorously. As
of December 31, 2015, included in accounts payable and expenses is $171, which represents an estimate of the Company's
exposure to the litigation and is also estimated as the maximum possible loss that the Company may incur.
Hotel Ground Rent
The Courtyard Altoona hotel is subject to a ground lease with an expiration date of April 30, 2029 with an extension
option by the Company of up to 12 additional terms of five years each. Monthly payments are determined by the quarterly
average room occupancy of the hotel. Rent is equal to approximately $8 per month when monthly occupancy is less than 85%
and can increase up to approximately $20 per month if occupancy is 100%, with minimum rent increased on an annual basis by
two and one-half percent (2.5%).
The Residence Inn San Diego Gaslamp hotel is subject to a ground lease with an expiration of January 31, 2065 with
an extension option of up to 3 additional terms of ten years each. Monthly payments are currently $40 per month and increase
10% every 5 years. The hotel is subject to supplemental rent payments annually calculated as 5% of gross revenues during the
applicable lease year, minus 12 times the monthly base rent scheduled for the lease year.
At the Residence Inn New Rochelle hotel is subject to an air rights lease and garage lease that each expires on
December 1, 2104. The lease agreements with the City of New Rochelle cover the space above the parking garage that is
occupied by the hotel as well as 128 parking spaces in a parking garage that is attached to the hotel. The annual base rent for
the garage lease is the hotel’s proportionate share of the city’s adopted budget for the operations, management and maintenance
of the garage and established reserves to fund the cost of capital repairs. Aggregate rent for 2015 under these leases amounted
to approximately $123.
F-32
The Hilton Garden Inn Marina del Rey hotel is subject to a ground lease with an expiration of December 31, 2067.
Minimum monthly payments are currently $43 per month and a percentage rent payment less the minimum rent is due in
arrears equal to 5% to 25% of gross income based on the type of income.
The Residence Inn Il Lugano hotel land is owned by the Company and is the lessee to an adjacent dock is subject to a
renewable submerged land lease with an expiration of April 1, 2016. Renewal of the submerged land lease is at the sole option
of the lessor. In the event the Company is in full compliance with the terms of the lease, the lessor is required to begin the
renewal process. The annual lease payment is $2.
The Company entered into a new corporate office lease in September 2015. The lease is for a term of 11 years and
includes a 12-month rent abatement period and certain tenant improvement allowances. The Company has a renewal option of
up to 2 successive terms of five years each. The Company will share the space with related parties and will be reimbursed for
the pro-rata share of rentable space occupied by the related parties.
Future minimum rental payments under the terms of all non-cancellable operating ground leases and the office lease
under which the Company is the lessee are expensed on a straight-line basis regardless of when payments are due. The
following is a schedule of the minimum future payments required under the ground, air rights, submerged, garage leases and
office lease as of December 31, 2015, and for each of the next four calendar years and thereafter (in thousands):
2016
2017
2018
2019
2020
Thereafter
Total
Other Leases(1) Office Lease
Amount
$
$
1,213 $
1,215
1,217
1,220
1,267
70,727
76,859 $
231
745
772
792
812
4,995
8,347
Management Agreements
The management agreements with Concord have an initial ten-year term that expire on February 28, 2017 and will
renew automatically for successive one-year terms unless terminated by the TRS lessee or the manager by written notice to the
other party no later than 90 days prior to the then current term’s expiration date. The management agreements may be
terminated for cause, including the failure of the managed hotel operating performance to meet specified levels. If the
Company were to terminate the management agreements during the first nine years of the initial term other than for breach or
default by the manager, the Company would be responsible for paying termination fees to the manager.
The management agreements with IHM have an initial term of five years and automatically renew for two five-year
periods unless IHM provides written notice to us no later than 90 days prior to the then current term's expiration date of its
intent not to renew. The IHM management agreements provide for early termination at the Company’s option upon sale of any
IHM-managed hotel for no termination fee, with six months advance notice. The IHM management agreements may be
terminated for cause, including the failure of the managed hotel to meet specified performance levels. Base management fees
are calculated as a percentage of the hotel's gross room revenue. If certain financial thresholds are met or exceeded, an
incentive management fee is calculated as 10% of the hotel's net operating income less fixed costs, base management fees and a
specified return threshold. The incentive management fee is capped at 1% of gross hotel revenues for the applicable
calculation.
F-33
As of December 31, 2015, Terms of the Company's management agreements are (dollars are not in thousands):
Property
Courtyard Altoona
Springhill Suites Washington
Homewood Suites by Hilton Boston-Billerica/ Bedford/
Burlington
Homewood Suites by Hilton Minneapolis-Mall of
America
Homewood Suites by Hilton Nashville-Brentwood
Homewood Suites by Hilton Dallas-Market Center
Homewood Suites by Hilton Hartford-Farmington
Homewood Suites by Hilton Orlando-Maitland
Homewood Suites by Hilton Carlsbad (North San Diego
County)
Hampton Inn & Suites Houston-Medical Center
Residence Inn Long Island Holtsville
Residence Inn White Plains
Residence Inn New Rochelle
Residence Inn Garden Grove
Residence Inn Mission Valley
Homewood Suites by Hilton San Antonio River Walk
Residence Inn Washington DC
Residence Inn Tysons Corner
Hampton Inn Portland Downtown
Courtyard Houston
Hyatt Place Pittsburgh North Shore
Hampton Inn Exeter
Hilton Garden Inn Denver Tech
Residence Inn Bellevue
Springhill Suites Savannah
Residence Inn Silicon Valley I
Residence Inn Silicon Valley II
Residence Inn San Mateo
Residence Inn Mountain View
Hyatt Place Cherry Creek
Courtyard Addison
Courtyard West University Houston
Residence Inn West University Houston
Hilton Garden Inn Burlington
Residence Inn San Diego Gaslamp
Hilton Garden Inn Marina del Rey
Residence Inn Dedham
Residence Inn Il Lugano
Management
Company
Base
Management
Fee
Monthly
Accounting
Fee
Monthly
Revenue
Management Fee
Incentive
Management Fee
Cap
—
—
550
550
550
550
550
550
—
—
—
—
—
—
—
—
—
—
550
550
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
Concord
Concord
4.0% $
4.0%
1,211 $
991
2.0%
2.0%
2.0%
2.0%
2.0%
2.0%
3.0%
3.0%
3.0%
3.0%
3.0%
2.5%
2.5%
2.5%
2.5%
2.5%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,500
1,200
1,500
1,200
1,200
1,200
1,200
1,200
1,200
1,500
1,500
1,500
1,200
1,500
1,500
1,500
1,200
1,500
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
IHM
F-34
—%
—%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
Management fees totaled approximately $8,742, $6,096 and $3,752, respectively, for the years ended December 31,
2015, 2014 and 2013. Incentive management fees paid to IHM for the years ended years ended December 31, 2015, 2014 and
2013 were $278, $161 and $63, respectively. There have been no incentive management fees paid to Concord.
F-35
Franchise Agreements
The Company’s TRS Lessees have entered into hotel franchise agreements with Promus Hotels, Inc., a subsidiary of
Hilton, Hampton Inns Franchise, LLC, Marriott International, Inc., Hyatt Hotels, LLC and Hilton Garden Inns Franchise, LLC.
Terms of the Company's franchise agreements are as of December 31, 2015:
Property
Homewood Suites by Hilton Boston-Billerica/ Bedford/ Burlington
Homewood Suites by Hilton Minneapolis-Mall of America
Homewood Suites by Hilton Nashville-Brentwood
Homewood Suites by Hilton Dallas-Market Center
Homewood Suites by Hilton Hartford-Farmington
Homewood Suites by Hilton Orlando-Maitland
Homewood Suites by Hilton Carlsbad (North San Diego County)
Hampton Inn & Suites Houston-Medical Center
Courtyard Altoona
Springhill Suites Washington
Residence Inn Long Island Holtsville
Residence Inn White Plains
Residence Inn New Rochelle
Residence Inn Garden Grove
Residence Inn Mission Valley
Homewood Suites by Hilton San Antonio River Walk
Residence Inn Washington DC
Residence Inn Tysons Corner
Hampton Inn Portland Downtown
Courtyard Houston
Hyatt Place Pittsburgh North Shore
Hampton Inn Exeter
Hilton Garden Inn Denver Tech
Residence Inn Bellevue
Springhill Suites Savannah
Residence Inn Silicon Valley I
Residence Inn Silicon Valley II
Residence Inn San Mateo
Residence Inn Mountain View
Hyatt Place Cherry Creek
Courtyard Addison
Courtyard West University Houston
Residence Inn West University Houston
Hilton Garden Inn Burlington
Residence Inn San Diego Gaslamp
Hilton Garden Inn Marina del Rey
Residence Inn Dedham
Residence Inn Il Lugano
Franchise/
Royalty Fee
Marketing/
Program Fee Expiration
4.0%
4.0%
4.0%
4.0%
4.0%
4.0%
4.0%
5.0%
5.5%
5.0%
5.5%
5.5%
5.5%
5.0%
5.0%
4.0%
5.5%
5.0%
6.0%
5.5%
5.0%
6.0%
5.5%
5.5%
5.0%
5.5%
5.5%
5.5%
5.5%
3% to 5.0%
5.5%
5.5%
6.0%
5.5%
6.0%
3% to 5.5%
6.0%
3% to 6.0%
4.0%
4.0%
4.0%
4.0%
4.0%
4.0%
4.0%
4.0%
2.0%
2.5%
2.5%
2.5%
2.5%
2.5%
2.5%
4.0%
2.5%
2.5%
4.0%
2.0%
3.5%
4.0%
4.3%
2.5%
2.5%
2.5%
2.5%
2.5%
2.5%
3.5%
2.0%
2.0%
2.0%
4.3%
2.5%
4.3%
2.5%
2.5%
2025
2025
2025
2025
2025
2025
2028
2020
2030
2030
2025
2030
2030
2031
2031
2026
2033
2031
2032
2030
2030
2031
2028
2033
2033
2029
2029
2029
2029
2034
2029
2029
2024
2029
2035
2030
2030
2045
Franchise and marketing/program fees totaled approximately $21,240, $15,110 and $9,394, respectively, for the years
ended December 31, 2015, 2014 and 2013.
F-36
13.
Related Party Transactions
Mr. Fisher owns 51% of IHM and affiliates of NorthStar Asset Management Group, Inc. own 45%. As of
December 31, 2015, the Company had hotel management agreements with IHM to manage 36 of its wholly owned hotels. As
of December 31, 2015, all 47 hotels owned by the NewINK JV and 34 of the 48 hotels owned by the Inland JV were managed
by IHM. Hotel management, revenue management and accounting fees paid to IHM for the hotels owned by the Company for
the years ended December 31, 2015, 2014 and 2013 were $8,466, $5,761 and $3,448, respectively. At December 31, 2015 and
2014, the amounts due to IHM were $998 and $558, respectively. Incentive management fees paid to IHM by the Company for
the years ended December 31, 2015, 2014 and 2013 were $278, $161 and $63, respectively.
Cost reimbursements from unconsolidated real estate entities revenue represents reimbursements of costs incurred on
behalf of the Innkeepers, NewINK, Inland JVs and an entity Castleblack Owner Holding, LLC. ("Castleblack") which is 97.5%
owned by affiliates of NorthStar and 2.5% owned by Mr. Fisher. These costs relate primarily to corporate payroll costs at the
Innkeepers, NewINK and Inland JVs where the Company is the employer. As the Company records cost reimbursements based
upon costs incurred with no added markup, the revenue and related expense has no impact on the Company’s operating income
or net income. Cost reimbursements from the Innkeepers JV are recorded based upon the occurrence of a reimbursed activity.
Various shared office expenses and rent are paid by the Company and allocated to the NewINK JV, the Inland JV,
Castleblack and IHM based on the amount of square footage occupied by each entity. Insurance expenses for medical, workers
compensation and general liability are paid by the NewINK JV and allocated back to the hotel properties or applicable entity.
During 2014, Mr. Fisher entered into a joint venture agreement with NorthStar by which Mr. Fisher acquired a 2.5%
non-voting interest in Castleblack.
F-37
14.
Quarterly Operating Results (unaudited)
Quarter Ended - 2015
March 31
June 30
September 30 December 31
(in thousands, except share and per share data)
Total revenue
Total operating expenses
Operating income
Net income attributable to common shareholders
Income per common share, basic (1)
Income per common share, diluted (1)
$
58,916
$
72,257
$
78,229
$
50,487
8,429
1,411
0.04
0.04
54,191
18,066
12,763
0.33
0.33
58,115
20,114
14,315
0.37
0.37
67,548
58,634
8,914
4,477
0.12
0.12
Weighted average number of common shares outstanding:
Basic
Diluted
37,018,039
37,322,278
38,211,833
38,618,824
38,212,028
38,614,360
38,213,219
38,619,472
Quarter Ended - 2014
March 31
June 30
September 30 December 31
(in thousands, except share and per share data)
$
36,866
$
47,077
$
60,662
$
34,370
2,496
(1,808)
(0.07)
(0.07)
42,076
5,001
65,137
2.46
2.44
45,979
14,683
8,664
0.32
0.31
52,610
48,095
4,516
(5,660)
(0.16)
(0.16)
Total revenue
Total operating expenses
Operating income
Net income (loss) attributable to common shareholders
Income (loss) per common share, basic (1)
Income (loss) per common share, diluted (1)
Weighted average number of common shares outstanding:
Basic
Diluted
26,271,678
26,271.678
26,437,878
26,734.919
27,370,815
27,695.347
33,972,134
33,972.134
(1)
The sum of per share amounts for the four quarters may differ from the annual per share amounts due to the required method of computing
weighted-average number of common shares outstanding in the respective periods and share offerings that occurred during the year. Unvested restricted shares
and unvested LTIP units could potentially dilute basic earnings per share in the future were not included in the computation of diluted loss per share, for the
periods where a loss has been recorded, because they would have been anti-dilutive for the periods presented.
F-38
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F
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Amendment No. 1)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2015
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-34693
CHATHAM LODGING TRUST
(Exact Name of Registrant as Specified in Its Charter)
Maryland
(State or Other Jurisdiction of
Incorporation or Organization)
222 Lakeview Ave, Suite 200
West Palm Beach, Florida
(Address of Principal Executive Offices)
27-1200777
(I.R.S. Employer
Identification No.)
33401
(Zip Code)
(561) 802-4477
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Shares of Beneficial Interest, par value $0.01 per share
Name of Each Exchange on Which Registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
No
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
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files).
Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) 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 the Form 10-K.
Yes
No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
(Do not check if a smaller reporting company)
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
The aggregate market value of the 38,306,743 common shares of beneficial interest held by non-affiliates of the registrant was $1,013,979,487.21 based
on the closing sale price on the New York Stock Exchange for such common shares of beneficial interest as of June 30, 2015.
The number of common shares of beneficial interest outstanding as of February 29, 2016 was 38,338,183.
Portions of the registrant's Definitive Proxy Statement for its 2016 Annual Meeting of Shareholders (to be filed with the Securities and Exchange
Commission on or before April 29, 2016) are incorporated by reference into this Annual Report on Form 10-K in response to Part III hereof.
DOCUMENTS INCORPORATED BY REFERENCE
EXPLANATORY NOTE
Chatham Lodging Trust is filing this Amendment No. 1 ("Amendment No. 1") to its Annual Report on Form 10-K (the
"Report") for the fiscal year ended December 31, 2015 filed with the Securities and Exchange Commission on February 29,
2016. As disclosed in the Report, the Company had two equity method investments that met the conditions of a significant
subsidiary under Rule 1-02(w) as required by Rule 3-09 of Regulation S-X as of December 31, 2015 from 2014.
Amendment No. 1 to the Report is being filed solely to include the separate financial statements of INK Acquisition,
LLC & Affiliates ("NewINK JV") and IHP I Owner JV, LLC and Affiliates ("Inland JV"), as provided in Exhibits 99.1 and
99.2, respectively, attached hereto. In connection with the filing of this Amendment No. 1 to the Report and pursuant to Rule
12b-15 of the Securities Exchange Act of 1934, as amended, the currently dated certifications of the principal executive officer
and principal financial officer of the Company are attached as exhibits hereto.
Except as otherwise expressly noted herein, this Amendment No. 1 to the Report does not amend any other
information set forth in the Report, and we have not updated disclosures therein to reflect any events that occurred at a date
subsequent to the date of the Report. Accordingly, this Amendment No. 1 should be read in conjunction with the Report.
3
Item 15.
Exhibits and Financial Statement Schedules.
1.
2.
3.
Financial Statements
Included at pages F-1 through F-7 of the Company's Annual Report on Form 10-K for the year ended December
31, 2015 filed with the Securities and Exchange Commission on February 29, 2016.
Financial Statement Schedules
The following financial statement schedule is included at pages F-38 through F-39 of the Company's Annual
Report on Form 10-K for the year ended December 31, 2015 filed with the Securities and Exchange Commission on
February 29, 2016: Schedule III - Real Estate and Accumulated Depreciation.
The financial statements of NewINK JV and Inland JV as required by Item 3-09 of Regulation S-X are included
in Exhibits 99.1 and 99.2 hereto, respectively, and are incorporated by reference herein.
A list of exhibits required to be filed as part of this report on Form 10-K is set forth in the Exhibit Index, which
immediately follows this item.
4
Exhibit
Number
Description of Exhibit
Exhibit Index
3.1
3.2
10.1*
10.2*
10.3*
10.4*
10.5*
10.6*
10.7*
10.8*
10.9*
10.10*
10.11*
10.12*
10.13*
10.14*
10.15*
10.16*
10.17*
10.18*
10.19*
10.20*
10.21*
10.22*
10.23*
10.24*
10.25*
Articles of Amendment and Restatement of Chatham Lodging Trust(19)
Second Amended and Restated Bylaws of Chatham Lodging Trust(1)
Chatham Lodging Trust Equity Incentive Plan, Amended and Restated as of May 17, 2013 (2)
Employment Agreement between Chatham Lodging Trust and Jeffrey H. Fisher(19)
Employment Agreement between Chatham Lodging Trust and Peter Willis(19)
Employment Agreement between Chatham Lodging Trust and Dennis M. Craven(19)
Employment Agreement between Chatham Lodging Trust and Jeremy Wegner(3)
First Amendment to Employment Agreement of Peter Willis dated January 30, 2015(4)
First Amendment to Employment Agreement of Dennis Craven dated January 30, 2015(4)
Form of Indemnification Agreement between Chatham Lodging Trust and its officers and trustees(5)
Form of LTIP Unit Vesting Agreement(5)
Form of Share Award Agreement for Trustees(5)
Form of Share Award Agreement for Officers(6)
Share Award Agreement, dated as of May 17, 2013, between Chatham Lodging Trust and Jeffrey H. Fisher
(Performance-Based Share Awards)(7)
Share Award Agreement, dated as of May 17, 2013, between Chatham Lodging Trust and Dennis M. Craven
(Performance-Based Share Awards)(7)
Share Award Agreement, dated as of May 17, 2013, between Chatham Lodging Trust and Peter Willis
(Performance-Based Share Awards)(7)
Share Award Agreement, dated as of January 31, 2014, between Chatham Lodging Trust and Jeffrey H. Fisher(8)
Share Award Agreement, dated as of January 31, 2014, between Chatham Lodging Trust and Dennis M. Craven
(8)
Share Award Agreement, dated as of January 31, 2014, between Chatham Lodging Trust and Peter Willis(8)
Share Award Agreement, dated as of January 31, 2014, between Chatham Lodging Trust and Jeffrey H. Fisher
(Performance-Based Share Awards) (8)
Share Award Agreement, dated as of January 31, 2014, between Chatham Lodging Trust and Dennis M. Craven
(Performance-Based Share Awards) (8)
Share Award Agreement, dated as of January 31, 2014, between Chatham Lodging Trust and Peter Willis
(Performance-Based Share Awards) (8)
Share Award Agreement, dated as of January 30, 2015, between Chatham Lodging Trust and Jeffrey H. Fisher(9)
Share Award Agreement, dated as of January 30, 2015, between Chatham Lodging Trust and Dennis M. Craven
(9)
Share Award Agreement, dated as of January 30, 2015, between Chatham Lodging Trust and Peter Willis(9)
Share Award Agreement, dated as of January 30, 2015, between Chatham Lodging Trust and Jeffrey H. Fisher
(Performance-Based Share Awards) (9)
Share Award Agreement, dated as of January 30, 2015, between Chatham Lodging Trust and Dennis M. Craven
(Performance-Based Share Awards) (9)
5
10.26*
10.27*
10.28*
10.29*
10.30*
10.31
10.32
10.33
10.34
10.35
10.36
10.37
10.38
10.39
10.40
10.41
10.42*
10.43*
12.1
21.1
23.1
23.2
23.3
23.4
31.1
31.2
31.3
31.4
Share Award Agreement, dated as of January 30, 2015, between Chatham Lodging Trust and Peter Willis
(Performance-Based Share Awards) (9)
Share Award Agreement, dated as of June 1, 2015, between Chatham Lodging Trust and Jeremy Wegner(10)
LTIP Unit Award Agreement, dated as of June 1, 2015, between Chatham Lodging Trust, Chatham Lodging,
L.P. and Jeffrey Fisher (Outperformance Plan) (11)
LTIP Unit Award Agreement, dated as of June 1, 2015, between Chatham Lodging Trust, Chatham Lodging,
L.P. and Dennis Craven (Outperformance Plan) (12)
LTIP Unit Award Agreement, dated as of June 1, 2015, between Chatham Lodging Trust, Chatham Lodging,
L.P. and Peter Willis (Outperformance Plan) (13)
Agreement of Limited Partnership of Chatham Lodging, L.P.(5)
First Amendment to the Agreement of Limited Partnership of Chatham Lodging, L.P.(10)
Form of IHM Hotel Management Agreement(5)
Third Amended and Restated Limited Liability Company Agreement of INK Acquisition LLC, dated as of June
9, 2014, by and between Platform Member-T, LLC and Chatham Lodging, L.P.(14)
Second Amended and Restated Limited Liability Company Agreement of INK Acquisition III, LLC, dated as of
June 9, 2014, by and between Platform Member Holdings-T Cam2, LLC and Chatham TRS Holding, Inc.(14)
Loan Agreement, dated as of June 9, 2014, between Grand Prix Sili II, LLC, as borrower, and JP Morgan Chase
Bank, National Association, as lender.(14)
Sales Agreement, dated January 31, 2014, by and among Chatham Lodging Trust, Chatham Lodging, L.P. and
Cantor Fitzgerald & Co.(15)
Limited Liability Company Agreement of IHP I Owner JV, LLC, dated as of November 17, 2014, by and
between Platform Member II-T, LLC and Chatham IHP, LLC.(16)
Limited Liability Company Agreement of IHP I Owner OPs JV, LLC, dated as of November 17, 2014, by and
between Platform Member Holdings II-T Cam2, LLC and Chatham TRS Holding, Inc.(16)
Sales Agreement, dated January 13, 2015 by and among Chatham Lodging Trust, Chatham Lodging, L.P. and
Barclays Capital Inc.(17)
Credit Agreement, dated as of November 25, 2015, among Chatham Lodging Trust, Chatham Lodging, L.P., the
lenders party thereto and Barclays Bank PLC, as administrative agent(18)
Form of 2016 Time-Based LTIP Unit Award Agreement(19)
Form of 2016 Performance-Based LTIP Unit Award Agreement(19)
Statement of computation of ratio of earnings to fixed charges and preferred share dividends(19)
List of Subsidiaries of Chatham Lodging Trust(19)
PricewaterhouseCoopers LLP Consent to include Report on Financial Statements of Chatham Lodging Trust(19)
PricewaterhouseCoopers LLP Consent to include Report on Financial Statements of INK Acquisition, LLC &
Affiliates and IHP I Owner JV, LLC and Affiliates
Grant Thornton LLP Consent to include Report on Financial Statements of INK Acquisition, LLC & Affiliates
Grant Thornton LLP Consent to include Report on Financial Statements of IHP I Owner JV, LLC and Affiliates
Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act
of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(19)
Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of
1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(19)
Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act
of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of
1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
6
32.1
32.2
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(19)
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS** XBRL Instance Document
101.SCH** XBRL Taxonomy Extension Schema Document
101.CAL** XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF** XBRL Taxonomy Extension Definition Linkbase Document
101.LAB** XBRL Taxonomy Extension Label Linkbase Document
101.PRE** XBRL Taxonomy Extension Presentation Linkbase Document
* Denotes management contract or compensation plan or arrangement in which trustees or officers are eligible to participate.
** Submitted electronically herewith. Attached as Exhibit 101 to this report are the following documents formatted in XBRL
(Extensible Business Reporting Language): (i) Consolidated Balance Sheets at December 31, 2015 and 2014; (ii)
Consolidated Statements of Operations for the years ended December 31, 2015, 2014 and 2013; (iii) Consolidated
Statements of Equity for the years ended December 31, 2015, 2014 and 2013; (iv) Consolidated Statements of Cash Flows
for the years ended December 31, 2015, 2014 and 2013; and (v) Notes to the Consolidated Financial Statements.
7
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)
(15)
(16)
(17)
(18)
(19)
Incorporated by reference to the Registrant's Current Report on Form 8-K filed with the SEC on April 21,
2015 (File No. 001-34693).
Incorporated by reference to the Registrant's Definitive Proxy Statement on Schedule 14A filed on April 15,
2013 (File No. 001-34693).
Incorporated by reference to the Registrant’s Current Report on Form 8-K filed with the SEC on May 5,
2015 (File No. 001-34693).
Incorporated by reference to the Registrant's Current Report on Form 8-K filed with the SEC on February 5,
2015 (File No. 001-34693).
Incorporated by reference to Amendment No. 4 to the Registrant’s Registration Statement on Form S-11
filed with the SEC on February 12, 2010 (File No. 333-162889).
Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q filed with the SEC on August
13, 2010 (File No. 001-34693).
Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q filed with the SEC on August
8, 2013 (File No. 001-34693).
Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on May 9,
2014 (File No. 001-34693).
Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q filed with the SEC on May 8,
2015 (File No. 001-34693).
Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q filed with the SEC on August
6, 2015 (File No. 001-34693).
Incorporated by reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q filed with the
SEC on August 6, 2015 (File No. 001-34693).
Incorporated by reference to Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q filed with the
SEC on August 6, 2015 (File No. 001-34693).
Incorporated by reference to Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q filed with the
SEC on August 6, 2015 (File No. 001-34693).
Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q filed with the SEC on August
11, 2014 (File No. 001-34693).
Incorporated by reference to the Registrant's Current Report on Form 8-K filed with the SEC on January 31,
2014 (File No. 001-34693).
Incorporated by reference to the Registrant's Current Report on Form 8-K filed with the SEC on November
20, 2014 (File No. 001-34693).
Incorporated by reference to the Registrant's Current Report on Form 8-K filed with the SEC on January 15,
2015 (File No. 001-34693).
Incorporated by reference to the Registrant’s Current Report on Form 8-K filed with the SEC on November
30, 2015 (File No. 001-34693).
Incorporated by reference to the Registrant’s Annual Report on Form 10-K filed with the SEC on February
29, 2016 (File No. 001-34693).
8
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.
SIGNATURE
Dated: March 24, 2016
CHATHAM LODGING TRUST
/s/ JEFFREY H. FISHER
Jeffrey H. Fisher
Chairman of the Board, President and Chief
Executive Officer
(Principal Executive Officer)
9
Exhibit 99.1
INK Acquisition, LLC & Affiliates
Financial Statements
As of December 31, 2015 and 2014 and for the year ended December 31, 2015, periods from June 9, 2014 to
December 31, 2014; January 1, 2014 to June 9, 2014, and the year ended December 31, 2013
With Reports of Independent Certified Public Accountants
1
Report of Independent Certified Public Accountants
To the Partners of
INK Acquisition, LLC & Affiliates
We have audited the accompanying combined financial statements of INK Acquisition, LLC & Affiliates, which
comprise the combined balance sheet as of December 31, 2015, and the related combined statements of operations,
changes in owners’ equity (deficit), and cash flows for the year then ended.
Management's Responsibility for the Combined Financial Statements
Management is responsible for the preparation and fair presentation of the combined financial statements in
accordance with accounting principles generally accepted in the United States of America; this includes the design,
implementation, and maintenance of internal control relevant to the preparation and fair presentation of combined
financial statements that are free from material misstatement, whether due to fraud or error.
Auditor's Responsibility
Our responsibility is to express an opinion on the combined financial statements based on our audit. We conducted
our audit in accordance with auditing standards generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the combined
financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
combined financial statements. The procedures selected depend on our judgment, including the assessment of the
risks of material misstatement of the combined financial statements, whether due to fraud or error. In making those
risk assessments, we consider internal control relevant to the Company's preparation and fair presentation of the
combined financial statements in order to design audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company's internal control. Accordingly, we
express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the
reasonableness of significant accounting estimates made by management, as well as evaluating the overall
presentation of the combined financial statements. We believe that the audit evidence we have obtained is sufficient
and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the combined financial statements referred to above present fairly, in all material respects, the
financial position of INK Acquisition, LLC & Affiliates as of December 31, 2015, and the results of their operations
and their cash flows for the year then ended in accordance with accounting principles generally accepted in the
United States of America.
/s/ PricewaterhouseCoopers LLP
Fort Lauderdale, Florida
March 24, 2016
2
Report of Independent Certified Public Accountants
To the Partners of
INK Acquisition, LLC & Affiliates
We have audited the accompanying combined financial statements of INK Acquisition, LLC (a Delaware limited
liability company) & Affiliates, which comprise the combined balance sheet as of December 31, 2014 (Successor),
and the related combined statements of operations, changes in owners' equity, and cash flows for the period June 9,
2014 through December 31, 2014 (Successor), and the related notes to the financial statements.
Management's responsibility for the financial statements
Management is responsible for the preparation and fair presentation of these combined financial statements in
accordance with accounting principles generally accepted in the United States of America; this includes the design,
implementation, and maintenance of internal control relevant to the preparation and fair presentation of combined
financial statements that are free from material misstatement, whether due to fraud or error.
Auditor's responsibility
Our responsibility is to express an opinion on these combined financial statements based on our audit. We
conducted our audit in accordance with auditing standards generally accepted in the United States of America.
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
combined financial statements are free from material misstatements.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
combined financial statements. The procedures selected depend on the auditor's judgment, including the assessment
of risks of material misstatement of the combined financial statements, whether due to fraud or error. In making
those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation
of the combined financial statements in order to design audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly,
we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and
the reasonableness of significant accounting estimates made by management, as well as evaluating the overall
presentation of the combined financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit
opinion.
Opinion
In our opinion, the combined financial statements referred to above present fairly, in all material respects, the
financial position of INK Acquisition, LLC & Affiliates as of December 31, 2014 (Successor) and the results of
their operations and their cash flows for the period from June 9, 2014 through December 31, 2014 (Successor) in
accordance with accounting principles generally accepted in the United States of America.
/s/ GRANT THORNTON LLP
Philadelphia, Pennsylvania
April 2, 2015
3
Report of Independent Certified Public Accountants
To the Partners of
INK Acquisition, LLC & Affiliates
We have audited the accompanying combined financial statements of INK Acquisition, LLC & Affiliates, which
comprise the combined balance sheet as of December 31, 2013, and the related combined statements of operations,
changes in owners’ equity (deficit), and cash flows for the year ended December 31, 2013 and for the period from
January 1, 2014 to June 9, 2014.
Management's Responsibility for the Combined Financial Statements
Management is responsible for the preparation and fair presentation of the combined financial statements in
accordance with accounting principles generally accepted in the United States of America; this includes the design,
implementation, and maintenance of internal control relevant to the preparation and fair presentation of combined
financial statements that are free from material misstatement, whether due to fraud or error.
Auditor's Responsibility
Our responsibility is to express an opinion on the combined financial statements based on our audits. We conducted
our audits in accordance with auditing standards generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the combined
financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
combined financial statements. The procedures selected depend on our judgment, including the assessment of the
risks of material misstatement of the combined financial statements, whether due to fraud or error. In making those
risk assessments, we consider internal control relevant to the Company's preparation and fair presentation of the
combined financial statements in order to design audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company's internal control. Accordingly, we
express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the
reasonableness of significant accounting estimates made by management, as well as evaluating the overall
presentation of the combined financial statements. We believe that the audit evidence we have obtained is sufficient
and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the combined financial statements referred to above present fairly, in all material respects, the
financial position of INK Acquisition, LLC & Affiliates as of December 31, 2013, and the results of their operations
and their cash flows for the years ended December 31, 2013 and 2012 and for the period from January 1, 2014 to
June 9, 2014 in accordance with accounting principles generally accepted in the United States of America.
/s/ PricewaterhouseCoopers LLP
Fort Lauderdale, Florida
March 31, 2015
4
INK Acquisition, LLC & Affiliates
Combined Balance Sheets
(In thousands)
December 31, 2015
December 31, 2014
Assets:
Investment in hotel properties, net
Cash and cash equivalents
Restricted cash
Hotel receivables (net of allowance for doubtful accounts of $389
and $389, respectively)
Deferred costs, net
Prepaid expenses and other assets
Total assets
Liabilities and Owner's Equity:
Debt
Accounts payable and accrued expenses
Total liabilities
Owners' Equity (Deficit)
Contributions
Distributions and accumulated deficit
Total owners' equity (deficit)
Total liabilities and owners' equity (deficit)
$
$
$
$
907,216
$
15,466
56,268
2,466
6,599
5,113
929,635
9,199
80,793
5,828
13,677
5,389
993,128
$
1,044,521
840,000
$
16,763
856,763
215,282
(78,917)
136,365
840,000
19,540
859,540
215,282
(30,301)
184,981
993,128
$
1,044,521
The accompanying notes are an integral part of these combined financial statements.
5
INK Acquisition, LLC & Affiliates
Combined Statements of Operations
(In thousands)
Successor
Predecessor
For the year ended
December 31, 2015
Period from June
9, 2014 through
December 31,
2014
Period from
January 1, 2014
through June 9,
2014
For the year ended
December 31, 2013
Revenue:
Room
Food and beverage
Other
Total revenue
Expenses:
Hotel operating expenses:
Room
Food and beverage
Telephone
Other hotel operating
General and administrative
Franchise and marketing fees
Advertising and promotions
Utilities
Repairs and maintenance
Management fees to related party
Insurance
Total hotel operating expenses
Depreciation and amortization
Property taxes and insurance
General and administrative
Hotel property acquisition costs and
other charges
Total operating expenses
Operating income
Interest and other income
Interest expense, including
amortization of deferred fees
Loss on early extinguishment of
debt
Income (loss) from continuing
operations
Loss from discontinued operations
Loss on sale of discontinued
operations
Net loss from discontinued operations
$
237,545
$
129,138
$
112,588
$
12,312
5,584
255,441
49,147
9,211
2,146
2,424
24,208
19,335
5,486
11,153
13,695
7,661
1,633
146,099
47,846
11,889
2,812
786
209,432
46,009
36
7,112
3,166
4,640
2,390
139,416
119,618
26,960
5,315
1,183
1,327
12,629
10,385
3,186
6,111
7,087
4,797
1,036
80,016
25,214
6,676
1,798
19,868
133,572
5,844
35
23,049
3,881
957
1,067
11,053
8,614
3,090
5,624
6,740
3,185
855
68,115
20,809
5,834
2,753
28
97,539
22,079
42
246,931
11,749
5,518
264,198
49,658
8,794
2,119
2,474
24,630
19,021
6,856
11,670
14,444
6,347
2,082
148,095
50,127
12,595
4,898
24
215,739
48,459
233
(37,411)
(21,180)
(24,571)
(55,672)
—
—
—
(8,863)
8,634
(15,301)
(2,450)
(15,843)
—
—
—
—
—
—
—
—
(15,301) $
—
(2,450) $
(274)
(2,456)
(2,730)
(18,573)
Net income (loss)
$
8,634
$
The accompanying notes are an integral part of these combined financial statements.
6
INK Acquisition, LLC & Affiliates
Combined Statements of Owners' Equity (Deficit)
(In thousands)
Contributions
Accumulated
Deficit/Gain
Distributions/
Other
Total Equity
Predecessor
Balance at December 31, 2012
Net loss
Distributions
Balance at December 31, 2013
Net loss
Distributions
360,000
—
—
360,000
—
—
Balance at June 9, 2014
$
360,000
$
(24,087)
(18,573)
—
(42,660)
(2,450)
—
(45,110) $
(206,297)
—
(126,394)
(332,691)
—
(4,000)
(336,691) $
129,616
(18,573)
(126,394)
(15,351)
(2,450)
(4,000)
(21,801)
Successor
Balance at June 9, 2014
$
Net loss
Contributions
Distributions
— $
—
215,282
—
— $
(15,301)
—
—
— $
—
—
(15,000)
Balance, beginning of period, December
31, 2014
$
215,282
$
Net income
Distributions
—
—
(15,301) $
8,634
—
(15,000) $
—
(57,250)
—
(15,301)
215,282
(15,000)
184,981
8,634
(57,250)
Balance, end of period, December 31,
2015
$
215,282
$
(6,667) $
(72,250) $
136,365
The accompanying notes are an integral part of these combined financial statements.
7
INK Acquisition, LLC & Affiliates
Combined Statement of Cash Flows
(In thousands)
Successor
Predecessor
For the year ended
December 31, 2015
Period from June
9, 2014 through
December 31,
2014
Period from
January 1, 2014
through June 9,
2014
For the year ended
December 31, 2013
Cash flow from operating activities:
Net income (loss)
$
8,634
$
(15,301) $
(2,450) $
(18,573)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation
47,589
25,072
20,659
Loss on early extinguishment of debt
Amortization of deferred franchise fees
Amortization of deferred financing costs
included in interest expense
Loss on sale of hotels in discontinued
operations
Changes in assets and liabilities:
Hotel receivables
Prepaid expenses and other assets
Deferred costs
Accounts payable and accrued expenses
Net cash provided by operating activities
Cash flows from investing activities:
Investment in hotel properties, net of cash
received
Improvements and additions to hotel properties
Proceeds from sale of assets
Payments for franchise fees and intangibles
Restricted cash
—
253
6,816
—
3,362
276
9
(2,240)
64,699
—
(25,707)
—
—
24,525
—
142
—
150
3,775
2,819
—
—
(5,828)
(5,389)
(191)
19,540
21,820
(911,733)
(20,856)
—
(3,954)
(80,793)
(4,272)
(1,100)
(19)
7,753
23,540
—
(17,135)
—
—
521
48,869
4,381
1,264
3,517
2,456
214
1,209
11
(6,895)
36,453
—
(30,133)
11,300
—
(32,284)
Net cash used in investing activities
(1,182)
(1,017,336)
(16,614)
(51,117)
Cash flows from financing activities:
Proceeds from the issuance of long-term debt
Payments of financing costs
Payments on debt
Payment of franchise obligation
Contributions from owners
Distributions to owners
—
—
—
—
—
(57,250)
840,000
(13,450)
—
—
193,165
(15,000)
—
—
—
—
—
950,000
(19,111)
(792,239)
(1,323)
—
(4,000)
(126,394)
Net cash provided by (used in) financing
activities
(57,250)
1,004,715
(4,000)
10,933
Change in cash and cash equivalents for assets held
for sale
Net change in cash and cash equivalents
Cash and cash equivalents, beginning of period
—
6,267
9,199
—
9,199
—
—
2,926
22,850
Cash and cash equivalents, end of period
$
15,466
$
9,199
$
25,776
$
27
(3,731)
26,554
22,850
Supplemental disclosure of cash flow information:
8
Cash paid for interest
Supplemental disclosure of non-cash information:
Accrued improvements and additions to hotel
properties
Chatham's equity was rolled-over from the
Predecessor company
$
$
$
30,447
$
15,628
$
20,076
53,139
319
$
857
$
1,407
$
1,594
— $
22,117
—
—
Successor
Predecessor
For the year
ended December
31, 2015
Period from
June 9, 2014
through
December 31,
2014
Period from
January 1,
2014 through
June 9, 2014
For the year
ended December
31, 2013
Non-cash changes related to distribution of four hotels to predecessor owner and successor recapitalization:
Investment in hotel properties
Net change in operating assets and liabilities
Debt
—
—
—
— $
—
—
92,127
34,432
(110,000)
—
—
—
See Note 3 to the financial statements for a description of assets and liabilities acquired in connection with the acquisition of 47
hotels from Old Ink JV (as defined in Note 1 to the financial statements) on June 9, 2014.
The accompanying notes are an integral part of these combined financial statements.
9
INK Acquisition, LLC & Affiliates
Notes to Financial Statements
(dollars in thousands)
1.
Organization
Predecessor
INK Acquisition, LLC and a series of affiliated limited liability companies (see below) were formed in 2011 to acquire
the assets and associated operations of 64 hotels as a result of the bankruptcy reorganization plan of affiliates of Innkeepers USA
Trust ("Innkeepers"). The affiliated limited liability companies, which are under common control, combined in these financial
statements are as follows:
INK Acquisition II, LLC
INK Acquisition III, LLC
INK Acquisition IV, LLC
INK Acquisition V, LLC
INK Acquisition VI, LLC
INK Acquisition VII, LLC
INK Acquisition, LLC and the affiliated limited liability companies above formed a joint venture (“Old Ink JV”) and were
each owned 89.7% by CRE-Ink REIT Member, LLC and its affiliates ("Cerberus") and 10.3% by Chatham Lodging, L.P.
("Chatham"). In addition, an entity owned by Jeffrey H. Fisher, the Chairman and Chief Executive Officer of Chatham Lodging
Trust, the sole general partner of Chatham, owned a 0.5% non-voting interest in CRE-Ink REIT Member, LLC. The Old Ink JV
had no substantive operations until October 27, 2011 when it acquired the 64 hotels. From 2011 to 2013, the Old Ink JV sold 13
of the 64 hotels.
In connection with a recapitalization transaction which closed on June 9, 2014, INK Acquisition II, LLC was dissolved and
INK Acquisition IV, V, VI and VII were contributed to INK Acquisition, LLC. The other four hotels that were part of Old Ink JV
were sold to Chatham.
Successor
After June 9, 2014, INK Acquisition, LLC owns 47 hotel properties through various limited liability companies. The
properties are leased to INK Acquisition III, LLC (hereinafter referred to as the "Affiliated Lessee"). INK Acquisition, LLC and
the Affiliated Lessee are under common control. Through wholly owned subsidiaries, NorthStar Realty Finance Corp. (“NorthStar”)
acquired Cerberus’ 89.7% interest in both INK Acquisition, LLC and the Affiliated Lessee, while the remaining 10.3% in these
entities are owned by Chatham. The new joint venture is referred to herein collectively as "Successor".
At December 31, 2015, the Successor owns 47 hotels with an aggregate of 6,097 (unaudited) rooms located in 16 states.
At December 31, 2015, the Successor hotels operate under the following brands: Residence Inn by Marriott (30 hotels), Hampton
Inn by Hilton (5 hotels), Hyatt House (5 hotels), Courtyard by Marriott (3 hotels), Four Points by Sheraton (1 hotel), Sheraton (1
hotel), TownePlace Suites (1 hotel), and Westin (1 hotel). As of December 31, 2015, management of all 47 of the Successor's
hotels is provided pursuant to management agreements with Island Hospitality Management Inc. ("IHM"), which is 51% owned
by Jeffrey H. Fisher, the Chairman of the Board and Chief Executive Officer of Chatham Lodging Trust, which is the sole general
partner of Chatham, and 45% owned by affiliates of NorthStar Asset Management Group, Inc.
2. Summary of Significant Accounting Policies
Basis of Presentation
The combined financial statements have been prepared on the accrual basis of accounting in accordance with accounting
principles generally accepted in the United States of America (“GAAP”). The combined financial statements include all of the
accounts of INK Acquisition, LLC and its subsidiaries and all of the accounts of the Affiliate Lessee. Combined financial statements
of INK Acquisition, LLC and the Affiliate Lessee, which are under common control and common management, have been presented
in order to provide more meaningful presentation of the operations of INK Acquisition, LLC. All intercompany accounts and
transactions have been eliminated. Due to the change in control on June 9, 2014 described above, the assets and liabilities have
been remeasured to fair value in the financial statements of the Successor. See Note 3 for further details.
10
These financial statements present information for the Old Ink JV under the header "Predecessor" and for the Successor
under the header "Successor". References to "Company" hereinafter refers to the accounting policies of both Successor and Old
Ink JV.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the balance
sheet date and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those
estimates. Significant estimates include the allocation of the purchase price of hotels, the allowance for doubtful accounts and the
fair value of hotels that are held for sale or impaired.
Fair Value of Financial Instruments
Financial Accounting Standards Board ("FASB") guidance on fair value measurements and disclosures defines fair value
for GAAP and establishes a framework for measuring fair value as well as a fair value hierarchy based on the quality and nature
of inputs used to measure fair value. The term “fair value” in these financial statements is defined in accordance with GAAP. The
hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1
measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy
are as follows:
Level 1 Inputs reflect unadjusted quoted prices in active markets for identical assets or liabilities that the Company has
the ability to access at the measurement date;
Level 2 Inputs represent other than quoted prices that are observable for the asset or liability either directly or indirectly,
including inputs in markets that are not considered to be active; and
Level 3 Inputs are those that are unobservable.
The carrying value of the Company's cash, accounts receivables, accounts payable and accrued expenses approximate
fair value because of the relatively short maturities of these instruments. The Company is not required to carry any other assets
or liabilities at fair value on a recurring basis other than its interest rate caps. The interest rate caps are valued using Level 3 inputs
and are valued at $0 and $144 as of December 31, 2015 and 2014, respectively.
When the Company classifies an asset as held for sale, the Company assesses whether the asset's carrying value is greater
than fair value less selling costs. If so, the asset is written down to fair value less selling costs on a nonrecurring basis. The fair
value determinations are based on Level 3 inputs as they are generally based on broker quotes or other comparable sales information.
The Company also disclosed the fair value of its variable rate debt based on estimates of current terms the Company
would expect to receive under the current market conditions, as compared to the terms and conditions of the Company's debt. The
fair value determination is based on Level 3 inputs as they are based on the fair value hierarchy.
Investment in Hotel Properties
The Company allocates the purchase prices of hotel properties acquired based on the fair value of the acquired real estate,
furniture, fixtures and equipment, identifiable intangible assets and assumed liabilities. In making estimates of fair value for
purposes of allocating the purchase price, the Company utilizes a number of sources of information that are obtained in connection
with the acquisition of a hotel property, including valuations performed by independent third parties and information obtained
about each hotel property resulting from pre-acquisition due diligence. Hotel property acquisition costs are expensed in the period
incurred.
The Company’s investment in hotel properties are carried at cost and are depreciated using the straight-line method over
the estimated useful lives of the assets, generally 15-40 years for buildings, 20 years for land improvements, 15 years for building
improvements and three to ten years for furniture, fixtures and equipment. Renovations and replacements at the hotel properties
that improve or extend the life of the assets are capitalized and depreciated over their useful lives, while repairs and maintenance
are expensed as incurred. Upon the sale or retirement of property and equipment, the cost and related accumulated depreciation
are removed from the Company’s accounts and any resulting gain or loss is recognized in the combined statements of operations.
11
The Company periodically reviews its hotel properties for impairment whenever events or changes in circumstances
indicate that the carrying value of the hotel properties may not be recoverable. Events or circumstances that may cause a review
include, but are not limited to, adverse changes in the demand for lodging at the properties due to declining national or local
economic conditions or new hotel construction in markets where the hotels are located. When such conditions exist, management
performs an analysis to determine if the estimated undiscounted future cash flows, without interest charges, from operations and
the net proceeds from the ultimate disposition of a hotel property exceed its carrying value. If the estimated undiscounted future
cash flows are less than the carrying amount, an adjustment to reduce the carrying amount to the related hotel property's estimated
fair market value is recorded and an impairment loss is recognized. No impairment charges on hotels held for use were recorded
for any of the periods presented.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand, demand deposits with financial institutions and short-term liquid
investments with an original maturity when purchased of three months or less. Cash balances in individual banks may exceed
federally insurable limits.
Restricted Cash
Restricted cash represents escrows for reserves required pursuant to the Company’s loans or hotel management
agreements. Included in restricted cash on the accompanying combined balance sheet at December 31, 2015 and 2014, are
renovation, property tax and insurance escrows of $56,268 and $80,793, respectively. The hotel mortgage loan agreements require
the Company to fund 4% of gross hotel revenues on a monthly basis for furnishings, fixtures and equipment and general repair
maintenance reserves (“Replacement Reserve”), in addition to property tax and insurance reserves, into an escrow account held
by the lender.
Hotel Receivables
Hotel receivables consist of amounts owed by guests staying at the Company’s hotels and amounts due from business
and group customers. An allowance for doubtful accounts is provided and maintained at a level believed to be adequate to absorb
estimated probable losses. At December 31, 2015 and 2014, the allowance for doubtful accounts was $389 and $389, respectively.
Deferred Costs
Deferred costs consisted of the following at December 31, 2015 and 2014:
Deferred costs
December 31, 2015 December 31, 2014
Loan costs
Franchise fees
Other
Less accumulated amortization
Deferred costs, net
$
$
13,450
$
3,954
197
17,601
(11,002)
6,599
$
13,450
3,954
202
17,606
(3,929)
13,677
On June 9, 2014, deferred costs associated with the Old Ink JV were revalued to zero. Loan costs are recorded by the
Company at cost and amortized over the term of the respective loan applying the effective interest rate method. Franchise fees
are recorded by the Company at cost and amortized over a straight-line basis over the term of the respective franchise agreements.
At December 31, 2015 and 2014, other deferred costs primarily relate to liquor licenses in the amounts of $187 and $187,
respectively. Amortization expense related to deferred loan costs was $6,816 for the year ended December 31, 2015 (Successor),
$3,775 for the Successor period ended December 31, 2014, $2,819 for the Predecessor period ended June 9, 2014, and $3,517 for
the year ended December 31, 2013 (Predecessor), which is included in interest expense in the combined statement of operations.
Prepaid Expenses and Other Assets
The Company’s prepaid expenses and other assets consist of prepaid insurance, prepaid property taxes, deposits, hotel
supplies inventory and the fair value of the Company’s interest rate caps.
12
Accounting for derivative instruments
The Company records its derivative instruments on the balance sheet at their estimated fair value. Changes in the fair
value of derivatives are recorded each period in current earnings or in other comprehensive income, depending on whether a
derivative is designated as part of a hedging relationship and, if it is, depending on the type of hedging relationship. The Company’s
interest rate caps are not designated as a hedge but to eliminate the incremental cost to the Company if one-month LIBOR interest
rate were to exceed 2.5% for the Successor year ended December 31, 2015 and period ended December 31, 2014; and 2.75% for
the Predecessor period from January 1, 2014 through June 9, 2014 and the Predecessor year ended December 31, 2013. Accordingly,
the interest rate caps are recorded on the balance sheet at estimated fair value with realized and unrealized changes in the fair value
reported in the combined statements of operations.
Revenue Recognition
Revenue from hotel operations is recognized by the Company when rooms are occupied and when services are provided.
Revenue consists of amounts derived from hotel operations, including sales from room, meeting room, restaurants, gift shop, in-
room movie and other ancillary amenities. Sales, use, occupancy, and similar taxes are collected and presented on a net basis
(excluded from revenue) in the accompanying combined statements of operations.
Income Taxes
The Company is a limited liability company (“LLC”) and has elected to be taxed as a partnership. Therefore, the Company
is solely a pass-through entity and does not have any federal or state income tax liabilities. Accordingly, the Company does not
record a provision for income taxes because the members report their share of the Company’s income or loss on their income tax
returns.
The Company is required to determine whether its tax positions are more likely than not to be sustained upon examination
by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits
of the position. The recognition of any tax benefit is measured as the largest amount of benefit that has a greater than fifty percent
likelihood of being realized upon ultimate settlement with the relevant taxing authority. De-recognition of a tax benefit previously
recognized results in the Company recording a tax liability that reduces ending members’ capital. Based on its analysis, the
Company has determined that it has not recognized any tax benefit nor incurred any liability for unrecognized tax benefits as of
December 31, 2015. However, the Company’s conclusions may be subject to review and adjustment at a later date based on factors
including, but not limited to, ongoing analyses of and changes to tax laws, regulations and interpretations thereof.
The Company recognizes interest and penalties related to unrecognized tax benefits in interest expense and other expenses,
respectively. No interest expense or penalties have been recognized as of and for the year ended December 31, 2015.
The Company files income tax returns in the U.S. federal jurisdiction, and may file income tax returns in various U.S.
states. The Company is subject to income tax examinations by major taxing authorities for all previous income tax returns filed.
Recently Issued Accounting Standards
On May 28, 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an entity
to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers.
The ASU will replace most existing revenue recognition guidance under GAAP when it becomes effective. The new standard is
effective for the Company on January 1, 2017. Early application is not permitted. The standard permits the use of either the
retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its
consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it
determined the effect of the standard on it financial statements.
In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entities Ability to Continue
as a Going Concern, which requires management to perform interim and annual assessments of an entities ability to continue
within one year of the date the financial statements are issued and provides guidance on determining when and how to disclose
going concern uncertainties in the financial statements. Certain disclosures will be required if conditions give rise to substantial
doubt about an entity's ability to continue as a going concern. This guidance is effective for the Company on January 1, 2017 and
will not have an impact on the Company's financial position, results of operations or cash flows.
13
In February 2015, the FASB issued ASU No. 2015-02, Amendments to the Consolidation Analysis, which requires
amendments to both the variable interest entity ("VIE") and voting models. The amendments (i) rescind the indefinite deferral of
certain aspects of accounting standards relating to consolidations and provide a permanent scope exception for registered money
market funds and similar unregistered money market funds, (ii) modify the identification of variable interests (fees paid to a
decision maker or service provider), the VIE characteristics for a limited partnership or similar entity and primary beneficiary
determination under the VIE model, and (iii) eliminate the presumption within the current voting model that a general partner
controls a limited partnership or similar entity. The new guidance is effective for annual reporting periods, and interim periods
within those annual periods, beginning after December 15, 2015 with early adoption permitted. The amendments may be applied
using either a modified retrospective or full retrospective approach. The Company is currently evaluating the effect the guidance
will have on its combined financial statements.
On April 7, 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires
debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the debt liability. This
standard is effective for fiscal years beginning after December 15, 2015 with early adoption permitted and will be applied on a
retrospective basis. Supplemental to ASU 2015-03, on August 16, 2015, the FASB issued Accounting Standards Update 2015-15,
Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements -Amendments
to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting, which clarifies that debt issuance costs
attributable to line-of-credit arrangements can be presented as an asset and amortized ratably over the life of the revolving debt
arrangement, regardless of whether there is an outstanding balance thereunder. This methodology is consistent with the Company’s
historical treatment of such costs. The new standard will be effective for the Company on January 1, 2016 and will not have a
material impact on the Company's financial position, results of operations or cash flows.
In September 2015, the FASB issued ASU No. 2015-16, Simplifying the Accounting for Measurement-Period Adjustments,
that eliminates the requirement to restate prior period financial statements for measurement period adjustments. The new guidance
requires an entity to recognize the adjustments to provisional amounts identified during the measurement period in the reporting
period in which the adjustments are determined. In addition, the adjustments must be disclosed by income statement line item
either on the face of the income statement or in the footnotes as if the adjustment to the provisional amounts had been recorded
as of the acquisition date. The amendment is effective prospectively for interim and annual periods beginning after December 15,
2015, with early adoption permitted for financial statements that have not been issued. We do not expect the new standard will
have a significant impact on our consolidated financial statements.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (ASU 2016-02), which will replace
most existing lease accounting guidance in U.S. GAAP. The core principle of the ASU is that an entity should recognize the rights
and obligations resulting from leases as assets and liabilities. ASU 2016-02 requires qualitative and specific quantitative disclosures
to supplement the amounts recorded in the financial statements so that users can understand more about the nature of an entity’s
leasing activities, including significant judgments and changes in judgments. ASU 2016-02 will be effective for the Company
beginning in fiscal 2020, and requires the modified retrospective method of adoption. Early adoption is permitted. The Company
is in the process of determining the method and timing of adoption and assessing the impact of ASU 2016-02 on its consolidated
financial statements.
3. Recapitalization
On June 9, 2014, wholly owned subsidiaries of NorthStar acquired Cerberus' 89.7% interest in INK Acquisition, LLC
and the Affiliated Lessee, which resulted in Successor acquiring 47 hotels from Old Ink JV. Prior to the recapitalization, the
Successor was funded with member contributions of $193,083. The Successor funded the acquisition with available cash, the
issuance of debt of $840,000 and the assumption of other liabilities of $2,405. The Successor incurred acquisition costs of $19,868
during 2014 related to the acquisition, of which $10,503 are based on debt breakage fees. The transaction resulted in a change in
control of Old Ink JV; accordingly it has been accounted for as a business combination.
14
Hotel Purchase Price Allocation
The following table presents the allocation of the purchase price of the assets acquired and the liabilities assumed by
the Successor, based on the fair value on the date of its acquisition (in thousands):
Land and improvements
Building and improvements
Acquired intangibles
Other assets acquired
Total assets acquired
$
$
Accounts payable and accrued expenses assumed $
Debt issued
Total liabilities
$
167,106
685,645
3,954
181,258
1,037,963
(2,405)
(840,000)
(842,405)
The value of the assets acquired was primarily based on a sales comparison approach (for land) and a depreciated
replacement cost approach (for building and improvements and furniture, fixtures and equipment). The sales comparison approach
uses inputs of recent land sales in the respective hotel markets. The depreciated replacement cost approach uses inputs of both
direct and indirect replacement costs using a nationally recognized authority on replacement cost information as well as the age,
square footage and number of rooms of the respective assets. Operating assets and liabilities are recorded at carrying value because
of the liquid nature of the assets and relatively short maturities of the obligations.
4. Allowance for Doubtful Accounts
The Company maintains an allowance for doubtful accounts at a level believed to be adequate to absorb losses and is
based on past loss experience, current economic and market conditions and other relevant factors. The allowance for doubtful
accounts was $389 and $389 as of December 31, 2015 and 2014, respectively.
5. Investment in Hotel Properties
Investment in hotel properties as of December 31, 2015 and 2014 consisted of the following:
December 31, 2015
December 31, 2014
Land and improvements
Building and improvements
Furniture, fixtures and equipment
Renovations in progress
Less accumulated depreciation
Investment in hotel properties, net
$
$
167,181
$
711,146
99,280
2,252
979,859
(72,643)
907,216
$
167,150
688,922
86,983
11,635
954,690
(25,055)
929,635
6. Debt
Debt is comprised of the following at December 31, 2015 and 2014:
Collateral
JPM Chase Loan-Successor(1)
Total
Interest
Rate
Maturity Date
3.72% December 9, 2016
12/31/15
Property
Carrying
Value
$ 904,963
$ 904,963
Balance Outstanding as of
December 31,
2015
December 31,
2014
$
$
840,000
840,000
$
$
840,000
840,000
15
(1) In connection with the recapitalization, the Successor refinanced the existing debt with a new $840.0 million, non-
recourse loan from JP Morgan Chase Bank, National Association, collateralized by the 47 hotels (the "Loan agreement"). The
new loan is a five year interest only loan comprised of a two year loan with three, one year extension options. The Company can
extend the loan provided that 1) no event of default shall have occurred and be continuing at the time the applicable extension
option is exercised and extended, 2) it obtains an interest rate cap, and 3) it provides certain notices as required in the loan agreement.
With respect to the third extension option, the Company must meet a minimum debt yield of 8.5% on the total amount outstanding
or prepay a portion of the debt to attain an 8.5% debt yield. Interest only payments are due monthly. The interest rate is based on
one-month LIBOR plus 3.39% (3.72% at December 31, 2015). Monthly payments are based on the number of days outstanding
during each period and the loan balance during the period. Payments are based on the weighted average rate. In connection with
entering into the loan, Chatham and NorthStar could be required under its unconditional guaranty to repay portions of this
indebtedness.
The Company estimates the fair value of its variable rate debt by taking into account general market conditions and the
estimated credit terms it could obtain for debt with similar maturity and is classified within Level 3 of the fair value hierarchy.
The Company’s only variable rate debt is under its JP Morgan Chase Bank, National Association loan. The estimated fair value
of the variable rate debt as of December 31, 2015 and 2014 was $840,074 and $840,102, respectively.
As of December 31, 2015, the Successor was in compliance with all of its financial covenants including, but not limited
to, the following:
(1) Chatham Guarantor (as defined in the Loan agreement) shall collectively maintain a Net Worth (as defined in
the Loan agreement) of not less than $225,000 in the aggregate; and
(2) Chatham Guarantor shall maintain Unencumbered Liquid Assets (as defined in the Loan agreement) of not less
than $25,000 of which (i) not less than $10,000 of Unencumbered Liquid Cash Assets (as defined in the Loan agreement) and (ii)
not less than $15,000 in Unencumbered Credit Line Capacity (as defined in the Loan agreement).
Future scheduled principal payments of Successor's debt obligations as of December 31, 2015, for each of the next five
calendar years and thereafter is as follows:
Amount
2016 $
840,000
2017
2018
2019
2020
Thereafter
—
—
—
—
—
$
840,000
7. Owners' Equity (Deficit)
The ownership of Successor at December 31, 2015 and 2014 was as follows:
Owners' Name
Platform Member-T LLC
Chatham Lodging, L.P.
Total
December 31, 2015
December 31, 2014
89.72 %
10.28 %
100.00%
89.72 %
10.28 %
100.00%
Under the terms of the Company's operating agreement, available cash from operations (as defined in the Company's
operating agreement) is to be distributed pari passu to the partners through the date of dissolution. In addition, available cash
from a capital event (as defined in the Company's operating agreement) is to be distributed to the partners subject to specified
internal rate of return tiers that could result in disproportionately greater distributions to Chatham upon meeting certain established
thresholds. Distributions paid by the Company during the periods ended December 31, 2015 and 2014 were $57,250 and $15,000,
respectively.
16
8. Concentration of Credit Risk
Cash is maintained with high-quality financial institutions and is insured by the Federal Deposit Insurance Corporation
(“FDIC”) up to $250,000 per financial institution. At times, cash balances may exceed the FDIC insured limits. Due to the highly
liquid nature of cash and the use of high-quality financial institutions, management believes that it has limited the Company's
credit exposure.
9. Commitments and Contingencies
Litigation
The nature of the operations of the hotels exposes the hotels and the Company to the risk of claims and litigation in the
normal course of their business. The Company is not presently subject to any material litigation nor, to the Company’s knowledge,
is any material litigation threatened against the Company or its properties.
An affiliate of the Company is currently a defendant, along with IHM, in a class action lawsuit filed in the San Diego
County Superior Court. The lawsuit alleges various wage and hour law violations concerning fifteen hotels operated by IHM in
the state of California and owned by affiliates of the Company, its Managing Member and/or certain third parties. All parties are
defending the case vigorously. As of December 31, 2015, the Company has not recorded a liability as all litigation relates to wage
and hour claims prior to the recapitalization event in June of 2014 and as such, the entire liability of Old Ink JV was subsequently
satisfied by the predecessor owners, and therefore should not impact the Successor.
Hotel Ground Rent
The Courtyard by Marriott in Ft. Lauderdale, FL hotel is subject to a ground lease with an expiration date of August 1,
2034. Rent is equal to approximately $9 per month, with minimum rent subject to annual increase based on increases in the
consumer price index.
The following is a schedule of the minimum future obligation payments required under the ground leases:
Amount
$
2016
2017
2018
2019
2020
Thereafter
Total
$
112
113
114
114
115
1,564
2,132
Hotel Management Agreements
As of December 31, 2015, all of the Successor hotels are managed by IHM. The management agreements with IHM
have an initial term of five years and may be extended subject to approval by both IHM and the Successor. Each of the IHM
management agreements provides for a base management fee of 3% of the managed hotel’s gross revenues. The Successor and
Predecessor management agreements with IHM also provide for accounting fees up to $1.20 per month per hotel as well a revenue
management fee of $0.75 per month per hotel. Each of the IHM management agreements may be terminated without cause by
giving not less than a 30 days prior written notice and upon the assignment of the of lessees interests in the related hotel or upon
sale or transfer of such hotel. If terminated without cause, the termination fee is equal to the average monthly base, accounting,
and revenue management fees paid since commencement of the agreement multiplied by the number of months remaining in the
initial term or the number of months remaining in the first year of any renewal term. The IHM management agreements may be
terminated for cause, including the failure of the managed hotels to meet specified performance levels.
17
Hotel Franchise Agreements
The Affiliated Lessee has entered into franchise agreements with Marriott International, Inc. (“Marriott”), relating to 30
Residence Inns, three Courtyards by Marriott and one TownePlace Suites. These franchise agreements expire between 2027 and
2034. Each of the Marriott franchise agreements provide for franchise fees ranging from 5% to 5.5% of the respective hotel’s
gross room sales plus marketing fees ranging from 1.5% to 2.5% of the respective hotel’s gross room sales. Each of the Marriott
franchise agreements is terminable by Marriott in the event that the applicable franchisee fails to cure an event of default or, in
certain circumstances such as the franchisee’s bankruptcy or insolvency, are terminable by Marriott at will. The Marriott franchise
agreements provide that, in the event of a proposed transfer of the hotel, the Company’s Affiliated Lessee’s interest in the agreement
or more than a specified amount of the Company’s Affiliated Lessee to a competitor of Marriott, Marriott has the right to purchase
or lease the hotel under terms consistent with those contained in the respective offer and may terminate if the Company’s Affiliated
Lessee elects to proceed with such a transfer.
The Affiliated Lessee has entered into franchise agreements with Hampton Inns Franchise LLC (“Hampton Inns”), relating
to five Hampton Inns. The franchise agreements expire in 2029. Each of the Hampton Inns franchise agreements provides for a
monthly program fee equal to 4% of the hotel’s gross rooms revenue plus royalty fees equal to 6% of the hotel’s gross rooms
revenue. Hampton Inns may terminate a franchise agreement in the event that the franchisee under that franchise agreement fails
to cure an event of default or, in certain circumstances such as the franchisee’s bankruptcy or insolvency.
The Affiliated Lessee has entered into franchise agreements with The Sheraton, LLC (“Sheraton”), relating to the Fort
Walton Beach - Sheraton Four Points, Fort Walton Beach, Florida hotel and the Rockville Sheraton, Rockville, Maryland hotel.
The franchise agreements have initial terms of 20 years and expire in 2034. Neither of the agreements has a renewal option. Each
of the Sheraton franchise agreements provides for royalty fees ranging from 5.50% to 6.0% of gross rooms sales plus royalty fees
of 2% of gross food and beverage sales for one of the Sheratons. Each of the agreements also provides for marketing fees of 1.0%
of gross rooms sales. Sheraton may terminate a franchise agreement in the event that the franchisee under that franchise agreement
fails to cure an event of default or, in certain circumstances such as franchisee’s bankruptcy or insolvency.
The Affiliated Lessee has entered into a franchise agreement with Westin Hotel Management, Inc. (“Westin”) relating to
the Morristown-Westin Governor Morris hotel. The franchise agreement has an initial term of 20 years and expires in 2034. It
has no renewal option. The Westin franchise agreement provides for royalty fees of 7% of gross rooms sales plus 3% of gross
food and beverage sales. The agreement also provides for marketing fees of 1.32% of gross rooms sales. Westin may terminate
the franchise agreement in the event that the franchisee fails to cure an event of default or, in certain circumstances such as
franchisee’s bankruptcy or insolvency.
The Affiliated Lessee has entered into franchise agreements with Hyatt House Franchising, LLC (“Hyatt House”) relating
to five Hyatt House hotels. The franchise agreements have an initial term of 20 years and expire in 2034. Each has a renewal
option of 10 years. The Hyatt House franchise agreements provide for royalty fees ranging from 3% to 5% of gross rooms revenue
plus marketing fees of 3.5% of gross rooms revenue. Hyatt may terminate the franchise agreements in the event that the franchisee
fails to cure an event of default or, in certain circumstances such as franchisee’s bankruptcy or insolvency.
18
10. Discontinued Operations
As of December 31, 2015 and 2014, the Successor had no hotel property classified as held for sale. During the year ended
December 31, 2013, Old Ink JV recognized a net loss on sale of the four hotels for $2,456.
The following table sets forth the components of discontinued operations for the Predecessor year ended December 31,
2013:
Hotel operating revenue
Hotel operating expenses
Amortization of franchise fees
Property tax and insurance
General and administrative
Impairment on hotels classified as held for sale
Loss from discontinued operations
Loss on sale of assets from discontinued operations
Net loss from discontinued operations
Predecessor
2013
1,854
(1,933)
(6)
(187)
(2)
—
(274)
(2,456)
(2,730)
$
$
11. Related Party Transactions
As of December 31, 2015, all 47 hotels owned by Successor are managed by IHM. Management, revenue management
and accounting fees paid by Old Ink JV to IHM for the Predecessor period January 1, 2014 through June 9, 2014 and for the year
ended December 31, 2013 were $4,797 and $6,347, respectively. Management, revenue management and accounting fees incurred
by Successor for the year ended December 31, 2015 and period from June 9, 2014 through December 31, 2014 were $8,761 and
$4,797, respectively. At December 31, 2015 and 2014, amounts due to IHM were ($993) and $714, respectively, and were included
in accounts payable and accrued expenses on the combined balance sheets.
The Company has additional related party transactions through cost reimbursements relating primarily to corporate payroll
where Chatham is the employer. As the Company records cost reimbursements based upon costs incurred with no added markup,
the revenue and related expense has no impact on the Company's operating income or net income. Cost reimbursements from the
related parties are recorded based upon the occurrence of a reimbursed activity.
Various shared office expenses and rent are paid by Chatham and allocated to the Company based on the amount of square
footage occupied by the entity. Insurance expenses for medical, workers compensation and general liability are paid by the Company
and allocated to the hotel properties or the appropriate related party.
12. Subsequent Events
The Company has performed an evaluation of subsequent events as of the balance sheet date through March 24, 2016,
the date of the issuance of the financial statements and determined there are no subsequent events.
19
Exhibit 99.2
IHP I Owner JV, LLC and Affiliates
Financial Statements
As of December 31, 2015 and 2014 and for the year ended December 31, 2015, and period from
November 17, 2014 through December 31, 2014
With Report of Independent Certified Public Accountants
1
Report of Independent Certified Public Accountants
To the Partners of
IHP I Owner JV, LLC & Affiliates
We have audited the accompanying combined financial statements of IHP I Owner JV, LLC & Affiliates, which
comprise the combined balance sheet as of December 31, 2015, and the related combined statements of operations,
changes in owners’ equity, and cash flows for the year then ended.
Management's Responsibility for the Combined Financial Statements
Management is responsible for the preparation and fair presentation of the combined financial statements in
accordance with accounting principles generally accepted in the United States of America; this includes the design,
implementation, and maintenance of internal control relevant to the preparation and fair presentation of combined
financial statements that are free from material misstatement, whether due to fraud or error.
Auditor's Responsibility
Our responsibility is to express an opinion on the combined financial statements based on our audit. We conducted
our audit in accordance with auditing standards generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the combined
financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
combined financial statements. The procedures selected depend on our judgment, including the assessment of the
risks of material misstatement of the combined financial statements, whether due to fraud or error. In making those
risk assessments, we consider internal control relevant to the Company's preparation and fair presentation of the
combined financial statements in order to design audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company's internal control. Accordingly, we
express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the
reasonableness of significant accounting estimates made by management, as well as evaluating the overall
presentation of the combined financial statements. We believe that the audit evidence we have obtained is sufficient
and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the combined financial statements referred to above present fairly, in all material respects, the
financial position of IHP I Owner JV, LLC & Affiliates as of December 31, 2015, and the results of their operations
and their cash flows for the year then ended in accordance with accounting principles generally accepted in the
United States of America.
/s/ PricewaterhouseCoopers LLP
Fort Lauderdale, Florida
March 24, 2016
2
Report of Independent Certified Public Accountants
To the Partners of
IHP I Owner JV, LLC
We have audited the accompanying combined financial statements of IHP I Owner JV, LLC ( a Delaware limited
liability company) and Affiliates, which comprise the combined balance sheet as of December 31, 2014, and the
related combined statements of operations, owners' equity, and cash flows for the period November 17, 2014
through December 31, 2014, and the related notes to the financial statements.
Management's responsibility for the financial statements
Management is responsible for the preparation and fair presentation of these combined financial statements in
accordance with accounting principles generally accepted in the United States of America; this includes the design,
implementation, and maintenance of internal control relevant to the preparation and fair presentation of combined
financial statements that are free from material misstatement, whether due to fraud or error.
Auditor's responsibility
Our responsibility is to express an opinion on these combined financial statements based on our audit. We
conducted our audit in accordance with auditing standards generally accepted in the United States of America.
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
combined financial statements are free from material misstatements.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
combined financial statements. The procedures selected depend on the auditor's judgment, including the assessment
of risks of material misstatement of the combined financial statements, whether due to fraud or error. In making
those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation
of the combined financial statements in order to design audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly,
we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and
the reasonableness of significant accounting estimates made by management, as well as evaluating the overall
presentation of the combined financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit
opinion.
Opinion
In our opinion, the combined financial statements referred to above present fairly, in all material respects, the
financial position of IHP I Owner JV, LLC and Affiliates as of December 31, 2014 and the results of their
operations and their cash flows for the period November 17, 2014 through December 31, 2014 in accordance with
accounting principles generally accepted in the United States of America.
/s/ GRANT THORNTON LLP
Philadelphia, Pennsylvania
April 2, 2015
3
IHP I Owner JV, LLC and Affiliates
Combined Balance Sheet
(In thousands)
December 31, 2015
December 31, 2014
Assets:
Investment in hotel properties, net
Cash and cash equivalents
Restricted cash
Hotel receivables (net of allowance for doubtful accounts of $96 and
$0)
Deferred costs, net
Intangibles, net
Prepaid expenses and other assets
Total assets
Liabilities:
Debt
Accounts payable and accrued expenses
Total liabilities
Owners' Equity:
Contributions
Distributions and accumulated deficit
Total owners' equity
Total liabilities and owners' equity
$
$
$
950,282 $
10,111
77,022
7,245
9,160
13,257
4,185
946,418
18,237
84,281
5,869
15,181
14,135
3,623
1,071,262 $
1,087,744
817,000 $
19,043
836,043
278,515
(43,296)
235,219
817,000
14,947
831,947
278,515
(22,718)
255,797
$
1,071,262 $
1,087,744
The accompanying notes are an integral part of these combined financial statements.
4
IHP I Owner JV, LLC and Affiliates
Combined Statement of Operations
(In thousands)
Year Ended
December 31, 2015
Period from
November 17, 2014
through
December 31, 2014
Revenue:
Room
Food and beverage
Other
Total revenue
Expenses:
Hotel operating expenses:
Room
Food and beverage
Telephone
Other hotel operating
General and administrative
Franchise and marketing fees
Advertising and promotions
Utilities
Repairs and maintenance
Management fees
Insurance
Total hotel operating expenses
Depreciation and amortization
Amortization of intangibles
Property taxes and insurance
General and administrative
Hotel property acquisition costs and other charges
Total operating expenses
Operating income (loss)
Interest and other income
Interest expense, including amortization of deferred fees
$
215,357 $
9,792
5,065
230,214
50,256
7,722
2,183
1,532
22,513
12,784
7,350
9,614
12,730
10,021
1,033
137,738
31,183
878
13,232
1,850
352
185,233
44,981
29
(37,138)
Net income (loss)
$
7,872 $
The accompanying notes are an integral part of these combined financial statements.
19,598
863
500
20,961
5,160
680
232
129
2,384
1,281
745
931
1,134
1,006
72
13,754
3,781
108
1,602
895
18,877
39,017
(18,056)
—
(4,580)
(22,636)
5
IHP I Owner JV, LLC and Affiliates
Combined Statement of Owners' Equity
(In thousands)
Balance at November 17, 2014
Contributions
Net loss
Distributions
Balance at December 31, 2014
Net income
Distributions
Balance at December 31, 2015
Distributions
and
Accumulated
Deficit
Total
Owners'
Equity
— $
—
(22,636)
(82)
(22,718) $
7,872
(28,450)
(43,296) $
—
278,515
(22,636)
(82)
255,797
7,872
(28,450)
235,219
Contributions
$
— $
278,515
—
—
278,515
$
—
—
278,515
$
$
$
The accompanying notes are an integral part of these combined financial statements.
6
IHP I Owner JV, LLC and Affiliates
Combined Statement of Cash Flows
(In thousands)
Cash flow from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation
Amortization of deferred franchise fees
Amortization of deferred financing costs included in interest expense
Amortization of intangibles
Changes in assets and liabilities:
Hotel receivables
Prepaid expenses and other assets
Deferred costs
Accounts payable and accrued expenses
Net cash provided by (used in) operating activities
Cash flows from investing activities:
Investment in hotel properties, net of cash received
Improvements and additions to hotel properties
Payments for franchise fees and intangibles
Restricted cash
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from issuance of debt
Payments of financing costs
Contributions
Distributions
Net cash provided by (used in) financing activities
Net change in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
Supplemental disclosure of cash flow information:
Cash paid for interest
Supplemental disclosure of non-cash information:
Accrued improvements and additions to hotel properties
Year Ended
December 31, 2015
Period from
November 17, 2014
through
December 31, 2014
$
7,872 $
(22,636)
30,795
388
5,640
878
(1,376)
(562)
(7)
3,272
46,900
—
(33,835)
—
7,259
(26,576)
—
—
—
(28,450)
(28,450)
(8,126)
18,237
10,111 $
31,350 $
826 $
3,735
46
697
108
(5,869)
(3,623)
—
14,947
(12,595)
(950,017)
(137)
(18,757)
(84,280)
(1,053,191)
817,000
(11,410)
278,515
(82)
1,084,023
18,237
—
18,237
2,386
2
$
$
$
See Note 3 to the financial statements for a description of assets and liabilities acquired in connection with the
acquisition of 48 hotels.
The accompanying notes are an integral part of these combined financial statements.
7
IHP I Owner JV, LLC and Affiliates
Notes to Financial Statement
(dollars in thousands)
1.
Organization
IHP I Owner JV, LLC, a Delaware limited liability company, was formed on November 17, 2014, as a joint venture
between affiliates of NorthStar Realty Finance Corp. (“NorthStar”) and Chatham Lodging, L.P. (“Chatham”) to acquire a portfolio
of 48-hotels (hereinafter referred to as the "Inland Acquisition"). IHP I Owner JV, LLC wholly owns various limited liability
companies which individually own the properties acquired. The properties are leased to IHP I OPS, LLC and IHP I OPS-II, LLC
(hereinafter referred to as the "Affiliate Lessees"). Through wholly-owned subsidiaries, Northstar owns a 90.0% interest and
Chatham owns a 10.0% interest in IHP I Owner JV, LLC and Affiliates. Together, the IHP I Owners JV, LLC and the Affiliate
Lessees' are referred to herein as collectively “we,” “us,” or the “Company".
On December 31, 2015, the Company owned 48 hotels with an aggregate of 6,401 (unaudited) rooms located in 20 states.
The hotels operate under the following brands: Residence Inn by Marriott (13 hotels), Hampton Inn by Hilton (7 hotels), Hyatt
House (1 hotel), Courtyard by Marriott (16 hotels), Homewood Suites by Hilton (8 hotels), Aloft (2 hotels) and Springhill Suites
by Marriott (1 hotel). As of December 31, 2015, management of 34 of the hotels is provided pursuant to management agreements
with Island Hospitality Management Inc. ("IHM"), which is 51% owned by Jeffrey H. Fisher, the Chairman of the Board and
Chief Executive Officer of Chatham Lodging Trust, which is the sole general partner of Chatham, and 45% owned by affiliates
of NorthStar Asset Management Group, Inc. Fourteen of the hotels are managed by Marriott International, Inc. (“Marriott”).
The affiliated limited liability companies combined in these financial statements are IHP I Owner JV, LLC and IHP I
OPS JV, LLC.
2. Summary of Significant Accounting Policies
Basis of Presentation
The combined financial statements have been prepared on the accrual basis of accounting in accordance with accounting
principles generally accepted in the United States of America (“GAAP”). The consolidated and combined financial statements
include all of the accounts of IHP I Owner JV, LLC and its subsidiaries and all of the accounts of the Affiliate Lessees. Combined
financial statements of IHP I Owner JV, LLC and the Affiliate Lessees, which are under common control and common management,
have been presented in order to provide a more meaningful presentation of the operations of IHP I Owner JV, LLC. All intercompany
accounts and transactions have been eliminated.
Revision to Previously Issued Financial Statements
In connection with the preparation of the Company's financial statements for the year ended December 31, 2015,
Management determined that the Combined Balance Sheet, Statement of Owners' Equity, and Statement of Cash Flows for the
period ended December 31, 2014 contained an error in the presentation of distributions due from Marriott. This error understated
the Company's hotel receivables and equity balances by $804, as well as cash flows used in operating activities and cash flows
provided by financing activities. Accordingly, the Company has revised these balances in the accompanying financial statements
for the period ended December 31, 2014. The Company concluded that the corrections are not material to any of its previously
issued combined financial statements. The adjustment does not affect the Company’s Combined Statement of Operations or cash
balance for the reporting period. Additionally, the revision does not affect the Company’s compliance with any financial covenants.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of and disclosures of contingent assets and liabilities at the balance sheet date and
the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Significant estimates include the allocation of the purchase price of hotels, the allowance for doubtful accounts and the fair value
of hotels that are held for sale or impaired.
8
Fair Value of Financial Instruments
Financial Accounting Standards Board ("FASB") guidance on fair value measurements and disclosures defines fair value
for GAAP and establishes a framework for measuring fair value as well as a fair value hierarchy based on the quality and nature
of inputs used to measure fair value. The term “fair value” in these financial statements is defined in accordance with GAAP. The
hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1
measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy
are as follows:
Level 1 Inputs reflect unadjusted quoted prices in active markets for identical assets or liabilities that the Company has
the ability to access at the measurement date;
Level 2 Inputs represent other than quoted prices that are observable for the asset or liability either directly or indirectly,
including inputs in markets that are not considered to be active; and
Level 3 Inputs are those that are unobservable.
The carrying value of the Company's cash, accounts receivables, accounts payable and accrued expenses approximate
fair value because of the relatively short maturities of these instruments. The Company is not required to carry any other assets
or liabilities at fair value on a recurring basis other than its interest rate caps. The interest rate caps are valued using Level 3 inputs
and are valued at $1 and $173 as of December 31, 2015 and 2014, respectively.
When the Company classifies an asset as held for sale, the Company assesses whether the asset's carrying value is greater
than fair value less selling costs. If so, the asset is written down to fair value less selling costs on a nonrecurring basis. The fair
value determinations are based on Level 3 inputs as they are generally based on broker quotes or other comparable sales information.
The Company also disclosed the fair value of its variable rate debt based estimates on current terms the Company would
expect to receive under the current general market conditions, as compared to the actual terms and conditions of the Company's
debt. The fair value determination is based on Level 3 inputs as they are based on the fair value hierarchy.
Investment in Hotel Properties
The Company allocates the purchase prices of hotel properties acquired based on the fair value of the acquired real estate,
furniture, fixtures and equipment, identifiable intangible assets and assumed liabilities. In making estimates of fair value for
purposes of allocating the purchase price, the Company utilizes a number of sources of information that are obtained in connection
with the acquisition of a hotel property, including valuations performed by independent third parties and information obtained
about each hotel property resulting from pre-acquisition due diligence. Hotel property acquisition costs are expensed in the period
incurred.
The Company’s investment in hotel properties are carried at cost and are depreciated using the straight-line method over
the estimated useful lives of the assets, generally 40 years for buildings, 20 years for land improvements, 15 years for building
improvements and three to ten years for furniture, fixtures and equipment. Renovations and replacements at the hotel properties
that improve or extend the life of the assets are capitalized and depreciated over their useful lives, while repairs and maintenance
are expensed as incurred. Upon the sale or retirement of property and equipment, the cost and related accumulated depreciation
are removed from the Company’s accounts and any resulting gain or loss is recognized in the combined statements of operations.
The Company periodically reviews its hotel properties for impairment whenever events or changes in circumstances
indicate that the carrying value of the hotel properties may not be recoverable. Events or circumstances that may cause a review
include, but are not limited to, adverse changes in the demand for lodging at the properties due to declining national or local
economic conditions or new hotel construction in markets where the hotels are located. When such conditions exist, management
performs an analysis to determine if the estimated undiscounted future cash flows, without interest charges, from operations and
the net proceeds from the ultimate disposition of a hotel property exceed its carrying value. If the estimated undiscounted future
cash flows are less than the carrying amount, an adjustment to reduce the carrying amount to the related hotel property's estimated
fair market value is recorded and an impairment loss is recognized. For the period November 17, 2014 through December 31,
2014 and for the year ended December 31, 2015, no impairment charges on hotels held for use were recorded.
9
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand, demand deposits with financial institutions and short term liquid
investments with an original maturity when purchased of three months or less. Cash balances in individual banks may exceed
federally insurable limits.
Restricted Cash
Restricted cash represents escrows for reserves required pursuant to the Company’s loans or hotel management
agreements. Included in restricted cash on the accompanying combined balance sheet at December 31, 2015 and 2014, are
renovation, property tax and insurance escrows of $77,022 and $84,281, respectively. The hotel mortgage loan agreements require
the Company to fund 4% of gross hotel revenues on a monthly basis for furnishings, fixtures and equipment and general repair
maintenance reserves (“Replacement Reserve”), in addition to property tax and insurance reserves, into an escrow account held
by the lender.
Hotel Receivables
Hotel receivables consist of amounts owed by guests staying at the Company’s hotels and amounts due from business
and group customers. An allowance for doubtful accounts is provided and maintained at a level believed to be adequate to absorb
estimated probable losses. At December 31, 2015 and 2014, allowance for doubtful accounts was $96 and $0, respectively.
Deferred Costs
Deferred costs consisted of the following at December 31, 2015 and 2014:
December 31, 2015
December 31, 2014
Loan costs
Franchise fees
Other
Less accumulated amortization
Deferred costs, net
$
$
11,411 $
4,513
7
15,931
(6,771)
9,160 $
11,411
4,513
—
15,924
(743)
15,181
Loan costs are recorded at cost and amortized over the term of the loan applying the effective interest rate method.
Franchise fees are recorded at cost and amortized over a straight-line basis over the term of the franchise agreements. For the
periods ended December 31, 2015 and 2014, amortization expense related to franchise fees of $388 and $46, respectively, was
included in depreciation and amortization in the combined statement of operations. Amortization expense of $5,633 and $697
related to loan costs for the periods ended December 31, 2015 and 2014, respectively, is included in interest expense in the combined
statement of operations.
Intangibles
Intangibles, consisting of identifiable intangibles acquired in the Inland Acquisition are as follows:
Intangible assets
Less accumulated amortization
Intangibles, net
$
$
14,243 $
(986)
13,257 $
14,243
(108)
14,135
December 31, 2015
December 31, 2014
Based on the third party valuations, the Company ascribed $14,243 of value related to the difference in Lieu of Taxes
(Pilot) and the real estate taxes over the life of the lease agreements associated with the following hotels:
IHP Elizabeth I (NJ) Owner, LLC - $6,191
IHP Elizabeth II (NJ) Owner, LLC - $8,052
10
The intangible assets will be amortized over 181 months from December 31, 2015, which corresponds to the term of the
land leases as follows:
2016
$
2017
2018
2019
2020
Thereafter
Total $
Amount
879
879
879
879
879
8,862
13,257
Prepaid Expenses and Other Assets
The Company’s prepaid expenses and other assets consist of prepaid insurance, prepaid property taxes, deposits, hotel
supplies inventory and the fair value of the company’s interest rate caps.
Accounting for derivative instruments
The Company records its derivative instruments on the balance sheet at their estimated fair value. Changes in the fair
value of derivatives are recorded each period in current earnings or in other comprehensive income, depending on whether a
derivative is designated as part of a hedging relationship and, if it is, depending on the type of hedging relationship. The Company’s
interest rate caps are not designated as a hedge but to eliminate the incremental cost to the Company if one-month LIBOR were
to exceed 3.5% during the periods ending December 31, 2015 and 2014. Accordingly, the interest rate caps are recorded on the
balance sheet at estimated fair value with realized and unrealized changes in the fair value reported in the combined statement of
operations.
Revenue Recognition
Revenue from hotel operations is recognized when rooms are occupied and when services are provided. Revenue consists
of amounts derived from hotel operations, including sales from room, meeting room, restaurants, gift shop, in-room movie and
other ancillary amenities. Sales, use, occupancy, and similar taxes are collected and presented on a net basis (excluded from
revenue) in the accompanying combined statement of operations.
Income Taxes
The Company is a limited liability company (“LLC”) and has elected to be taxed as a partnership. Therefore, the Company
is solely a pass-through entity and does not have any federal or state income tax liabilities. Accordingly, the Company does not
record a provision for income taxes because the members report their share of the Company’s income or loss on their income tax
returns.
The Company is required to determine whether its tax positions are more likely than not to be sustained upon examination
by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits
of the position. The recognition of any tax benefit is measured as the largest amount of benefit that has a greater than fifty percent
likelihood of being realized upon ultimate settlement with the relevant taxing authority. De-recognition of a tax benefit previously
recognized results in the Company recording a tax liability that reduces ending members’ capital. Based on its analysis, the
Company has determined that it has not recognized any tax benefit nor incurred any liability for unrecognized tax benefits as of
December 31, 2015. However, the Company’s conclusions may be subject to review and adjustment at a later date based on factors
including, but not limited to, ongoing analyses of and changes to tax laws, regulations and interpretations thereof.
The Company recognizes interest and penalties related to unrecognized tax benefits in interest expense and other expenses,
respectively. No interest expense or penalties have been recognized as of and for the period ended December 31, 2015.
The Company files income tax returns in the U.S. federal jurisdiction, and may file income tax returns in various U.S.
states. The Company is subject to income tax examinations by major taxing authorities for all previous income tax returns filed.
11
Recently Issued Accounting Standards
On May 28, 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an entity
to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers.
The ASU will replace most existing revenue recognition guidance under GAAP when it becomes effective. The new standard is
effective for the Company on January 1, 2017. Early application is not permitted. The standard permits the use of either the
retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its
consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it
determined the effect of the standard on it financial statements.
In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entities Ability to Continue
as a Going Concern, which requires management to perform interim and annual assessments of an entities ability to continue
within one year of the date the financial statements are issued and provides guidance on determining when and how to disclose
going concern uncertainties in the financial statements. Certain disclosures will be required if conditions give rise to substantial
doubt about an entity's ability to continue as a going concern. This guidance is effective for the Company on January 1, 2017 and
will not have an impact on the Company's financial position, results of operations or cash flows.
In February 2015, the FASB issued ASU No. 2015-02, Amendments to the Consolidation Analysis, which requires
amendments to both the variable interest entity ("VIE") and voting models. The amendments (i) rescind the indefinite deferral of
certain aspects of accounting standards relating to consolidations and provide a permanent scope exception for registered money
market funds and similar unregistered money market funds, (ii) modify the identification of variable interests (fees paid to a
decision maker or service provider), the VIE characteristics for a limited partnership or similar entity and primary beneficiary
determination under the VIE model, and (iii) eliminate the presumption within the current voting model that a general partner
controls a limited partnership or similar entity. The new guidance is effective for annual reporting periods, and interim periods
within those annual periods, beginning after December 15, 2015 with early adoption permitted. The amendments may be applied
using either a modified retrospective or full retrospective approach. The Company is currently evaluating the effect the guidance
will have on its combined financial statements.
On April 7, 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires
debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the debt liability. This
standard is effective for fiscal years beginning after December 15, 2015 with early adoption permitted and will be applied on a
retrospective basis. Supplemental to ASU 2015-03, on August 16, 2015, the FASB issued Accounting Standards Update 2015-15,
Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements -Amendments
to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting, which clarifies that debt issuance costs
attributable to line-of-credit arrangements can be presented as an asset and amortized ratably over the life of the revolving debt
arrangement, regardless of whether there is an outstanding balance thereunder. This methodology is consistent with the Company’s
historical treatment of such costs. The new standard will be effective for the Company on January 1, 2016 and will not have a
material impact on the Company's financial position, results of operations or cash flows.
In September 2015, the FASB issued ASU No. 2015-16, Simplifying the Accounting for Measurement-Period Adjustments,
that eliminates the requirement to restate prior period financial statements for measurement period adjustments. The new guidance
requires an entity to recognize the adjustments to provisional amounts identified during the measurement period in the reporting
period in which the adjustments are determined. In addition, the adjustments must be disclosed by income statement line item
either on the face of the income statement or in the footnotes as if the adjustment to the provisional amounts had been recorded
as of the acquisition date. The amendment is effective prospectively for interim and annual periods beginning after December 15,
2015, with early adoption permitted for financial statements that have not been issued. We do not expect the new standard will
have a significant impact on our consolidated financial statements.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (ASU 2016-02), which will replace
most existing lease accounting guidance in U.S. GAAP. The core principle of the ASU is that an entity should recognize the rights
and obligations resulting from leases as assets and liabilities. ASU 2016-02 requires qualitative and specific quantitative disclosures
to supplement the amounts recorded in the financial statements so that users can understand more about the nature of an entity’s
leasing activities, including significant judgments and changes in judgments. ASU 2016-02 will be effective for the Company
beginning in fiscal 2020, and requires the modified retrospective method of adoption. Early adoption is permitted. The Company
is in the process of determining the method and timing of adoption and assessing the impact of ASU 2016-02 on its consolidated
financial statements.
12
3. Acquisition of Hotel Properties
On November 17, 2014, the Company acquired 48 hotels. Prior to the acquisition, the Company was funded with member
contributions of $278,515. The Company funded the acquisition with available cash, the issuance of debt of $817,000 and the
assumption of other liabilities of $2,712. The Company incurred acquisition costs of $352 and $18,877 during the year ended
December 31, 2015 and period from November 17, 2014 through December 31, 2014, respectively, related to the Inland Acquisition.
Hotel Purchase Price Allocation
The following table presents the allocation of the purchase price of the assets acquired and the liabilities assumed,
based on the fair value on the date of its acquisition (in thousands):
Land and improvements
Building and improvements
Acquired intangibles
Other assets acquired
Total assets acquired
Accounts payable and accrued expenses assumed
Debt issued
Total liabilities
$
$
$
$
107,412
796,823
18,756
153,407
1,076,398
(2,712)
(817,000)
(819,712)
The value of the assets acquired was primarily based on a sales comparison approach (for land) and a depreciated
replacement cost approach (for building and improvements and furniture, fixtures and equipment). The sales comparison approach
uses inputs of recent land sales in the respective hotel markets. The depreciated replacement cost approach uses inputs of both
direct and indirect replacement costs using a nationally recognized authority on replacement cost information as well as the age,
square footage and number of rooms of the respective assets. Operating assets and liabilities are recorded at carrying value because
of the liquid nature of the assets and relatively short maturities of the obligations.
4. Allowance for Doubtful Accounts
The Company maintains an allowance for doubtful accounts at a level believed to be adequate to absorb losses and is
based on past loss experience, current economic and market conditions and other relevant factors. Allowance for doubtful accounts
was $96 and $0 at December 31, 2015 and 2014, respectively.
5. Investment in Hotel Properties
Investment in hotel properties as of December 31, 2015 and 2014 consisted of the following:
December 31, 2015
December 31, 2014
Land and improvements
$
107,413 $
Building and improvements
Furniture, Fixtures and equipment
Renovations in progress
Less accumulated depreciation
Investment in hotel properties, net
$
805,039
49,914
22,445
984,811
(34,529)
950,282 $
107,412
796,825
45,781
135
950,153
(3,735)
946,418
13
6. Debt
Debt is comprised of the following at December 31, 2015 and 2014:
Collateral
Bank of America Loan (1)
Total
Interest
Rate
Maturity Date
3.93% December 9, 2016
12/31/15
Property
Carrying
Value
$ 927,836
$ 927,836
Balance Outstanding as of
December 31,
2015
December 31,
2014
$
$
817,000
817,000
$
$
817,000
817,000
(1) During the period from November 17, 2014 through December 31, 2014, the Company received a $817,000, non-
recourse loan from Bank of America, National Association, collateralized by the Company's 48 hotels (the "Loan agreement").
The loan is a five year, interest only loan comprised of a two year loan with three, one year extension options. The Company can
extend the loan provided that 1) no event of default shall have occurred and be continuing at the time the applicable extension
option is exercised and extended, 2) it obtains an interest rate cap, and 3) it provides certain notices as required in the loan agreement.
With respect to the third extension option, the Company, must meet a minimum debt yield of 8.75% on the total amount outstanding
or prepay a portion of the debt to attain an 8.75% debt yield. Interest only payments are due monthly. The interest rate is based
on one month LIBOR plus 3.6% (3.93% at December 31, 2015). Monthly payments are based on the number of days and loan
balance during the period. Payments are based on the average weighted rate. In connection with entering into the loan, Chatham
and NorthStar could be required under its unconditional guaranty to repay portions of this indebtedness.
The Company estimates the fair value of its variable rate debt by taking into account general market conditions and the
estimated credit terms it could obtain for debt with similar maturity and is classified within Level 3 of the fair value hierarchy.
The Company's only variable rate debt is the mortgage loan from Bank of America, National Association referenced above. The
estimated fair value of the Company’s variable rate debt as of December 31, 2015 was $816,950.
As of December 31, 2015, the Company was in compliance with all of its financial covenants including but not limited
to the following:
(1)
(2)
Chatham shall collectively maintain a Net Worth (as defined in the Loan agreement) of not less than $260,000 in the
aggregate; and
Chatham shall maintain Unencumbered Liquid Assets (as defined in the Loan agreement) of not less than $28,000 of
which not less than $10,000 of Unencumbered Liquid Cash Assets (as defined in the Loan agreement).
Future scheduled principal payments of debt obligations as of December 31, 2015, and for each of the next five calendar
years and thereafter is as follows:
2016
2017
2018
2019
2020
Thereafter
Amount
$
817,000
—
—
—
—
—
Total $
817,000
14
7. Owners' Equity
The ownership of the Company at December 31, 2015 and 2014 was as follows:
Owners' Name
December 31, 2015
December 31, 2014
Platform Member - II-T LLC
Chatham IHP, LLC
Total
90 %
10 %
100%
90 %
10 %
100%
Under the terms of the Company's operating agreement, available cash from operations (as defined in the Company's
operating agreement) is to be distributed pari passu to the partners through the date of dissolution. In addition, available cash
from a capital event (as defined in the Company's operating agreement) is to be distributed to the partners subject to specified
internal rate of return tiers that could result in disproportionately greater distributions to Chatham upon meeting certain established
thresholds. Distributions paid by the Company during the periods ended December 31, 2015 and 2014 were $28,450 and $0,
respectively.
8. Concentration of Credit Risk
Cash is maintained with high-quality financial institutions and is insured by the Federal Deposit Insurance Corporation
(“FDIC”) up to $250,000 per financial institution. At times, cash balances may exceed the FDIC insured limits. Due to the highly
liquid nature of cash and the use of high-quality financial institutions, management believes that it has limited the Company's
credit exposure.
9. Commitments and Contingencies
Litigation
The nature of the operations of the hotels exposes the hotels and the Company to the risk of claims and litigation in the
normal course of their business. The Company is not presently subject to any material litigation nor, to the Company’s knowledge,
is any material litigation threatened against the Company or its properties.
Hotel Ground Rent
The subsidiary owners of the Courtyard by Marriott Elizabeth, NJ and the Residence Inn Elizabeth, NJ are lessees under
a ground lease, as amended. Under the ground lease, no lease payments are due and the lease expires on the earlier of the day on
which any Payment in Lieu of Tax (“PILOT”) Bonds are repaid in their entirety or June 4, 2048. At lease expiration, the lessee
may acquire the land for $1. The subsidiary owners are also party to Allocation Agreements which require the lessee to make
quarterly PILOT payments through the end of the PILOT program in February 2031. The payments required under the Allocation
Agreements are expensed as incurred. PILOT payments are equal to approximately $352 and $383 per year for the Courtyard by
Marriott Elizabeth, NJ and the Residence Inn Elizabeth, NJ, respectively.
The following is a schedule of future PILOT payments required under the Allocation Agreements:
Amount
$
2016
2017
2018
2019
2020
Thereafter
Total
$
15
736
736
736
736
809
8,874
12,627
Hotel Management Agreements
As of December 31, 2015, 34 of the 48 hotels are managed by IHM. The management agreements with IHM have an
initial term of five years and may be extended subject to approval by both IHM and the Company. Each of the IHM management
agreements provides for a base management fee of 3% for the managed hotel’s gross revenues. Each of the management agreements
with IHM also provides for accounting fees up to $1.20 per month per hotel as well a revenue management fee of $0.75 per month
per hotel. Marriott manages 14 of the hotels under a management and franchise agreement. These agreements expire in 2033.
The Marriott agreements may be renewed on the same terms and conditions for one successive period of ten years. Each of the
Marriott agreements may be terminated for cause, including the failure of the managed hotel to meet specified performance levels.
Under the Marriott agreements, the combined management and franchise fee is 7% of gross revenue plus an incentive management
fee equal to 25% of available cash in any year, as defined in the agreements. Each of the IHM management agreements may be
terminated without cause by giving not less than a 30 days prior written notice and upon the assignment of the of lessee's interests
in the related hotel or upon sale or transfer of such hotel. If terminated without cause, the termination fee is equal to the average
monthly base, accounting, and revenue management fees paid since commencement of the agreement multiplied by the number
of months remaining in the initial term or the number of months remaining in the first year of any renewal term. Each of the IHM
management agreements may be terminated for cause, including the failure of the managed hotel to meet specified performance
levels.
Hotel Franchise Agreements
The Affiliated Lessee has entered into franchise agreements with Marriott relating to six Residence Inn hotels and ten
Courtyards by Marriott. These franchise agreements expire between 2021 and 2030. These Marriott franchise agreements provide
for franchise fees ranging from 5.5% to 6% of the applicable hotel’s gross room sales plus marketing fees ranging from 2% to
2.5% of the applicable hotel’s gross room sales. The Marriott franchise agreements are terminable by Marriott in the event that
the applicable franchisee fails to cure an event of default or, in certain circumstances such as the franchisee’s bankruptcy or
insolvency, are terminable by Marriott at will. The Marriott franchise agreements provide that, in the event of a proposed transfer
of the hotel, the Affiliated Lessee’s interest in the agreement or more than a specified amount of the Affiliated Lessee to a competitor
of Marriott, Marriott has the right to purchase or lease the hotel under terms consistent with those contained in the respective offer
and may terminate if the Affiliated Lessee elects to proceed with such a transfer.
The Affiliated Lessee has entered into franchise agreements with Hampton Inns Franchise LLC (“Hampton Inn”), relating
to seven Hampton Inn hotels. The franchise agreements expire in 2029. The Hampton Inn franchise agreements provide for a
monthly program fee equal to 4% of the hotel’s gross rooms revenue plus a royalty fee equal to 6% of the hotel’s gross rooms
revenue. Hampton Inn may terminate a franchise agreement in the event that the applicable franchisee fails to cure an event of
default or, in certain circumstances such as the franchisee’s bankruptcy or insolvency.
The Affiliated Lessee has entered into franchise agreements with Homewood Suites Franchise LLC (“Homewood Suites”),
relating to eight Homewood Suites hotels. The franchise agreements expire in 2029. The Homewood Suites franchise agreements
provide for a monthly program fee ranging from 3.5% to 4.3% of the applicable hotel’s gross rooms revenue plus royalty fees
equal to 5.5% of the applicable hotel’s gross rooms revenue. Homewood Suites may terminate a franchise agreement in the event
that the franchisee fails to cure an event of default or, in certain circumstances such as the applicable franchisee’s bankruptcy or
insolvency.
The Affiliated Lessee has entered into franchise agreements with The Sheraton, LLC (“Sheraton”), relating to the
Birmingham Aloft and Chapel Hill Aloft hotels. The franchise agreements have terms of 20 years and expire in 2034. Neither of
the agreements has a renewal option. The Sheraton franchise agreements provide for royalty fees of 5% of the applicable hotel's
gross rooms sales. Sheraton may terminate a franchise agreement in the event that the applicable franchisee fails to cure an event
of default or, in certain circumstances such as franchisee’s bankruptcy or insolvency.
The Affiliated Lessee has entered into a franchise agreement with Hyatt House Franchising, LLC (“Hyatt House”) relating
to one Hyatt House hotel. The franchise agreement expires in 2032. The Hyatt House franchise agreement provides for royalty
fees of 5% of gross rooms revenue plus marketing fees of 3.5% of gross rooms revenue. Hyatt may terminate the franchise
agreement in the event that the franchisee fails to cure an event of default or, in certain circumstances such as franchisee’s bankruptcy
or insolvency.
16
10. Related Party Transactions
As of December 31, 2015, 34 hotels are managed by IHM. Management, revenue management and accounting fees
incurred by the Company for the 34 hotels managed by IHM for the years ended December 31, 2015 and 2014 were $4,695 and
$536, respectively. At December 31, 2015 and 2014, the amount due to IHM was $816 and $229, respectively, and is included in
accounts payable and accrued expenses on the combined balance sheets.
The Company has additional related party transactions through cost reimbursements relating primarily to corporate payroll
where Chatham is the employer. As the Company records cost reimbursements based upon costs incurred with no added markup,
the revenue and related expense has no impact on the Company's operating income or net income. Cost reimbursements from the
related parties are recorded based upon the occurrence of a reimbursed activity.
Various shared office expenses and rent are paid by Chatham and allocated to the Company based on the amount of square
footage occupied by the entity. Insurance expenses for medical, workers compensation and general liability are paid by INK
Acquisition, LLC, a related party joint venture wholly owned by NorthStar and Chatham, and allocated back to the hotel properties
or the Company.
11. Subsequent Events
The Company has performed an evaluation of subsequent events since the balance sheet date through March 24, 2016,
the date of the issuance of the financial statements and determined there are no subsequent events.
17
Corporate Information
Management
Board of Trustees
Shareholder Information
Jeffrey H. Fisher
Chairman of the Board,
Chief Executive Officer
and President
Dennis Craven
Executive Vice President
and Chief Operating Officer
Peter Willis
Executive Vice President
and Chief Investment Officer
Eric Kentoff
Senior Vice President,
General Counsel
and Secretary
Jeremy Wegner
Senior Vice President
and Chief Financial Officer
Independent Registered CPA
PricewaterhouseCoopers LLP
401 East Las Olas Boulevard
Fort Lauderdale, FL 33301
Miles Berger
Chairman
and Chief Executive Officer
Berger Management
Services LLC
Thomas J. Crocker
Chief Executive Officer
Crocker Partners, LLC
Jack P. DeBoer
Chairman
Consolidated Holdings, Inc.
Glen R. Gilbert
Private Investor
C. Gerald Goldsmith
Private Investor
Robert Perlmutter
Senior Executive Vice President
and Chief Operating Officer
The Macerich Company
Rolf E. Ruhfus
Chairman
and Chief Executive Officer
LodgeWorks Corporation
Joel F. Zemans
Private Investor
Investor Relations
Chatham Lodging Trust
222 Lakeview Avenue
Suite 200
West Palm Beach, FL 33401
Tel: 561.802.4477
Fax: 561.835.4125
Annual Meeting
The annual meeting will be held
on Thursday, May 19, 2016 at
9:00 a.m. in the Palms Meeting
Room. Address above.
Transfer Agent
Wells Fargo Bank, N.A.
Wells Fargo Shareowner Services
161 North Concord Exchange
South St. Paul, Minnesota 55075
Locations
SEATTLE (5%)
SILICON VALLEY (24%)
DENVER (5%)
MINNESOTA (2%)
PORTLAND, ME (2%)
EXETER, NH (1%)
MASSACHUSETTS (5%)
CONNECTICUT (1%)
NEW YORK (6%)
PENNSYLVANIA (5%)
WASHINGTON, D.C. (5%)
LOS ANGELES (7%)
SAN DIEGO (13%)
NASHVILLE (1%)
DALLAS (3%)
HOUSTON (7%)
SAN ANTONIO (3%)
SAVANNAH, GA (3%)
ORLANDO (1%)
FORT LAUDERDALE (3%)
Chatham Lodging Trust is a self-advised, publicly-traded real estate invest-
ment trust focused primarily on investing in upscale extended-stay hotels and premium-
branded, select-service hotels. Our high quality hotels are located in major markets
with high barriers to entry, near primary demand generators for both business and
leisure guests. Our primary objective is to generate attractive returns for our sharehold-
ers through investing in hotel properties at prices that provide strong returns on invested
capital, paying meaningful dividends and generating long-term value appreciation.
Note: Figures are rounded to the nearest whole percentage and therefore may not reflect the exact
percentage. MSA/State reflects % of total undepreciated cost basis as of December 31, 2015.
Chatham Lodging Trust222 Lakeview Avenue, Suite 200West Palm Beach, FL 33401561.802.4477WWW.CHATHAMLODGINGTRUST.COM2015Annual ReportCHATHAM LODGING TRUST | 2015 ANNUAL REPORT