2016 Annual Report
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Chatham Lodging Trust is a self-advised, publicly-traded real estate investment 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 shareholders through investing in hotel properties at prices that
provide strong returns on invested capital, paying meaningful dividends and generating long-term
value appreciation.
Chatham Lodging Trust
1
Dear Shareholder,
Greetings to each of you and I hope this letter finds
market where we acquired assets since 2013 was
you well. A year ago, the outlook for 2016 was very
Denver, Colorado, where economic growth has also
encouraging not only for Chatham, but the entire
been strong in comparison to the rest of the country.
hotel industry. Two leading industry forecasters, STR,
A misconception we sometimes encounter when
Inc., and CBRE Hotels, estimated RevPAR growth
meeting with interested parties is that select-service
of 5.0 percent and 6.1 percent, much higher than the
or limited-service assets are inferior to big box,
3.2 percent that was realized.
branded, full-service hotels and therefore must not be
As we look back 12 months later, those expectations
as valuable, much less more valuable. However, having
were ambitious given the lack of lodging demand
driven by weaker economic growth and an uncertain
political landscape that lingered for most of the year.
New hotel supply growth in the upscale, limited- and
select-service hotel segments around the country
further impacted results. Even though industry-wide
lodging demand grew 1.7 percent, this essentially was
offset by an increase in room supply of 1.6 percent.
Unfortunately, within our upscale segment, lodging
supply increased a healthy 5.6 percent.
Although 2016 was a challenging year for
Chatham, we achieved the highest adjusted EBITDA,
FFO and FFO per share in our history. Additionally,
our annual dividend reached its highest level since
our inception and marked the sixth consecutive year
of dividend increases for our shareholders.
We have assembled a superior quality portfolio of
38 wholly owned hotels comprising 5,712 rooms.
Approximately 50 percent of our hotel investments
are in California and Washington state, specifically in
Jeff H. Fischer Chairman, Chief Executive Officer and President
key markets like Silicon Valley, San Diego, Los Angeles
been active in these segments for more than three
(Marina del Rey) and Seattle (Bellevue), positioning
decades, we know that not to be the case if one
Chatham to benefit from continued economic
focuses on quality, superior brands and great locations.
expansion with its West Coast concentration. Another
That is exactly what our portfolio represents.
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2016 Annual Report
Our portfolio is in excellent physical condition.
at our four Houston hotels didn’t experience the
We have one of the highest quality, top MSA focused
effects of these factors until the last half of the year.
select-service and upscale extended-stay investment
Even though two of these hotels are located directly
portfolios in the hotel REIT space.
at the medical center and the other two hotels are
In fact, if you compare our 2016 Revenue per
nearby, our four hotels experienced a RevPAR decline
Available Room (RevPAR) of $131 to brand-wide
of 9.7 percent, and their performance brought down
statistics, our portfolio RevPAR is on par with Hyatt,
our overall RevPAR growth by approximately 140
is two percent better than Embassy Suites, five percent
basis points.
higher than the full-service Marriott and Hilton
Our acquisition strategy focuses on acquiring
brands and at least 15 percent better than the full-service
hotels in markets where RevPAR growth is projected
Sheraton, DoubleTree, Crowne Plaza and Holiday Inn
to be higher than our current portfolio, and although
brands. With strong absolute RevPAR, our portfolio
we didn’t acquire any hotels in 2016, the four hotels
margins are significantly higher, allowing us to drive
we acquired in 2015 outperformed our overall
earnings and cash flow that enables us to reward our
portfolio with a 3.6 percent RevPAR increase.
shareholders with a higher dividend.
Silicon Valley is our most important market and
represents our highest overall investment in any area
OPE R AT I NG PE R FOR M A NC E
of the country and approximately 24% of our hotel
RevPAR at our 38 hotels rose 0.1 percent to $131 in
EBITDA. RevPAR at our four Silicon Valley hotels
2016. Our average daily rate (ADR) increased 1.2
grew 1.4 percent to $185 on a 4.1 percent rate increase
percent, offsetting a 1.1 percent decline in occupancy
to $225. Occupancy remains a very healthy 82
to a still very strong 81 percent. Our 0.1 percent
percent. Considering that RevPAR growth was
growth compares to industry-wide RevPAR growth
approximately 10 percent in 2015, we are pleased
of 3.2 percent. Within Chatham’s upscale segment,
with the 2016 Silicon Valley results.
RevPAR growth was 2.1 percent which was certainly
As asset managers, we work closely with Island
impacted by the 5.6 percent supply growth in the
Hospitality, an affiliated management company
upscale segment, compared to 1.6 percent for the
that operates all 38 of our hotels, to continuously
entire industry. I am encouraged that despite the
pursue aggressive tactics to improve operating results.
significant increase in new supply in our segments,
Given the slight 2016 RevPAR growth, there was
we maintained very high absolute occupancy and still
a tremendous amount of time and energy invested in
were able to increase ADR.
driving the proper mix between rate and occupancy
Chatham owns four hotels in Houston which saw
through effective revenue management strategy.
demand drop due to the decline in oil- and gas-
Island Hospitality implemented the right strategies
related business. Additionally, new supply growth
and successfully pushed ADR. Maintaining rate
was a very high 5.7 percent city-wide. RevPAR growth
integrity is very important as we absorb new supply
Chatham Lodging Trust
3
in our markets and resist the urge to drop our rates
S OL I D BA L A NC E S H E ET A N D C A PI TA L
to compete with other hotels trying to ramp up their
ST RUCT U R E
occupancy. The fact that Island could grow ADR
Our balance sheet remains in excellent condition
in the face of significant new supply is impressive,
with our leverage ratio a healthy 40 percent, down
and we will continue to push ADR in 2017 as this
from 41 percent a year ago. The average interest rate
will help us minimize the adverse impact on our
on our debt is 4.5 percent, with the weighted average
operating margins in an expected flat RevPAR
maturity date for our fixed rate debt in February
growth environment.
2024, and our line of credit doesn’t mature until late
Adjusted EBITDA rose 1 percent to $128.0 million,
2020. Our proportionate share of non-recourse joint
adjusted FFO grew 1 percent to $89.0 million and
venture debt and unrestricted cash was $168.0 million
adjusted FFO per share advanced less than 1 percent
and $2.6 million, respectively, and this adversely
to $2.30 per share from $2.29 per share.
impacts our perceived credit ratios. Excluding our
With RevPAR growth of 0.1 percent, our gross
interests in the two joint ventures, Chatham’s fixed
operating profit margins declined 130 basis points or
charge coverage ratio is 3.6 times, and net debt to
approximately 2.6 percent to 48.6 percent. Our hotel
trailing 12-month corporate EBITDA is 5.2 times.
EBITDA margins declined 190 basis points to 41.2
Our hotel investments continue to generate
percent, still the highest among all lodging REITs,
significant free cash flow, enabling us to reduce our
290 basis points higher than the next highest lodging
net debt by $13.9 million in 2016 after $22.5 million
REIT and 710 basis points or approximately 21 percent
in capital expenditures. We will continue to use our
higher than the average of all lodging REITs.
free cash flow after capital expenditures to reduce
In a flat revenue climate, it is very important to be
debt. With our well-positioned capital structure,
able to adjust expense structures to minimize any
strong coverage ratios and low cost of debt, we are
margin erosion, and we are well prepared to adjust
prudently leveraged. Over time, we intend to reduce
quickly to changing market conditions because of our
our leverage through growth and asset recycling.
relationship with Island Hospitality and their seasoned
experience. We implemented cost savings initiatives
JOI N T V E N T U R E S
very quickly as RevPAR declined in the third quarter
We invested $50 million in 2014 for an approximate
which enabled us to mitigate the margin loss in the
10 percent interest in two joint ventures with
fourth quarter when our operating profit margins
NorthStar Realty Finance (NRF) that own an
declined 50 basis points, much improved from the 180
aggregate of 95 hotels comprising 12,498 rooms. In
basis point erosion in the third quarter. This
early 2017, Colony Capital merged with NRF and
nimbleness is vital to maintaining profitability levels
formed Colony NorthStar, Inc. (CLNS). We look
which will enable us to outperform as RevPAR
forward to working with CLNS. The two joint
growth accelerates.
ventures provide us with partial ownership in
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2016 Annual Report
approximately $2 billion of hotels. These investments
in the top MSA and urban markets during the earlier
generate excellent returns and provide us the
part in this development cycle. In the end, I think
opportunity to leverage the infrastructure required
Chatham recovers earlier because of where our hotels
for the much larger platform to Chatham’s benefit.
are located and the fact that we’ve been effected
For the year ended December 31, 2016, Chatham
earlier than most, particularly as we look back at 2016.
received distributions of $7.2 million from the joint
2017 will be an active year for us as we find
ventures, generating an approximate 14.4 percent
creative ways to drive incremental shareholder value.
leveraged return on our investment, particularly
We will continue to pursue the two remaining room
gratifying given the significant amount of capital
additions in Silicon Valley. Additionally, we intend to
invested into the Inland portfolio during 2016
recycle capital by selling certain hotels and using
renovating and upgrading the properties.
those proceeds to invest in hotels located within
higher growth markets. Finally, we believe that
DELIVERS ANOTHER DIVIDEND
selectively developing hotels over time will allow us
INCREASE
to earn higher returns and keep the average age of
In February 2016, our Board of Trustees approved
our hotel portfolio young. These actions will be
another 10 percent increase in our monthly dividend
accretive to our net asset value, and will also help us
from $0.10 per share to $0.11 per share. On an
grow earnings in an otherwise slower growth period
annualized basis, the dividend increased $0.12 to $1.32
as we add rooms, recycle capital into higher growth
per share. This was our sixth consecutive year raising
hotels or develop hotels.
our dividend, following a 25 percent increase to our
Our management teams at Chatham, as well as
monthly dividend in 2015.
Island Hospitality, have worked together and gained
Our 2016 dividend per share of $1.30 represented
tremendous experience through many cycles, and our
approximately 57 percent of our 2016 adjusted FFO
unique platform can deliver value to our shareholders.
per share, and based on the midpoint of our guidance
We will continue to pursue our goal of building
for 2017, an annual dividend of $1.32 per share
Chatham into one of the premier hotel REITs.
represents an adjusted FFO per share payout ratio of
Thank you for your support. We truly appreciate it.
62 percent. Despite the projected decrease in earnings
in 2016, the payout ratio is healthy and supportable.
Sincerely,
OU T LO OK FOR 2 0 17
Our initial guidance reflects a cautious outlook for
2017 based on our expectation that economic growth
will remain muted in 2017 and that new supply will
Jeffrey H. Fischer
continue to adversely impact the industry and our
Chairman, Chief Executive Officer and President
hotels in 2017. New supply has been more concentrated
March 13, 2017
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, 2016
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.
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 38,352,554 common shares of beneficial interest held by non-affiliates of the registrant was $842,989,137 based on
the closing sale price on the New York Stock Exchange for such common shares of beneficial interest as of June 30, 2016.
The number of common shares of beneficial interest outstanding as of February 23, 2017 was 38,399,617.
Portions of the registrant's Definitive Proxy Statement for its 2017 Annual Meeting of Shareholders (to be filed with the Securities and Exchange
Commission on or before April 29, 2017) 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:
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purposes.
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 real estate investment trust ("REIT") for federal income tax
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:
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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 ("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
PART I
Dollar amounts presented in this Item 1 are in thousands, except per share data.
Overview
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 REIT for federal income tax purposes 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, 2016, 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)
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 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, 2016 and 2015, respectively,
we had issued 29,333 and 5,595 shares under the DRSPP at a weighted average price of $21.22 and $25.00 per share,
respectively. We filed a new $25 million registration statement for the DRSPP in January 2017 to replace the prior expiring
program.
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, 2016, we had issued 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,
2016, 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, 2016, the Company owned 38 hotels with an aggregate of 5,712 rooms located in 15 states and
the District of Columbia. As of December 31, 2016, 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, "JVs", 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 the Company’s
taxable REIT subsidiary (“TRS”) holding company. 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 its TRS
holding company. 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, 2016, Island Hospitality Management Inc. (“IHM”), which is 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, 2016, all of the NewINK JV hotels were managed by IHM. As of December 31, 2016, 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, 2016, 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, 2016:
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
135
127
145
200
192
146
103
121
125
197
178
111
180
231
160
231
248
160
144
194
176
100
120
180
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
$45.1 million
Total
5.712
$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
—
—
—
—
$14.1 million
$20.0 million
$33.7 million
$29.0 million
$16.6 million
—
$22.7 million
—
$18.8 million
$22.9 million
—
—
$46.2 million
$30.0 million
$64.8 million
$70.7 million
$48.6 million
$37.9 million
—
—
—
—
—
—
—
—
$22.1 million
230,112
$532.5 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 as of December 31, 2016, managed 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, 2016, our leverage ratio
was approximately 40 percent, which decreased from 41 percent at December 31, 2015. 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, and alternative lodging
marketplaces, 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 and alternative lodging market places. 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 continue 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 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 REIT 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 had an initial ten-year term that would have expired on February 28, 2017.
The Company terminated the management agreements with Concord as of December 31, 2016 and the Company entered into
management agreements with IHM for these hotels beginning January 1, 2017. No termination fees were paid in connection
with the termination of the management agreements with Concord. During the term of the management agreements with
Concord, the base management fees were 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
As of December 31, 2016, terms of our management agreements for our 38 wholly owned hotels were 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%
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%
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
1,200
1,200
1,200
1,200
1,200
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
—
—
—
850
850
1,000
1,000
1,000
1,000
1,000
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 $9.4 million, $8.7 million and $6.1 million, respectively, for the years ended
December 31, 2016, 2015 and 2014. Incentive management fees, which are included in management fees, for the years ended
December 31, 2016, 2015 and 2014 were $0.3 million, $0.3 million and $0.2 million, respectively. There have been no
incentive management fees accrued or paid to Concord.
11
Hotel Franchise Agreements
The fees associated with the franchise agreements are calculated as a 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, 2016 were 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%
2.5%
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 $22.4 million, $21.2 million and $15.1 million,
respectively, for the years ended December 31, 2016, 2015 and 2014.
12
Operating Leases
The Courtyard Altoona hotel is subject to a ground lease with an expiration date of April 30, 2029 and we have an
extension option of up to 12 additional terms of five years each. Monthly payments are determined by the quarterly average
room occupancy of the hotel. Rent currently 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 and
we have an extension option of up to three additional terms of ten years each. Monthly payments are currently approximately
$40,000 per month and increase 10% every five 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 2016 under these leases
amounted to approximately $27,000 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 approximately $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 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 is
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, garage leases and gross office
lease as of December 31, 2016 for each of the next five calendar years and thereafter (dollars in thousands):
2017
2018
2019
2020
2021
Thereafter
Total
$
$
Other Leases(1)
Office Lease
Amount
1,215 $
1,217
1,220
1,267
1,273
69,454
75,646 $
745
772
792
812
832
4,163
8,116
(1) Includes minimum future payments due under ground, air rights and garage leases.
Employees
As of February 27, 2017, we had 45 employees, 40 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 hotel level 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 without regard
to 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, or to repay debt, or for other corporate purposes 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 Chairman and Chief Executive Officer, controls IHM, a hotel
management company that, as of December 31, 2016, managed 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 may
be 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, 2016, 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 conditions, or 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 out 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 without regard to 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 our 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, as well as any amounts we seek to refinance, 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 agreements 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 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 decision-
making authority regarding the properties owned through the JVs or other joint ventures that we may invest in. Our joint
venture partners may be able to make certain important decisions about our joint venture and the joint venture properties
without our approval or consent. 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 may 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 some instances, the co-venturer
partner may be able to effect the sale of joint venture properties or borrow funds without our approval or consent. 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 call 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
our consent, including certain property dispositions conducted at arm’s length, certain actions related to the restructuring of the
JVs and the removal of us as managing member in the event we fail to fulfill our 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 may be 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, as of December 31, 2016, managed 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, and may manage additional hotels that we
acquire or own (wholly or through a joint venture) in the future. Because Mr. Fisher is our Chairman and 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 TRS.
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 and alternative lodging market places 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 TRS 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.
22
The increasing use by consumers of Internet travel intermediaries and alternative lodging market places 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. Additional sources of competition,
including alternative lodging marketplaces, such as HomeAway and Airbnb, which operate websites that market available
furnished, privately-owned residential properties, including homes and condominiums, that can be rented on a nightly, weekly
or monthly basis, may, as they become more accepted, lead to a reduced demand for conventional hotel guest rooms and to an
increased supply of lodging alternatives. Although most of the business for our hotels is expected to be derived from traditional
channels, if the amount of bookings made through Internet intermediaries or the use of alternative lodging market places
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.
23
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.
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
ventures' 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 operating 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 there 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.
24
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.
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.
25
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.
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.
26
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.
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 shareholder 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, our Board may elect to 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 without regard to 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.
27
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.
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 holding company is subject to federal, state and local income tax on its 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 holding company is available for distribution to us.
Our ownership of TRSs is limited and our transactions with our TRS 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
beginning 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.
28
Our TRS holding company is subject to federal, foreign, state and local income tax on its taxable income, and its 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 TRS is and will continue to be less than 25% (or 20% for taxable years beginning 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 TRS holding company for the purpose of ensuring compliance with TRS
ownership limitations. In addition, we will scrutinize all of our transactions with our TRS holding company and our TRS
Lessees 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.
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 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 company will fail to
qualify as a “taxable REIT subsidiary” if it or any of our TRS Lessees 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 a TRS Lessee must qualify as an "eligible
independent contractor" under the REIT rules in order for the rent paid to us by the TRS Lessee to be qualifying income for our
REIT income test requirements and for our TRS holding company to qualify as a “taxable REIT subsidiary”. 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.
29
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 TRS 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 TRS will generally not provide any tax benefit, except for
being carried forward against future taxable income in the TRS.
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.
30
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.
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 TRS)
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 TRS) can consist of
the securities of any one issuer, no more than 25% of the value of our assets can consist of debt of "publicly 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 may be subject to adverse legislative or regulatory tax changes that could reduce the market price of our shares.
At any time, the federal income tax laws governing REITs or the administrative interpretations of those laws may be
amended. We cannot predict when or if any new federal income tax law, regulation, or administrative interpretation, or any
amendment to any existing federal income tax law, regulation or administrative interpretation, will be adopted, promulgated or
become effective and any such law, regulation, or interpretation may take effect retroactively. In addition, according to publicly
released statements, a top legislative priority of the Trump administration and Congress may be significant reform of the Code,
including significant changes to taxation of business entities. There is a substantial lack of clarity around both the timing and
the details of any such tax reform and the impact of any potential tax reform on an investment in us. We and our shareholders
could be adversely affected by any such change in, or any new, federal income tax law, regulation or administrative
interpretation.
31
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 (determined
without regard to the deduction for dividends paid and excluding any net capital gains) 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.
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 and other factors. 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.
32
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 capitalizations. 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. Our
DRSPP permits the purchase of up to $25 million of our common shares through purchases and reinvestment of dividends on
our common shares.
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, 2016:
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
135
127
145
200
192
146
103
121
125
197
178
111
180
231
160
231
248
160
144
194
176
100
120
180
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
$45.1 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
139,535
171,774
159,398
—
—
—
—
169,355
$14.1 million
220,690
$20.0 million
218,000
$33.7 million
273,438
$29.0 million
222,603
$16.6 million
280,000
—
305,785
$22.7 million
229,508
—
176,395
$18.8 million
224,719
$22.9 million
136,937
155,000
—
—
316,883
$46.2 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
$22.1 million
5,712
$1,314.4 million
$
230,112
$532.5 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 with an
extension option by us of up to 12 additional terms of five years each. The Residence Inn New Rochelle hotel is subject to 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. For more information on the leases to which we or our hotels are subject, see
"Item 1. Business - Operating Leases".
Item 3. Legal Proceedings
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. 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.
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, 2016 was $20.55 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:
2016
First quarter
Second quarter
Third quarter
Fourth Quarter
2015
First quarter
Second quarter
Third quarter
Fourth Quarter
High
Low
Dividends
$
21.94 $
16.91 $
22.77
24.56
21.35
19.61
18.95
16.77
0.31
0.33
0.33
0.33
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)
(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 $0.11 per share for each month in
the first quarter of 2017. The January 2017 monthly dividend was paid on February 24, 2017 to shareholders of record on
January 31, 2017.
Shareholder Information
On January 31, 2017, there were 227 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.
The below graph provides a comparison of the five-year cumulative total return on our common shares from
December 31, 2011 to the NYSE closing price per share on December 31, 2016 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, 2011 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.
36
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
Value of
initial
investment at
December 31,
2016
Chatham Lodging Trust
Russell 2000 Index
FTSE NAREIT All
Equity REIT Index
FTSE NAREIT
Lodging/Resorts Index
$
$
$
$
100.00
100.00
100.00
$
$
$
150.75
116.35
120.14
$
$
$
209.95
161.52
124.00
$
$
$
309.77
169.43
157.66
$
$
$
229.52
161.95
161.27
$
$
$
246.43
196.45
176.24
100.00
$
112.53
$
143.12
$
189.64
$
143.33
$
178.22
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
Future distributions will be at the discretion of our board of trustees and will depend on our financial performance,
debt service obligations, applicable debt covenants (if any), capital expenditure requirements, maintenance of our REIT
qualification and other factors as our board of trustees deems relevant.
The following table sets forth information regarding the income tax characterization of regular distributions by the
Company on its common shares for the years ended December 31, 2016 and 2015, respectively:
Common shares:
Ordinary income
Return of capital
Capital gain
Total
2016
2015
$
$
1.242
0.138
—
1.38
90 % $
10 %
— %
100% $
1.128
—
0.072
1.20
94 %
— %
6 %
100%
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.
Equity Compensation Plan Information
The following table provides information, as of December 31, 2016, 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. See Note 11 to our consolidated financial statements for additional
information regarding our Equity Incentive Plan.
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
—
—
—
—
—
—
1,900,922
—
1,900,922
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.
Sale of Unregistered Securities
None.
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 0 and 763
common shares forfeited in the years ended December 31, 2016 and 2015, respectively, related to such repurchases.
38
Item 6. Selected Financial Data
The following tables present selected historical financial information as of and for the years ended December 31,
2016, 2015, 2014, 2013 and 2012. The selected historical financial information as of and for the years ended December 31,
2016, 2015, 2014, 2013 and 2012 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,
2016
December 31,
2015
December 31,
2014
December 31,
2013
December 31,
2012
(In thousands, except share and per-share data)
Statement of Operations Data:
Total revenue
$
293,820
$
276,950
$
197,216
$
126,228
$
100,464
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 (loss) before income tax benefit (expense)
Income tax benefit (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:
$
$
$
$
Basic
Diluted
Other Data:
Net cash provided by operating activities
Net cash used in investing activities
Net cash provided by (used in) financing activities
Cash dividends declared per common share
48,775
21,564
11,119
510
4,139
234,884
58,936
51
(28,297)
(4)
718
(10)
31,394
301
148,777
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)
—
2,411
(3,830)
(1,874)
(1,439)
3,576
33,438
(260)
65,750
67,186
(105)
—
3,106
(124)
31,695
$
33,178
$
67,081
$
2,982
$
(212)
(212)
(208)
(208)
—
(1,375)
(75)
(1,450)
—
31,483
$
32,966
$
66,873
$
2,982
$
(1,450)
0.82
$
0.87
$
2.32
$
0.13
$
(0.12)
0.81
$
0.86
$
2.30
$
0.13
$
(0.12)
38,299,067
38,482,875
37,917,871
38,322,285
28,531,094
28,846,724
21,035,892
21,283,831
13,811,691
13,811,691
81,842
(182,363)
106,480
1.28
49,306
(452,988)
414,538
0.93
31,571
(235,190)
203,344
0.84
14,885
(13,036)
(2,033)
0.78
87,669
(21,078)
(75,509)
1.30
39
As of
As of
As of
As of
As of
December 31,
2016
December 31,
2015
December 31,
2014
December 31,
2013
December 31,
2012
(In thousands)
Balance Sheet Data:
Investment in hotel properties, net
$
1,233,094
$
1,258,452
$
1,096,425
$
652,877
$
426,074
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
Deferred tax asset, net
Total assets
Mortgage debt, net
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
$
$
12,118
25,083
20,424
4,389
4,642
2,778
426
21,036
19,273
23,618
4,433
5,365
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
—
1,302,954
$
1,337,229
$
1,165,099
$
673,924
$
457,221
530,323
$
539,623
$
527,721
$
222,063
$
159,746
52,500
27,782
6,017
4,742
621,364
676,742
65,580
25,100
2,703
7,221
640,227
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
4,848
4,131
3,415
2,167
1,611
Total liabilities and equity
$
1,302,954
$
1,337,229
$
1,165,099
$
673,924
$
457,221
40
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
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, 2016, 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, 2016, the Company owned 38 hotels with an aggregate of 5,712 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, "JVs", which refers collectively to, for the period prior to December 30, 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.
41
To qualify as a REIT, the Company cannot operate its hotels. Therefore, the Operating Partnership and its subsidiaries
lease each of the Company's wholly owned hotels to a taxable REIT subsidiary lessee (“TRS Lessee”), which is wholly owned
by the Company’s taxable REIT subsidiary (“TRS”) holding company. 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 its TRS holding company. 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, 2016, Island Hospitality Management Inc. (“IHM”), which is 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, 2016, all of the NewINK JV hotels were managed by IHM. As of December 31, 2016, 34 of
the Inland JV hotels are managed by IHM and 14 hotels are managed by Marriott International, Inc. ("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
• Adjusted 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” herein for a discussion of our use of FFO, Adjusted FFO, EBITDA, Adjusted
EBITDA and Adjusted Hotel EBITDA and a reconciliation of FFO, Adjusted FFO, EBITDA, Adjusted EBITDA and Adjusted
Hotel EBITDA to net income or loss, measurements recognized by generally accepted accounting principles in the United
States (“GAAP”).
42
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. Trends
for many of these indicators appear to be moderating. GDP growth is currently modest, with Bloomberg forecasting growth of
1.7% in 2016 and 2.3% in 2017. Lodging industry performance is also impacted by room supply growth, which is currently
increasing. Overall U.S. room supply increased 1.6% in 2016, but supply in the Upscale segment, in which most of our hotels
operate, increased by 5.6% in 2016. Smith Travel Research is projecting U.S. hotel supply growth to increase to 2.0% in 2017.
Continued supply growth, especially when coupled with slowing corporate demand, could negatively impact RevPAR growth.
Marriott, a major hotel franchisor is currently projecting 2017 RevPAR growth of 0.0% to 2.0%. We are currently projecting
2017 RevPAR change of -1.0% to 1.0%.
Comparison of the year ended December 31, 2016 (“2016”) to the year ended December 31, 2015 (“2015”)
Results of operations for the year ended December 31, 2016 include the operating activities of our 38 wholly owned
hotels and our investments in the NewINK JV and Inland JV. We acquired four hotels in the year ended December 31, 2015
and the Torrance JV was sold on December 30, 2015. 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.
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
Total revenue
Year ended
December 31,
2016
December 31,
2015
% Change
$
273,345
$
258,137
6,221
10,115
4,139
5,536
9,534
3,743
$
293,820
$
276,950
5.9%
12.4%
6.1%
10.6%
6.1%
Total revenue increased $16.8 million from $293.8 million for the year ended December 31, 2016 compared to total
revenue of $277.0 million for the 2015 period. Total revenue related to the four hotels acquired during 2015 contributed $16.8
million 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 $273.3 million and $258.1 million for the years ended December 31, 2016 and 2015, respectively, with $15.2 million of
this increase attributable to the four hotels acquired in 2015. The revenue from the remaining properties owned for all of 2016
and 2015 remained flat.
43
As reported by Smith Travel Research, industry RevPAR for the years ended December 31, 2016 and 2015 increased
3.2% and 6.3%, respectively, in the 2016 and 2015 periods as compared to the respective years ended December 31, 2015 and
2014. RevPAR at our wholly owned hotels decreased 0.1% and increased 5.8%, respectively, in the 2016 and 2015 periods as
compared to the respective prior year periods regardless of ownership. Our RevPAR was lower than the overall industry
growth due to lower growth in our specific markets.
In the table below, we present both actual and same property room revenue metrics. Actual Occupancy, ADR and
RevPAR metrics reflect the performance of the hotels for the actual days such hotels were owned by the Company during the
periods presented. Same property Occupancy, ADR, and RevPAR results for the 38 hotels wholly owned by the Company as of
December 31, 2016 reflect the performance of the hotels during the entire period regardless of our ownership during the
periods presented, which is a non-GAAP financial measure. Results for the hotels for the periods prior to our ownership were
provided to us by prior owners and have not been adjusted by us or audited by the Company's auditors.
For the years ended December 31,
2016
2015
Percentage Change
Same
Property (38
hotels)
Actual (38
hotels)
Same
Property (38
hotels)
Actual (34
hotels)
Same
Property (38
hotels)
Actual
(38/34
hotels)
80.6%
80.6%
81.6%
81.5%
$ 162.89
$ 162.89
$ 160.99
$ 158.11
$ 131.32
$ 131.32
$ 131.38
$ 128.82
(1.2)%
1.2 %
(0.1)%
(1.1)%
3.0 %
1.9 %
Occupancy
ADR
RevPAR
The RevPAR decrease of 0.1% was primarily attributable to an increase in ADR of 1.2% offset by a decrease in
Occupancy of 1.2%.
Food and beverage revenue was $6.2 million and $5.5 million for the years ended December 31, 2016 and 2015,
respectively. For 2016, $0.9 million of the increase relates to the hotels acquired in 2015 and a decrease of $0.2 million relates
to the remaining properties. Food and beverage revenue increased due to 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 $10.1 million and $9.5 million for the years ended December 31, 2016 and 2015, respectively. Total other operating
revenue related to the four hotels acquired in 2015 contributed $0.6 million of the increase.
Cost reimbursements from unconsolidated real estate entities, comprised of payroll costs at the NewINK JV, Inland JV
and an entity which is 2.5% owned by Mr. Fisher, where the Company is the employer were $4.1 million and $3.7 million for
the years ended December 31, 2016 and 2015, respectively. The increase is due to increases in shared office expenses and
deferred rent expense. These cost reimbursements were offset by the reimbursed costs from unconsolidated real estate entities
included in operating expenses.
44
Hotel Operating Expenses
Hotel operating expenses consisted of the following for the periods indicated (dollars in thousands):
Year ended
December 31,
2016
December 31,
2015
% 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
$
57,209
$
50,165
4,928
1,712
2,358
22,274
22,412
5,147
9,545
12,444
9,389
1,359
4,127
1,708
2,467
21,101
21,240
5,040
9,464
11,722
8,742
1,218
Total hotel operating expenses
$
148,777
$
136,994
14.0 %
19.4 %
0.2 %
(4.4)%
5.6 %
5.5 %
2.1 %
0.9 %
6.2 %
7.4 %
11.6 %
8.6 %
Hotel operating expenses increased $11.8 million, or 8.6% to $148.8 million for the year ended December 31, 2016
from $137.0 million for the year ended December 31, 2015. The increase in total hotel operating expenses attributable to the
four hotels acquired in 2016 was $9.1 million while the remaining hotels contributed $2.7 million to the increase.
Consequently, the margins for our hotels owned during the entirety of both the 2016 and 2015 periods decreased in 2016.
Room expenses, which are the most significant component of hotel operating expenses, increased $7.0 million from
$50.2 million in 2015 to $57.2 million in 2016. Total room expenses related to the four hotels acquired in 2015 contributed
$3.2 million to the increase, while the remaining hotels contributed $3.8 million to the increase, or 6.5%, due primarily to
increased hotel employee compensation and benefits.
The remaining hotel operating expenses increased $4.8 million or 5.5%, from $86.8 million in 2015 to $91.6 million
in 2016. The increase attributable to the four hotels acquired in 2015 was $5.8 million while the remaining hotels had a
decrease of $1.0 million. Food and beverage expense increased due to 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 decreased $0.2 million from $49.0 million for the year ended December 31,
2015 to $48.8 million for the year ended December 31, 2016. The increase attributable to the four hotels acquired in 2015 is
$1.5 million, while the decrease attributable to the remaining hotels of $1.7 million was due to some assets being fully
depreciated. 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.
Property Taxes and Insurance
Total property taxes and insurance expenses increased $3.0 million from $18.6 million for the year ended December
31, 2015 to $21.6 million for the year ended December 31, 2016. The increase related to the four hotels acquired in 2015, was
$2.4 million and the remaining hotels contributed $0.6 million of the increase or 3.2% due to incremental increases in values
and assessments.
45
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 $3.0 million and $2.8 million for the years ended December 31, 2016 and 2015, respectively) decreased $0.7
million, or 8.0%, to $8.1 million in 2016 from $8.8 million in 2015, with the decrease due to a decrease in payroll and bonuses,
a decrease in professional fees and a decrease in board expenses.
Hotel Property Acquisition Costs and Other Charges
Hotel property acquisition costs decreased $1.0 million from $1.5 million for the year ended December 31, 2015 to
$0.5 million for the year ended December 31, 2016. Acquisition-related costs are expensed when incurred. The Company
incurred other charges of $0.7 million 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 $0.4 million related to legal fees for a
class action lawsuit filed in the State of California in 2015. Property acquisition costs in the 2016 period related to a prior
acquisition for which final amounts were more than previously accrued.
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 $4.1
million and $3.7 million for the years ended December 31, 2016 and 2015, respectively. Reimbursed costs increased due to an
increase in the shared office expenses and deferred rent expense. 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 decreased $0.2 million from $0.3 million for the year ended
December 31, 2015 to $0.1 million for the year ended December 31, 2016. The $0.2 million decrease is related to services
provided to NorthStar in 2015.
Interest Expense, Including Amortization of Deferred Fees
Interest expense increased $0.4 million, or 1.3%, from $27.9 million for the year ended December 31, 2015 to $28.3
million for the year ended December 31, 2016. Interest expense is comprised of the following (dollars in thousands):
Mortgage debt interest
Credit facility interest
Other fees
Amortization of deferred financing costs
Total
Year ended
December 31, 2016
December 31, 2015
% Change
$
$
25,250
$
25,105
1,307
657
1,083
28,297
$
574
637
1,608
27,924
0.6 %
127.7 %
3.1 %
(32.6)%
1.3 %
Interest expense on the Company's revolving credit facilities increased due to higher utilization for the year ended
December 31, 2016 as compared to year ended December 31, 2015. Amortization of deferred financing fees decreased $0.5
million due to refinancing of the senior unsecured revolving credit facility in November 2015.
46
Loss on Early Extinguishment of Debt
Loss on early extinguishment of debt decreased $0.4 million from a loss of $0.4 million for the year ended December
31, 2015 compared to $4 thousand for the year ended December 31, 2016 due to paying off the loan associated with the
Altoona hotel in January 2016 instead of at the maturity date of April 2016 and entering into a new unsecured revolving credit
agreement in November 2015, which replaced our previous secured revolving credit agreement.
Income (loss) from Unconsolidated Real Estate Entities
Income (loss) from unconsolidated real estate entities decreased $1.7 million from $2.4 million for the year ended
December 31, 2015 to $0.7 million for the year ended December 31, 2016. The decrease is due primarily to a loss on the
Inland JV of $0.7 million, which is conducting renovations at multiple hotels and income on NewINK JV of $0.8 million,
compared to income in 2015 of $0.8 million on the Inland JV, income of $0.9 million on the NewINK JV and income of $0.1
million on the Torrance JV.
Income (loss) on Sale from Unconsolidated Real Estate Entities
Income (loss) on sale from unconsolidated real estate entities decreased $3.6 million from a gain of $3.6 million for
the year ended December 31, 2015 to a loss of $10 thousand for the year ended December 31, 2016. The decrease is due to the
sale of the Torrance JV in December 2015.
Income Tax Expense
Income tax expense decreased $0.6 million from an expense of $0.3 million for the year ended December 31, 2015 to
a benefit of $0.3 million for the year ended December 31, 2016. The decrease was due to the release of a valuation allowance.
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 $31.7 million for the year ended December 31, 2016, compared to net income of $33.2 million for the
year ended December 31, 2015. The decrease in our net income was due to the factors discussed above.
47
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 the 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.
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 (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.
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):
Years Ended
December 31,
2015
December 31,
2014
% Change
Room
Food and beverage
Other
Cost reimbursements from unconsolidated real estate entities
$
258,137
$
184,926
5,536
9,534
3,743
2,764
7,534
1,992
Total revenue
$
276,950
$
197,216
39.6%
100.3%
26.5%
87.9%
40.4%
Total revenue was $277.0 million for the year ended December 31, 2015 compared to total revenue of $197.2 million
for the 2014 period. Total revenue related to the nine hotels acquired during 2014 contributed $51.5 million of the increase and
the four hotels acquired during 2015 contributed $19.7 million 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 $258.1 million and $184.9 million for the years ended
December 31, 2015 and 2014, respectively, with $48.9 million of this increase attributable to the nine hotels acquired in 2014
and $17.6 million attributable to the four hotels acquired in 2015. The remaining $6.7 million of the increase relating to
properties owned for all of 2015 and 2014, which represents a 3.6% increase over 2014.
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 respective prior 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
periods regardless of ownership.
48
In the table below, we present both actual and same property room revenue metrics. Actual Occupancy, ADR and
RevPAR metrics reflect the performance of the hotels for the actual days such hotels were owned by the Company during the
periods presented. Same property Occupancy, ADR, and RevPAR results for the 38 wholly owned by the Company as of
December 31, 2015, reflect the performance of the hotels during the entire period regardless of our ownership during the
periods presented, which is a non-GAAP financial measure. Results for the hotels for the periods prior to our ownership were
provided to us by prior owners and have not been adjusted by us or audited by the Company's auditors.
For the years ended December 31,
2015
2014
Percentage Change
Same
Property (38
hotels)
Actual (34
hotels)
Same
Property (38
hotels)
Actual (25
hotels)
81.6%
83.4%
81.6%
81.4%
$ 161.00
$ 150.84
$ 152.29
$ 144.46
$ 131.41
$ 122.69
$ 124.22
$ 117.64
Same
Property
(38/38
hotels)
Actual
(34/25
hotels)
—%
5.7%
5.8%
2.5%
4.4%
4.3%
Occupancy
ADR
RevPAR
The RevPAR increase of 5.8% was primarily attributable to an increase in ADR of 5.7%.
Food and beverage revenue was $5.5 million and $2.8 million for the years ended December 31, 2015 and 2014,
respectively. For 2015, $1.7 million of the increase relates to the hotels acquired in 2014 and $0.6 million relates to the four
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 $9.5 million and $7.5 million for the years ended December 31, 2015 and 2014, respectively. Total other operating revenue
related to the nine hotels acquired in 2014 contributed $0.8 million of the increase, while the four hotels acquired in 2015
contributed $1.6 million 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), Inland JV (from November 17, 2014
to December 31, 2015) and an entity which is 2.5% owned by Mr. Fisher (from August 1, 2014 to December 31, 2015) where
the Company is the employer, were $3.7 million and $2.0 million 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.
49
Hotel Operating Expenses
Hotel operating expenses consisted of the following for the periods indicated (dollars in thousands):
Years 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 $36.0 million to $137.0 million for the year ended December 31, 2015 from
$101.0 million 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 acquired 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 was $24.2 million while the four
hotels acquired in 2015 contributed $9.3 million to the increase. Excluding those hotels, total hotel operating expenses
increased $2.5 million or 2.85%, 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 2015.
Room expenses, which are the most significant component of hotel operating expenses, increased $12.6 million from
$37.5 million in 2014 to $50.2 million in 2015. Total room expenses related to the nine hotels acquired in 2014 contributed
$8.6 million of the increase and the four hotels acquired in 2015 contributed $3.4 million to the increase. Excluding those
hotels, room expenses increased $0.7 million or 2.1%, due primarily to increased hotel employee compensation and benefits.
The remaining hotel operating expenses increased $23.4 million or 36.9%, from $63.4 million in 2014 to $86.8
million in 2015. The number of rooms owned 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 $15.7 million while the four hotels acquired in
2015 contributed $5.9 million 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 $14.3 million from $34.7 million for the year ended December 31,
2014 to $49.0 million for the year ended December 31, 2015. The increase attributable to the nine hotels acquired in 2014 is
$10.9 million, while the increase attributable to the four hotels acquired in 2015 is $3.7 million. 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.
50
Property Taxes and Insurance
Total property taxes and insurance expenses increased $6.0 million from $12.6 million for the year ended December
31, 2014 to $18.6 million for the year ended December 31, 2015. The increase related primarily to the nine hotels acquired in
2014, which contributed $3.0 million of the increase, while the four hotels acquired in 2015 contributed $2.4 million of the
increase. The remaining increase of $0.6 million, or 5.5%, 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 $2.8 million and $2.5 million for the years ended December 31, 2015 and 2014, respectively) increased $1.5
million, or 20.5%, to $8.8 million in 2015 from $7.3 million in 2014, with the increase due to higher employee compensation of
$0.9 million in 2015 associated with additional employees and incentive compensation and a $0.4 million increase in
professional fees and a $0.2 million increase in office expenses.
Hotel Property Acquisition Costs and Other Charges
Hotel property acquisition costs decreased $8.9 million from $10.4 million for the year ended December 31, 2014 to
$1.5 million 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 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 $0.7 million 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 $0.4 million 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 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 $3.7
million and $2.0 million for the year 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 $0.2 million from $0.1 million for the year ended
December 31, 2014 to $0.3 million for the year ended December 31, 2015. Of the $0.2 million increase, $0.15 million is
related to services provided to NorthStar.
51
Interest Expense, Including Amortization of Deferred Fees
Interest expense increased $6.5 million or 30.8% from $21.4 million for the year ended December 31, 2014 to $27.9
million for the year ended December 31, 2015. 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,
2015
December 31,
2014
% Change
$
$
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 %
The increase in interest expense for the year ended December 31, 2015 is primarily due to interest expense of $7.8
million on loans issued during or subsequent to the first half of 2014 having a principal balance of $329.1 million, including the
four new loans having an aggregate principal balance of $222.0 million on the four Silicon Valley hotels issued on June 9,
2014, the $30.0 million loan on the Savannah hotel issued on July 2, 2014, the $16.2 million and $20.0 million loans on the
Homewood Suites by Hilton Billerica and Homewood Suites by Hilton Carlsbad hotels, respectively, each issued on
November 25, 2014, the $18.3 million loan on the Hampton Inn and Suites Houston Medical hotel issued on December 17,
2014 and the $22.6 million loan on the Hilton Garden Inn Marina del Rey hotel assumed on September 17, 2015. The increase
was partially offset by $0.2 million 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 $0.1 million 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 facility 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 decreased $0.2 million from a loss of $0.2 million for the year ended December
31, 2014 compared to a loss of $0.4 million 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 (loss) from Unconsolidated Real Estate Entities
Income or (loss) from unconsolidated real estate entities increased $6.2 million from a loss of $3.8 million for the year
ended December 31, 2014 to a gain of $2.4 million 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 $0.6 million, compared to $0.3 million in 2014, income
on the Inland JV of $0.8 million, which was not owned until November 14, 2014 and income on NewINK JV of $0.9 million,
compared to losses in 2014 on the Innkeepers JV, NewINK JV and Inland JV of $0.4 million, $1.6 million and $2.3 million,
respectively.
Income (loss) on Sale from Unconsolidated Real Estate Entities
Income (loss) on sale from unconsolidated real estate entities decreased $62.2 million from a gain of $65.8 million for
the year ended December 31, 2014 to a gain of $3.6 million for the year ended December 31, 2015. The decrease is due to the
sale of the Innkeepers JV to NewINK JV in June 2014, partially offset by the sale of the Torrance JV in December 2015.
52
Income Tax Expense
Income tax expense decreased $0.2 million from an expense of $0.1 million for the year ended December 31, 2014 to
an expense of $0.3 million for the year ended December 31, 2015. We are subject to income taxes based on the taxable income
of our TRS holding company at a combined federal and state tax rate of approximately 40%.
Net Income
Net income was $33.2 million for the year ended December 31, 2015, compared to a net income of $67.1 million for
the year ended December 31, 2014. The increase 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 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) Adjusted 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 Adjusted 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 Adjusted Hotel EBITDA are not measures of our liquidity, nor are FFO, Adjusted FFO, EBITDA, Adjusted
EBITDA or Adjusted 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 Adjusted 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 reflect historical cost of
our asset base and our acquisition and disposition activities and are less reflective of our ongoing operations, and that by
adjusting to exclude 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 costs related to hotel 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, 2016,
2015 and 2014 (in thousands, except share data):
For the year ended
December 31,
2016
2015
2014
Funds From Operations (“FFO”):
Net income
Loss (income) on sale from 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 share and unit holders
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 share and unit holders
$
Weighted average number of common shares and units
$
31,695
$
10
—
48,562
8,186
88,453
510
4
25
88,992
$
$
33,178
(3,576)
—
67,081
(65,750)
1
48,784
7,458
85,844
1,451
412
104
87,811
34,579
4,902
40,813
10,381
184
3,932
55,310
Basic
Diluted
38,556,842
38,175,646
28,737,314
38,740,650
38,327,355
28,846,724
Diluted weighted average common share count used for calculation of adjusted FFO per share may differ from diluted
weighted average common share count used for calculation of GAAP Net Income per share by LTIP units, which may be
converted to common shares of beneficial interest and if Net Income per share is negative and 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,
2016, 2015 and 2014 (in thousands):
Earnings Before Interest, Taxes, Depreciation and
Amortization (“EBITDA”):
Net income
Interest expense
Income tax (benefit) expense
Depreciation and amortization
Adjustments for unconsolidated real estate entity items
EBITDA
Hotel property acquisition costs and other charges
Loss on early extinguishment of debt
Adjustments for unconsolidated real estate entity items
Loss (income) on sale from 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,
2016
2015
2014
$
31,695
$
33,178
$
67,081
28,297
(301)
48,775
15,908
124,374
510
4
62
10
—
27,924
260
48,981
15,081
125,424
1,451
412
136
21,354
105
34,710
10,211
133,461
10,381
184
4,053
(3,576)
(65,750)
—
1
3,013
$ 127,973
2,835
$ 126,682
$
2,469
84,799
Adjusted Hotel EBITDA is defined as net income before interest, income taxes, depreciation and amortization,
corporate general and administrative, hotel property acquisition costs, loss on early extinguishment of debt, interest and other
income and income or loss from unconsolidated real estate entities. We present Adjusted Hotel EBITDA because we believe it
is useful to investors in comparing our hotel operating performance between periods and comparing our Adjusted Hotel
EBITDA margins to those of our peer companies. Adjusted Hotel EBITDA represents the results of operations for our wholly
owned hotels only.
55
The following is a presentation of Adjusted Hotel EBITDA for the years ended December 31, 2016, 2015 and 2014 (in
thousands):
Net income
Add:
Interest expense
Income tax expense
Depreciation and amortization
Corporate General and administrative
Hotel property acquisition costs and other charges
Loss from unconsolidated real estate entities
Loss on early extinguishment of debt
Loss on sale from unconsolidated real estate entities
Less:
Interest and other income
Income from unconsolidated real estate entities
Income on sale from unconsolidated real estate entities
Income tax benefit
For the year ended
December 31,
2016
2015
31,695
28,297
—
48,775
11,119
510
—
4
10
(51)
(718)
—
(301)
33,178
27,924
260
48,981
11,677
1,451
—
412
—
(264)
(2,411)
(3,576)
—
2014
67,081
21,354
105
34,710
9,852
10,381
3,830
184
—
(108)
—
(65,750)
—
Adjusted Hotel EBITDA
$ 119,340
$ 117,632
$ 81,639
Although we present FFO, Adjusted FFO, EBITDA, Adjusted EBITDA and Adjusted 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 Adjusted Hotel EBITDA do not reflect our cash
expenditures or future requirements for capital expenditures or contractual commitments;
FFO, Adjusted FFO, EBITDA, Adjusted EBITDA and Adjusted Hotel EBITDA do not reflect changes in, or
cash requirements for, our working capital needs;
FFO, Adjusted FFO, EBITDA, Adjusted EBITDA and Adjusted Hotel EBITDA do not reflect funds available
to make cash distributions;
• EBITDA, Adjusted EBITDA and Adjusted 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 Adjusted 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 Adjusted 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 Adjusted
Hotel EBITDA differently than we do, limiting their usefulness as a comparative measure.
56
In addition, FFO, Adjusted FFO, EBITDA, Adjusted EBITDA and Adjusted 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 Adjusted Hotel EBITDA are not measures of our liquidity. Because of these limitations, FFO, Adjusted
FFO, EBITDA, Adjusted EBITDA and Adjusted 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 Adjusted Hotel EBITDA only supplementally.
Our consolidated financial statements and the notes to those statements included elsewhere are prepared in accordance with
GAAP.
57
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, 2016 and December 31, 2015, we had cash and cash equivalents of approximately $12.1 million
and $21.0 million, respectively. We are required to maintain at least a total of $10.0 million 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 $197.5 million available under our $250.0 million senior unsecured revolving credit facility as of December 31, 2016.
For the year ended December 31, 2016, net cash flows provided by operations were $87.7 million, driven by net
income of $31.7 million and by $52.9 million of non-cash items, including $49.9 million of depreciation and amortization, $4
thousand of the extinguishment of debt, $3.0 million of share-based compensation expense and a net loss from the sale of
interests in unconsolidated real estate entities of $10 thousand, offset by $0.7 million related to the income from unconsolidated
entities and $0.4 million related to a deferred tax benefit. 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 $4.2 million. Net cash flows used in investing activities were $21.1 million, primarily related to
capital improvements on our 38 wholly owned hotels of $22.5 million, $5.8 million related to required escrow deposits
included in restricted cash, reduced by distributions of $7.2 million received from unconsolidated real estate entities. Net cash
flows used in financing activities were $75.5 million, comprised of net proceeds of $0.5 million raised through our dividend
reinvestment and share purchase plan ("DRSPP"), net repayments on our unsecured credit facility of $13.1 million, principal
payments or payoffs on mortgage debt of $9.7 million, payments of deferred financing and offering costs of $0.1 million, and
distributions to shareholders and LTIP unit holders of $53.1 million.
For the year ended December 31, 2015, net cash flows provided by operations were $81.8 million, driven by net
income of $33.2 million, offset by $53.8 million of non-cash items, including $50.6 million of depreciation and amortization,
$0.4 million of the extinguishment of debt and $2.8 million of share-based compensation expense, offset by $2.4 million related
to the income from unconsolidated entities and a net gain from the sale of interests in unconsolidated real estate entities of $3.6
million. 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 $0.8 million. Net cash flows
used in investing activities were $182.4 million, 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 $169.5 million, capital
improvements on our 38 wholly owned hotels of $20.3 million, $5.5 million related to required escrow deposits included in
restricted cash, reduced by distributions of $12.9 million received from unconsolidated real estate entities and distributions
from the sale of the Torrance JV. Net cash flows provided by financing activities were $106.5 million, comprised of net
proceeds of $120.8 million 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 $43.1
million, principal payments or payoffs on mortgage debt of $7.9 million, payments of deferred financing and offering costs of
$4.2 million, repurchase of vested common shares of $22 thousand and distributions to shareholders and LTIP unit holders of
$45.3 million.
For the year ended December 31, 2014, net cash flows provided by operations were $49.3 million, driven by net
income of $67.1 million, offset by $42.7 million of non-cash items, including $36.2 million of depreciation and amortization,
$0.2 million of the extinguishment of debt, $2.5 million of share-based compensation expense and $3.8 million related to the
loss from unconsolidated entities, offset by a net gain from the sale of interests in unconsolidated real estate entities of $65.8
million. 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 $5.2 million. Net cash flows
used in investing activities were $453.0 million, primarily related to the purchase of the four Silicon Valley hotels, the Cherry
Creek hotel and the four hotels acquired from Inland for $404.7 million, investment in the Inland JV of $28.0 million, capital
improvements on our 34 wholly owned hotels of $14.9 million, $7.4 million related to required escrow deposits included in
restricted cash, reduced by distributions of $2.1 million received from unconsolidated real estate entities. Net cash flows
provided by financing activities were $414.5 million, comprised of proceeds from the issuance of new mortgage loans of
$340.5 million, net proceeds of $150.8 million raised from our September 2014 follow-on common share offerings, $20.7
million raised from our ATM Plan, net repayments on our secured credit facility of $27.5 million, principal payments or payoffs
on mortgage debt of $34.8 million, payments of deferred financing and offering costs of $8.6 million and distributions to
shareholders and LTIP unit holders of $26.5 million.
58
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. In March
2016, we changed the monthly dividend and distribution from $0.10 to $0.11 per common share and LTIP unit, which we
maintained for the remainder of 2016. On January 27, 2017, we paid an aggregate of $4.3 million in dividends on our common
shares and distributions on our LTIP units attributable to the December 2016 monthly 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. At
December 31, 2016, our leverage ratio was approximately 40 percent, which decreased from 41 percent at December 31, 2015
based on the ratio of our net debt (total debt outstanding before deferred financing costs less unrestricted cash and cash
equivalents) to hotel investments at cost, including our JV investments. At December 31, 2016, we had total debt of $585.1
million at an average rate of approximately 4.5%. 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. Over time, we intend to finance our growth with free cash flow, 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, 2016 and 2015, we had $52.5 million and $65.6 million, respectively, in borrowings under our
revolving credit facility. At December 31, 2016, the maximum borrowing availability under our senior unsecured revolving
credit facility was $250.0 million. We also had mortgage debt on individual hotels aggregating $532.6 million and $542.3
million at December 31, 2016 and 2015, 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 $175.0 million. Proceeds
under the New Credit Agreement were used to repay outstanding borrowings under the Existing Credit Agreement. The New
Credit Agreement 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 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
59
The New Credit Agreement 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, 2016.
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, 2016 and 2015, respectively, we had issued
29,333 and 5,595 shares under the DRSPP at a weighted average price of $21.22 and $25.00 per share, respectively. We filed a
new $25 million registration statement for the DRSPP in January 2017 to replace the prior expiring program.
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, 2016, we had issued 880,820 shares under the
ATM Plan at a weighted average price of $23.54 per share. As of December 31, 2016, there were common shares having a
maximum aggregate sales price of approximately $29.3 million 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. 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.
60
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, 2016 and 2015, we invested approximately $24.5 million and $20.7 million,
respectively, on capital projects in our hotels. Of the $24.5 million spent for the year ended December 31, 2016, $16.9 million
related to planned renovations, discretionary and emergency expenditures and $7.6 million was related to the expansion of our
Silicon Valley properties. We expect to invest approximately $27.0 million on capital improvements to our existing hotels in
2017, including improvements required under any brand required PIP.
The Company is continuing with plans to expand its two Residence Inns located in Sunnyvale, CA. The expansions
are expected to include a new lobby and public spaces in each location. We are not certain when the expansions of the two
Sunnyvale Residence Inns will commence. It is possible that one or both of these projects will commence in 2017, but the
timing is uncertain due to potential delays related to finalizing plans, obtaining approvals from local authorities and ensuring
costs to complete the expansions justify the investment. While we do not have final budgets for these projects, we currently
anticipate that total expenditures will be approximately $75 million to $80 million, but these costs are subject to change.
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. See also Item 13 of this Form 10-K.
Contractual Obligations
The following table sets forth our contractual obligations as of December 31, 2016, 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, 2016 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 (1)
Revolving credit facility, including interest (2)
Ground leases
Property loans, including interest (2)
Total
Less Than
One Year
One to Three
Years
Three to Five
Years
More Than Five
Years
$
8,116
$
745
$
1,564
$
1,644
$
60,443
75,646
686,810
2,036
1,215
29,049
4,072
2,437
61,690
54,335
2,540
80,484
4,163
—
69,454
515,587
Total
$
831,015
$
33,045
$
69,763
$
139,003
$
589,204
(1) The Company entered into a new corporate office lease in 2015. The lease is for eleven years and includes a 12-month rent abatement period
and certain tenant improvement allowances. The Company will share the space with related parties and will be reimbursed for the pro-rata
share of rentable space occupied by related parties.
(2) Does not reflect paydowns or additional borrowings under the senior unsecured revolving credit facility after December 31, 2016. Interest
payments are based on the interest rate in effect as of December 31, 2016. See Note 6, “Debt” to our consolidated financial statements for
additional information relating to our property loans.
In addition to the above listed obligations, we pay management and franchise fees to our hotel management companies
and franchisors based on the revenues of our hotels.
61
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 JV and
Inland JV and will receive a promote interest in the applicable JV if it meets certain return thresholds. NorthStar may also
approve certain actions by its JVs without the Company’s consent, including certain property dispositions conducted at arm’s
length, certain actions related to the restructuring of the 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 either 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, 5 to 20 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 these 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, 2016 and 2015, we had no hotels that were 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, 2016, we had no hotel properties held for sale.
62
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. As of December 31, 2016 and 2015, we had no
JVs that were impaired.
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 statements 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
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.
63
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 Financial Accounting Standards Board ("FASB") issued ASU 2014-09 ("ASU 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 2014-09 will replace most existing revenue
recognition guidance in GAAP when it becomes effective. The standard permits the use of either the retrospective or
cumulative effect transition method. In July 2015, the FASB voted to defer the effective date to January 1, 2018 with early
adoption beginning January 1, 2017. We are evaluating the effect that ASU 2014-09 will have on our consolidated financial
statements and related disclosures. The Company has begun to evaluate each of its revenue streams under the new model.
Based on preliminary assessments, the Company does not expect adoption of this guidance will have a material impact on its
consolidated financial statements and related disclosures.
In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes, to simplify the
presentation of deferred income taxes into a single non-current line item in the balance sheet. During 2016, the Company
adopted ASU 2015-17 on a retrospective basis, as permitted by the standard. All deferred tax assets and liabilities as of
December 31, 2016 have been presented as a single non-current line item in the accompanying consolidated balance sheets.
On February 25, 2016, the FASB issued ASU 2016-02 (“ASU 2016-02”), Leases, which relates to the accounting of
leasing transactions. This standard requires a lessee to record on the balance sheet the assets and liabilities for the rights and
obligations created by leases with lease terms of more than 12 months. In addition, this standard requires both lessees and
lessors to disclose certain key information about lease transactions. This standard will be effective for fiscal years beginning
after December 15, 2018, including interim periods within those fiscal years. ASU 2016-02 is expected to impact the
Company's financial statements as the Company has certain operating/land rights arrangements for which the Company is the
lessee.
On March 30, 2016, the FASB issued ASU 2016-09 (“ASU 2016-09”), Compensation - Stock Compensation:
Improvements to Employee Share-Based Payment Accounting, which relates to the accounting for employee share-based
payments. This standard addresses several aspects of the accounting for share-based payment award transactions, including:
(a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of
cash flows. This standard will be effective for fiscal years beginning after December 15, 2016, including interim periods within
those fiscal years. We are evaluating the impact the adoption of ASU 2016-09 will have on our consolidated financial
statements.
On August 26, 2016, the FASB issued ASU 2016-15 ("ASU 2016-15"), Classification of Certain Cash Receipts and
Cash Payments, which clarifies and provides specific guidance on eight cash flow classification issues with an objective to
reduce the current diversity in practice. This standard will be effective for fiscal years beginning after December 15, 2017,
including interim periods within those fiscal years with earlier adoption is permitted. We are evaluating the impact the
adoption of ASU 2016-15 will have on our consolidated financial statements as the Company has certain cash payments and
receipts related to debt extinguishment and distributions from equity method investments that will be affected by the new
standard.
64
On November 17, 2016, the FASB issued ASU 2016-18 ("ASU 2016-18"), Restricted Cash, which requires that the
statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts general
described as restricted cash or restricted cash equivalents. This standard will be effective for public companies for fiscal years
beginning after December 15, 2017, and interim periods within those fiscal years and all other entities for fiscal years
beginning after December 15, 2018. We are evaluating the impact the adoption of ASU 2016-18 will have on our consolidated
financial statements.
On January 5, 2017, the FASB issued ASU 2017-01 ("ASU 2017-01"), Definition of a Business, which will likely
result in more acquisitions being accounted for as asset acquisitions across all industries, particularly real estate,
pharmaceutical and oil and gas. Application of the changes would also affect the accounting for disposal transactions. This
standard will be effective for public business entities with a calendar year end in 2018 and all other entities have an additional
year to adopt. We are evaluating the impact the adoption of ASU 2017-01 will have on our consolidated financial statements.
65
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
We may be exposed to interest rate changes primarily as a result of our assumption of long-term debt in connection
with our acquisitions and upon refinancing of existing debt. 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, 2016 and December 31, 2015 was $516.0
million and $522.9 million, respectively.
At December 31, 2016, 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
2017
2018
2019
2020
2021
Thereafter
Total
Fair Value
—
—
— 52,500
—
2.75%
—
—
—
—
— $ 52,500
—
2.75%
$ 52,500
Average interest rate
4.76%
4.69%
4.68%
4.67%
5.25%
4.62%
4.67%
$4,302
$5,374
$7,340
$ 9,899
$ 22,309
$483,339
$532,563
$515,970
(1) LIBOR of 0.77% plus a margin of 1.95% at December 31, 2016. Prime borrowings are 4.45%
We estimate that a hypothetical 100 basis points increase in the variable interest rate would result in additional interest
expense of approximately $0.5 million annually. This assumes that the amount outstanding under our floating rate debt remains
$52.5 million, the balance as of December 31, 2016.
66
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
of 2016 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,
2016. 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 this assessment,
management has concluded that, as of December 31, 2016, 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, 2016, 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.
67
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 2017
Annual Meeting of Shareholders to be held on May 17, 2017.
Item 11. Executive Compensation
The information required by this item is incorporated by reference to the Company's Proxy Statement for the 2017
Annual Meeting of Shareholders to be held on May 17, 2017.
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 2017
Annual Meeting of Shareholders to be held on May 17, 2017.
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 2017
Annual Meeting of Shareholders to be held on May 17, 2017.
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 2017
Annual Meeting of Shareholders to be held on May 17, 2017
.
68
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-41:
Schedule III - Real Estate and Accumulated Depreciation
2(a).
Individual financial statements of entities accounted for by the equity method that qualify as significant subsidiaries
for the years ended December 31, 2016, 2015 and 2014 have 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 are included.
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.
69
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(17)
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(17)
Employment Agreement between Chatham Lodging Trust and Peter Willis(17)
Employment Agreement between Chatham Lodging Trust and Dennis M. Craven(17)
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)
70
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
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) (11)
LTIP Unit Award Agreement, dated as of June 1, 2015, between Chatham Lodging Trust, Chatham
Lodging, L.P. and Peter Willis (Outperformance Plan) (11)
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.(12)
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.(12)
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.(12)
Sales Agreement, dated January 31, 2014, by and among Chatham Lodging Trust, Chatham Lodging, L.P.
and Cantor Fitzgerald & Co.(13)
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.(14)
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.(14)
Sales Agreement, dated January 13, 2015 by and among Chatham Lodging Trust, Chatham Lodging, L.P.
and Barclays Capital Inc.(15)
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(16)
10.42*
10.43*
Form of 2016 Time-Based LTIP Unit Award Agreement(17)
Form of 2016 Performance-Based LTIP Unit Award Agreement(17)
12.1
21.1
23.1
31.1
31.2
32.1
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
71
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, 2016 and 2015; (ii)
Consolidated Statements of Operations for the years ended December 31, 2016, 2015 and 2014; (iii) Consolidated
Statements of Equity for the years ended December 31, 2016, 2015 and 2014; (iv) Consolidated Statements of Cash Flows
for the years ended December 31, 2016, 2015 and 2014; 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)
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 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).
72
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 27, 2017
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 27, 2017
Senior Vice President and Chief Financial Officer (Principal
Financial and Accounting Officer)
February 27, 2017
/s/ MILES BERGER
Trustee
Miles Berger
/s/ THOMAS J. CROCKER
Trustee
Thomas J. Crocker
/s/ JACK P. DEBOER
Trustee
Jack P. DeBoer
/s/ EDWIN B. BREWER
Trustee
Edwin B. Brewer
/s/ C. GERALD GOLDSMITH Trustee
C. Gerald Goldsmith
/s/ ROBERT PERLMUTTER Trustee
Robert Perlmutter
/s/ ROLF E. RUHFUS
Trustee
Rolf E. Ruhfus
73
February 27, 2017
February 27, 2017
February 27, 2017
February 27, 2017
February 27, 2017
February 27, 2017
February 27, 2017
CHATHAM LODGING TRUST
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Certified Public Accounting Firm
Consolidated Balance Sheets at December 31, 2016 and 2015
Consolidated Statements of Operations for the years ended December 31, 2016, 2015 and 2014
Consolidated Statements of Equity for the years ended December 31, 2016, 2015 and 2014
Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015 and 2014
Notes to Consolidated Financial Statements
Financial Statement Schedule
Schedule III - Real Estate and Accumulated Depreciation at December 31, 2016
Page No.
F-2
F-3
F-4
F-5
F-6
F-8
F-41
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, 2016 and 2015, and the results of their operations and their cash flows for each of the three years in the period
ended December 31, 2016 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, 2016, based on criteria established in Internal Control - Integrated Framework (2013 framework) 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 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 27, 2017
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 $155 and $95,
respectively)
Deferred costs, net
Prepaid expenses and other assets
Deferred tax asset, net
Total assets
Liabilities and Equity:
Mortgage debt, net
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 (see note 12)
Equity:
Shareholders’ Equity:
Preferred shares, $0.01 par value, 100,000,000 shares authorized and unissued at
December 31, 2016 and 2015
Common shares, $0.01 par value, 500,000,000 shares authorized; 38,367,014
and 38,308,937 shares issued and outstanding at December 31, 2016 and 2015,
respectively
Additional paid-in capital
Retained earnings (distributions in excess of retained earnings)
Total shareholders’ equity
Noncontrolling Interests:
Noncontrolling interest in operating partnership
Total equity
Total liabilities and equity
December 31,
2016
December 31,
2015
$
1,233,094
$
1,258,452
12,118
25,083
20,424
4,389
4,642
2,778
426
21,036
19,273
23,618
4,433
5,365
5,052
—
$
$
$
$
1,302,954
530,323
52,500
27,782
6,017
4,742
1,337,229
539,623
65,580
25,100
2,703
7,221
621,364
640,227
—
—
380
722,019
(45,657)
676,742
4,848
681,590
379
719,773
(27,281)
692,871
4,131
697,002
$
1,302,954
$
1,337,229
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
Income (loss) on sale from unconsolidated real estate entities
Income before income tax benefit (expense)
Income tax benefit (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,
2016
2015
2014
$
$
273,345
6,221
10,115
4,139
293,820
$
258,137
5,536
9,534
3,743
276,950
184,926
2,764
7,534
1,992
197,216
57,209
4,928
1,712
2,358
22,274
22,412
5,147
9,545
12,444
9,389
1,359
148,777
48,775
21,564
11,119
510
4,139
234,884
58,936
51
(28,297)
(4)
718
(10)
31,394
301
31,695
(212)
31,483
0.82
0.81
$
$
$
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
Basic
Diluted
38,299,067
38,482,875
37,917,871
38,322,285
28,531,094
28,846,724
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, 2014
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
$7,062
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
49,110
44,274
(763)
—
—
—
—
—
—
40
—
—
—
—
—
—
—
—
412
118,757
—
—
(22)
1,594
—
—
(286)
—
Balance December 31, 2015
38,308,937
379
719,773
Issuance of shares pursuant to Equity
Incentive Plan
Issuance of shares, net of offering costs of
$75
Issuance of restricted time-based shares
Amortization of share based compensation
Dividends declared on common shares
($1.30 per share)
Distributions declared on LTIP units
($1.30 per unit)
Reallocation of noncontrolling interest
Net income
26,488
23,738
7,851
—
—
—
—
—
—
1
—
—
—
—
—
—
550
407
—
1,278
—
—
11
—
Balance, December 31, 2016
38,367,014
380
722,019
—
—
—
—
—
—
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
—
—
—
—
550
408
—
(473)
286
212
(473)
—
33,178
4,131
697,002
—
—
—
550
408
—
1,278
1,235
2,513
(49,859)
(49,859)
— (49,859)
—
—
—
11
31,483
(45,657)
31,483
676,742
(719)
(11)
212
(719)
—
31,695
4,848
681,590
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 loss (gain) from remeasurement and sales of investment in unconsolidated real
estate entities
Loss on early extinguishment of debt
Deferred tax benefit
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
Forfeited distributions - non vested shares
Distributions-common shares/units
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
Cash paid for income taxes
-Continued-
F-6
For the year ended
December 31,
2015
2014
2016
$
31,695
$
33,178
$
67,081
48,562
214
1,076
10
4
(426)
3,013
(718)
47
(94)
2,288
1,998
87,669
48,784
197
1,606
34,579
131
1,532
(3,576)
(65,750)
412
—
2,835
(2,411)
(318)
(580)
(2,277)
3,992
81,842
184
—
2,471
3,830
243
(754)
(118)
5,877
49,306
(22,496)
(20,331)
(14,931)
—
7,228
—
(5,810)
(169,447)
(404,737)
12,903
—
(5,488)
2,053
(27,948)
(7,425)
(21,078)
(182,363)
(452,988)
43,450
(56,530)
(3,775)
—
(5,954)
(50)
(75)
482
—
(91)
(52,966)
(75,509)
(8,918)
21,036
12,118
26,836
742
$
$
$
$
$
$
131,580
(88,500)
(3,239)
—
(4,760)
(2,112)
(2,042)
250,000
(277,500)
(2,631)
340,475
(32,186)
(1,585)
(7,062)
120,839
171,552
(22)
—
(45,264)
106,480
5,959
15,077
21,036
25,508
160
$
$
$
(18)
—
(26,507)
414,538
10,856
4,221
15,077
18,296
220
Supplemental disclosure of non-cash investing and financing information:
On January 15, 2016, the Company issued 26,488 shares to its independent trustees pursuant to the Company’s Equity
Incentive Plan as compensation for services performed in 2015. 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.
As of December 31, 2016, the Company had accrued distributions payable of $4.7 million. These distributions were paid
on January 27, 2017 except for $0.5 million related to accrued but unpaid distributions on unvested performance based shares
(See Note 11). As of December 31, 2015, the Company had accrued distributions payable of $7.2 million. These distributions
were paid on January 29, 2016 except for $0.3 million related to accrued but unpaid distributions on unvested performance
based shares. As of December 31, 2014, the Company had accrued distributions payable of $2.9 million. These distributions
were paid on January 25, 2015 except for $0.1 million related to accrued but unpaid distributions on unvested performance
based shares.
Accrued share based compensation of $0.6 million, $0.6 million and $0.4 million is included in accounts payable and
accrued expenses as of December 31, 2016, 2015 and 2014.
Accrued capital improvements of $2.0 million, $1.2 million and $0.9 million are included in accounts payable and
accrued expenses as of December 31, 2016, 2015, and 2014 respectively.
During 2014, the Company wrote-off $0.4 million of deferred loan costs and $0.2 million of accumulated amortization on
a loan that was paid off. During 2015, the Company wrote-off $1.5 million of deferred loan costs and $1.1 million 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 $22.6 million.
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, 2016, the Company owned 38 hotels with an aggregate of 5,712 (unaudited) rooms located in 15
states and the District of Columbia. As of December 31, 2016, 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, "JVs", which refers
collectively to, for the period prior to December 31, 2016, 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 the
Company’s taxable REIT subsidiary (“TRS”) holding company. 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 leased to TRS Lessees, in which the Company indirectly owns, or owned, as applicable,
noncontrolling interests through its TRS holding company. 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, 2016, Island Hospitality Management Inc. (“IHM”), which is 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, 2016, all of the NewINK JV hotels were managed by IHM. As of December 31, 2016, 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.
F-8
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 consisting of normal, recurring adjustments which are 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.
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.
Reclassifications
Certain prior period amounts in the consolidated financial statements have been reclassified to conform to be
comparable to the current period presentation. The reclassification did not have any impact on the previously reported income
or equity.
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 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 mortgage 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 investments 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, 5 to 20 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.
F-9
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, 2016, 2015 and 2014, 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, 2016, 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.
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.
On January 1, 2016, the Company adopted accounting guidance under Accounting Standards Codification (ASC) Topic
810, "Consolidation,” modifying the analysis it must perform to determine whether it should consolidate certain types of legal
entities. The guidance does not amend the existing disclosure requirements for variable interest entities ("VIEs") or voting interest
model entities. The guidance, however, modified the requirements to qualify under the voting interest model. Under the revised
guidance, the Operating Partnership will be a VIE of the Company. As the Operating Partnership is already consolidated in the
financial statements of the Company, the identification of this entity as a VIE has no impact on the consolidated financial statements
of the Company. There were no other legal entities qualifying under the scope of the revised guidance that were consolidated as
a result of the adoption. In addition, there were no other voting interest entities under prior existing guidance determined to be
variable interest entities under the revised guidance.
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. As of December 31,
2016, no JV hotels were impaired.
F-10
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 sheets at
December 31, 2016 and 2015 is $25.1 million and $19.3 million, 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, 2016 and 2015, the allowance for doubtful accounts was $0.2 million and $0.1 million,
respectively.
Deferred Costs
Deferred costs consist of franchise agreement fees for the Company’s hotels and loan costs related to the Company’s
senior unsecured revolving credit facility. Deferred costs consisted of the following at December 31, 2016 and 2015 (in thousands):
December 31, 2016
December 31, 2015
Loan costs
Franchise fees
Less accumulated amortization
Deferred costs, net
$
$
4,561
$
3,568
8,129
(3,487)
4,642
$
4,511
3,474
7,985
(2,620)
5,365
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
years ended December 31, 2016, 2015 and 2014, amortization expense related to franchise fees of $0.2 million, $0.2 million and
$0.1 million, respectively, is included in depreciation and amortization in the consolidated statements of operations. Amortization
expense related to loan costs of $0.7 million, $1.2 million and $1.2 million for the years ended December 31, 2016, 2015 and
2014, respectively, is included in interest expense in the consolidated statements of operations.
Mortgage Debt, net
Mortgage debt, net consists of loan costs consist of loan costs related to mortgage loans on certain hotel properties less
the costs associated with acquiring those loans. Mortgage debt consisted of the following at December 31, 2016 and 2015 (in
thousands):
Mortgage debt
Deferred financing costs
Mortgage debt, net
December 31, 2016
December 31, 2015
$
$
532,563
(2,240)
530,323
$
$
542,292
(2,669)
539,623
Loan costs are recorded at cost and amortized over the term of the loan applying the effective interest rate method.
For the years ended December 31, 2016, 2015 and 2014, amortization expense related to loan costs of $0.4 million, $0.4
million, $0.4 million, respectively, is included in interest expense in the consolidated statement of operations.
F-11
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.
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 statements 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.
F-12
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.
The Company leases its wholly owned hotels to TRS Lessees, which are wholly owned by the Company’s taxable REIT
subsidiary (a “TRS”) which, in turn is 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 its TRS holding company. The TRS is subject to federal and state income taxes and the Company
accounts for taxes, where applicable, in accordance with the provisions of FASB 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, 2016, 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, 2016.
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 the Company's TRS 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 was closed
in 2016 and no adjustments were required.
F-13
Organizational and Offering Costs
The Company expenses 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, 2016 and 2015, 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 Financial Accounting Standards Board ("FASB") issued ASU 2014-09 ("ASU 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 2014-09 will replace most existing revenue
recognition guidance in GAAP when it becomes effective. The standard permits the use of either the retrospective or
cumulative effect transition method. In July 2015, the FASB voted to defer the effective date to January 1, 2018 with early
adoption beginning January 1, 2017. We are evaluating the effect that ASU 2014-09 will have on our consolidated financial
statements and related disclosures. The Company has begun to evaluate each of its revenue streams under the new model.
Based on preliminary assessments, the Company does not expect adoption of this guidance will have a material impact on its
consolidated financial statements and related disclosures.
In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes, to simplify the
presentation of deferred income taxes into a single non-current line item in the balance sheet. During 2016, the Company
adopted ASU 2015-17 on a retrospective basis, as permitted by the standard. All deferred tax assets and liabilities as of
December 31, 2016 have been presented as a single non-current line item in the accompanying consolidated balance sheets.
On February 25, 2016, the FASB issued ASU 2016-02 (“ASU 2016-02”), Leases, which relates to the accounting of
leasing transactions. This standard requires a lessee to record on the balance sheet the assets and liabilities for the rights and
obligations created by leases with lease terms of more than 12 months. In addition, this standard requires both lessees and
lessors to disclose certain key information about lease transactions. This standard will be effective for fiscal years beginning
after December 15, 2018, including interim periods within those fiscal years. ASU 2016-02 is expected to impact the
Company's financial statements as the Company has certain operating/land rights arrangements for which the Company is the
lessee.
On March 30, 2016, the FASB issued ASU 2016-09 (“ASU 2016-09”), Compensation - Stock Compensation:
Improvements to Employee Share-Based Payment Accounting, which relates to the accounting for employee share-based
payments. This standard addresses several aspects of the accounting for share-based payment award transactions, including:
(a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of
cash flows. This standard will be effective for fiscal years beginning after December 15, 2016, including interim periods within
those fiscal years. We are evaluating the impact the adoption of ASU 2016-09 will have on our consolidated financial
statements.
On August 26, 2016, the FASB issued ASU 2016-15 ("ASU 2016-15"), Classification of Certain Cash Receipts and
Cash Payments, which clarifies and provides specific guidance on eight cash flow classification issues with an objective to
reduce the current diversity in practice. This standard will be effective for fiscal years beginning after December 15, 2017,
including interim periods within those fiscal years with earlier adoption is permitted. We are evaluating the impact the
adoption of ASU 2016-15 will have on our consolidated financial statements as the Company has certain cash payments and
receipts related to debt extinguishment and distributions from equity method investments that will be affected by the new
standard.
F-14
On November 17, 2016, the FASB issued ASU 2016-18 ("ASU 2016-18"), Restricted Cash, which requires that the
statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts general
described as restricted cash or restricted cash equivalents. This standard will be effective for public companies for fiscal years
beginning after December 15, 2017, and interim periods within those fiscal years and all other entities for fiscal years
beginning after December 15, 2018. We are evaluating the impact the adoption of ASU 2016-18 will have on our consolidated
financial statements.
On January 5, 2017, the FASB issued ASU 2017-01 ("ASU 2017-01"), Definition of a Business, which will likely
result in more acquisitions being accounted for as asset acquisitions across all industries, particularly real estate,
pharmaceutical and oil and gas. Application of the changes would also affect the accounting for disposal transactions. This
standard will be effective for public business entities with a calendar year end in 2018 and all other entities have an additional
year to adopt. We are evaluating the impact the adoption of ASU 2017-01 will have on our consolidated financial statements.
3.
Acquisition of Hotel Properties
Hotel Purchase Price Allocation
No acquisitions were completed in 2016. The allocation of the purchase price of each of the hotels acquired by the
Company in 2015, 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, net of cash
Gaslamp
Dedham
Ft.
Lauderdale
Marina del
Rey
Total
2/25/2015
7/17/2015
8/17/2015
9/17/2015
240
81
104
134
559
$
— $
4,230 $
9,200 $
— $ 13,430
89,040
17,304
24,048
43,210
173,602
960
466
252
1,340
3,018
3
—
81
—
278
—
(204)
2
—
47
—
3
—
2
—
32
—
40
—
6
13
1,755
1,755
30
43
217
190
43
538
(22,569)
(22,569)
(10)
(279)
(67)
(560)
$
90,155 $
22,040 $
33,293 $
23,959 $ 169,447
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 $0.5
million, $1.5 million and $10.4 million, respectively, during the years ended December 31, 2016, 2015 and 2014. Property
acquisition costs incurred during 2016 related to prior acquisitions for which final amounts were more than previously accrued.
F-15
The amount of revenue and operating income from the hotels acquired in 2015 from their respective date of
acquisition through December 31, 2016 is as follows (in thousands):
December 31,
2016
December 31,
2015
Revenue
Operating Income
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
$
$
15,018
4,026
6,564
10,523
36,131
$
$
7,616
1,909
2,984
5,216
17,725
$
$
12,670
1,995
2,132
2,500
19,297
$
$
6,850
1,043
863
1,200
9,956
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 or 2014 had taken place on January 1, 2014 and
2013, respectively. There were no hotels acquired in 2016. 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 $0.7 million and $7.2 million, respectively, of acquisition-
related costs incurred in the years ended December 31, 2015 and 2014. Supplemental pro forma earnings for the year ended
December 2014 were adjusted to include these charges from 2015. 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, nor do they purport to represent the results of operations for future periods (in
thousands, except share and per share data).
Pro forma total revenue
Pro forma net income
Pro forma income per share:
Basic
Diluted
Weighted average common shares outstanding
Basic
Diluted
For the year ended
December 31,
2015
292,908
32,137
0.85
0.84
$
$
$
$
$
$
$
$
2014
271,321
22,013
0.58
0.57
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, 2014 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.
F-16
4.
Investment in Hotel Properties
Investment in hotel properties as of December 31, 2016 and 2015 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, 2016
December 31, 2015
$
274,554
$
1,045,880
50,495
10,067
1,380,996
(147,902)
1,233,094
$
$
274,543
1,031,649
63,542
8,829
1,378,563
(120,111)
1,258,452
5.
Investment in Unconsolidated Entities
On April 17, 2013, the Company acquired a 5.0% interest in the Torrance JV with Cerberus for $1.6 million. The
Torrance JV acquired the 248-room (unaudited) Residence Inn by Marriott in Torrance, CA for $31.0 million. The Company
accounted for this investment under the equity method. During the years ended December 31, 2016 and 2015, the Company
received cash distributions from the Torrance JV as follows (in thousands):
Cash generated from other activities and excess cash
Total
$
$
— $
— $
185
185
On December 30, 2015, the Torrance JV completed the sale of the 248-room (unaudited) Residence Inn by Marriott in
Torrance, CA for $51.8 million to BRE Torrance Holdco LLC ("BRE"). The gain from the Company's promote interest in the
Torrance JV was approximately $3.6 million.
For the year ended
December 31,
2016
2015
F-17
The Company owned a 10.3% interest in the Innkeepers JV, which owned 51 hotels comprising an aggregate of 6,845
rooms (unaudited) until June 9, 2014. The Company accounted for this investment under the equity method. 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. 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 $18.8 million and the net gain from the Company's promote interest in the Innkeepers JV was approximately
$47.0 million (which was credited toward the purchase of the Silicon Valley Hotels), resulting in a total gain of $65.8 million
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, 2016 and December 31, 2015, the Company's share of partners' capital in the NewINK JV is approximately
$10.1 million and $14.0 million, respectively, and the total difference between the carrying amount of the investment and the
Company's share of partners' capital is approximately $16.1 million and $16.7 million (for which the basis difference related to
amortizing assets is being recognized over the life of the related assets as a basis difference adjustment).
During the years ended December 31, 2016 and 2015, the Company received cash distributions from the NewINK JV
as follows (in thousands):
Cash generated from other activities and excess cash
Total
$
$
4,728
4,728
$
$
5,884
5,884
For the year ended
December 31,
2016
2015
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, 2016
and 2015, the Company received cash distributions from the Inland JV as follows (in thousands):
Cash generated from other activities and excess cash $
Total
$
2,500
2,500
$
$
2,845
2,845
For the year ended
December 31,
2016
2015
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.
F-18
The Company's investments in the NewInk JV and the Inland JV are $(6.0) million and $20.4 million, respectively, at
December 31, 2016. 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, 2016, 2015 and 2014 (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, 2016
December 31, 2015
December 31, 2014
$
$
$
1,849,295
143,769
1,993,064
$
$
1,857,497
206,894
2,064,391
$
$
1,907,928
261,311
2,169,239
1,656,949
$
1,657,000
$
1,677,159
34,567
1,691,516
35,807
1,692,807
34,929
1,712,088
30,428
271,120
301,548
37,633
333,951
371,584
45,470
411,681
457,151
Total Liabilities and Equity
$
1,993,064
$
2,064,391
$
2,169,239
Statement of Operations
Revenue
Total hotel operating expenses
Hotel 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,
2016
484,708
289,569
195,139
964
$
$
$
2015
497,698
290,123
207,575
19,241
$
$
$
— $
— $
964
118
600
718
$
$
$
$
19,241
1,811
600
2,411
$
$
$
$
$
$
$
$
$
$
$
$
2014
290,419
166,849
123,570
(40,018)
(5)
(40,023)
(4,165)
335
(3,830)
F-19
6.
Debt
The Company's mortgage loans and its senior unsecured revolving credit facility are collateralized by first-mortgage
liens on certain of the Company's 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)
Courtyard by Marriott Altoona, PA (8)
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 (7)
Homewood Suites by Hilton Billerica, MA (5)
Homewood Suite by Hilton Carlsbad, CA (5)
Interest
Rate
Maturity Date
12/31/16
Property
Carrying
Value
Balance Outstanding as of
December 31,
2016
December 31,
2015
2.75% November 25, 2019
$
— $
52,500
$
5.96%
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
9,699
20,071
44,758
33,014
30,926
31,368
35,657
69,251
40,307
83,041
90,952
65,395
57,091
37,444
43,133
11,557
29,732
14,840
—
14,141
29,026
16,575
22,699
18,758
22,864
46,206
33,674
64,800
70,700
48,600
37,900
30,000
22,145
16,225
19,950
18,300
65,580
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
Hampton Inn & Suites Houston Medical Cntr., TX (6)
4.25%
January 6, 2025
Total debt before unamortized debt issue costs
$ 748,236
$
585,063
$
607,872
Unamortized mortgage debt issue costs
Total debt outstanding
(2,240)
582,823
(2,669)
605,203
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
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%, or prime plus an applicable margin of 0.55% to 1.3%.
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 $0.2 million 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 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, the Company, as parent guarantor, and the Operating Partnership, 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 $175.0 million. Proceeds under the New Credit
Agreement were used to repay outstanding borrowings under the Existing Credit Agreement. The New Credit Agreement
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 $250.0 Million
Increase borrowing capacity by up to
additional $150.0 million
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, 2016 and 2015, the Company had $52.5 million and $65.6 million, respectively, of outstanding
borrowings under its senior unsecured revolving credit facility. At December 31, 2016, the maximum borrowing availability
under the senior unsecured revolving credit facility was $250.0 million.
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, 2016 and
2015 was $516.0 million and $522.7 million, 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, 2016, 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, 2016 and 2015 was $52.5 million and
$65.6 million, respectively.
As of December 31, 2016, the Company was in compliance with all of its financial covenants. At December 31, 2016,
the Company’s consolidated fixed charge coverage ratio was 3.4 and the bank covenant is 1.5. Future scheduled principal
payments of debt obligations as of December 31, 2016, for each of the next five calendar years and thereafter are as follows (in
thousands):
2017
2018
2019
2020
2021
Thereafter
Total
F-21
Amount
4,302
5,374
59,840
9,899
22,309
483,339
585,063
$
$
7.
Income Taxes
The Company’s TRS is subject to federal and state income tax. In 2016, the company owned 100% of TRS1 and TRS
2 that filed separate income tax returns. The companies merged on April 30, 2016. Beginning on May 1, 2016 the Company's
TRS is taxed as one legal entity.
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 benefit
Total tax expense (benefit)
For the year ended
December 31,
2015
2014
2016
$
$
$
56
69
125
$
$
(380)
(46)
(426)
(301) $
129
131
260
—
—
—
260
$
$
$
82
27
109
(3)
(1)
(4)
105
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 TRS before taxes were as follows (in thousands):
Book income (loss) before income taxes of the TRS
Statutory rate of 34% applied to pre-tax income
Effect of state and local income taxes, net of federal tax benefit
Provision to return adjustment
Permanent adjustments
Change in valuation allowance
Other
$
$
For the year ended
December 31,
2016
$
$
974
331
38
(406)
16
(299)
19
$
$
2015
2,384
810
97
211
140
(998)
—
Total income tax (benefit) expense
$
(301)
$
260
$
2014
(520)
(178)
(14)
40
—
257
—
105
Effective tax rate
(30.90)%
10.91%
(20.19)%
F-22
At December 31, 2016, our TRS had a gross deferred tax asset associated with future tax deductions of $0.4 million.
The tax effect of each type of temporary difference and carry forward that gives rise to the deferred tax asset as of
December 31, 2016 and 2015 are as follows (in thousands):
Deferred tax assets:
Allowance for doubtful accounts
Accrued compensation
Total book to tax difference in partnership
Net operating loss
Valuation allowance
Net deferred tax asset
For the year ended
December 31,
2016
2015
$
$
59
$
692
(404)
79
—
426
$
36
489
(356)
130
(299)
—
As of each reporting date, the Company's management considers new evidence, both positive and negative, that
could impact management's view with regard to future realization of deferred tax assets. As of December 31, 2016,
management determined that sufficient positive evidence existed to conclude that it is more likely than not that the net deferred
tax asset would be realizable against the current period's earnings, and therefore, released the related valuation allowance in
accordance with GAAP for intraperiod tax allocation.
F-23
8.
Dividends Declared and Paid
The Company declared regular common share dividends of $1.30 per share and distributions on LTIP units of $1.30
per unit for the year ended December 31, 2016. The dividends and distributions and their tax characterization were as follows:
Special
January
February
March
1st Quarter 2016
April
May
June
2nd Quarter 2016
July
August
September
3rd Quarter 2016
October
November
December
4th Quarter 2016
Total 2016
Record
Date
Payment
Date
Common
share
distribution
amount
LTIP
unit
distribution
amount
Ordinary
Income
Return of
Capital
1/15/2016
1/29/2016
$
1/29/2016
2/26/2016
2/29/2016
3/25/2016
3/31/2016
4/29/2016
4/29/2016
5/27/2016
5/31/2016
6/24/2016
6/30/2016
7/29/2016
7/29/2016
8/26/2016
8/31/2016
9/30/2016
9/30/2016
10/28/2016
$
$
$
$
$
$
10/31/2016
11/25/2016 $
11/30/2016
12/30/2016
12/30/2016
1/27/2017
$
$
$
0.08
0.10
0.10
0.11
0.39
0.11
0.11
0.11
0.33
0.11
0.11
0.11
0.33
0.11
0.11
0.11
0.33
1.38
$
$
$
$
$
$
$
$
$
$
$
0.08
0.10
0.10
0.11
0.39
0.11
0.11
0.11
0.33
0.11
0.11
0.11
0.33
0.11
0.11
0.11
0.33
1.38
$
0.072
$
0.090
0.090
0.099
0.351
0.099
0.099
0.099
0.297
0.099
0.099
0.099
0.297
0.099
0.099
0.099
0.297
1.242
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
0.008
0.010
0.010
0.011
0.039
0.011
0.011
0.011
0.033
0.011
0.011
0.011
0.033
0.011
0.011
0.011
0.033
0.138
F-24
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
For the year ended December 31, 2016, approximately 90.0% of the distributions paid to stockholders were considered
ordinary income and approximately 10.0% were considered returns of capital. 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 a capital gain 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 is 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, 2016, 38,367,014 common shares were outstanding.
Common share offerings of the Company consisted of the following from inception through December 31, 2016:
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, 2016 and 2015, respectively, we had issued
29,333 and 5,595 shares under the DRSPP at a weighted average price of $21.22 and $25.00 per share, respectively. As of
December 31, 2016, there were common shares having a maximum aggregate sales price of approximately $24.4 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, 2016 and 2015, 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, 2016,
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, 2016 and December 31, 2015, the Company withheld 0 and 763, respectively,
common shares that had vested to executives in accordance with the Equity Incentive Plan at a value of $29.35, 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, 2016 and 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, 2016 and 2015, there were
no Operating Partnership common units held by unaffiliated third parties.
At December 31, 2016 and 2015, 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, 2016. Accordingly, these LTIP units will be allocated their pro-rata share of the Company's net income
(loss).
At December 31, 2016 and 2015, an aggregate of 222,585 and 183,300 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 per LTIP unit 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.
At December 31, 2016 and 2015, an aggregate of 72,966 and 0 2016 Time-Based LTIP Unit Awards, respectively, a
special class of operating partnership units, were held by executive officers. The 2016 Time-Based LTIP Unit Awards will vest
ratably on each of January 28, 2017, January 28, 2018 and January 28, 2019. Prior to vesting, a holder is entitled to receive
distributions on and to vote the LTIP Units that comprise the 2016 Time-Based LTIP Unit Awards.
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. The LTIP units held by the non-controlling interest holders, which may be
converted to common shares of beneficial interest, have been excluded from the denominator of the diluted earnings per share
calculation as there would be no effect on the amounts since limited partners' share of income or loss would also be added back
to net income or loss. 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):
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
For the year ended
December 31,
2016
2015
2014
$
$
31,483
(189)
—
$
32,966
(151)
—
$
31,294
$
32,815
$
66,873
(216)
(324)
66,333
38,299,067
37,917,871
28,531,094
183,808
404,414
315,630
38,482,875
38,322,285
28,846,724
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
$
$
0.82
$
0.87
$
2.32
0.81
$
0.86
$
2.30
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 accrued and 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,
2016, there were 1,900,922 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, 2016 are:
Award Type
Award Date
Total Shares
Granted
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
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, 2016
40,829
40,829
32,142
12,935
13,387
—
2,983
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 2014 and 2015,
compensation expense is based on a valuation of $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
1/31/2014
1/30/2015
27%
29%
—%
—%
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, 2016, 2015 and 2014 is as
follows:
December 31, 2016
December 31, 2015
December 31, 2014
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
170,480
—
(59,655)
110,825
$
$
21.38
—
20.14
22.05
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
As of December 31, 2016 and 2015, there were $0.9 million and $2.1 million, respectively, of unrecognized
compensation costs related to restricted share awards. As of December 31, 2016, these costs were expected to be recognized
over a weighted–average period of approximately 1.1 years. For the years ended December 31, 2016, 2015 and 2014, the
Company recognized approximately $1.3 million, $1.6 million and $1.3 million, 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.
A summary of the Company's LTIP Unit awards for the years ended years ended December 31, 2016, 2015 and
2014 is as follows:
December 31, 2016
December 31, 2015
December 31, 2014
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
183,300
$
112,251
—
Non-vested at end of period
295,551
$
14.13
14.73
—
14.36
51,555
$
15.18
103,110
$
183,300
(51,555)
183,300
$
14.13
(15.18)
14.13
—
(51,555)
51,555
$
15.18
—
(15.18)
15.18
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 year 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.
Time-Based Equity Incentive Awards
On January 28, 2016, the Company’s Operating Partnership, upon the recommendation of the Compensation
Committee, granted 72,966 time-based awards (the “2016 Time-Based LTIP Unit Award”). The grants were made pursuant to
award agreements that provide for time-based vesting (the "LTIP Unit Time-Based Vesting Agreement").
The 2016 Time-Based LTIP Unit Awards will vest ratably on each of January 28, 2017, January 28, 2018 and January
28, 2019 (provided that the recipient remains employed by the Company through the applicable vesting date, subject to
acceleration of vesting in the event of the recipient’s death, disability, termination without cause or resignation with good
reason, or in the event of a change of control of the Company). Prior to vesting, a holder is entitled to receive distributions on
and to vote the LTIP Units that comprise the 2016 Time-Based LTIP Unit Awards. Compensation expense is based on an
estimated value of $16.69 per 2016 Time-Based LTIP Unit Award.
Performance-Based Equity Incentive Awards
On January 28, 2016, the Company’s Operating Partnership, upon the recommendation of the Compensation
Committee, also granted 39,285 performance-based awards (the "2016 Performance-Based LTIP Unit Awards"). The grants
were made pursuant to award agreements that provide for performance-based vesting (the "LTIP Unit Performance-Based
Vesting Agreement"). The 2016 Performance-Based LTIP Unit Awards are comprised of Class A Performance LTIP Units of
the Operating Partnership (“Class A Performance LTIP Units”) that will vest only if and to the extent that (i) the Company
achieves certain long-term performance criteria established by the Compensation Committee and set forth in the LTIP Unit
Performance-Based Vesting Agreement and (ii) the recipient remains employed by the Company through the applicable vesting
date, subject to acceleration of vesting in the event of the recipient’s death, disability, termination without cause or resignation
with good reason, or in the event of a change of control of the Company. Compensation expense is based on an estimated value
of $11.09 per 2016 Performance-Based LTIP Unit Awards, 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.
F-31
The 2016 Performance-Based LTIP Unit Awards shall vest based on the following:
(a) The number of Class A Performance LTIP Units that most nearly equals (but does not exceed) one-third of the
Class A Performance LTIP Units issued pursuant to such 2016 Performance-Based LTIP Unit Award shall vest on January 28,
2017, if the Total Shareholder Return for the 12-month period beginning January 28, 2016 and ending on January 27, 2017 is
8% or more.
(b) The number of Class A Performance LTIP Units that most nearly equals (but does not exceed) one-third of the
Class A Performance LTIP Units issued pursuant to such 2016 Performance-Based LTIP Unit Award shall vest on January 28,
2018, if the Total Shareholder Return for the 12-month period beginning January 28, 2017 and ending on January 27, 2018 is
8% or more.
(c) The number of Class A Performance LTIP Units that most nearly equals (but does not exceed) one-third of the
Class A Performance LTIP Units issued pursuant to such 2016 Performance-Based LTIP Unit Award shall vest on January 28,
2019, if the Total Shareholder Return for the 12-month period beginning January 28, 2018 and ending on January 27, 2019 is
8% or more.
(d) All of the Class A Performance LTIP Units issued pursuant to such 2016 Performance-Based LTIP Unit Award (less
any Class A Performance LTIP Units that previously vested under paragraphs (a), (b) or (c) above), shall vest on January 28,
2019, if the average Total Shareholder Return for the 36-month period ending on January 27, 2019 is 8% or more.
For purposes of the 2016 Performance-Based LTIP Unit Awards, "Total Shareholder Return" means, with respect to
the measurement periods described in paragraphs (a), (b), (c) and (d) above, the total percentage return per common share of
the Company based on the closing price of the Company’s common shares on the New York Stock Exchange (“NYSE”) on the
last trading day immediately preceding the first day of the applicable measurement period compared to the closing price of the
Company’s common shares on the NYSE on the last trading day of such measurement period and assuming contemporaneous
reinvestment in Company common shares of all dividends and other distributions at the closing price of the Company’s
common shares on the date such dividend or other distribution was paid.
A holder of a Class A Performance LTIP Unit will generally (i) only be entitled, during the period prior to the vesting
of such Class A Performance LTIP Unit, to receive 10% of the distributions made on a common unit of limited partnership
interest (“Common Unit”) in the Operating Partnership (the “Pre-Vesting Distributions”), and (ii) be entitled, upon the vesting
of such Class A Performance LTIP Unit, to 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. In addition, prior to the
vesting of a Class A Performance LTIP Unit, the holder of such Class A Performance LTIP Unit will not be entitled to vote on
such Class A Performance LTIP Unit.
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 operations 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):
Outperformance Plan
2016 Time-Based LTIP Unit Awards
2016 Performance-Based LTIP Unit Awards
Dividend
Yield
4.5%
—%
5.8%
Risk Free
Interest
Rate
0.95%
0.79%
1.13%
Discount
—%
7.5%
—%
Grant Date
Volatility
26%
28%
30%
6/1/2015
1/28/16
1/28/16
F-32
The Company recorded $1.2 million, $0.7 million and $0.8 million in compensation expense related to the LTIP units
for years ended December 31, 2016, 2015 and 2014, respectively. As of December 31, 2016 and 2015, there was $2.6 million
and $2.2 million, respectively, of total unrecognized compensation cost related to LTIP units. This cost is expected to be
recognized over approximately 2.2 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, 2016. 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,
2016. Accordingly, these LTIP units were allocated their pro-rata share of the Company's net income.
Board of Trustee Share Compensation
For 2016 and 2015, each independent trustee was compensated $0.1 million for their services. For 2014, each
independent trustee was compensated $0.08 million 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 2016, 2015 and 2014, the
Company issued 26,488, 14,113 and 16,542 common shares, respectively, to its independent trustees as compensation for
services performed in 2015, 2014 and 2013, 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, 2017, the Company distributed 23,980 common shares to its independent trustees for services performed in 2016.
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. 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 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 currently 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
an extension option by the Company of up to three additional terms of ten years each. Monthly payments are currently
approximately $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.
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 2016 under these leases amounted
to approximately $27,000 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 approximately $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.
F-33
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 shares the space with related parties and is 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, garage leases and gross office
lease as of December 31, 2016, for each of the next five calendar years and thereafter (in thousands):
2017
2018
2019
2020
2021
Thereafter
Total
Other Leases(1) Office Lease
Amount
$
$
1,215 $
1,217
1,220
1,267
1,273
69,454
75,646 $
745
772
792
812
832
4,163
8,116
Management Agreements
The management agreements with Concord had an initial ten-year term that would have expired on February 28, 2017.
The management agreements with Concord were terminated as of December 31, 2016. The Company entered into
management agreements with IHM for these hotels beginning January 1, 2017.
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-34
As of December 31, 2016, 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
—
—
—
850
850
1,000
1,000
1,000
1,000
1,000
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%
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%
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
1,200
1,200
1,200
1,200
1,200
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-35
—%
—%
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 $9.4 million, $8.7 million and $6.1 million, respectively, for the years ended
December 31, 2016, 2015 and 2014. Incentive management fees paid to IHM for the years ended years ended December 31,
2016, 2015 and 2014 were $0.3 million, $0.3 million and $0.2 million, respectively. There have been no incentive management
fees accrued or paid to Concord.
F-36
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, 2016:
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%
2.5%
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 $22.4 million, $21.2 million and $15.1 million,
respectively, for the years ended December 31, 2016, 2015 and 2014.
F-37
13.
Related Party Transactions
Mr. Fisher owns 51% of IHM and affiliates of NorthStar Asset Management Group, Inc. own 45%. As of
December 31, 2016, the Company had hotel management agreements with IHM to manage 36 of its wholly owned hotels. As
of December 31, 2016, 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 accrued or paid to IHM for the hotels owned by the
Company for the years ended December 31, 2016, 2015 and 2014 were $9.2 million, $8.5 million and $5.8 million,
respectively. At December 31, 2016 and 2015, the amounts due to IHM were $0.9 million and $1.0 million, respectively.
Incentive management fees paid to IHM by the Company for the years ended December 31, 2016, 2015 and 2014 were $0.3
million, $0.3 million and $0.2 million, 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
for the years ended December 31, 2016, 2015 and 2014 were $6.2 million, $4.2 million and $3.3 million, respectively.
F-38
14.
Quarterly Operating Results (unaudited)
Quarter Ended - 2016
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)
$
68,850
$
78,001
$
79,733
$
57,861
10,989
3,300
0.09
0.08
59,429
18,572
12,168
0.32
0.31
60,275
19,458
13,355
0.35
0.34
67,236
57,319
9,917
2,660
0.07
0.07
Weighted average number of common shares outstanding:
Basic
Diluted
38,274,448
38,671,129
38,299,132
38,734,987
38,307,382
38,768,638
38,315,040
38,525,598
Quarter Ended - 2015
March 31
June 30
September 30 December 31
(in thousands, except share and per share data)
$
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
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
37,018,039
37,322,278
38,211,833
38,618,824
38,212,028
38,614,360
38,213,219
38,619,472
(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-39
15.
Subsequent Events
As of January 1, 2017, hotel management of the Altoona and Washington, PA hotels was transferred to IHM from
Concord. The management agreements have similar terms to the other agreements with IHM, as discussed in note 12. Terms
of the Company's management agreements are (dollars are not in thousands):
Property
Courtyard Altoona
Springhill Suites Washington
Base
Management
Fee
Monthly
Accounting Fee
Monthly
Revenue
Management
Fee
Incentive
Management
Fee Cap
3.0% $
3.0%
1,500 $
1,200
1,000
1,000
1.0%
1.0%
On January 6, 2017, the SEC declared effective the Company's new $25 million registration statement for the DRSPP
to replace the prior expiring program.
As of January 10, 2017, our JV partner, NorthStar, merged into a new company, Colony NorthStar, Inc. (“Colony
NorthStar”). The merger was between Colony Capital, Inc. (“Colony”), NorthStar Asset Management Group Inc. and
NorthStar Realty Finance Corp. (“NRF”). The transaction was originally announced on June 3, 2016 and approved by all three
companies’ stockholders at their respective special meetings held on December 20, 2016. As a result, the interests in NewINK
JV and Inland JV that are not held by us are now held by Colony.
F-40
CHATHAM LODGING TRUST
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2016
(in thousands)
Initial Cost
Gross Amount at End of Year
Description
Acquisition Encumbrances
Land
Year of
Buildings &
Improvements
Cost Cap.
Sub. To
Acq. Land
Cost Cap. Sub.
To Acq. Bldg &
Improvements
Land
Buildings &
Improvements
Total
Bldg &
Improvements
Accumulated
Depreciation
Year of
Original
Construction
Depreciation
Life
Homewood Suites Orlando - Maitland, FL
Homewood Suites Boston - Billerica, MA
Homewood Suites Minneapolis - Mall of
America, Bloomington, MN
Homewood Suites Nashville - Brentwood, TN
Homewood Suites Dallas - Market Center,
Dallas, TX
Homewood Suites Hartford - Farmington, CT
Hampton Inn & Suites Houston - Houston, TX
Residence Inn Holtsville - Holtsville, NY
Courtyard Altoona - Altoona, PA
SpringHill Suites Washington - Washington, PA
Residence Inn White Plains - White Plains, NY
Residence Inn New Rochelle - New Rochelle,
NY
Homewood Suites Carlsbad - Carlsbad, CA
Residence Inn Garden Grove - Garden Grove,
CA
Residence Inn Mission Valley - San Diego, CA
Homewood Suites San Antonio - San Antonio,
TX
Doubletree Suites Washington DC - Washington,
DC
Residence Inn Tyson's Corner - Vienna, VA
Hampton Inn Portland Downtown - Portland, ME
Courtyard Houston - Houston, TX
Hyatt Place Pittsburgh - Pittsburgh, PA
Hampton Inn & Suites Exeter - Exeter, NH
Hilton Garden Inn Denver Tech - Denver, CO
Residence Inn Bellevue - Bellevue, WA
SpringHill Suites Savannah - Savannah, GA
Residence Inn Silicon Valley I - Sunnyvale, CA
Residence Inn Silicon Valley II - Sunnyvale, CA
Residence Inn San Mateo - San Mateo, CA
Residence Inn Mt. View - Mountain View, CA
Hyatt Place Cherry Creek - Cherry Creek, CO
Courtyard Addison - Dallas, TX
Courtyard West University - Houston, TX
Residence Inn West University - Houston, TX
Hilton Garden Inn Burlington - Burlington, MA
Residence Inn Gaslamp - San Diego, CA
Hilton Garden Inn Marina del Rey, CA
Residence Inn Dedham, MA
Residence Inn Ft. Lauderdale, FL
Grand Total(s)
2010
2010
2010
2010
2010
2010
2010
2010
2010
2010
2010
2010
2010
2011
2011
2011
2011
2011
2012
2013
2013
2013
2013
2013
2013
2014
2014
2014
2014
2014
2014
2014
2014
2014
2015
2015
2015
2015
—
16,225
$
1,800 $
1,470
7,200 $
10,555
34 $
48
2,901 $ 1,834 $
1,325
1,518
10,101 $
11,880
11,935 $
13,398
10,101 $
11,880
—
—
—
—
18,300
—
—
—
—
14,141
19,950
33,674
29,026
16,575
—
22,699
—
18,758
22,864
—
—
46,206
30,000
64,800
70,700
48,600
37,900
—
—
—
—
—
—
22,145
—
—
3,500
1,525
2,500
1,325
3,200
2,200
—
1,000
2,200
—
3,900
7,109
9,856
5,999
6,083
5,752
4,315
5,600
3,000
1,900
4,100
13,800
2,400
42,652
46,474
38,420
22,019
3,700
2,413
2,012
3,640
4,918
—
—
4,230
9,200
$ 274,212 $
13,960
9,300
7,583
9,375
12,709
18,765
10,730
10,692
17,677
20,281
27,520
35,484
39,535
24,764
22,063
28,917
22,664
27,350
35,576
12,350
23,100
56,957
36,050
45,846
50,380
31,352
31,813
26,300
21,554
17,916
25,631
27,193
89,040
43,210
17,304
24,048
992,744 $
19
12
29
92
56
—
—
—
—
9
—
—
—
7
28
—
—
—
—
4
5
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
343 $
F-41
1,754
1,269
1,285
1,181
793
1,086
895
990
6,119
2,997
1,351
1,726
596
3,519
1,537
2,529
1,417
3,256
2,200
—
1,000
2,200
9
3,900
7,109
9,856
15,714
10,569
8,868
10,556
13,502
19,851
11,625
11,682
23,796
23,278
28,871
37,210
40,131
19,233
12,106
11,397
11,973
16,758
22,051
11,625
12,682
25,996
23,287
32,771
44,319
49,987
4,690
6,006
29,454
35,460
4,967
145
212
528
157
35
442
1,770
1,098
237
548
272
6,771
259
1,320
323
1,222
1,136
41
374
16
143
6,111
5,752
4,315
5,600
3,000
1,904
4,105
13,800
2,400
42,652
46,474
38,420
22,019
3,700
2,413
2,012
3,640
4,918
—
—
4,230
9,200
27,030
29,062
22,876
27,878
35,733
12,385
23,542
58,727
37,148
46,083
50,928
31,624
38,584
26,559
22,874
18,239
26,853
28,329
89,081
43,584
17,320
24,191
33,141
34,814
27,191
33,478
38,733
14,289
27,647
72,527
39,548
88,735
97,402
70,044
60,603
30,259
25,287
20,251
30,493
33,247
89,081
43,584
21,550
33,391
52,974 $274,555 $
1,045,718 $1,320,273 $
15,714
10,569
8,868
10,556
13,502
19,851
11,625
11,682
23,796
23,278
28,871
37,210
40,131
29,454
27,030
29,062
22,876
27,878
35,733
12,385
23,542
58,727
37,148
46,083
50,928
31,624
38,584
26,559
22,874
18,239
26,853
28,329
89,081
43,584
17,320
24,191
1,045,718 $
1,833
2,093
2,784
1,968
1,647
1,936
2,306
3,331
2,040
2,048
3,862
3,816
4,353
5,309
5,511
3,953
4,063
3,990
2,295
2,686
3,186
1,053
1,998
4,718
2,899
7,872
8,671
5,400
5,499
1,573
1,198
966
1,458
1,557
4,122
1,407
633
832
116,866
2000
1999
1998
1998
1998
1999
1997
2004
2001
2000
1982
2000
2008
2003
2003
1996
1974
2001
2011
2010
2011
2010
1999
2008
2009
1983
1985
1985
1985
1987
2000
2004
2004
1975
2009
2013
1998
2008
(1)
(1)
(1)
(1)
(1)
(1)
(1)
(1)
(1)
(1)
(1)
(1)
(1)
(1)
(1)
(1)
(1)
(1)
(1)
(1)
(1)
(1)
(1)
(1)
(1)
(1)
(1)
(1)
(1)
(1)
(1)
(1)
(1)
(1)
(1)
(1)
(1)
(1)
(1) Depreciation is computed based upon the following estimated useful lives:
Building
Land improvements
Building improvements
Notes:
Years
40
20
5-20
(a) The change in total cost of real estate assets for the year ended is as
follows:
Balance at the beginning of the year
Acquisitions
Dispositions during the year
Capital expenditures and transfers from construction-in-
progress
Investment in Real Estate
2016
2015
2014
2013
2012
2011
$1,306,192 $
1,105,504 $
654,560 $423,729 $
392,463 200,974
—
—
187,032
444,233
222,273
26,979 185,995
—
—
—
(951)
—
14,081
13,656
6,711
8,558
5,238
5,494
$1,320,273 $
1,306,192 $
1,105,504 $654,560 $
423,729 $392,463
(b) The change in accumulated depreciation and amortization of real estate assets for the year ended is as follows:
Balance at the beginning of the year
Depreciation and amortization
Balance at the end of the year
$
83,245 $
50,910 $
28,980 $ 17,398 $
33,621
32,335
21,930
11,582
8,394
9,004
1,901
6,493
$ 116,866 $
83,245 $
50,910 $ 28,980 $
17,398 $ 8,394
(c) The aggregate cost of properties for federal income tax purposes (in thousands) is approximately
$1,320,434 as of December 31, 2016.
F-42
INK Acquisition, LLC & Affiliates
Financial Statements
As of December 31, 2016 and 2015 and for the years ended December 31, 2016 and 2015, and periods from
June 9, 2014 to December 31, 2014 and January 1, 2014 to June 9, 2014
With Reports of Independent Certified Public Accountants
Report of Independent Certified Public Accountants
To the Managing Member of
INK Acquisition, LLC & Affiliates
We have audited the accompanying combined financial statements of INK Acquisition, LLC & Affiliates which comprise the
combined balance sheets as of December 31, 2016 and 2015, and the related combined statements of operations, owners’ equity
(deficit), and cash flows for the years 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.
Certified Public Accountants’ 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, 2016 and 2015, and the results of their operations and their cash
flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.
/s/ PricewaterhouseCoopers LLP
Fort Lauderdale, Florida
February 27, 2017
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 Managing Manager of
INK Acquisition, LLC & Affiliates
We have audited the accompanying combined financial statements of INK Acquisition, LLC & Affiliates, which comprise the
combined statement of operations, changes in owners’ equity (deficit), and cash flows 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.
Certified Public Accountants’ 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 results of
operations and cash flows of INK Acquisition, LLC & Affiliates 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)
$
$
$
Assets:
Investment in hotel properties, net
Cash and cash equivalents
Restricted cash
Hotel receivables (net of allowance for doubtful accounts of $377
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
Commitments and contingencies (see note 9)
Owners' Equity (Deficit)
Contributions
Distributions and accumulated deficit
Total owners' equity
Total liabilities and owners' equity
December 31, 2016
December 31, 2015
870,214
$
15,816
59,157
2,830
3,475
3,427
907,216
15,466
56,268
2,466
3,736
5,113
954,919
$
990,265
839,977
$
16,665
856,642
215,282
(117,005)
98,277
$
954,919
$
837,137
16,763
853,900
215,282
(78,917)
136,365
990,265
The accompanying notes are an integral part of these combined financial statements.
5
INK Acquisition, LLC & Affiliates
Combined Statements of Operations
(In thousands)
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
Net income (loss)
Successor
For the year
ended December
31, 2016
For the year
ended December
31, 2015
Period from June
9, 2014 through
December 31,
2014
Predecessor
Period from
January 1, 2014
through June 9,
2014
$
242,413
$
237,545
$
129,138
$
112,588
11,862
6,646
260,921
53,744
9,048
2,090
2,281
23,369
19,742
5,788
10,531
13,597
8,922
1,697
150,809
50,235
12,526
3,101
201
216,872
44,049
23
12,312
5,584
255,441
49,147
9,211
2,146
2,424
23,108
19,335
5,486
11,153
13,695
8,761
1,633
146,099
47,846
11,889
2,812
786
209,432
46,009
36
7,112
3,166
139,416
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
4,640
2,390
119,618
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
(36,160)
$
7,912
$
(37,411)
8,634
$
(21,180)
(15,301) $
(24,571)
(2,450)
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
Earnings
Distributions/
Other
Total Equity
Predecessor
Balance at December 31, 2013
Net loss
Distributions
360,000
—
—
Balance at June 9, 2014
$
360,000
$
(42,660)
(2,450)
—
(45,110) $
(332,691)
—
(4,000)
(336,691) $
(15,351)
(2,450)
(4,000)
(21,801)
Successor
Balance at June 9, 2014
Net loss
Contributions
Distributions
Balance at December 31, 2014
Net income
Distributions
Balance at December 31, 2015
Net income
Distributions
Balance at December 31, 2016
$
$
$
$
— $
—
215,282
—
215,282
$
—
—
215,282
$
—
—
— $
(15,301)
—
—
(15,301) $
8,634
—
(6,667) $
7,912
—
215,282
$
1,245
$
— $
—
—
(15,000)
(15,000) $
—
(57,250)
(72,250) $
—
(46,000)
(118,250) $
—
(15,301)
215,282
(15,000)
184,981
8,634
(57,250)
136,365
7,912
(46,000)
98,277
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, 2016
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
Cash flow from operating activities:
Net income (loss)
$
7,912
$
8,634
$
(15,301) $
(2,450)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation
Amortization of deferred franchise fees
Amortization of deferred financing costs
included in interest expense
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
Payments for franchise fees and intangibles
Restricted cash
49,977
253
2,882
(364)
1,686
8
153
62,507
—
(13,226)
—
(2,889)
47,589
253
6,816
3,362
276
9
(2,240)
64,699
—
(25,707)
—
24,525
25,072
142
3,775
(5,828)
(5,389)
(191)
19,540
21,820
(911,733)
(20,856)
(3,954)
(80,793)
20,659
150
2,819
(4,272)
(1,100)
(19)
7,753
23,540
—
(17,135)
—
521
Net cash used in investing activities
(16,115)
(1,182)
(1,017,336)
(16,614)
Cash flows from financing activities:
Proceeds from the issuance of long-term debt
Payments of financing costs
Contributions from owners
Distributions to owners
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
Chatham's equity was rolled-over from the
Predecessor company
$
$
$
$
—
(42)
—
—
—
—
(46,000)
(57,250)
840,000
(13,450)
193,165
(15,000)
(46,042)
(57,250)
1,004,715
350
15,466
6,267
9,199
9,199
—
15,816
$
15,466
$
9,199
$
—
—
—
(4,000)
(4,000)
2,926
22,850
25,776
32,887
$
30,447
$
15,628
$
20,076
319
$
857
$
1,407
— $
22,117
—
68
$
— $
8
- continued -
Successor
Predecessor
For the year ended
December 31, 2016
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
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 Combined 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, 2016, the Successor owns 47 hotels with an aggregate of 6,097 (unaudited) rooms located in 16 states.
At December 31, 2016, 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, 2016, 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.
Reclassifications
Certain prior period amounts in the consolidated financial statements have been reclassified to be comparable to the
current period presentation. The reclassification did not have any impact on the previously reported income or equity.
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 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.
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 $4 thousand and $0 as of December 31, 2016 and 2015, 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.
11
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, 5 to 20 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. 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, 2016 and 2015, are
renovation, property tax and insurance escrows of $59.2 million and $56.3 million, 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.
Deferred Costs
Deferred costs consisted of the following at December 31, 2016 and 2015:
Deferred costs
Franchise fees
Other
Less accumulated amortization
December 31, 2016 December 31, 2015
3,954
193
4,147
(672)
3,954
197
4,151
(415)
3,736
Deferred costs, net
$
3,475
$
On June 9, 2014, deferred costs associated with the Old Ink JV were revalued to zero. 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,
2016 and 2015, other deferred costs primarily relate to liquor licenses in the amounts of $187 thousand and $187 thousand,
respectively. For the periods ended December 31, 2016 and 2015, amortization expense related to franchise fees of $0.3 million
and $0.3 million, respectively, was included in depreciation and amortization in the combined statement of operations.
12
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 the one-month LIBOR
interest rate were to exceed 2.5% for the years ended December 31, 2016 and 2015. 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, 2016. 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, 2016.
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.
As of December 31, 2016, the Company is no longer subject to US federal income tax examinations for years before 2013 with
a few exceptions to state examinations before 2013.
Recently Issued Accounting Standards
On May 28, 2014, the Financial Accounting Standards Board ("FASB") issued ASU 2014-09 ("ASU 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 2014-09 will replace most existing revenue recognition guidance
in GAAP when it becomes effective. The standard permits the use of either the retrospective or cumulative effect transition method.
In July 2015, the FASB voted to defer the effective date to January 1, 2018 with early adoption beginning January 1, 2017. We
are evaluating the effect that ASU 2014-09 will have on our combined financial statements and related disclosures. The Company
has begun to evaluate each of its revenue streams under the new model. Based on preliminary assessments, the Company does
not expect adoption of this guidance will have a material impact on its combined financial statements and related disclosures.
13
On February 25, 2016, the FASB issued ASU 2016-02 (“ASU 2016-02”), Leases, which relates to the accounting of
leasing transactions. This standard requires a lessee to record on the balance sheet the assets and liabilities for the rights and
obligations created by leases with lease terms of more than 12 months. In addition, this standard requires both lessees and
lessors to disclose certain key information about lease transactions. This standard will be effective for fiscal years beginning
after December 15, 2018, including interim periods within those fiscal years. ASU 2016-02 is expected to impact the
Company's financial statements as the Company has certain land rights arrangements for which the Company is the lessee.
On August 26, 2016, the FASB issued ASU 2016-15 ("ASU 2016-15"), Classification of Certain Cash Receipts and
Cash Payments, which clarifies and provides specific guidance on eight cash flow classification issues with an objective to
reduce the current diversity in practice. This standard will be effective for fiscal years beginning after December 15, 2017,
including interim periods within those fiscal years with earlier adoption permitted. We are evaluating the impact the adoption
of ASU 2016-15 will have on our combined financial statements as the Company has certain cash payments and receipts related
to debt extinguishment and distributions from equity method investments that will be affected by the new standard.
On November 17, 2016, the FASB issued ASU 2016-18 ("ASU 2016-18"), Restricted Cash, which requires that the
statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts general
described as restricted cash or restricted cash equivalents. This standard will be effective for public companies for fiscal years
beginning after December 15, 2017, and interim periods within those fiscal years and all other entities for fiscal years
beginning after December 15, 2018. We are evaluating the impact the adoption of ASU 2016-18 will have on our combined
financial statements.
On January 5, 2017, the FASB issued ASU 2017-01 ("ASU 2017-01"), Definition of a Business, which will likely
result in more acquisitions being accounted for as asset acquisitions across all industries, particularly real estate,
pharmaceutical and oil and gas. Application of the changes would also affect the accounting for disposal transactions. This
standard will be effective for public business entities with a calendar year end in 2018 and all other entities have an additional
year to adopt. We are evaluating the impact the adoption of ASU 2017-01 will have on our combined 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 $193.1 million. The Successor funded the acquisition with available cash,
the issuance of debt of $840.0 million and the assumption of other liabilities of $2.4 million. The Successor incurred acquisition
costs of $19.9 million during 2014 related to the acquisition, of which $10.5 million are related to 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.
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
Net assets acquired
$
$
167,106
685,645
3,954
181,258
1,037,963
(2,405)
(840,000)
(842,405)
195,558
14
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 $0.4 million and $0.4 million as of December 31, 2016 and 2015, respectively.
5. Investment in Hotel Properties
Investment in hotel properties as of December 31, 2016 and 2015 consisted of the following:
December 31, 2016
December 31, 2015
Land and improvements
Building and improvements
Furniture, fixtures and equipment
Renovations in progress
Less accumulated depreciation
Investment in hotel properties, net
$
$
167,234
$
720,318
104,377
561
992,490
(122,276)
870,214
$
167,181
711,146
99,280
2,252
979,859
(72,643)
907,216
6. Debt
Debt is comprised of the following at December 31, 2016 and 2015:
Collateral
JPM Chase Loan-Successor(1)
Unamortized debt costs
Total
Interest
Rate
Maturity Date
12/31/16
Property
Carrying
Value
Balance Outstanding as of
December 31,
2016
December 31,
2015
4.09%
June 9, 2017
$ 869,653
$
$
840,000
(23)
839,977
$
$
840,000
(2,863)
837,137
(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.
On June 9, 2016, the Company exercised its first one year extension option. 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% (4.09% at December 31,
2016). 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 to repay portions of this indebtedness in connection with certain customary non-recourse carve-out provisions such as
environmental conditions, misuse of funds and material misrepresentations.
Loan costs are recorded at cost and amortized over a straight-line basis, which approximates the effective interest rate
method, over the term of the loan. For the periods ended December 31, 2016 and 2015, amortization expense related to loan costs
was $2.9 million and $6.8 million, respectively, and is included in interest expense in the combined statement of operations.
15
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, 2016 was $840.2 million.
As of December 31, 2016, 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 $225.0 million, in the aggregate; and
(2) Chatham Guarantor shall maintain Unencumbered Liquid Assets (as defined in the Loan agreement) of not less
than $25.0 million of which (i) not less than $10.0 million of Unencumbered Liquid Cash Assets (as defined in the Loan agreement)
and (ii) not less than $15.0 million in Unencumbered Credit Line Capacity (as defined in the Loan agreement).
Future scheduled principal payments of Successor's debt obligations as of December 31, 2016, for each of the next five
calendar years and thereafter is as follows:
2017 $
2018
2019
2020
2021
Thereafter
Amount
840,000
—
—
—
—
—
$
840,000
7. Owners' Equity (Deficit)
The ownership of Successor at December 31, 2016 and 2015 was as follows:
Owners' Name
Platform Member-T LLC
Chatham Lodging, L.P.
Total
December 31, 2016
December 31, 2015
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 for the years ended December 31, 2016 and 2015 were $46.0 million and $57.3
million, 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 thousand 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.
16
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 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 thousand 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
$
2017
2018
2019
2020
2021
Thereafter
Total
$
113
115
117
120
122
1,539
2,126
Hotel Management Agreements
As of December 31, 2016, 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 $1,200 per month per hotel as well a revenue
management fee of $750 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. Each of the IHM management agreements
may be terminated for cause, including the failure of the managed hotels to meet specified performance levels.
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 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.
17
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 Inn 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 Sheraton's. 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.
10. Related Party Transactions
As of December 31, 2016, 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 from January 1, 2014 through June 9, 2014 was $3.2
million. Management, revenue management and accounting fees incurred by Successor for the years ended December 31, 2016
and 2015 and period from June 9, 2014 through December 31, 2014 were $8.9 million, $8.8 million, and $4.8 million, respectively.
At December 31, 2016 and 2015, amounts due from IHM were $0.8 million and $1.0 million, 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.
11. Subsequent Events
The Company has performed an evaluation of subsequent events as of the balance sheet date through February 27,
2017, the date of the issuance of the financial statements.
On January 10, 2017, Colony Capital, Inc. ("Colony"), NorthStar Asset Management Group Inc. ("NSAM"), and
NorthStar Realty Finance Corp. ("NRF") merged to form Colony NorthStar, Inc. ("Colony NorthStar"). The transaction was
originally announced on June 3, 2016 and was approved by all three companies' stockholders at their respective special
meetings held on December 20, 2016. The completed merger has no effect on franchise agreements, management agreements,
or the owner's equity interest of Colony NorthStar.
18
IHP I Owner JV, LLC and Affiliates
Financial Statements
As of December 31, 2016 and 2015 and for the years ended December 31, 2016 and 2015, and period
from November 17, 2014 through December 31, 2014
With Report of Independent Certified Public Accountants
Report of Independent Certified Public Accountants
To the Managing Member 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 sheets as of December 31, 2016 and 2015, and the related combined statements of operations, owners’
equity, and cash flows for the years 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.
Certified Public Accountants’ 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 IHP I Owner JV, LLC & Affiliates as of December 31, 2016 and 2015, and the results of their operations and their cash flows
for the years then ended in accordance with accounting principles generally accepted in the United States of America.
/s/ PricewaterhouseCoopers LLP
Fort Lauderdale, Florida
February 27, 2017
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, 2016
December 31, 2015
Assets:
Investment in hotel properties, net
Cash and cash equivalents
Restricted cash
Hotel receivables (net of allowance for doubtful accounts of $150 and
$96)
Deferred costs, net
Intangibles, net
Prepaid expenses and other assets
Total assets
Liabilities:
Debt
Accounts payable and accrued expenses
Total liabilities
Commitments and contingencies (see note 9)
Owners' Equity:
Contributions
Distributions and accumulated deficit
Total owners' equity
Total liabilities and owners' equity
$
$
$
979,081 $
10,164
24,129
5,898
3,700
12,378
2,795
950,282
10,111
77,022
7,245
3,896
13,257
4,185
1,038,145 $
1,065,998
816,972 $
17,902
834,874
278,515
(75,244)
203,271
811,736
19,043
830,779
278,515
(43,296)
235,219
$
1,038,145 $
1,065,998
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, 2016
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
$
209,240 $
215,357 $
9,431
5,115
223,786
51,258
7,624
2,125
1,392
22,228
12,412
7,425
9,174
12,651
11,146
1,325
138,760
36,517
879
13,758
1,443
149
191,506
32,280
18
9,792
5,065
230,214
50,256
7,722
2,183
1,532
21,602
12,784
7,350
9,614
12,730
10,932
1,033
137,738
31,183
878
13,232
1,850
352
185,233
44,981
29
Interest expense, including amortization of
deferred fees
Net income (loss)
$
(39,246)
(6,948) $
(37,138)
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
Net loss
Distributions
Balance at December 31, 2016
Distributions
and
Accumulated
Deficit
Total
Owners'
Equity
— $
—
(22,636)
(82)
(22,718) $
7,872
(28,450)
(43,296) $
(6,948)
(25,000)
(75,244) $
—
278,515
(22,636)
(82)
255,797
7,872
(28,450)
235,219
(6,948)
(25,000)
203,271
Contributions
$
— $
278,515
—
—
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)
Year Ended
December 31, 2016
Year Ended
December 31, 2015
Period from
November 17, 2014
through
December 31, 2014
$
(6,948) $
7,872 $
(22,636)
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
$
$
$
36,111
387
5,075
879
1,347
1,390
—
(517)
37,724
—
(65,534)
—
52,893
(12,641)
—
(30)
—
(25,000)
(25,030)
53
10,111
10,164 $
30,795
388
5,640
878
(1,376)
(562)
(7)
3,272
46,900
—
(33,835)
—
7,259
3,735
46
697
108
(5,869)
(3,623)
—
14,947
(12,595)
(950,017)
(137)
(18,757)
(84,280)
(26,576)
(1,053,191)
—
—
—
(28,450)
(28,450)
(8,126)
18,237
10,111 $
817,000
(11,410)
278,515
(82)
1,084,023
18,237
—
18,237
33,723 $
31,350 $
2,386
202 $
826 $
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 Combined Financial Statements
(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, 2016, 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, 2016, 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 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 $0.8 million, 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.
Reclassifications
Certain prior period amounts in the consolidated financial statements have been reclassified to be comparable to the
current period presentation. The reclassification did not have any impact on the previously reported income or equity.
8
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 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.
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 $90 thousand and $1 thousand as of December 31, 2016 and 2015, 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 40 years for buildings, 20 years for land improvements, 5 to 20 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.
9
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, 2016 and 2015, are
renovation, property tax and insurance escrows of $24.1 million and $77.0 million, 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. For the 14 properties managed by Marriott, the Company is required by management agreements
to fund an additional 5% of gross hotel revenues on a monthly basis for the replacement reserve.
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.
Deferred Costs
Deferred costs consisted of the following at December 31, 2016 and 2015:
December 31, 2016
December 31, 2015
Franchise fees
Other
Less accumulated amortization
Deferred costs, net
$
$
4,513 $
7
4,520
(820)
3,700 $
4,513
7
4,520
(624)
3,896
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, 2016 and 2015, amortization expense related to franchise fees of $0.4 million and $0.4 million,
respectively, was included in depreciation and amortization 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 $
(1,865)
12,378 $
14,243
(986)
13,257
December 31, 2016
December 31, 2015
10
Based on the third party valuations, the Company ascribed $14.2 million 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 - $6.2 million
IHP Elizabeth II (NJ) Owner, LLC - $8.0 million
The intangible assets will be amortized over 169 months from December 31, 2016, which corresponds to the term of the
land leases as follows:
$
2017
2018
2019
2020
2021
Thereafter
Total $
Amount
879
879
879
879
879
7,983
12,378
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 the one-month LIBOR
interest rate were to exceed 3.5% during the periods ending December 31, 2016 and 2015. 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 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 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, 2016. 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.
11
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, 2016.
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.
As of December 31, 2016, the Company is no longer subject to US federal income tax examinations for years before 2013 with
a few exceptions to state examinations before 2013.
Recently Issued Accounting Standards
On May 28, 2014, the Financial Accounting Standards Board ("FASB") issued ASU 2014-09 ("ASU 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 2014-09 will replace most existing revenue recognition guidance
in GAAP when it becomes effective. The standard permits the use of either the retrospective or cumulative effect transition method.
In July 2015, the FASB voted to defer the effective date to January 1, 2018 with early adoption beginning January 1, 2017. We
are evaluating the effect that ASU 2014-09 will have on our combined financial statements and related disclosures. The Company
has begun to evaluate each of its revenue streams under the new model. Based on preliminary assessments, the Company does
not expect adoption of this guidance will have a material impact on its combined financial statements and related disclosures.
On February 25, 2016, the FASB issued ASU 2016-02 (“ASU 2016-02”), Leases, which relates to the accounting of
leasing transactions. This standard requires a lessee to record on the balance sheet the assets and liabilities for the rights and
obligations created by leases with lease terms of more than 12 months. In addition, this standard requires both lessees and
lessors to disclose certain key information about lease transactions. This standard will be effective for fiscal years beginning
after December 15, 2018, including interim periods within those fiscal years. ASU 2016-02 is expected to impact the
Company's financial statements as the Company has certain land rights arrangements for which the Company is the lessee.
On August 26, 2016, the FASB issued ASU 2016-15 ("ASU 2016-15"), Classification of Certain Cash Receipts and
Cash Payments, which clarifies and provides specific guidance on eight cash flow classification issues with an objective to
reduce the current diversity in practice. This standard will be effective for fiscal years beginning after December 15, 2017,
including interim periods within those fiscal years with earlier adoption permitted. We are evaluating the impact the adoption
of ASU 2016-15 will have on our combined financial statements as the Company has certain cash payments and receipts related
to debt extinguishment and distributions from equity method investments that will be affected by the new standard.
On November 17, 2016, the FASB issued ASU 2016-18 ("ASU 2016-18"), Restricted Cash, which requires that the
statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts general
described as restricted cash or restricted cash equivalents. This standard will be effective for public companies for fiscal years
beginning after December 15, 2017, and interim periods within those fiscal years and all other entities for fiscal years
beginning after December 15, 2018. We are evaluating the impact the adoption of ASU 2016-18 will have on our combined
financial statements.
On January 5, 2017, the FASB issued ASU 2017-01 ("ASU 2017-01"), Definition of a Business, which will likely
result in more acquisitions being accounted for as asset acquisitions across all industries, particularly real estate,
pharmaceutical and oil and gas. Application of the changes would also affect the accounting for disposal transactions. This
standard will be effective for public business entities with a calendar year end in 2018 and all other entities have an additional
year to adopt. We are evaluating the impact the adoption of ASU 2017-01 will have on our combined financial statements.
On January 26, 2017, the FASB issued ASU 2017-05 ("ASU 2017-05"), Simplifying the Accounting for Goodwill
Impairment, which removes Step 2 of the goodwill impairment test requiring a hypothetical purchase price allocation. A
goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the
carrying amount of goodwill. All other goodwill impairment guidance will remain largely unchanged. This standard will be
effective for calendar year-end 2022, with earlier adoption permitted for any impairment tests performed after January 1, 2017.
We are evaluating the impact the adoption of ASU 2017-05 will have on our combined 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 $278.5 million. The Company funded the acquisition with available cash, the issuance of debt of $817.0 million
and the assumption of other liabilities of $2.7 million. The Company incurred acquisition costs of $0.1 million, $0.4 million, and
$18.9 million during the years ended December 31, 2016 and 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
Net assets acquired
$
$
107,412
796,823
18,756
153,407
1,076,398
(2,712)
(817,000)
(819,712)
256,686
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 $0.2 million and $0.1 million at December 31, 2016 and 2015, respectively.
5. Investment in Hotel Properties
Investment in hotel properties as of December 31, 2016 and 2015 consisted of the following:
December 31, 2016
December 31, 2015
Land and improvements
$
107,489 $
Building and improvements
Furniture, Fixtures and equipment
Renovations in progress
Less accumulated depreciation
Investment in hotel properties, net
$
850,373
85,707
6,153
1,049,722
(70,641)
979,081 $
107,413
805,039
49,914
22,445
984,811
(34,529)
950,282
13
6. Debt
Debt is comprised of the following at December 31, 2016 and 2015:
Collateral
Bank of America Loan (1)
Unamortized debt costs
Total
Interest
Rate
Maturity Date
4.30% December 9, 2017
12/31/16
Property
Carrying
Value
$ 972,928
Balance Outstanding as of
December 31,
2016
December 31,
2014
$
$
817,000
(28)
816,972
$
$
817,000
(5,264)
811,736
(1) During the period from November 17, 2014 through December 31, 2014, the Company received a $817.0 million,
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.
On December 9, 2016, the Company exercised its first one year extension option. 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% (4.3% at
December 31, 2016). 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 to repay portions
of this indebtedness in connection with certain customary non-recourse carve-out provisions such as environmental conditions,
misuse of funds and material misrepresentations.
Loan costs are recorded at cost and amortized over a straight-line basis, which approximates the effective interest rate
method, over the term of the loan. For the periods ended December 31, 2016 and 2015, amortization expense related to loan costs
was $5.1 million and $5.6 million, respectively, and is included in interest expense in the combined statement of operations.
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. The estimated fair value
of the variable rate debt as of December 31, 2016 was $817.0 million.
As of December 31, 2016, the Company 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 $260.0 million, in the aggregate; and
(2) Chatham Guarantor shall maintain Unencumbered Liquid Assets (as defined in the Loan agreement) of not less
than $28.0 million, which can include a combination of cash and available credit line capacity, of which not less than $10.0 million
shall consist of Unencumbered Liquid Cash Assets (as defined in the Loan agreement).
Future scheduled principal payments of debt obligations as of December 31, 2016, and for each of the next five calendar
years and thereafter is as follows:
2017
2018
2019
2020
2021
Thereafter
Amount
$
817,000
—
—
—
—
—
Total $
817,000
14
7. Owners' Equity
The ownership of the Company at December 31, 2016 and 2015 was as follows:
Owners' Name
December 31, 2016
December 31, 2015
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 for the years ended December 31, 2016 and 2015 were $25.0 million and $28.5
million, 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 thousand 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 $0.4 million and $0.4 million 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
$
2017
2018
2019
2020
2021
Thereafter
Total
$
15
736
736
736
809
809
8,065
11,891
Hotel Management Agreements
As of December 31, 2016, 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 $1,200 per month per hotel as well a revenue management fee of $750 per month
per hotel. Marriott manages 14 of the hotels under a management 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. Each of the Marriott franchise agreements
provide for franchise fees ranging from 5.5% to 6% of the respective hotel’s gross room sales plus marketing fees ranging from
2% to 2.5% of the respective hotel’s gross room sales. Each of 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 franchisee under the 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 Homewood Suites Franchise LLC (“Homewood Suites”),
relating to eight Homewood Suites hotels. The franchise agreements expire in 2029. None of the agreements has a renewal option.
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. It has a renewal option of 10 years. 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, 2016, 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, 2016 and 2015 were $5.2 million
and $4.7 million, respectively. At December 31, 2016 and 2015, the amount due to IHM was $0.9 million and $0.8 million,
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 February 27,
2017, the date of the issuance of the financial statements.
On January 10, 2017, Colony Capital, Inc. ("Colony"), NorthStar Asset Management Group Inc. ("NSAM"), and
NorthStar Realty Finance Corp. ("NRF") merged to form Colony NorthStar, Inc. ("Colony NorthStar"). The transaction was
originally announced on June 3, 2016 and was approved by all three companies' stockholders at their respective special
meetings held on December 20, 2016. The completed merger has no effect on franchise agreements, management agreements,
or the owner's equity interest of Colony NorthStar.
17
COR POR AT E INFOR M AT ION
M A NAGE M E N T
BOA RD OF T RUST E E S
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
I N DE PE N DE N T
R EGI S T E R ED C PA
PricewaterhouseCoopers LLP
401 East Las Olas Boulevard
Fort Lauderdale, FL 33301
Miles Berger
Chairman
and Chief Executive Officer
Berger Management
Services LLC
Bill Brewer
Executive Vice President
and Chief Financial Officer
Education Realty Trust
Thomas J. Crocker
Chief Executive Officer
Crocker Partners, LLC
Jack P. DeBoer
Chairman
Consolidated Holdings, Inc.
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
S H A R E HOLDE R
I N FOR M AT ION
Investor Relations
Chatham Lodging Trust
222 Lakeview Avenue
Suite 200
West Palm Beach, FL 33401
Tel: 561.802.4477
Fax: 561.835.4125
A N N UA L M E ET I NG
The annual meeting will be held
on Thursday, May 18, 2017 at
9:00 a.m. in the Palms Meeting
Room. Address above.
T R A NS F E R AGE N T
Wells Fargo Bank, N.A.
Wells Fargo Shareowner Services
161 North Concord Exchange
South St. Paul, Minnesota 55075
LO C AT IONS
Seattle, WA: 5%
Minnesota: 1%
Denver, CO: 5%
Nashville, TN: 1%
Silicon Valley, CA: 24%
Los Angeles, CA: 7%
San Diego, CA: 13%
Dallas, TX: 3%
Houston, TX: 7%
San Antonio, TX: 3%
Exeter, NH: 1%
Portland, ME: 2%
Massachusetts: 5%
Connecticut: 1%
New York: 6%
Pennsylvania: 5%
Washington, D.C.: 5%
Savannah, GA: 3%
Orlando, FL: 1%
Fort Lauderdale, FL: 2%
222 Lakeview Avenue, Suite 200
West Palm Beach, FL 33401
561.802.4477
www.chathamlodgingtrust.com
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