2 0 17 A NNU A L R E P OR T
Chatham Lodging Trust
is a self-advised, publicly-traded real estate
investment trust focused primarily on invest-
ing in upscale extended-stay hotels and
premium-branded, select-service hotels.
Our high quality hotels are located in major
markets with high barriers to entry, near
primary demand generators for both business
and leisure guests. Our primary objective is to
generate attractive returns for our sharehold-
ers through investing in hotel properties at
prices that provide strong returns on invested
capital, paying meaningful dividends and
generating long-term value appreciation.
Dear Shareholder,
Greetings to each of you, and I hope this letter finds
Two: Leverage Existing Assets—We constantly look
you well. In 2017, we set forth an updated, four-prong
for opportunities to add significant value to our core
strategy designed to enhance long-term shareholder
properties. We have successfully accomplished this
value. They include:
with the addition of a new tower in Silicon Valley at our
One: Recycle Capital—We have a very focused and
Mountain View, Calif. property. We intend to optimize
high-quality portfolio and know that we can selectively
excess land at existing hotels, such as Portland, Maine,
prune assets from our portfolio where the buyer net
where we are exploring the possibility of building a second
operating income capitalization rates (“cap rate”) are
hotel. We also seek to maximize the real estate we have
low. We intend to sell assets when appropriate and
under roof, such as converting seldom-used meeting
redeploy those proceeds into superior-quality hotels in
rooms or other under-utilized spaces into guest rooms
markets with higher growth potential that will produce
that can produce higher returns.
higher cash-on-cash returns.
Three: Develop Hotels Selectively—We will seek
opportunities to build a hotel on a very select and limited
basis in targeted high growth markets. I started in the
industry well over 30 years ago building hotels. We’ve
got the internal expertise to efficiently develop and
construct quality properties. With Island Hospitality
operating more than 160 hotels around the country, we
will leverage that local knowledge to cherry pick markets
where we foresee tremendous opportunity. Our criteria
include locations with high barriers to new competition,
significant and expanding demand drivers and the ability
to deliver unlevered yields of at least 10 percent.
Four: Continue Investing in our Existing Portfolio
throughout the Cycle—We not only regularly renovate to
keep our properties fresh and appealing, but also seek
ways to upgrade to provide the experience today’s
traveler wants and for which they are willing to pay. This
allows us to remain competitive and achieve RevPAR
premiums throughout all phases of the cycle.
Reflecting on this strategy in 2017, we successfully
executed on all four prongs of this strategy:
Jeffrey H. Fisher
Chairman, Chief Executive Officer and President
• In December, after a lengthy loan assumption process,
Chatham sold the 145-suite Homewood Suites by
Chatham Lodging Trust 1
Hilton Carlsbad, Calif., for $33 million, or approximately
well positioned within these markets to benefit from
$228,000 per suite. Chatham sold the hotel at an
their expansion in the coming years.
approximate 6.5 percent cap rate.
• During the year, we raised $151 million of equity at a
Operating Performance
weighted average price of $21.59 per share. We used
We delivered adjusted FFO per share of $2.14, above the
proceeds from the sale of that hotel and the equity raised
midpoint of our original 2017 guidance, driven by RevPAR
to acquire three, high-quality hotels for $132 million at
growth towards the upper end of our original guidance of
an approximate 8.0 percent cap rate and entered into
–1 percent to +1 percent.
an agreement to acquire an under-development hotel
RevPAR at the 40 hotels we owned as of December 31st
for $21 million in the 2018 second quarter that will
rose 0.7 percent to $133 in 2017. Our average daily rate
bring incremental FFO growth into 2019.
(ADR) increased 1.9 percent to $167, offsetting a
• We have targeted highly select areas of the country
1.2 percent decline in occupancy to a still very strong
where we are pursuing development opportunities and
80 percent. Our 0.7 percent growth compares to
are in the early planning stages.
industry-wide RevPAR growth of 3.0 percent, which was
• We invested approximately $30.2 million on hotel
driven by a 2.1 percent ADR increase and a 0.9 percent
upgrades to our owned portfolio, including the complete
occupancy gain. Within the upscale segment where the
renovation of five hotels and the public space of two
majority of Chatham’s hotels are positioned, RevPAR
hotels, as well as the conversion of a meeting room into
growth was 1.5 percent. The disparity in performance of
five guest rooms at our Hyatt Place Cherry Creek, Colo.
the upscale segment to the industry is completely driven
by supply growth of 6.0 percent, compared to 1.8 percent
for the entire industry. I am somewhat encouraged by
the fact that demand in the upscale segment rose 6.1
percent. So, despite the significant increase in new
supply in our segments, we maintained very high
absolute occupancy and still were able to increase ADR.
Importantly, at the close of 2017, our leverage ratio
stands at 34 percent, down from 40 percent one year
ago, providing us with the financial flexibility to
opportunistically acquire and develop hotels in 2018
and 2019.
We have assembled a superior quality portfolio of 40
wholly owned hotels, comprising 6,018 rooms. We have
the highest quality, top MSA, focused, select-service and
upscale extended-stay investment portfolios in the
hotel REIT space. Almost 50 percent of our hotel EBITDA
is generated in California and Washington state, areas of
the country where economic expansion has been the
highest and where some of the world’s largest companies
are investing significantly in their future. Our hotels are
2 2017 Annual Report
Our top three markets, as measured by the percentage
operating profit margins erode 120 basis points to 47.4
of hotel EBITDA, are Silicon Valley, San Diego and
percent, still very healthy margins and the highest
Houston. Silicon Valley is our most important market,
among all lodging REITs. Having said that, increased
representing our highest overall investment in any
wages continue to have the largest impact on our
area of the country and compromising approximately
margins due to both low unemployment across the
25 percent of our hotel EBITDA. RevPAR at our four
country and demand for qualified hotel employees who
Silicon Valley hotels grew 0.4 percent. In late 2016, we
are being poached by new hotels.
added 32-rooms to our Mountain View Residence Inn,
Adjusted EBITDA declined 1 percent to $126.7 million,
and that expansion is generating double digit unlevered
adjusted FFO lessened 3.0 percent to $86.3 million, and
returns. We continue to explore adding rooms in our two
adjusted FFO per share declined 7.0 percent to $2.14 from
Sunnyvale locations and remain bullish on the long-term
$2.30 per share last year, due in part to deleveraging
viability of Silicon Valley.
Chatham’s balance sheet.
RevPAR in San Diego declined 1.6 percent. Our Residence
Inn San Diego Gaslamp was renovated in the 2017 first
Solid Balance Sheet and Capital Structure
quarter, and our Residence Inn Mission Valley began its
Our balance sheet remains in excellent condition with
renovation in the 2017 fourth quarter. 2018 is poised to
our 2017 year-end leverage ratio at 34 percent, down
be a strong convention year.
from 40 percent a year earlier. The average interest rate
Chatham owns four hotels in Houston where RevPAR
on our debt is 4.6 percent, with the weighted average
rose 0.7 percent in 2017. The city’s hotels experienced a
maturity date for our fixed rate debt in February 2024,
volatile year, benefitting from hosting the Super Bowl in
with the earliest maturity in 2021. With the recently
the first quarter. Demand weakened due to the decline
announced amendment, our line of credit doesn’t mature
in oil- and gas-related business through the first three
until 2023, and we have $218 million available under our
quarters, as well as added new supply, then experienced
line of credit. Our proportionate share of non-recourse
a massive increase in demand during the last four
joint venture debt and unrestricted cash was $165.4
months of the year attributable to Hurricane Harvey.
million and $2.9 million, respectively, and this adversely
Thankfully, our hotels escaped any major damage, and I
impacts our perceived credit ratios although our credit
want to thank our incredible hotel associates who helped
ratios are strong. Excluding our interests in the two joint
keep our doors open to welcome our valued guests.
ventures, Chatham’s fixed charge coverage ratio is
Our acquisition strategy focuses on acquiring hotels
3.5 times, and net debt to trailing 12-month corporate
where RevPAR growth is projected to be higher than our
EBITDA is 4.8 times.
portfolio. RevPAR jumped 4.2 percent for the three
acquired hotels.
Joint Ventures
With RevPAR growth of only 0.7 percent, operating
We invested approximately $55 million in 2014 for an
margins were pressured. We saw our 2017 gross
almost 10 percent interest in two joint ventures with
Chatham Lodging Trust 3
NorthStar Realty Finance (NRF) that own an aggregate of
2017. Operationally, we must continue to work closely
95 hotels comprising 12,498 rooms. In early 2017, Colony
with Island Hospitality to enhance our revenue
Capital merged with NRF and formed Colony NorthStar,
opportunities, some of which might require capital
Inc. (CLNS). The two joint ventures provide us with partial
investment such as adding a small bar where we believe
ownership in approximately $2.4 billion of hotels.
the capture rate would be meaningful, and to minimize
During the 2017 second quarter, the joint ventures
margin loss through aggressive asset management and
closed on the refinancing of the debt securing the
implementing creative strategies aimed at reducing
hotels in the Innkeepers and Inland portfolios. We
operating costs. We also are working with our
reduced the credit spread on both loans, extended the
franchisors to implement new measures that will help
maturity date on both loans to 2022, thereby solidifying
owners regain some lost margins.
the two joint ventures’ capital structures and also
We will continue to pursue ways to deliver incremental
setting aside reserves of approximately $67 million to
value by executing our four-prong strategy. Our guidance
fund necessary capital expenditures to enhance the
does not reflect any further investments. At the outset
hotels’ competitive position.
of 2018, our leverage is 34 percent, giving us dry powder
For 2017, Chatham received distributions of $3.2 million
to grow opportunistically. Additionally, we will pursue
from the joint ventures, down from $7.2 million received
selectively selling certain hotels and using those
in 2016, due primarily to using distributable cash to fund
proceeds to invest in hotels located in higher growth
the reserves and pay the issuance costs related to the
markets. Finally, we believe that selectively developing
refinancing. We expect those distributions will increase
hotels over time will allow us to earn higher returns and
in 2018.
keep the average age of our hotel portfolio young.
Chatham still generates the highest operating margins
Delivering a Healthy Dividend
of all lodging REITs, and we’re going to work to maintain
We maintained our existing monthly dividend of $0.11
our position at the top. By far, Chatham has the highest
per share during 2017. Our 2017 dividend per share of
quality select/limited-service portfolio among lodging
$1.32 represented approximately 62 percent of our
REITs, and we will remain focused on executing our
2017 adjusted FFO per share. Based on the midpoint of
strategy and growing long-term shareholder value.
our guidance for 2018, an annual dividend of $1.32 per
Thank you for your support. We truly appreciate it.
share represents an adjusted FFO per share payout ratio
Sincerely,
of 71 percent. Despite the projected decrease in FFO per
share in 2018, the payout ratio is supportable.
Outlook for 2018
Jeffrey H. Fisher
We forecast 2018 adjusted FFO per share of $1.80 to
Chairman, Chief Executive Officer and President
$1.94, which at the midpoint is down 12.6 percent from
March 7, 2018
4 2017 Annual Report
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, 2017
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
Non-accelerated filer
(Do not check if a smaller reporting company)
Accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any
new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
No
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 38,204,087 common shares of beneficial interest held by non-affiliates of the registrant was $767,520,108 based on
the closing sale price on the New York Stock Exchange for such common shares of beneficial interest as of June 30, 2017.
The number of common shares of beneficial interest outstanding as of February 27, 2018 was 45,867,610.
Portions of the registrant's Definitive Proxy Statement for its 2018 Annual Meeting of Shareholders (to be filed with the Securities and Exchange
Commission on or before May 17, 2018) are incorporated by reference into this Annual Report on Form 10-K in response to Part III hereof.
DOCUMENTS INCORPORATED BY REFERENCE
Page
4
16
34
35
36
36
37
40
42
65
66
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Business
Item 1.
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4. Mine Safety Disclosures
Legal Proceedings
Properties
TABLE OF CONTENTS
PART I.
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
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
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:
•
•
•
•
•
•
•
•
•
•
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 common shares. Additionally, the following factors could cause actual results to vary from our forward-looking
statements:
•
•
•
•
•
•
•
•
•
•
•
the factors included in this report, including those set forth under the sections titled “Business,” Risk Factors” and
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in other reports
that we file with the United States Securities and Exchange Commission ("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, 2017, 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)
Initial public offering
Private placement offering (2)
Follow-on common share offering
Over-allotment option
Follow-on common share offering
Over-allotment option
Follow-on common share offering
Over-allotment option
Follow-on common share offering
Over-allotment option
Follow-on common share offering
Over-allotment option
Follow-on common share offering
Over-allotment option
4/21/2010
4/21/2010
2/8/2011
2/8/2011
1/14/2013
1/31/2013
6/18/2013
6/28/2013
9/30/2013
10/11/2013
9/24/2014
9/24/2014
1/27/2015
1/27/2015
Follow-on common share offering
11/9/2017
8,625,000 $
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
5,000,000
41,956,000
20.00 $
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
21.90
$
Net Proceeds
(in thousands)
158,700
10,000
60,300
9,100
48,400
1,300
70,000
7,400
56,700
8,500
125,600
18,900
103,300
172,500 $
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
109,500
839,850 $
15,500
108,700
802,400
(1) Excludes any shares issued pursuant to the Company's ATM Plans or DRSPPs (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.
4
In January 2014, the Company established a $25 million dividend reinvestment and stock purchase plan (the "Prior
DRSPP"). We filed a new $50 million registration statement for the dividend reinvestment and stock purchase plan (the "New
DRSPP" and together with the Prior DRSPP, the "DRSPPs") on December 28, 2017 to replace the prior program. Under the
DRSPPs, 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 prospectuses for the DRSPPs. As of December 31, 2017 and December 31, 2016,
respectively, we had issued 741,730 and 29,333 shares under the DRSPPs at a weighted average price of $21.00 and $21.22
per share, respectively. As of December 31, 2017, there were common shares having a maximum aggregate sales price of
approximately $50 million available for issuance under the New DRSPP.
In January 2014, the Company established an At the Market Equity Offering (" Prior 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 Prior ATM Plan. We filed a $100 million registration statement for a new ATM
program (the "ATM Plan" and together with the Prior ATM Plan, the "ATM Plans") on December 28, 2017 to replace the prior
program. At the same time, the Company entered into sales agreements with Cantor, Barclays, Robert W. Baird & Co.
Incorporated ("Baird"), BTIG, LLC ("BTIG"), Citigroup Global Markets Inc. ("Citigroup"), Stifel, Nicolaus & Company,
Incorporated ("Stifel") and Wells Fargo Securities, LLC ("Wells Fargo") as sales agents. As of December 31, 2017 and
December 31, 2016, respectively, we had issued 2,147,695 and 880,820 shares under the ATM Plans at a weighted average
price of $21.87 and $23.54 per share, respectively, in addition to the offerings discussed above. As of December 31, 2017,
there were common shares having a maximum aggregate sales price of approximately $100.0 million available for issuance
under the ATM Plan.
As of December 31, 2017, the Company owned 40 hotels with an aggregate of 6,018 rooms located in 15 states and
the District of Columbia. As of December 31, 2017, the Company also (i) held a 10.3% noncontrolling interest in a joint
venture (the “NewINK JV”) with affiliates of Colony NorthStar, Inc. ("CLNS"), 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 CLNS, 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, 2017, Island Hospitality Management Inc. (“IHM”), which is 51%
owned by Mr. Fisher, managed 40 of the Company’s wholly owned hotels. As of December 31, 2017, all of the NewINK JV
hotels were managed by IHM. As of December 31, 2017, 34 of the Inland JV hotels were managed by IHM and 14 hotels were
managed by Marriott International, Inc. ("Marriott"). The Torrance JV hotel was managed by Marriott.
As of December 31, 2017, 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 (five 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), the Hyatt Place® brand (two hotels) and all suite hotels that operate under the upper scale
extended stay Embassy Suites brand® (one hotel).
5
We primarily invest in upscale extended-stay hotels such as Homewood Suites by Hilton® and Residence Inn by
Marriott®. We also invest in upscale or upper upscale all suite hotels such as SpringHill Suites by Marriott® or Embassy
Suites.® Extended-stay and all-suite hotels typically have the following characteristics:
• principal customer base includes business travelers, whether short-term transient travelers or those 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 or suites that
include a wet bar, refrigerator and microwave, quality room furnishings, pool, and exercise facilities.
Additionally, we invest in premium-branded select-service hotels such as Courtyard by Marriott®, Hampton Inn®,
Hampton Inn and Suites by Hilton®, Hyatt Place® and Hilton Garden Inn by Hilton®. The service and amenity offerings of
these hotels typically include complimentary breakfast or a smaller for pay breakfast or evening dining option, high-speed
internet access, local calls, in-room movie channels, and daily linen and room cleaning service.
6
The following sets forth certain information with respect to our 40 wholly-owned hotels at December 31, 2017:
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
Courtyard Altoona
Altoona, Pennsylvania
Springhill Suites Washington
Washington, Pennsylvania
Residence Inn Long Island
Holtsville
Holtsville, New York
Residence Inn White Plains
White Plains, New York
Residence Inn New Rochelle
New Rochelle, New York
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
Hilton Garden Inn Portsmouth
Portsmouth, NH
Summerville Courtyard
Summerville, SC
Embassy Suites Springfield
Springfield, VA
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
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
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
9/20/2017
11/15/2017
12/6/2017
1999
1998
1998
1998
1999
2000
1997
2001
2000
2004
1982
2000
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
2006
2014
2013
147
144
121
137
121
143
120
105
86
124
135
127
200
192
146
103
121
125
197
178
111
180
231
160
231
248
160
144
199
176
100
120
180
240
81
105
134
131
96
219
$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
$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
$43.5 million
$20.2 million
$68.0 million
Total
6.018
$1,414.1 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
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
332,061
210,417
310,500
—
—
—
—
—
$18.3 million
—
—
—
—
$13.8 million
$33.2 million
$28.5 million
$16.3 million
—
$22.3 million
—
$18.4 million
$22.4 million
—
—
$45.5 million
$30.0 million
$64.8 million
$70.7 million
$48.6 million
$37.9 million
—
—
—
—
—
—
—
—
$21.8 million
—
—
—
234,978
$508.5 million
7
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.
• 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 that as of
December 31, 2017, managed all 40 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 levels at which we have operated in the
past. 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, 2017, our leverage ratio
was approximately 34 percent, which decreased from 40 percent at December 31, 2016. 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.
8
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.
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.
9
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 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.
10
As of December 31, 2017, terms of our management agreements for our 40 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
IHM
IHM
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
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
Hilton Garden Inn Portsmouth
Courtyard Summerville
Embassy Suites Springfield
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
IHM
11
3.0% $
1,500 $
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%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
1,200
1,200
1,200
1,200
1,200
1,200
1,200
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
1,500
1,500
1,500
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
—
—
876
876
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
1,000
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%
1.0%
1.0%
1.0%
1.0%
Management fees totaled approximately $9.9 million, $9.4 million and $8.7 million, respectively, for the years ended
December 31, 2017, 2016 and 2015. Incentive management fees, which are included in management fees, for the years ended
December 31, 2017, 2016 and 2015 were $0.2 million, $0.3 million and $0.3 million, respectively.
12
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 40 wholly owned hotels as of December 31, 2017 were as
follows:
Property
Franchise Company
Franchise/
Royalty Fee
Marketing/
Program Fee
Expiration
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.
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
Hilton Garden Inn Portsmouth
Courtyard Summerville
Embassy Suites Springfield
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.
6.0%
Marriott International, Inc.
3% to 6.0%
Hilton Garden Inns Franchise LLC
Marriott International, Inc.
Hilton Franchise Holding LLC
5.5%
6.0%
5.5%
13
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%
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%
4.0%
2.5%
4.0%
2025
2025
2025
2025
2025
2025
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
2037
2037
2037
Franchise and marketing/program fees totaled approximately $23.2 million, $22.4 million and $21.2 million,
respectively, for the years ended December 31, 2017, 2016 and 2015.
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 2017 under these leases
amounted to approximately $26,000 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 equal to 5% to
25% of gross income based on the type of income less the minimum rent is due in arrears.
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 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 office lease as
of December 31, 2017 for each of the next five calendar years and thereafter (dollars in thousands):
2018
2019
2020
2021
2022
Thereafter
Total
$
$
Other Leases(1)
Office Lease
Amount
1,217 $
1,220
1,267
1,273
1,276
68,178
74,431 $
772
792
812
832
853
3,310
7,371
(1) Other leases includes ground, garage and air rights leases at our hotels.
Employees
As of February 27, 2018, we had 45 employees, 35 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 are
represented by a collective bargaining agreement, however, certain hotel level employees of IHM are represented under a
collective bargaining agreement.
14
Additional Material U.S. Federal Income Tax Considerations
The following is a summary of certain additional material federal income tax considerations with respect to the
ownership of our shares of beneficial interest. This summary supplements and should be read together with “Material U.S.
Federal Income Tax Considerations” in the prospectus dated January 4, 2017 and filed as part of our registration statement on
Form S-3ASR (No. 333-215418).
Recent Legislation
The recently passed Tax Cuts and Jobs Act (“TCJA”) made many significant changes to the U.S. federal income tax
laws applicable to businesses and their owners, including REITs and their shareholders, and may lessen the relative competitive
advantage of operating as a REIT rather than as a C corporation. Pursuant to the TCJA, as of January 1, 2018, (1) the federal
income tax rate applicable to corporations is reduced to 21%, (2) the highest marginal individual income tax rate is reduced to
37% (through taxable years ending in 2025), (3) the corporate alternative minimum tax is repealed, and (4) the backup
withholding rate for U.S. shareholders is reduced to 24%. In addition, individuals, estates and trusts may deduct up to 20% of
certain pass-through income, including ordinary REIT dividends that are not “capital gain dividends” or “qualified dividend
income,” subject to certain limitations. For taxpayers qualifying for the full deduction, the effective maximum tax rate on
ordinary REIT dividends would be 29.6% (through taxable years ending in 2025). The maximum rate of withholding with
respect to our distributions to non-U.S. shareholders that are treated as attributable to gains from the sale or exchange of U.S.
real property interests is also reduced from 35% to 21%. The deduction of net interest expense is limited for all businesses;
provided that certain businesses, including real estate businesses, may elect not to be subject to such limitations and instead to
depreciate their real property related assets over longer depreciable lives. To the extent that our TRS or any other TRS we form
has interest expense that exceeds its interest income, the net interest expense limitation could potentially apply to such TRS.
The reduced corporate tax rate will apply to our TRS and any other TRS we form.
We urge you to consult your tax advisors regarding the impact of the TCJA on the purchase, ownership and sale of our
shares of beneficial interest.
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.
15
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.
16
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.
To maintain our qualification 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, 2017, managed 40 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, 2017, IHM managed all 40 of our wholly owned hotels, as well as all of the 47 hotels owned by
the NewINK JV and 34 of the 48 hotels owned by the Inland JV. As a result, a substantial portion of our revenues is generated
by hotels managed by IHM. This significant concentration of operational risk in one hotel management company makes us
more vulnerable economically than if our hotel management was more diversified among several hotel management
companies. Any adverse developments in IHM's business and affairs, financial strength or ability to operate our hotels
efficiently and effectively could have a material adverse effect on our business, financial condition, 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.
17
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.
18
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 levels at which we have operated in the
past. 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.
19
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 CLNS 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 CLNS 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. CLNS 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 (i) the non-recourse mortgage loan secured by the NewINK JV properties and the related non-
recourse mezzanine loan secured by the membership interests in the owners of the NewINK JV properties and (ii) the non-
recourse mortgage loan secured by the Inland JV properties, the Operating Partnership provided the applicable lenders with
customary environmental indemnities, as well as guarantees of certain customary non-recourse carveout provisions such as
fraud, material and intentional misrepresentations and misapplication of funds. In some circumstances, such as the bankruptcy
of the applicable borrowers, the guarantees are for the full amount of the outstanding debt, but in most circumstances, the
guarantees are capped at 15% of the debt outstanding at the time in question (in the case of the NewINK JV loans) or 20% of
the debt outstanding at the time in question (in the case of the Inland JV loans). In connection with each of the NewINK JV
and Inland JV loans, the Operating Partnership has entered into a contribution agreement with its JV partner whereby the JV
partner is, in most cases, responsible to cover such JV partner’s pro rata share of any amounts due by the Operating Partnership
under the applicable guarantees and environmental indemnities.
20
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 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 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% of IHM, a hotel management company that, as of December 31,
2017, managed 40 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
experience improving economic fundamentals in the future. We cannot predict the extent to which lodging industry
fundamentals will improve. In the event conditions in the industry do not improve, 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.
21
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.
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The seasonality of the hotel industry may cause fluctuations in our quarterly revenues that cause us to borrow money to
fund distributions to our shareholders.
Certain hotel properties we own or acquire in the future (wholly or through joint ventures) have business that is
seasonal in nature. This seasonality can be expected to cause quarterly fluctuations in revenues. Quarterly earnings may be
adversely affected by factors outside our control, including weather conditions and poor economic factors. As a result, we may
have to enter into short-term borrowings in order to offset these fluctuations in revenue and to make distributions to our
shareholders.
The cyclical nature of the lodging industry may cause the return on our investments to be substantially less than we expect.
The lodging industry is cyclical in nature. Fluctuations in lodging demand and, therefore, operating performance, are
caused largely by general economic and local market conditions, which subsequently affects levels of business and leisure
travel. In addition to general economic conditions, new hotel room supply is an important factor that can affect the lodging
industry's performance and overbuilding has the potential to further exacerbate the negative impact of an economic recession.
Room rates and occupancy, and thus RevPAR, tend to increase when demand growth exceeds supply growth. Decline in
lodging demand, or a continued growth in lodging supply, could result in returns that are substantially below expectations or
result in losses, which could have a material adverse effect on our business, financial condition, results of operations and our
ability to make distributions to our shareholders.
Due to our concentration in hotel investments, a downturn in the lodging industry would adversely affect our operations
and financial condition.
Our entire business is related to the hotel industry. Therefore, a downturn in the hotel industry, in general, will have a
material adverse effect on our revenues, net operating profits and cash available for distribution to our shareholders.
The ongoing need for capital expenditures at our hotel properties may adversely affect our business, financial condition and
results of operations and limit our ability to make distributions to our shareholders.
Hotel properties have an ongoing need for renovations and other capital improvements, including replacements, from
time to time, of furniture, fixtures and equipment. The franchisors of our hotels and those of our JVs also require periodic
capital improvements as a condition of keeping the franchise licenses. In addition, our lenders require us to set aside amounts
for capital improvements to our hotel properties. These capital improvements may give rise to the following risks:
• possible environmental problems;
• construction cost overruns and delays;
• possibility that revenues will be reduced temporarily while rooms or restaurants offered are out of service due
to capital improvement projects;
• a possible shortage of available cash to fund capital improvements and the related possibility that financing
for these capital improvements may not be available on affordable terms;
• uncertainties as to market demand or a loss of market demand after capital improvements have begun; and
• disputes with franchisors/managers regarding compliance with relevant management/franchise agreements.
The costs of all these capital improvements could adversely affect our business, financial condition, results of
operations and cash available for distribution to our shareholders.
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The increasing use 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 marketplaces
increases significantly, room revenues may flatten or decrease and our profitability may be adversely affected.
The need for business-related travel and, thus, demand for rooms in our hotels may be materially and adversely affected by
the increased use of business-related technology.
The increased use of teleconference and video-conference technology by businesses could result in decreased business
travel as companies increase the use of technologies that allow multiple parties from different locations to participate at
meetings without traveling to a centralized meeting location, such as our hotels. To the extent that such technologies play an
increased role in day-to-day business and the necessity for business-related travel decreases, demand for our hotel rooms may
decrease and we could be materially and 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.
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We may assume liabilities in connection with the acquisition of hotel properties, including unknown liabilities, which, if
significant, could adversely affect our business.
We may assume existing liabilities in connection with the acquisition of hotel properties, some of which may be
unknown or unquantifiable. Unknown liabilities might include liabilities for cleanup or remediation of undisclosed
environmental conditions, claims of hotel guests, vendors or other persons dealing with the seller of a particular hotel property,
tax liabilities, employment-related issues and accrued but unpaid liabilities whether incurred in the ordinary course of business
or otherwise. If the magnitude of such unknown liabilities is high, they could adversely affect our business, financial condition,
results of operations and our ability to make distributions to our shareholders.
Uninsured and underinsured losses could adversely affect our operating results and our ability to make distributions to our
shareholders.
We maintain comprehensive insurance on each of our hotel properties, including liability, terrorism, fire and extended
coverage, of the type and amount customarily obtained for or by hotel property owners. There can be no assurance that such
coverage will continue to be available at reasonable rates. Various types of catastrophic losses, like earthquakes and floods and
losses from foreign terrorist activities such as those on September 11, 2001 or losses from domestic terrorist activities such as
the Oklahoma City bombing, may not be insurable or may not be insurable on reasonable economic terms. Lenders may require
such insurance and failure to obtain such insurance could constitute a default under loan agreements. Depending on our access
to capital, liquidity and the value of the properties securing the affected loan in relation to the balance of the loan, a default
could have a material adverse effect on our results of operations and ability to obtain future financing.
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:
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• 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.
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.
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We may seek to sell hotel properties owned by us or any of the JVs in the future. There can be no assurance that we
will be able to sell any hotel property on acceptable terms.
If financing for hotel properties is not available or is not available on attractive terms, it will adversely impact the
ability of third parties to buy our hotels. As a result, we or our JVs may hold hotel properties for a longer period than we would
otherwise desire and may sell hotels at a loss.
We may be required to expend funds to correct defects or to make improvements before a hotel property can be sold.
We cannot assure you that we will have funds available to correct those defects or to make those improvements. In acquiring a
hotel property, we may agree to lock-out provisions that materially restrict us from selling that property for a period of time or
impose other restrictions, such as a limitation on the amount of debt that can be placed or repaid on that property. These factors
and any others that would impede our ability to respond to adverse changes in the performance of our properties could have a
material adverse effect on our operating results and financial condition, as well as our ability to make distributions to our
shareholders.
Increases in our property taxes would adversely affect our ability to make distributions to our shareholders.
Hotel properties are subject to real and personal property taxes. These taxes may increase as tax rates change and as
the properties are assessed or reassessed by taxing authorities. In particular, our property taxes could increase following our
hotel purchases as the acquired hotels are reassessed. If property taxes increase, our financial condition, results of operations
and our ability to make distributions to our shareholders could be materially and adversely affected.
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.
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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.
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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 for years
prior to 2018, on our taxable income at regular corporate rates (at a 35% rate for years prior to 2018 and a 21% rate for 2018
and thereafter; 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. In certain circumstances, the ability of our TRS Lessees to deduct net interest expense could be limited.
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 20% 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.
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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 20% 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
20% limitation 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 U.S. federal income tax rate applicable to qualified dividend income payable to certain non-corporate
U.S. shareholders is 20%. Dividends payable by REITs, however, generally are not eligible for the reduced qualified dividend
rates. For taxable years beginning after December 31, 2017 and before January 1, 2026, under the recently enacted law
informally known as the Tax Cuts and Jobs Act (“TCJA”), non-corporate taxpayers may deduct up to 20% of certain pass-
through business income, including “qualified REIT dividends” (generally, dividends received by a REIT shareholder that are
not designated as capital gain dividends or qualified dividend income), subject to certain limitations, resulting in an effective
maximum U.S. federal income tax rate of 29.6% on such income. Although the reduced U.S. federal income tax rate applicable
to qualified dividend income does not adversely affect the taxation of REITs or dividends payable by REITs, the more
favorable rates applicable to regular corporate qualified dividends and the reduced corporate tax rate (currently 21%) could
cause certain non-corporate investors 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 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.
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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.
31
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 20% 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. The TCJA significantly changes
the U.S. federal income tax laws applicable to businesses and their owners, including REITs and their shareholders. Technical
corrections or other amendments to the TCJA or administrative guidance interpreting the TCJA may be forthcoming at any
time. We cannot predict the long-term effect of the TCJA or any future law changes on REITs and their shareholders. We and
our shareholders could be adversely affected by any such change in, or any new, federal income tax law, regulation or
administrative interpretation.
32
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.
33
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
New DRSPP permits the purchase of up to $50 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.
34
Item 2. Properties
The following table sets forth certain operating information for our 40 wholly owned hotels as of December 31, 2017:
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
Courtyard Altoona
Altoona, Pennsylvania
Springhill Suites Washington
Washington, Pennsylvania
Residence Inn Long Island Holtsville
Holtsville, New York
Residence Inn White Plains
White Plains, New York
Residence Inn New Rochelle
New Rochelle, New York
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
Hilton Garden Inn Portsmouth
Portsmouth, NH
Summerville Courtyard
Summerville, SC
Embassy Suites Springfield
Springfield, VA
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
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
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
9/20/2017
11/15/2017
12/6/2017
1999
1998
1998
1998
1999
2000
1997
2001
2000
2004
1982
2000
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
2006
2014
2013
147
144
121
137
121
143
120
105
86
124
135
127
200
192
146
103
121
125
197
178
111
180
231
160
231
248
160
144
199
176
100
120
180
240
81
105
134
131
96
219
$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
$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
$43.5 million
$20.2 million
$68.0 million
Total
6,018
$1,414.1 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
107,619
139,535
171,774
159,398
169,355
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
332,061
210,417
310,500
—
—
—
—
—
$18.3 million
—
—
—
—
$13.8 million
$33.2 million
$28.5 million
$16.3 million
—
$22.3 million
—
$18.4 million
$22.4 million
—
—
$45.5 million
$30.0 million
$64.8 million
$70.7 million
$48.6 million
$37.9 million
—
—
—
—
—
—
—
—
$21.8 million
—
—
—
234,978
$508.5 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".
35
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. IHM is currently a defendant in a class
action lawsuit pending in the Santa Clara County Superior Court. The class action lawsuit was filed on October 21, 2016 under
the title Ruffy, et al, v. Island Hospitality Management, LLC, et al. Case No. 16-CV-301473. The class action relates to hotels
operated by IHM in the state of California and owned by affiliates of the Company and the NewINK JV, and/or certain third
parties. The complaint alleges various wage and hour law violations based on alleged misclassification of certain hotel
managerial staff and violation of certain California statutes regarding incorrect information contained on employee paystubs.
The plaintiffs seek injunctive relief, money damages, penalties, and interest. None of the potential classes has been certified and
we are defending our case vigorously. As of December 31, 2017, included in accounts payable and expenses is $0.2 million
which represents an estimate of the Company’s exposure to the litigation and is also its estimated maximum possible loss that
the Company may incur.
Item 4. Mine Safety Disclosures
Not applicable.
36
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 29, 2017 was $22.76 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:
2017
First quarter
Second quarter
Third quarter
Fourth Quarter
2016
First quarter
Second quarter
Third quarter
Fourth Quarter
High
Low
Dividends
$
21.32 $
18.79 $
20.50
21.34
23.76
18.82
19.59
21.18
0.33
0.33
0.33
0.33
High
Low
Dividends
$
21.94 $
22.77
24.56
21.35
16.91 $
19.61
18.95
16.77
0.31
0.33
0.33
0.33
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 2018. The January 2018 monthly dividend was paid on February 23, 2018 to shareholders of record on
January 31, 2018.
Shareholder Information
On January 31, 2018, there were 307 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, 2012 to the NYSE closing price per share on December 31, 2017 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, 2012 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.
37
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
Value of
initial
investment at
December 31,
2017
Chatham Lodging Trust
Russell 2000 Index
FTSE NAREIT All
Equity REIT Index
FTSE NAREIT
Lodging/Resorts Index
$
$
$
$
100.00
100.00
100.00
$
$
$
139.27
138.82
103.21
$
$
$
139.27
138.82
131.23
$
$
$
205.49
145.62
134.23
$
$
$
152.25
139.19
146.69
$
$
$
163.47
168.85
160.29
100.00
$
127.18
$
168.52
$
127.37
$
158.38
$
169.72
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).
38
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, 2017 and 2016, respectively:
Common shares:
Ordinary income
Return of capital
Unrecap. Sec. 1250 Gain
Total
$
$
2017
2016
1.128
0.120
0.072
1.32
85.5 % $
9.1 %
5.4 %
100% $
1.242
0.138
—
1.38
90 %
10 %
— %
100%
Equity Compensation Plan Information
The following table provides information, as of December 31, 2017, 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 12 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
—
—
—
—
—
—
1,871,942
—
1,871,942
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 no
common shares forfeited in the years ended December 31, 2017 and 2016, respectively, related to such repurchases.
39
Item 6. Selected Financial Data
The consolidated financial data included in the following table has been derived from the financial statements for the
last five years and includes the information required by Item 301 of Regulation S-K. 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,
2017
December 31,
2016
December 31,
2015
December 31,
2014
December 31,
2013
(In thousands, except share and per-share data)
$
298,856
$
293,820
$
276,950
$
197,216
$
126,228
Statement of Operations Data:
Total revenue
Hotel operating expenses
Depreciation and amortization
Impairment loss
Property taxes, ground rent and insurance
General and administrative
Other charges
Reimbursed costs from unconsolidated real estate entities
Total operating expenses
Operating income
Interest and other income
155,679
46,292
6,663
20,916
12,825
523
2,920
245,818
53,038
30
148,777
48,775
—
21,564
11,119
510
4,139
234,884
58,936
51
Interest expense, including amortization of deferred fees
(27,901)
(28,297)
Loss on early extinguishment of debt
Gain on sale of hotel property
Income (loss) from unconsolidated real estate entities
Net gain (loss) from remeasurement and sales of investment in
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
Income per Common Share - Diluted:
Net income attributable to common shareholders
Weighted average number of common shares outstanding:
$
$
$
$
—
3,327
1,582
—
30,076
(396)
29,680
(202)
29,478
0.73
0.73
$
$
$
$
(4)
—
718
(10)
31,394
301
31,695
(212)
31,483
0.82
0.81
$
$
$
$
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
$
$
$
$
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
$
$
$
$
68,596
18,249
—
8,915
8,131
3,341
1,635
108,867
17,361
132
(11,580)
(933)
—
(1,874)
—
3,106
(124)
2,982
(208)
2,982
0.13
0.13
Basic
Diluted
39,859,143
40,112,266
38,299,067
38,482,875
37,917,871
38,322,285
28,531,094
28,846,724
21,035,892
21,283,831
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
86,689
(160,645)
71,171
1.32
87,669
(21,078)
(75,509)
1.30
81,842
(182,363)
106,480
1.28
49,306
(452,988)
414,538
0.93
31,571
(235,190)
203,344
0.84
40
As of
As of
As of
As of
As of
December 31,
2017
December 31,
2016
December 31,
2015
December 31,
2014
December 31,
2013
(In thousands)
Balance Sheet Data:
Investment in hotel properties, net
$
1,320,082
$
1,233,094
$
1,258,452
$
1,096,425
$
652,877
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
$
$
9,333
27,166
24,389
4,047
4,646
2,523
30
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
—
1,392,216
$
1,302,954
$
1,337,229
$
1,165,099
$
673,924
506,316
$
530,323
$
539,623
$
527,721
$
222,063
32,000
31,692
6,582
5,846
582,436
803,162
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
6,618
4,848
4,131
3,415
2,167
Total liabilities and equity
$
1,392,216
$
1,302,954
$
1,337,229
$
1,165,099
$
673,924
41
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, 2017, 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
Follow-on common share offering
Over-allotment option
Follow-on common share offering
Over-allotment option
Follow-on common share offering
Over-allotment option
Follow-on common share offering
Over-allotment option
Follow-on common share offering
Over-allotment option
Follow-on common share offering
4/21/2010
4/21/2010
2/8/2011
2/8/2011
1/14/2013
1/31/2013
6/18/2013
6/28/2013
9/30/2013
10/11/2013
9/24/2014
9/24/2014
1/27/2015
1/27/2015
11/9/2017
8,625,000 $
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
5,000,000
41,956,000
20.00 $
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
21.90
$
172,500 $
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
109,500
839,850 $
158,700
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
108,700
802,400
(1) Excludes any shares issued pursuance to the Company's ATM Plans or DRSPPs.
(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, 2017, the Company owned 40 hotels with an aggregate of 6,018 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 affiliates of Colony NorthStar, Inc. ("CLNS"), 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 CLNS,
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.
42
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, 2017, Island Hospitality Management Inc. (“IHM”), which is 51%
owned by Mr. Fisher, managed 40 of the Company’s wholly owned hotels. As of December 31, 2017, all of the NewINK JV
hotels were managed by IHM. As of December 31, 2017, 34 of the Inland JV hotels were managed by IHM and 14 hotels were
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”).
43
Results of Operations
Industry outlook
We believe that the hotel industry’s performance is correlated to the performance of the economy overall, and
specifically key economic indicators such as GDP growth, employment trends, corporate travel and corporate profits. Trends
for many of these indicators appear to be healthy. Lodging industry performance is also impacted by room supply growth,
which is currently increasing. Overall U.S. room supply increased 1.8% in 2017, but supply in the Upscale segment, in which
most of our hotels operate, increased by 6.0% in 2017. Smith Travel Research is projecting U.S. hotel supply growth to
increase to 2.0% in 2018. Continued supply growth could negatively impact RevPAR growth. We are currently projecting 2018
RevPAR change of -1.5% to 0.5% as compared to 2017.
Comparison of the year ended December 31, 2017 (“2017”) to the year ended December 31, 2016 (“2016”)
Results of operations for the year ended December 31, 2017 include the operating activities of our 40 wholly owned
hotels and our investments in the NewINK JV and Inland JV. We acquired three hotels and sold one hotel in the year ended
December 31, 2017. Accordingly, the comparisons below are influenced by the fact that three wholly owned hotels were
owned by us for only a portion of the year ended December 31, 2017. We acquired the Hilton Garden Inn Portsmouth, NH on
September 20, 2017, the Courtyard by Marriott Summerville, SC on November 15, 2017, and the Embassy Suites Springfield,
VA on December 6, 2017. The Homewood Suites Carlsbad, CA was sold on December 20, 2017.
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,
2017
278,466
6,255
11,215
2,920
298,856
$
$
$
$
December 31,
2016
% Change
273,345
6,221
10,115
4,139
293,820
1.9 %
0.5 %
10.9 %
(29.5)%
1.7 %
Total revenue increased $5.0 million to $298.9 million for the year ended December 31, 2017 compared to total
revenue of $293.8 million for the 2016 period. Total revenue related to the three hotels acquired during 2017 contributed $3.5
million of the increase. Since our hotels are primarily 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 $278.5 million and $273.3 million for the years ended December 31, 2017 and 2016, respectively, with $2.9
million of this increase attributable to the three hotels acquired in 2017. The room revenue from the remaining properties
owned for all of 2017 including the Carlsbad hotel increased $2.3 million.
As reported by Smith Travel Research, industry RevPAR for the years ended December 31, 2017 and 2016 increased
3.0% and 3.2%, respectively, as compared to the years ended December 31, 2016 and 2015. RevPAR at our wholly owned
hotels increased 1.0% in the 2017 and 2016 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 primarily due to new
supply.
44
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 40 hotels wholly owned by the Company as of
December 31, 2017 and 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. The Homewood Suites Carlsbad hotel is included in actual
Occupancy, ADR and RevPAR through the date of sale of December 20, 2017. 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,
2017
2016
Percentage Change
Same
Property (40
hotels)
Actual (41
hotels)
Same
Property (40
hotels)
Actual (38
hotels)
Same
Property (40
hotels)
Actual
(41/38
hotels)
79.8%
79.9%
80.7%
80.6%
$ 166.82
$ 166.40
$ 163.74
$ 162.89
$ 133.05
$ 132.93
$ 132.13
$ 131.32
(1.1)%
1.9 %
0.7 %
(0.9)%
2.2 %
1.2 %
Occupancy
ADR
RevPAR
Food and beverage revenue was $6.3 million and $6.2 million for the years ended December 31, 2017 and 2016,
respectively. For 2017, $0.4 million of the increase relates to the hotels acquired in 2017 and a decrease of $0.3 million relates
to the remaining properties. Food and beverage revenue increased due to the Hilton Garden Inn Portsmouth and Embassy
Suites Springfield hotels acquired in 2017 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, parking, guaranteed no show bookings, restaurant lease income,
gift shop, in-room movie and other ancillary amenities revenue, was $11.2 million and $10.1 million for the years ended
December 31, 2017 and 2016, respectively. Total other operating revenue from the three hotels acquired in 2017 contributed
$0.2 million of the increase with the remainder coming from the hotel properties owned for all of 2017 primarily due to
guaranteed no show bookings, restaurant lease income, meeting rooms, miscellaneous room revenue and parking.
Cost reimbursements from unconsolidated real estate entities, comprised of corporate payroll, office rent and
insurance 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 $2.9 million and $4.1 million for the years ended December 31, 2017 and 2016, respectively. The decrease is
primarily attributable to decreases in salaries and office rent expense. These cost reimbursements were offset by the
reimbursed costs from unconsolidated real estate entities included in operating expenses.
45
Hotel Operating Expenses
Hotel operating expenses consisted of the following for the periods indicated (dollars in thousands):
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
Total hotel operating expenses
Year ended
December 31,
2017
December 31,
2016
% Change
$
59,151
$
57,209
5,342
1,647
2,886
23,639
23,247
5,380
9,944
13,317
9,898
1,228
155,679
$
4,928
1,712
2,358
22,274
22,412
5,147
9,545
12,444
9,389
1,359
148,777
$
3.4 %
8.4 %
(3.8)%
22.4 %
6.1 %
3.7 %
4.5 %
4.2 %
7.0 %
5.4 %
(9.6)%
4.6 %
Hotel operating expenses increased $6.9 million, or 4.6% to $155.7 million for the year ended December 31, 2017
from $148.8 million for the year ended December 31, 2016. The increase in total hotel operating expenses attributable to the
three hotels acquired in 2017 was $2.1 million while the remaining hotels contributed $4.8 million to the increase.
Room expenses, which are the most significant component of hotel operating expenses, increased $2.0 million from
$57.2 million in 2016 to $59.2 million in 2017. Total room expenses related to the three hotels acquired in 2017 contributed
$0.6 million to the increase, while the remaining hotels contributed $1.4 million to the increase. The increase in rooms expense
was due primarily to increased wages.
The remaining hotel operating expenses increased $4.9 million, or 5.3%, from $91.6 million in 2016 to $96.5 million
in 2017. The increase attributable to the three hotels acquired in 2017 was $1.5 million while the remaining hotels had an
increase of $3.4 million. Food and beverage expense increased due to the Hilton Garden Inn Portsmouth and Embassy Suites
Springfield hotels acquired in 2017 that have food and beverage operations. Most of our other hotels have limited for sale food
and beverage activities. Increases attributed to the remaining hotels acquired before 2017 related to franchise and management
fees related to increased revenues, utilities costs and repair costs.
Depreciation and Amortization
Depreciation and amortization expense decreased $2.5 million from $48.8 million for the year ended December 31,
2016 to $46.3 million for the year ended December 31, 2017. The increase attributable to the three hotels acquired in 2017 is
$0.5 million, while the decrease attributable to the remaining hotels of $3.0 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, 5 to 20
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.
Impairment loss
Impairment loss was $6.7 million for the year ended December 31, 2017, compared to zero for the year ended
December 31, 2016. The Company recorded an impairment at our Washington SHS, PA hotel during the year ended December
31, 2017.
46
Property Taxes and Insurance
Total property taxes and insurance expenses decreased $0.7 million from $21.6 million for the year ended December
31, 2016 to $20.9 million for the year ended December 31, 2017. The increase related to the three hotels acquired in 2017 was
$0.1 million while the remaining hotels decreased $0.8 million primarily attributable to successful real estate tax appeals at
some of our properties.
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 $3.8 million and $3.0 million for the years ended December 31, 2017 and 2016, respectively) increased $0.9
million, or 11.1%, to $9.0 million in 2017 from $8.1 million in 2016, with the increase primarily due to salaries, professional
fees, entity taxes, travel and office expenses.
Other Charges
In 2017 we adopted Financial Accounting Standards Board ("FASB") ASU 2017-01 and began capitalizing acquisition
related costs. Prior to 2017 acquisition related costs were expensed as incurred. Other charges remained level from $0.5
million for the year ended December 31, 2016 to $0.5 million for the year ended December 31, 2017. The 2017 costs primarily
consisted of the Company's share of expense related to a class action lawsuit in California (See Legal Proceedings in Part I).
The property acquisition costs in 2016 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, office rent and insurance
costs of the NewINK JV and Inland JV and an entity which is 2.5% owned by Mr. Fisher, where the Company is the employer,
were $2.9 million and $4.1 million for the years ended December 31, 2017 and 2016, respectively. The decrease is primarily
attributable to decreases in salaries and office 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 $21.0 thousand from $51.0 thousand for the year
ended December 31, 2016 to $30.0 thousand for the year ended December 31, 2017.
Interest Expense, Including Amortization of Deferred Fees
Interest expense decreased $0.4 million, or 1.4%, from $28.3 million for the year ended December 31, 2016 to $27.9
million for the year ended December 31, 2017. 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, 2017
24,977
$
December 31, 2016
25,250
$
1,577
692
655
27,901
$
1,307
657
1,083
28,297
% Change
(1.1 )%
20.7 %
5.3 %
(39.5 )%
(1.4)%
The decrease in interest expense for the year ended December 31, 2017 as compared to year ended December 31, 2016
is primarily due to a change in amortization of deferred financing fees. Interest expense on the Company's senior unsecured
revolving credit facility increased due to an increase in LIBOR for the year ended December 31, 2017 as compared to year
ended December 31, 2016. Mortgage debt decreased primarily due to lower principal balances on our mortgage debt.
47
Loss on Early Extinguishment of Debt
Loss on early extinguishment of debt decreased to zero for the year ended December 31, 2017 from $4.0 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.
Gain on Sale of Hotel Property
Gain on sale of hotel property increased $3.3 million for the year ended December 31, 2017 compared to the year
ended December 31, 2016 due to the sale of the Homewood Suites Carlsbad hotel on December 20, 2017.
Income from Unconsolidated Real Estate Entities
Income from unconsolidated real estate entities increased $0.9 million from $0.7 million for the year ended December
31, 2016 to $1.6 million for the year ended December 31, 2017. The increase is due primarily to an increase in the basis
adjustment amortization from $0.6 million in 2016 to $1.6 million in 2017.
Income (loss) on Sale from Unconsolidated Real Estate Entities
Income (loss) on sale from unconsolidated real estate entities decreased to zero from a loss of $10 thousand for the
year ended December 31, 2016 due to finalizing the prorations of the sale of the Torrance JV in December 2015. There were
no sales of unconsolidated real estate entities in 2017.
Income Tax Benefit (Expense)
Income tax benefit (expense) changed from a benefit of $0.3 million for the year ended December 31, 2016 to an
expense of $0.4 million for the year ended December 31, 2017. The change was due to the valuation allowance that was
established in 2017. On December 22, 2017, the TCJA was enacted. The TCJA includes a number of changes to the existing
U.S. tax code, most notably a reduction of the U.S. corporate income tax rate from 35% to 21% effective for tax years
beginning after December 31, 2017. Changes in tax rates and tax laws are accounted for in the period of enactment. Therefore,
as a result of the TCJA being signed into law, the net deferred tax assets before valuation allowance were reduced by $0.6
million with a corresponding net adjustment to current year tax expense for the remeasurement of the Company’s U.S. net
deferred tax assets. Our federal income tax expense for periods beginning in 2018 will be based on the new rate.
Net Income
Net income was $29.7 million for the year ended December 31, 2017, compared to net income of $31.7 million for the
year ended December 31, 2016. The decrease in our net income was due to the factors discussed above.
48
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, the Residence Inn Dedham, MA on July 17, 2015, the Residence Inn Ft. Lauderdale, FL on
August 17, 2015 and the Hilton Garden Inn Marina del Rey, CA on September 17, 2015.
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
Room
December 31,
2016
273,345
$
Food and beverage
Other
Cost reimbursements from unconsolidated real estate entities
Total revenue
$
6,221
10,115
4,139
293,820
December 31,
2015
% Change
$
$
258,137
5,536
9,534
3,743
276,950
5.9%
12.4%
6.1%
10.6%
6.1%
Total revenue was $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.
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 prior 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 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 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
$ 131.32
$ 162.89
$ 131.32
$ 160.99
$ 131.38
$ 158.11
$ 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%.
49
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, parking, guaranteed no show bookings, restaurant lease income,
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, office rent and insurance 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 office rent. These cost reimbursements were offset by the reimbursed costs from unconsolidated
real estate entities included in operating expenses.
Hotel Operating Expenses
Hotel operating expenses consisted of the following for the periods indicated (dollars in thousands):
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
Total hotel operating expenses
Years Ended
December 31,
2016
December 31,
2015
% Change
$
$
57,209
4,928
1,712
2,358
22,274
22,412
5,147
9,545
12,444
9,389
1,359
148,777
$
$
50,165
4,127
1,708
2,467
21,101
21,240
5,040
9,464
11,722
8,742
1,218
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 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 contributed $9.1 million while the remaining hotels contributed $2.7 million to the increase.
Consequently our 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 is $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.
50
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 increase attributable to the remaining hotels of $1.7 million was due to some assets being fully
depreciated. Depreciation is recorded on our assets generally over 40 years for buildings, 20 years for land improvements, 5 to
20 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 primarily 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 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 $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.
Other Charges
Other charges 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. 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, office rent and insurance
costs at the 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 year ended December 31, 2016 and 2015, respectively. Reimbursement costs
increased due to an increase in shared office expenses and office rent. 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 CLNS in 2015.
51
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
Years 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 facility 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.
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 from Unconsolidated Real Estate Entities
Income 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 the 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 Benefit (Expense)
Income tax benefit (expense) changed $0.6 million from an expense of $0.3 million for the year ended December 31,
2015 to an benefit of $0.3 million for the year ended December 31, 2016. The change was due to the release of a valuation
allowance. We are subject to income taxes based on the taxable income of our TRS holding company for tax years prior to
2018 at a combined federal and state tax rate of approximately 40%. Future tax years will be taxed at an estimated 25%.
Net Income
Net income was $31.7 million for the year ended December 31, 2016, compared to a net income of $33.2 million for
the year ended December 31, 2015. The increase in our net income was due to the factors discussed above.
52
Material Trends or Uncertainties
We are not aware of any material trends or uncertainties, favorable or unfavorable, that may be reasonably
anticipated to have a material impact on either the capital resources or the revenues or income to be derived from the
acquisition and operation of properties, loans and other permitted investments, other than those referred to in this section and
the risk factors identified in the “Risk Factors” section of this Annual Report on this Form 10-K.
Non-GAAP Financial Measures
We consider the following non-GAAP financial measures useful to investors as key supplemental measures of our
operating performance: (1) FFO, (2) Adjusted FFO, (3) EBITDA, (4) Adjusted EBITDA and (5) 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 property level performance of our 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 addressed in
NAREIT’s definition of FFO, including 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, 2017,
2016 and 2015 (in thousands, except share data):
$
Funds From Operations (“FFO”):
Net income
Gain on sale of hotel property
Loss (income) on sale from unconsolidated real estate entities
Depreciation
Impairment loss
Adjustments for unconsolidated real estate entity items
FFO attributed to common share and unit holders
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
For the year ended
December 31,
2017
2016
2015
29,680
(3,327)
—
46,060
6,663
6,600
85,676
523
—
96
86,295
$
31,695
$
33,178
—
10
48,562
—
8,186
88,453
510
4
25
88,992
$
—
(3,576)
48,784
—
7,458
85,844
1,451
412
104
87,811
Basic
Diluted
40,138,856
40,391,978
38,556,842
38,740,650
38,175,646
38,327,355
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 other charges,
impairment write-downs, 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,
2017, 2016 and 2015 (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
Other charges
Impairment loss
For the year ended
December 31,
2017
2016
2015
$
29,680
$
31,695
$
33,178
27,901
396
46,292
14,650
118,919
523
6,663
28,297
(301)
48,775
15,908
124,374
510
—
27,924
260
48,981
15,081
125,424
1,451
—
Loss on early extinguishment of debt
Adjustments for unconsolidated real estate entity items
Gain on sale of hotel property
Loss (income) on sale from unconsolidated real estate entities
Share based compensation
Adjusted EBITDA
—
136
(3,327)
—
3,784
$ 126,698
4
62
—
10
3,013
$ 127,973
412
136
—
(3,576)
2,835
$ 126,682
Adjusted Hotel EBITDA is defined as net income before interest, income taxes, depreciation and amortization,
corporate general and administrative, impairment loss, loss on early extinguishment of debt, other charges, 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, 2017, 2016 and 2015 (in
thousands):
Net income
Add:
Less:
Interest expense
Income tax expense
Depreciation and amortization
Corporate general and administrative
Other charges
Impairment loss
Loss on early extinguishment of debt
Loss on sale from unconsolidated real estate entities
Interest and other income
Gain on sale of hotel property
Income from unconsolidated real estate entities
Income on sale from unconsolidated real estate entities
Income tax benefit
For the year ended
December 31,
2017
29,680
27,901
396
46,292
12,825
523
6,663
—
—
(30)
(3,327)
(1,582)
—
—
2016
31,695
28,297
—
48,775
11,119
510
—
4
10
(51)
—
(718)
—
(301)
2015
33,178
27,924
260
48,981
11,677
1,451
—
412
—
(264)
—
(2,411)
(3,576)
—
Adjusted Hotel EBITDA
$ 119,341
$ 119,340
$ 117,632
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.
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, debt
repayments and distributions to equity holders.
As of December 31, 2017 and December 31, 2016, we had cash and cash equivalents of approximately $9.3 million
and $12.1 million, respectively. Additionally, we had $218.0 million available under our $250.0 million senior unsecured
revolving credit facility as of December 31, 2017.
For the year ended December 31, 2017, net cash flows provided by operations were $86.7 million, driven by net
income of $29.7 million and by $56.9 million of non-cash items, including $46.9 million of depreciation and amortization, $6.7
million of impairment loss, $3.8 million of share-based compensation expense, distributions of $0.7 million received from
unconsolidated real estate entities and $0.4 million related to a deferred tax expense, offset by $1.6 million related to the
income from unconsolidated entities, offset by a gain on sale of hotel of $3.3 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 $3.4 million. Net cash flows used in investing activities were $160.6
million, primarily related the purchase of the Hilton Garden Inn Portsmouth for $43.4 million, the purchase of the Summerville
Courtyard for $20.2 million, the Springfield Embassy Suites for $68.2 million and the purchase of a parcel of land in Los
Angeles for $6.5 million, capital improvements on our 40 wholly owned hotels of $30.2 million, $5.0 million related to our
Inland JV investment, $2.2 million related to required escrow deposits included in restricted cash, reduced by proceeds from
the sale of the Homewood Suites Carlsbad hotel of $12.5 million and distributions of $2.6 million received from
unconsolidated real estate entities. Net cash flows provided by financing activities were $71.2 million, comprised of $150.7
million of common equity proceeds raised from our issuance of common shares in our November 2017 underwritten public
offering and through sales under our ATM Plans and DRSPPs, net repayments on our unsecured credit facility of $20.5 million,
principal payments or payoffs on mortgage debt of $4.2 million, payments of deferred financing and offering costs of $2.1
million, and distributions to shareholders and LTIP unit holders of $52.7 million.
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 $51.8 million of non-cash items, including $49.9 million of depreciation and amortization, $3.0
million of share-based compensation expense, 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 Prior 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.
57
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 $51.4 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 Prior 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.
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 and 2017. On January 26, 2018, we paid an aggregate of $5.0 million in dividends on our common shares
and distributions on our LTIP units attributable to the December 2017 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 levels at which we have operated in the
past. A subsequent decrease in hotel property values will not necessarily cause us to repay debt to comply with this limitation.
At December 31, 2017, our leverage ratio was approximately 34 percent, which decreased from 40 percent at December 31,
2016 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, 2017, we had total debt of $540.5
million at an average rate of approximately 4.6%. Our debt coverage ratios currently are favorable and we are comfortable in
this leverage range and believe we have the capacity and flexibility to take advantage of acquisition opportunities as they arise.
We intend to continue to fund our investments with a prudent balance of debt and equity. We will pay down borrowings on our
senior unsecured revolving credit facility with excess cash flow until we find other uses of cash such as investments in our
existing hotels, hotel acquisitions or further joint venture investments. Our debt may include mortgage debt collateralized by
our hotel properties and unsecured debt.
At December 31, 2017 and 2016, we had $32.0 million and $52.5 million, respectively, in outstanding borrowings
under our senior unsecured revolving credit facility. At December 31, 2017, the maximum borrowing availability under our
senior unsecured revolving credit facility was $250.0 million. We also had mortgage debt on individual hotels aggregating
$508.5 million and $532.6 million at December 31, 2017 and 2016, respectively.
58
On November 25, 2015, the Company, as parent guarantor, and the Operating Partnership, 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
Our senior unsecured credit facility contains representations, warranties, covenants, terms and conditions customary
for transactions of this type, including a maximum leverage ratio, a minimum fixed charge coverage ratio and minimum net
worth financial covenants, limitations on (i) liens, (ii) incurrence of debt, (iii) investments, (iv) distributions, and (v) mergers
and asset dispositions, covenants to preserve corporate existence and comply with laws, covenants on the use of proceeds of the
senior unsecured revolving credit facility and default provisions, including defaults for non-payment, breach of representations
and warranties, insolvency, non-performance of covenants, cross-defaults and guarantor defaults. We were in compliance with
all financial covenants at December 31, 2017.
In January 2014, we established a $25 million dividend reinvestment and stock purchase plan (the "Prior DRSPP").
We filed a new $50 million registration statement for the dividend reinvestment and stock purchase plan (the "New DRSPP"
and together with the Prior DRSPP, the "DRSPPs") on December 28, 2017 to replace the prior expiring program. Under the
DRSPPs, 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 prospectuses for the DRSPPs. As of December 31, 2017 and December 31, 2016,
respectively, we had issued 741,730 and 29,333 shares under the DRSPPs at a weighted average price of $21.00 and $21.22
per share, respectively. As of December 31, 2017, there were common shares having a maximum aggregate sales price of
approximately $50 million available for issuance under the New DRSPP.
59
In January 2014, the Company established an At the Market Equity Offering ("Prior 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 Prior ATM Plan. We filed a $100 million registration statement for a new ATM
program (the "ATM Plan" and together with the Prior ATM Plan, the "ATM Plans") on December 28, 2017 to replace the prior
program. At the same time, the Company entered into sales agreements with Cantor, Barclays, Robert W. Baird & Co.
Incorporated ("Baird"), BTIG, LLC ("BTIG"), Citigroup Global Markets Inc. ("Citigroup"), Stifel, Nicolaus & Company,
Incorporated ("Stifel") and Wells Fargo Securities, LLC ("Wells Fargo") as sales agents. As of December 31, 2017 and
December 31, 2016, respectively, we had issued 2,147,695 and 880,820 shares under the ATM Plans at a weighted average
price of $21.87 and $23.54 per share, respectively, in addition to the offerings discussed above. As of December 31, 2017,
there were common shares having a maximum aggregate sales price of approximately $100.0 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 senior unsecured revolving credit facility or through the
encumbrance of any unencumbered hotels. We believe that our net cash provided by operations will be adequate to fund
operating obligations, pay interest on any borrowings and fund dividends in accordance with the requirements for qualification
as a REIT under the Code. We expect to meet our long-term liquidity requirements, such as hotel property acquisitions and debt
maturities or repayments through additional long-term secured and unsecured borrowings, the issuance of additional equity or
debt securities or the possible sale of existing assets.
We intend to continue to invest in hotel properties as suitable opportunities arise. We intend to finance our future
investments with free cash flow, the net proceeds from additional issuances of common and preferred shares, issuances of
common units in our Operating Partnership or other securities, borrowings or asset sales. The success of our acquisition
strategy depends, in part, on our ability to access additional capital through other sources. There can be no assurance that we
will continue to make investments in properties that meet our investment criteria. Additionally, we may choose to dispose of
certain hotels as a means to provide liquidity.
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, 2017 and 2016, we invested approximately $30.2 million and $24.5 million,
respectively, on capital projects in our hotels. We expect to invest approximately $33.0 million on capital improvements to our
existing hotels in 2018, 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 2018, 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 $80 million to $90 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 14, “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.
60
Off-Balance Sheet Arrangements
We had no material off-balance sheet arrangements at December 31, 2017 other than non-recourse debt associated
with the NewINK JV and Inland JV as discussed below.
Contractual Obligations
The following table sets forth our contractual obligations as of December 31, 2017, and the effect these obligations are
expected to have on our liquidity and cash flow in future periods (in thousands).
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
$
7,371
$
772
$
1,603
$
1,686
$
37,054
74,432
632,218
1,742
1,217
28,687
35,312
2,487
63,197
—
2,550
76,916
3,310
—
68,178
463,418
Total
$
751,075
$
32,418
$
102,599
$
81,152
$
534,906
(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, 2017. Interest
payments are based on the interest rate in effect as of December 31, 2017. See Note 7, “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.
The Company’s ownership interests in the NewINK JV and Inland JV are subject to change in the event that either we
or CLNS calls for additional capital contributions to the respective JVs 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. CLNS may also approve certain
actions related to the 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.
61
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 were expensed in 2016 and 2015. The Company early adopted
ASU 2017-01 "Definition of a Business" which requires these costs to be capitalized for asset acquisitions. The Company generally
expects its hotel acquisitions will qualify as asset acquisitions.
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 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.
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. For the year ended December 31, 2017, the Company incurred an impairment loss on its
Washington SHS, PA hotel. For the years ended December 31, 2016 and 2015 there were no impairment losses.
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, 2017, we had no hotel properties held for sale.
Investment in Unconsolidated Real Estate Entities
If it is determined that the Company does not have a controlling interest in a joint venture, either through its financial
interest in a variable investment entity ("VIE") or in a voting interest entity, the equity method of accounting is used if the company
has the ability to exercise significant influence. Under this method, the investment, originally recorded at cost, is adjusted to
recognize the Company’s share of net earnings or losses of the affiliates as they occur rather than as dividends or other distributions
are received, advances to and commitments for the investee.
Investment in unconsolidated real estate entities are accounted for under the equity method of accounting and the Company
records its equity in earnings or losses under the hypothetical liquidation of book value (“HLBV”) method of accounting due to
the structures and the preferences we receive on the distributions from the joint ventures pursuant to the joint venture agreements.
Under this method, the Company recognizes income and loss in each period based on the change in liquidation proceeds we would
receive from a hypothetical liquidation of our investment based on depreciated book value. Therefore, income or loss may be
allocated disproportionately as compared to the ownership percentages due to specified preferred return rate thresholds and may
be more or less than actual cash distributions received and more or less than what the Company may receive in the event of an
actual liquidation. In the event a basis difference is created between the carrying amount of the Company's share of partner's
capital, the resulting amount is allocated based on the assets of the investee and, if assigned to depreciable or amortizable assets,
then amortized as a component of income (loss) from unconsolidated real estate entities.
62
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 is 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, 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, 2017 and 2016, 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.
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 (at a 35% rate for taxable years prior to 2018 and a 21% rate for 2018 and
thereafter) 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.
63
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 modified
retrospective approach. In July 2015, the FASB voted to defer the effective date to January 1, 2018 with early adoption
beginning January 1, 2017. We adopted the new accounting guidance on January 1, 2018 on a modified retrospective basis,
which requires a cumulative effect adjustment. The Company has finalized its evaluation of each of its revenue streams under
the new model and because of the short-term, day-to-day nature of the Company's hotel revenues, the pattern of revenue
recognition is not expected to change and we did not recognize any cumulative effect adjustment. Furthermore, we do not
expect the updated accounting guidance to materially impact the recognition of or the accounting for disposition of hotels, since
we primarily dispose of hotels to third parties in exchange for cash with few contingencies.
On February 25, 2016, the FASB issued ASU 2016-02 (“ASU 2016-02”), Leases, which relates to the accounting for
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. Leases with a term of 12 months or less will be accounted
for similarly to existing guidance for operating leases today. The Company is the lessee on certain air/land rights arrangements
and an office lease and expects to record right of use assets and lease liabilities for these leases under the new standard. This
guidance is effective for the Company on January 1, 2019, however, early adoption is permitted. The standard requires a
modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in
the financial statements. The Company is evaluating the impact that ASU 2016-02 will have on its consolidated financial
statements and related disclosures.
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 and is to be applied on a retrospective basis.
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. The Company does not anticipate that the adoption of ASU 2016-15 will
have a material impact to our consolidated financial statements.
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 generally
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 and is to be applied on a retrospective basis. This standard addresses presentation of
restricted cash in the consolidated statements of cash flows only and will have no effect on our reported consolidated financial
condition or results of operations.
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. The
changes to the definition of a business will likely result in more of the Company's property acquisitions qualifying as asset
acquisitions, which will permit capitalization of acquisition costs. 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. The Company has adopted this
guidance as of 2017. The adoption did not have a material impact on our consolidated financial statements.
64
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
We may be exposed to interest rate changes primarily as a result of 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 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, 2017 and December 31, 2016 was $506.6
million and $516.0 million, respectively.
At December 31, 2017, 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 as of December 31, 2017 that are sensitive to changes in interest rates (dollars in
thousands):
Floating rate:
Debt
Average interest rate (1)
Fixed rate:
Debt
2018
2019
2020
2021
2022
Thereafter
Total
Fair Value
— $32,000
—
4.17%
—
—
—
—
—
—
— $ 32,000
—
4.17%
$ 32,000
$5,041
$6,992
$9,536
$ 21,945
$ 9,954
$454,986
$508,454
$506,608
Average interest rate
4.71%
4.70%
4.68%
5.26%
4.63%
4.63%
4.66%
(1) Weighted average interest rate based on borrowings at LIBOR of 1.45% plus a margin of 1.95% and a prime rate of 4.25% plus a margin of
0.95% at December 31, 2017.
We estimate that a hypothetical 100 basis point increase in the variable interest rate would result in additional interest
expense of approximately $0.3 million annually. This assumes that the amount outstanding under our floating rate debt remains
$32.0 million, the balance as of December 31, 2017.
65
Item 8. Consolidated Financial Statements and Supplementary Data
See our Consolidated Financial Statements and the Notes thereto beginning at page F-1 included in Item 15, which are
incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief
Financial Officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures
pursuant to Exchange Act Rule 13a-15(b) as of the end of the period covered by this report. Based on that evaluation, our Chief
Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective at the
reasonable assurance level 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 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as
such term is defined in Exchange Act Rule 13a-15(f) and 15d- 15(f). 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,
2017. 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, 2017, 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, 2017, has been audited by
PricewaterhouseCoopers LLP, an independent registered certified public accounting firm, as stated in their report, which
appears on page F-2 of this Annual Report on Form 10-K.
Item 9B. Other Information
None.
66
Item 10. Trustees, Executive Officers and Corporate Governance
Part III
The information required by this item is incorporated by reference to the Company's Proxy Statement for the 2018
Annual Meeting of Shareholders to be held on May 17, 2018.
Item 11. Executive Compensation
The information required by this item is incorporated by reference to the Company's Proxy Statement for the 2018
Annual Meeting of Shareholders to be held on May 17, 2018.
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 2018
Annual Meeting of Shareholders to be held on May 17, 2018.
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 2018
Annual Meeting of Shareholders to be held on May 17, 2018.
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 2018
Annual Meeting of Shareholders to be held on May 17, 2018.
.
67
Item 15. Exhibits and Financial Statement Schedules
PART IV
1.
Financial Statements
Included herein at pages F-1 through F-8
2.
Financial Statement Schedules
The following financial statement schedule is included herein at page F-43:
Schedule III - Real Estate and Accumulated Depreciation as of December 31, 2017
All other schedules for which provision is made in Regulation S-X are either not required to be included herein under the
related instructions or are inapplicable or the related information is included in the footnotes to the applicable financial
statement and, therefore, have been omitted.
3. Exhibits
A list of exhibits required to be filed as part of this report on Form 10-K is set forth in the Exhibit Index, which immediately
follows this item and is incorporated by reference herein.
68
Exhibit
Number
Description of Exhibit
EXHIBIT INDEX
3.1
3.2
10.1*
10.2*
10.3*
10.4*
10.5*
10.6*
10.7*
10.8*
10.9*
10.10*
10.11*
10.12*
10.13*
10.14*
10.15*
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25*
10.26*
Articles of Amendment and Restatement of Chatham Lodging Trust(12)
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(12)
Employment Agreement between Chatham Lodging Trust and Peter Willis(12)
Employment Agreement between Chatham Lodging Trust and Dennis M. Craven(12)
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 June 1, 2015, between Chatham Lodging Trust and Jeremy Wegner(7)
LTIP Unit Award Agreement, dated as of June 1, 2015, between Chatham Lodging Trust, Chatham
Lodging, L.P. and Jeffrey Fisher (Outperformance Plan) (8)
LTIP Unit Award Agreement, dated as of June 1, 2015, between Chatham Lodging Trust, Chatham
Lodging, L.P. and Dennis Craven (Outperformance Plan) (8)
LTIP Unit Award Agreement, dated as of June 1, 2015, between Chatham Lodging Trust, Chatham
Lodging, L.P. and Peter Willis (Outperformance Plan) (8)
Agreement of Limited Partnership of Chatham Lodging, L.P.(5)
First Amendment to the Agreement of Limited Partnership of Chatham Lodging, L.P.(7)
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.(9)
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.(9)
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.(9)
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.(10)
Limited Liability Company Agreement of IHP I OPs JV, LLC, dated as of November 17, 2014, by and
between Platform Member Holdings II-T Cam2, LLC and Chatham TRS Holding, Inc.(10)
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(11)
Form of 2016 Time-Based LTIP Unit Award Agreement(12)
Form of 2016 Performance-Based LTIP Unit Award Agreement(12)
69
10.27*
10.28*
10.29
10.30
10.31
10.32
10.33
10.34
10.35
12.1
21.1
23.1
31.1
31.2
32.1
Form of 2017 Time-Based LTIP Unit Award Agreement(13)
Form of 2017 Performance-Based LTIP Unit Award Agreement(13)
Sales Agreement, dated December 28, 2017, by and among Chatham Lodging Trust, Chatham Lodging,
L.P. and Cantor Fitzgerald & Co.(14)
Sales Agreement, dated December 28, 2017, by and among Chatham Lodging Trust, Chatham Lodging,
L.P. and Barclays Capital Inc.(14)
Sales Agreement, dated December 28, 2017, by and among Chatham Lodging Trust, Chatham Lodging,
L.P. and BTIG, LLC(14)
Sales Agreement, dated December 28, 2017, by and among Chatham Lodging Trust, Chatham Lodging,
L.P. and Citigroup Global Markets Inc(14)
Sales Agreement, dated December 28, 2017, by and among Chatham Lodging Trust, Chatham Lodging,
L.P. and Robert W. Baird & Co. Incorporated(14)
Sales Agreement, dated December 28, 2017, by and among Chatham Lodging Trust, Chatham Lodging,
L.P. and Stifel, Nicolaus & Company, Incorporated(14)
Sales Agreement, dated December 28, 2017, by and among Chatham Lodging Trust, Chatham Lodging,
L.P. and Wells Fargo Securities(14)
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
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, 2017 and 2016; (ii)
Consolidated Statements of Operations for the years ended December 31, 2017, 2016 and 2015; (iii) Consolidated
Statements of Equity for the years ended December 31, 2017, 2016 and 2015; (iv) Consolidated Statements of Cash Flows
for the years ended December 31, 2017, 2016 and 2015; and (v) Notes to the Consolidated Financial Statements.
70
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)
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
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
November 30, 2014 (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).
Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on May
9, 2017 (File No. 001-34693).
Incorporated by reference to the Registrant's Current Report on Form 8-K filed with the SEC on December
28, 2017 (File No. 001-34693).
71
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
SIGNATURE
Dated:
February 27, 2018
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, 2018
Senior Vice President and Chief Financial Officer (Principal
Financial and Accounting Officer)
February 27, 2018
/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, JR.
Trustee
Edwin B. Brewer, Jr.
/s/ C. GERALD GOLDSMITH Trustee
C. Gerald Goldsmith
/s/ ROBERT PERLMUTTER
Trustee
Robert Perlmutter
/s/ ROLF E. RUHFUS
Trustee
Rolf E. Ruhfus
72
February 27, 2018
February 27, 2018
February 27, 2018
February 27, 2018
February 27, 2018
February 27, 2018
February 27, 2018
CHATHAM LODGING TRUST
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Certified Public Accounting Firm
Consolidated Balance Sheets at December 31, 2017 and 2016
Consolidated Statements of Operations for the years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Equity for the years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015
Notes to Consolidated Financial Statements
Financial Statement Schedule
Schedule III - Real Estate and Accumulated Depreciation at December 31, 2017
Page No.
F-2
F-4
F-5
F-6
F-7
F-9
F-43
F-1
Report of Independent Registered Public Accounting Firm
To the Board of Trustees and Shareholders of Chatham Lodging Trust
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Chatham Lodging Trust and its subsidiaries as of December
31, 2017 and 2016, and the related consolidated statements of operations, of equity and of cash flows for each of the three years
in the period ended December 31, 2017, including the related notes and financial statement schedule listed in the index
appearing under Item 15(2) (collectively referred to as the “consolidated financial statements”). We also have audited the
Company's internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control -
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of the Company as of December 31, 2017 and 2016, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2017 in conformity with accounting principles generally accepted in the
United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013)
issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal
control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included
in the accompanying Management Annual Report on Internal Control over Financial Reporting appearing under Item 9A. Our
responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control
over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting
Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance
with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and
the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement,
whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material
respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement
of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.
Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated
financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements. 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.
Definition and Limitations of 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. 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.
F-2
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
Certified Public Accountants
Fort Lauderdale, Florida
February 27, 2018
We have served as the Company’s auditor since 2009.
F-3
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 $200 and $155,
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, 2017 and 2016
Common shares, $0.01 par value, 500,000,000 shares authorized; 45,375,266
and 38,367,014 shares issued and outstanding at December 31, 2017 and 2016,
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,
2017
December 31,
2016
$
1,320,082
$
1,233,094
9,333
27,166
24,389
4,047
4,646
2,523
30
1,392,216
506,316
32,000
31,692
6,582
5,846
582,436
$
$
12,118
25,083
20,424
4,389
4,642
2,778
426
1,302,954
530,323
52,500
27,782
6,017
4,742
621,364
$
$
—
—
450
871,730
(69,018)
803,162
6,618
809,780
380
722,019
(45,657)
676,742
4,848
681,590
$
1,392,216
$
1,302,954
The accompanying notes are an integral part of these consolidated financial statements.
F-4
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
Impairment loss
Property taxes, ground rent and insurance
General and administrative
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
Gain on sale of hotel property
Income 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:
Basic
Diluted
Distributions per common share:
For the year ended
December 31,
2017
2016
2015
$
$
278,466
6,255
11,215
2,920
298,856
$
273,345
6,221
10,115
4,139
293,820
258,137
5,536
9,534
3,743
276,950
59,151
5,342
1,647
2,886
23,639
23,247
5,380
9,944
13,317
9,898
1,228
155,679
46,292
6,663
20,916
12,825
523
2,920
245,818
53,038
30
(27,901)
—
3,327
1,582
—
30,076
(396)
29,680
(202)
29,478
0.73
0.73
$
$
$
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
$
$
$
39,859,143
40,112,266
1.32
$
38,299,067
38,482,875
1.38
$
37,917,871
38,322,285
1.28
$
The accompanying notes are an integral part of these consolidated financial statements.
F-5
CHATHAM LODGING TRUST
Consolidated Statements of Equity
(In thousands, except share and per share data)
Balance, January 1, 2015
34,173,691
$
339
$ 599,318
$
(11,120) $
588,537
$
3,415
$591,952
Common Shares
Shares
Amount
Additional
Paid - In
Capital
Accumulated
Deficit
Total
Shareholders’
Equity
Noncontrolling
Interest in
Operating
Partnership
Total
Equity
Issuance of shares pursuant to Equity
Incentive Plan
Issuance of shares, net of offering costs of
$2,042
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
14,113
4,028,512
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
Issuance of shares pursuant to Equity
Incentive Plan
Issuance of shares, net of offering costs of
$2,149
Issuance of restricted time-based shares
Amortization of share based compensation
Dividends declared on common shares
($1.32 per share)
Distributions declared on LTIP units
($1.32 per unit)
Reallocation of noncontrolling interest
Net income
23,980
6,979,272
5,000
—
—
—
—
—
—
70
—
—
—
—
—
—
500
148,472
—
815
—
—
(76)
—
—
—
—
—
—
—
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
—
—
—
—
500
—
500
148,542
— 148,542
—
815
—
2,469
—
3,284
(52,839)
(52,839)
— (52,839)
—
—
—
(76)
29,478
29,478
(977)
76
202
(977)
—
29,680
Balance, December 31, 2017
45,375,266
$
450
$ 871,730
$
(69,018) $
803,162
$
6,618
$809,780
The accompanying notes are an integral part of these consolidated financial statements.
F-6
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
Gain on sale of hotel property
Income (loss) on sale from unconsolidated real estate entities
Impairment loss
Loss on early extinguishment of debt
Loss on write-off of deferred franchise fee
Deferred tax expense (benefit)
Share based compensation
Income from unconsolidated real estate entities
Distributions from unconsolidated 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
Proceeds from sale of hotel properties
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
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
For the year ended
December 31,
2016
2015
2017
$
29,680
$
31,695
$
33,178
46,060
217
648
(3,327)
—
6,663
—
16
396
3,784
(1,582)
667
353
(935)
356
3,693
86,689
(30,233)
(138,248)
12,555
2,551
(5,036)
(2,234)
(160,645)
129,000
(149,500)
(4,160)
—
—
(2,149)
150,691
—
(94)
(52,617)
71,171
(2,785)
12,118
48,562
214
1,076
—
10
—
4
—
(426)
3,013
(718)
—
47
(94)
2,288
1,998
87,669
(22,496)
—
—
7,228
—
48,784
197
1,606
—
(3,576)
—
412
—
—
2,835
(2,411)
—
(318)
(580)
(2,277)
3,992
81,842
(20,331)
(169,447)
—
12,903
—
(5,810)
(21,078)
(5,488)
(182,363)
43,450
(56,530)
(3,775)
(5,954)
(50)
(75)
482
—
(91)
(52,966)
(75,509)
(8,918)
21,036
131,580
(88,500)
(3,239)
(4,760)
(2,112)
(2,042)
120,839
(22)
—
(45,264)
106,480
5,959
15,077
21,036
$
9,333
$
12,118
$
F-7
Supplemental disclosure of cash flow information:
Cash paid for interest
Cash paid for income taxes
$
$
26,541
710
$
$
26,836
742
$
$
25,508
160
Supplemental disclosure of non-cash investing and financing information:
On January 15, 2017, the Company issued 23,980 shares to its independent trustees pursuant to the Company’s Equity
Incentive Plan as compensation for services performed in 2016. 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.
As of December 31, 2017, the Company had accrued distributions payable of $5.8 million. These distributions were paid
on January 26, 2018 except for $0.8 million related to accrued but unpaid distributions on unvested performance based shares
(See Note 12). 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. 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.
Accrued share based compensation of $0.5 million, $0.6 million and $0.6 million is included in accounts payable and
accrued expenses as of December 31, 2017, 2016 and 2015.
Accrued capital improvements of $2.4 million, $2.0 million and $1.2 million are included in accounts payable and
accrued expenses as of December 31, 2017, 2016, and 2015 respectively.
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 accompanying notes are an integral part of these consolidated financial statements.
F-8
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, 2017, the Company owned 40 hotels with an aggregate of 6,018 (unaudited) rooms located in 15
states and the District of Columbia (unaudited). As of December 31, 2017, the Company also (i) held a 10.3% noncontrolling
interest in a joint venture (the “NewINK JV”) with affiliates of Colony NorthStar, Inc. ("CLNS"), 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 CLNS, 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, 2017, 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, 2017, Island Hospitality Management Inc. (“IHM”), which is 51%
owned by Mr. Fisher, managed 40 of the Company’s wholly owned hotels. As of December 31, 2017, all of the NewINK JV
hotels were managed by IHM. As of December 31, 2017, 34 of the Inland JV hotels were managed by IHM and 14 hotels were
managed by Marriott International, Inc. ("Marriott"). The Torrance JV hotel was managed by Marriott.
F-9
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 statement 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.
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 7.
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, such as transfer taxes,
title insurance, environmental and property condition reviews, and legal and accounting fees were expensed in 2016 and 2015.
On January 1, 2017, the Company early adopted ASU 2017-01 "Definition of a Business" and now capitalizes these costs for asset
acquisitions.
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-10
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. For the year ended December 31, 2017, the Company
incurred an impairment loss on its Washington SHS, PA hotel (See footnote 5). For the years ended December 31, 2016 and 2015,
there were no impairment losses.
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, 2017, 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,
2017 and 2016, no JV investments were impaired.
F-11
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, 2017 and 2016 is $27.2 million and $25.1 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, 2017 and 2016, the allowance for doubtful accounts was $0.2 million and $0.2 million,
respectively.
Deferred Costs
Deferred costs consist of franchise agreement fees for the Company’s hotels, costs associated with potential future
acquistions and loan costs related to the Company’s senior unsecured revolving credit facility. Deferred costs consisted of the
following at December 31, 2017 and 2016 (in thousands):
December 31, 2017
December 31, 2016
Loan costs
Franchise fees
Other
Less accumulated amortization
Deferred costs, net
$
$
4,561
4,407
21
8,989
(4,343)
4,646
$
$
4,561
3,568
—
8,129
(3,487)
4,642
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, 2017, 2016 and 2015, amortization expense related to franchise fees of $0.2 million, $0.2 million and
$0.2 million, respectively, is included in depreciation and amortization in the consolidated statements of operations. Amortization
expense related to loan costs of $0.6 million, $0.7 million and $1.2 million for the years ended December 31, 2017, 2016 and
2015, respectively, is included in interest expense in the consolidated statements of operations.
Mortgage Debt, net
Mortgage debt, net consists of mortgage loans on certain hotel properties less the costs associated with acquiring those
loans. Mortgage debt consisted of the following at December 31, 2017 and 2016 (in thousands):
Mortgage debt
Deferred financing costs
Mortgage debt, net
December 31, 2017
December 31, 2016
$
$
508,454
(2,138)
506,316
$
$
532,563
(2,240)
530,323
Deferred financing 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, 2017, 2016 and 2015, amortization expense related to loan costs of
$0.1 million, $0.4 million, $0.4 million, respectively, is included in interest expense in the consolidated statement of operations.
F-12
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-13
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. On December 22, 2017, the TCJA was enacted. The TCJA
includes a number of changes to the existing U.S. tax code, most notably a reduction of the U.S. corporate income tax rate from
35% to 21% effective for tax years beginning after December 31, 2017. Changes in tax rates and tax laws are accounted for in the
period of enactment. Therefore, as a result of the TCJA being signed into law, the net deferred tax assets before valuation allowance
were reduced by $0.6 million with a corresponding net adjustment to current year tax expense for the remeasurement of the
Company’s U.S. net deferred tax assets. Our federal income tax expense for periods beginning in 2018 will be based on the new
rate.
As of December 31, 2017, the Company is no longer subject to U.S federal income tax examinations for years before
2014 and with few exceptions to state examinations before 2014. 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, 2017.
Interest and penalties related to uncertain tax benefits, if any, in the future will be recognized as operating expense.
F-14
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.
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, 2017 and 2016, 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 modified
retrospective approach. In July 2015, the FASB voted to defer the effective date to January 1, 2018 with early adoption
beginning January 1, 2017. We adopted the new accounting guidance on January 1, 2018 on a modified retrospective basis,
which requires a cumulative effect adjustment. The Company has finalized its evaluation of each of its revenue streams under
the new model and because of the short-term, day-to-day nature of the Company's hotel revenues, the pattern of revenue
recognition is not expected to change and we did not recognize any cumulative effect adjustment. Furthermore, we do not
expect the updated accounting guidance to materially impact the recognition of or the accounting for disposition of hotels, since
we primarily dispose of hotels to third parties in exchange for cash with few contingencies.
On February 25, 2016, the FASB issued ASU 2016-02 (“ASU 2016-02”), Leases, which relates to the accounting for
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. Leases with a term of 12 months or less will be accounted
for similarly to existing guidance for operating leases today. The Company is the lessee on certain air/land rights arrangements
and an office lease and expects to record right of use assets and lease liabilities for these leases under the new standard. This
guidance is effective for the Company on January 1, 2019, however, early adoption is permitted. The standard requires a
modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in
the financial statements. The Company is evaluating the impact that ASU 2016-02 will have on its consolidated financial
statements and related disclosures.
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 and is to be applied on a retrospective basis.
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. The Company does not anticipate that the adoption of ASU 2016-15 will
have a material impact to our consolidated financial statements.
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 generally
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 and is to be applied on a retrospective basis. This standard addresses presentation of
restricted cash in the consolidated statements of cash flows only and will have no effect on our reported consolidated financial
condition or results of operations.
F-15
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. The
changes to the definition of a business will likely result in more of the Company's property acquisitions qualifying as asset
acquisitions, which will permit capitalization of acquisition costs. 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. The Company has adopted this
guidance as of 2017. The adoption did not have a material impact on our consolidated financial statements.
3.
Acquisition of Hotel Properties
Hotel Purchase Price Allocation
We acquired the Hilton Garden Inn Portsmouth ("Portsmouth") hotel in Portsmouth, NH for $43.4 million on
September 20, 2017, the Courtyard Summerville ("Summerville") hotel in Summerville, SC for $20.2 million on November 15,
2017 and the Embassy Suites Springfield Embassy ("Springfield") hotel in Springfield, VA for $68.1 million on December 6,
2017. No acquisitions were completed in 2016. The allocation of the purchase price of each of the hotels acquired by the
Company in 2017, 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
Accounts receivable
Prepaid expenses and other assets
Accounts payable and accrued expenses
Net assets acquired, net of cash
HGI
Portsmouth
CY
Summerville
ES
Springfield
Total
9/20/2017
11/15/2017
12/6/2017
131
96
219
446
$
3,600 $
2,500 $
7,700 $ 13,800
37,630
2,120
8
32
12
(27)
16,923
58,807
113,360
730
1,490
4,340
1
1
28
(1)
3
—
129
(51)
12
33
169
(79)
$
43,367 $
20,181 $
68,075 $131,623
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 and $1.5 million, respectively, during the years ended December 31, 2016 and 2015 which are included in Other
charges in the Consolidated Statement of Operations. Property acquisition costs incurred during 2016 related to prior
acquisitions for which final amounts were more than previously accrued. Property acquisition costs of $0.7 million were
capitalized in 2017.
The amount of revenue and operating income from the hotels acquired in 2017 from their respective date of
acquisition through December 31, 2017 is as follows (in thousands):
For the Year Ended December 31, 2017
Revenue
Operating Income
Hilton Garden Inn Portsmouth, NH
Courtyard Summerville, SC
Embassy Suites Springfield, VA
Total
$
$
$
$
2,453
384
674
3,511
$
$
$
$
1,116
152
161
1,429
F-16
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 year ended December 31, 2015 had taken place on January 1, 2014. There were no
hotels acquired in 2016. Supplemental pro forma earnings were adjusted to exclude $0.7 million of acquisition-related costs
incurred in the year ended December 31, 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
37,917,871
38,322,285
As a result of the properties being treated as acquired as of January 1, 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.
On August 29, 2017, the Company purchased a parcel of land in Los Angeles county for $6.5 million.
On October 18, 2017, the Company entered into an agreement to acquire a additional hotel located in Summerville,
SC for $20.8 million. This transaction is expected to close in the second quarter of 2018, subject to satisfactory completion of
due diligence and customary closing conditions. The Company intends to fund the purchase price with available cash and
borrowings under the Company's unsecured revolving credit facility.
4.
Disposition of Hotel Properties
On December 20, 2017, the Company sold the Homewood Suites by Hilton Carlsbad (North San Diego County) for
$33.0 million and recognized a gain on sale of a hotel property of $3.3 million. The buyer assumed the mortgage loan secured
by the hotel of $20.0 million. Proceeds from the sale were used to repay amounts outstanding on the Company's senior
unsecured revolving credit facility. This sale did not represent a strategic shift that had or will have a major effect on the
Company's operations and financial results, and therefore, did not qualify to be reported as discontinued operations.
For the years ended December 31, 2017, 2016 and 2015, the Company's Consolidated statements of operations
included operating income of $2.8 million, $2.5 million and $3.4 million, respectively related to the Homewood Suites by
Hilton Carlsbad (North San Diego County).
F-17
5.
Investment in Hotel Properties
Investment in hotel properties as of December 31, 2017 and 2016 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, 2017
291,054
$
December 31, 2016
274,554
$
1,140,477
1,045,880
63,443
13,262
1,508,236
(188,154)
1,320,082
$
50,495
10,067
1,380,996
(147,902)
1,233,094
$
During the year ended December 31, 2017, the Company identified indicators of impairment at its Washington SHS, PA hotel,
primarily due to decreased operating performance and continued economic weakness. As such, the Company was required to
perform a test of recoverability. This test compared the sum of the estimated future undiscounted cash flows attributable to the
hotel over our remaining anticipated holding period and its expected value upon disposition to our carrying value for the hotel.
The Company determined that the estimated undiscounted future cash flow attributable to the hotel did not exceed its carrying
value and an impairment existed. As a result, the Company recorded a $6.7 million impairment charge in the consolidated
statements of operations during the year ended December 31, 2017. Fair value was determined based on a discounted cash
flow model using our estimates of future cash flows and third-party market data, considered Level 3 inputs. We may record
additional impairment charges if operating results of this hotel are materially different from our forecasts, the economy and
lodging industry weakens, or we shorten our contemplated holding period.
6.
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, 2017 and 2016, the Company
received cash distributions from the Torrance JV as follows (in thousands):
For the year ended
December 31,
2017
2016
Cash generated from other activities and excess cash
Total
$
$
— $
— $
—
—
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 which was recorded in Income (loss) on sale from unconsolidated real estate
entities in the Consolidated Statement of Operations.
F-18
On June 9, 2014, the Company acquired a 10.3% interest in the NewINK JV, a joint venture between affiliates of
NorthStar Realty Finance Corp. ("NorthStar") and the operating partnership. The Company accounts for this investment under
the equity method. NorthStar merged with Colony Capital, Inc. ("Colony") on January 10, 2017 to form a new company,
CLNS, which owns an 89.7% interest and the Company owns a 10.3% interest in the NewINK JV. The value of NewINK JV
assets and liabilities were adjusted to reflect estimated fair market value at the time Colony merged with NorthStar. As of
December 31, 2017 and December 31, 2016, the Company's share of partners' capital in the NewINK JV is approximately
$51.8 million and $10.1 million, respectively, and the total difference between the carrying amount of the investment and the
Company's share of partners' capital is approximately $58.4 million and $16.1 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). The Company serves
as managing member of the NewINK JV. During the years ended December 31, 2017 and 2016, the Company received cash
distributions from the NewINK JV as follows (in thousands):
Cash generated from other activities and excess cash
Total
$
$
2,518
2,518
$
$
4,728
4,728
For the year ended
December 31,
2017
2016
On November 17, 2014, the Company acquired a 10.0% interest in Inland JV, a joint venture between affiliates of
NorthStar and the Operating Partnership. The Company accounts for this investment under the equity method. NorthStar
merged with Colony Capital, Inc. ("Colony") on January 10, 2017 to form a new company, CLNS, which owns a 90.0% interest
in the Inland JV. The value of Inland JV assets and liabilities were adjusted to reflect estimated fair market value at the time
Colony merged with NorthStar. As of December 31, 2017 and 2016, the Company's share of partners capital in the Inland JV
was approximately $35.5 million and $20.4 million, respectively, and the total difference between the carrying amount of the
investment and the Company's share of partners' capital is approximately $11.1 million and $0.0 million, respectively (for
which the basis difference related to amortizing assets is being recognized over the life of the related assets as a basis difference
adjustment). The Company serves as managing member of the Inland JV. During the years ended December 31, 2017 and
2016, the Company received cash distributions from the Inland JV as follows (in thousands):
Cash generated from other activities and excess cash $
Total
$
700
700
$
$
2,500
2,500
For the year ended
December 31,
2017
2016
On May 9, 2017, the NewINK JV refinanced the $840.0 million loan collateralized by the 47 hotels with a new
$850.0 million loan. The new non-recourse loan is with Morgan Stanley Bank, N.A. The new loan bears interest at a rate of
LIBOR plus a spread of 2.79%, has an initial maturity of June 7, 2019 and three one-year extension options.
On June 9, 2017, the Inland JV refinanced the $817.0 million loan collateralized by the 48 hotels with a new
$780.0 million non-recourse loan with Column Financial, Inc. On June 9, 2017, the Company contributed an additional $5.0
million of capital related to its share in the Inland JV to reduce the debt collateralized by the 48 hotels and fund capital reserves
and deferred financing costs. The new loan bears interest at a rate of LIBOR plus a spread of 3.3%, has an initial maturity of
July 9, 2019 and three one-year extension options.
F-19
The Company’s ownership interests in the JVs are subject to change in the event that either the Company or CLNS
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. In connection with (i) the non-recourse mortgage loan secured by the
NewINK JV properties and the related non-recourse mezzanine loan secured by the membership interests in the owners of the
NewINK JV properties and (ii) the non-recourse mortgage loan secured by the Inland JV properties, the Operating Partnership
provided the applicable lenders with customary environmental indemnities, as well as guarantees of certain customary non-
recourse carveout provisions such as fraud, material and intentional misrepresentations and misapplication of funds. In some
circumstances, such as the bankruptcy of the applicable borrowers, the guarantees are for the full amount of the outstanding
debt, but in most circumstances, the guarantees are capped at 15% of the debt outstanding at the time in question (in the case
of the NewINK JV loans) or 20% of the debt outstanding at the time in question (in the case of the Inland JV loans). In
connection with each of the NewINK JV and Inland JV loans, the Operating Partnership has entered into a contribution
agreement with its JV partner whereby the JV partner is, in most cases, responsible to cover such JV partner’s pro rata share of
any amounts due by the Operating Partnership under the applicable guarantees and environmental indemnities. The Company
manages the JVs and will receive a promote interest in each applicable JV if it meets certain return thresholds for such JV.
CLNS may also approve certain actions by the JVs without the Company’s consent, including certain property dispositions
conducted at arm’s length, certain actions related to the restructuring of the applicable JV and removal of the Company as
managing member in the event the Company fails to fulfill its material obligations under the applicable joint venture
agreement.
The Company's investments in the NewInk JV and the Inland JV are $(6.6) million and $24.4 million, respectively, at
December 31, 2017. 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, 2017, 2016 and 2015 (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, 2017
December 31, 2016
December 31, 2015
$
$
$
$
$
$
2,363,726
130,910
2,494,636
1,597,351
38,773
1,636,124
$
$
$
1,849,295
143,769
1,993,064
1,656,949
34,567
1,691,516
87,326
771,186
858,512
30,428
271,120
301,548
1,857,497
206,894
2,064,391
1,657,000
35,807
1,692,807
37,633
333,951
371,584
Total Liabilities and Equity
$
2,494,636
$
1,993,064
$
2,064,391
F-20
For the year ended
December 31,
$
2017
487,174
294,280
192,894
$
(107) $
— $
(107) $
7
1,575
1,582
$
$
$
2016
484,708
289,569
195,139
964
$
$
$
— $
964
118
600
718
$
$
$
$
2015
497,698
290,123
207,575
19,241
—
19,241
1,811
600
2,411
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
$
$
$
$
$
$
$
$
F-21
7.
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)
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
Residence Inn by Marriott Silicon Valley I, CA
Residence Inn by Marriott Silicon Valley II, CA
Residence Inn by Marriott San Mateo, CA
Residence Inn by Marriott Mountain View, CA
SpringHill Suites by Marriott Savannah, GA
Hilton Garden Inn Marina del Rey, CA (2)
Homewood Suites by Hilton Billerica, MA
Homewood Suites by Hilton Carlsbad, CA
Hampton Inn & Suites Houston Medical Cntr., TX
Interest
Rate
Maturity Date
12/31/17
Property
Carrying
Value
Balance Outstanding as of
December 31,
2017
December 31,
2016
4.17% November 25, 2019
$
— $
32,000
$
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
4.25%
January 6, 2025
19,222
45,958
32,173
30,287
32,371
35,199
67,418
38,643
79,584
86,974
63,012
55,162
36,393
41,906
12,191
—
15,116
13,762
28,469
16,253
22,251
18,375
22,437
45,462
33,160
64,800
70,700
48,600
37,900
30,000
21,760
16,225
—
18,300
52,500
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
Total debt before unamortized debt issue costs
$ 691,609
$
540,454
$
585,063
Unamortized mortgage debt issue costs
Total debt outstanding
(2,138)
538,316
(2,240)
582,823
(1)
(2)
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 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.
F-22
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, 2017 and 2016, the Company had $32.0 million and $52.5 million, respectively, of outstanding
borrowings under its senior unsecured revolving credit facility. At December 31, 2017, 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 by discounting the future cash flows of each instrument at
estimated market rates. All of the Company's mortgage loans are fixed-rate. 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, 2017 and
2016 was $506.6 million and $516.0 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, 2017, 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, 2017 and 2016 was $32.0 million and
$52.5 million, respectively.
As of December 31, 2017, the Company was in compliance with all of its financial covenants. At December 31, 2017,
the Company’s consolidated fixed charge coverage ratio was 3.2 and the bank covenant is 1.5. Future scheduled principal
payments of debt obligations as of December 31, 2017, for each of the next five calendar years and thereafter are as follows (in
thousands):
2018
2019
2020
2021
2022
Thereafter
Total
F-23
Amount
$
5,041
38,992
9,536
21,945
9,954
454,986
540,454
$
8.
Income Taxes
The components of income tax expense for the following periods are as follows (in thousands):
Current:
Federal
State
Current tax expense
Deferred:
Federal
State
Deferred tax (expense) benefit
Total tax (expense) benefit
For the year ended
December 31,
2016
2015
2017
$
$
$
— $
—
— $
350
46
396
396
$
56
69
125
$
$
(380)
(46)
(426)
(301) $
129
131
260
—
—
—
260
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
Tax reform impact
Provision to return adjustment
Permanent adjustments
Change in valuation allowance
Other
Total income tax (benefit) expense
For the year ended
December 31,
2017
(4,261)
(1,449)
(108)
644
5
13
1,289
2
396
$
$
$
2016
974
331
38
—
(406)
16
(299)
19
(301)
2015
2,384
810
97
—
211
140
(998)
—
260
$
$
$
$
$
$
Effective tax rate
(9.29)%
(30.90)%
10.91%
F-24
On December 22, 2017, the TCJA was enacted. The TCJA includes a number of changes to the existing U.S. tax code,
most notably a reduction of the U.S. corporate income tax rate from 35% to 21% effective for tax years beginning after
December 31, 2017. Changes in tax rates and tax laws are accounted for in the period of enactment. Therefore, as a result of the
TCJA being signed into law, the net deferred tax assets before valuation allowance were reduced by $0.6 million with a
corresponding net adjustment to current year tax expense for the remeasurement of the Company’s U.S. net deferred tax assets.
Our federal income tax expense for periods beginning in 2018 will be based on the new rate.
At December 31, 2017, our TRS had a gross deferred tax asset associated with future tax deductions of $30.0 thousand. The tax
effect of each type of temporary difference and carry forward that gives rise to the deferred tax asset as of December 31, 2017
and 2016 are as follows (in thousands):
Total deferreds:
Allowance for doubtful accounts
Accrued compensation
AMT credit
Total book to tax difference in partnership
Net operating loss
Valuation allowance
Net deferred tax asset
For the year ended
December 31,
2017
2016
$
$
51
$
505
30
(579)
1,312
(1,289)
30
$
59
627
65
(404)
79
—
426
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. The Company's TRS is expecting
increased taxable losses in 2018. As of December 31, 2017, the TRS continues to recognize a full valuation allowance equal to
100% of the gross deferred tax assets, with the exception of the AMT tax credit, due to the uncertainty of the TRS's ability to
utilize these deferred tax assets. Management will continue to monitor the need for a valuation allowance.
F-25
9.
Dividends Declared and Paid
The Company declared regular common share dividends of $1.32 per share and distributions on LTIP units of $1.32
per unit for the year ended December 31, 2017. The dividends and distributions and their tax characterization were as follows:
January
February
March
1st Quarter 2017
April
May
June
2nd Quarter 2017
July
August
September
3rd Quarter 2017
October
November
December
4th Quarter 2017
Total 2017
Record
Date
Payment
Date
1/31/2017
2/24/2017
2/28/2017
3/31/2017
3/31/2017
4/28/2017
4/28/2017
5/26/2017
5/26/2017
6/30/2017
6/30/2017
7/28/2017
7/31/2017
8/31/2017
9/29/2017
8/25/2017
9/29/2017
10/27/2017
$
$
$
$
$
$
10/31/2017
11/30/2017
12/29/2017
11/24/2017 $
12/29/2017
1/26/2018
$
$
Common
share
distribution
amount
LTIP
unit
distribution
amount
Taxable
Ordinary
Income
Unrecap.
Sec. 1250
Gain
0.1042
$
0.0058
0.1042
0.1042
0.3126
0.1042
0.1042
0.1042
0.3126
0.1042
0.1042
0.1042
0.3126
0.1042
0.1042
0.1042
0.3126
1.2504
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
0.0058
0.0058
0.0174
0.0058
0.0058
0.0058
0.0174
0.0058
0.0058
0.0058
0.0174
0.0058
0.0058
0.0058
0.0174
0.0696
0.11
0.11
0.11
0.33
0.11
0.11
0.11
0.33
0.11
0.11
0.11
0.33
0.11
0.11
0.11
0.33
0.11
0.11
0.11
0.33
0.11
0.11
0.11
0.33
0.11
0.11
0.11
0.33
0.11
0.11
0.11
0.33
1.32
$
$
$
$
$
$
$
$
$
$
$
1.32
F-26
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
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
11/30/2016
12/30/2016
11/25/2016 $
12/30/2016
1/27/2017
$
$
Common
share
distribution
amount
LTIP
unit
distribution
amount
Taxable
Ordinary
Income
Return of
Capital
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
$
$
$
$
$
$
$
$
$
$
$
$
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
$
1.38
For the year ended December 31, 2017, approximately 94.7% of the distributions paid to stockholders were considered
ordinary income and approximately 5.3% were considered section 1250 unrecaptured gain. 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 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-27
10.
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, 2017, 45,375,266 common shares were outstanding.
Common share offerings of the Company consisted of the following from inception through December 31, 2017:
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
Follow-on common share offering
Over-allotment option
Follow-on common share offering
Over-allotment option
Follow-on common share offering
Over-allotment option
Follow-on common share offering
Over-allotment option
Follow-on common share offering
Over-allotment option
Follow-on common share offering
4/21/2010
4/21/2010
2/8/2011
2/8/2011
1/14/2013
1/31/2013
6/18/2013
6/28/2013
9/30/2013
10/11/2013
9/24/2014
9/24/2014
1/27/2015
1/27/2015
11/9/2017
8,625,000 $
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
5,000,000
41,956,000
20.00 $
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
21.90 $
$
172,500 $
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
109,500 $
839,850 $
158,700
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
108,700
802,400
(1) Excludes any shares issued pursuant to the Company's ATM Plans or DRSPPs (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 and reinvestment and stock purchase plan (the "Prior
DRSPP"). We filed a new $50 million registration statement for the dividend reinvestment and stock purchase plan (the "New
DRSPP" and together with the Prior DRSPP, the "DRSPPs") on December 28, 2017 to replace the prior expiring program.
Under the DRSPPs, 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 prospectuses for the DRSPPs. As of December 31, 2017 and December 31,
2016, respectively, we had issued 741,730 and 29,333 shares under the DRSPPs at a weighted average price of $21.00 and
$21.22 per share, respectively. As of December 31, 2017, there were common shares having a maximum aggregate sales price
of approximately $50.0 million available for issuance under the New DRSPP.
In January 2014, the Company established the Prior 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 Prior ATM Plan. We filed a $100 million registration statement for a new ATM program (the "ATM Plan" and
together with the Prior ATM Plan, the "ATM Plans") on December 28, 2017 to replace the prior program. At the same time, the
Company entered into sales agreements with Cantor, Barclays, Robert W. Baird & Co. Incorporated ("Baird"), BTIG, LLC
("BTIG"), Citigroup Global Markets Inc. ("Citigroup"), Stifel, Nicolaus & Company, Incorporated ("Stifel") and Wells Fargo
F-28
Securities, LLC ("Wells Fargo") as sales agents. As of December 31, 2017 and December 31, 2016, respectively, we had issued
2,147,695 and 880,820 shares under the ATM Plans at a weighted average price of $21.87 and $23.54 per share, respectively, in
addition to the offerings above. As of December 31, 2017, there were common shares having a maximum aggregate sales price
of approximately $100.0 million available for issuance under the ATM Plan.
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, 2017 and 2016.
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, 2017 and 2016, there were
no Operating Partnership common units held by unaffiliated third parties.
At December 31, 2017 and 2016, 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 (the "Code"), and
26,250 LTIP units awarded in 2010 and held by 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. 100% of these LTIP units have
vested as of December 31, 2017 . As of June 4, 2014, the Company determined that a revaluation event occurred, as defined in
the Code, and 231,525 LTIP units awarded in 2010 and held by 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. 100% of the
units have reached parity as of December 31, 2017. Accordingly, these LTIP units awarded in 2010 are allocated their pro-rata
share of the Company's net income.
At December 31, 2017 and 2016, an aggregate of 356,933 and 222,585 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. As of June 1 2017, the Company
determined that a revaluation event occurred, as defined in the Code, and 118,791 and 128,859 LITP units awarded in 2016 and
2017, respectively, and held by six officers of the Company had achieved full parity with the common units of the Operating
Partnership with respect to liquidating distributions and all other purposes. As of December 31, 2017, 33% and 0% of these
units awarded in 2016 and 2017, respectively, have vested. Accordingly, these LTIP units awarded in 2016 and 2017 are
allocated their pro-rata share of the Company's net income.
At December 31, 2017 and 2016, an aggregate of 162,540 and 72,966 2016 Time-Based LTIP Unit Awards,
respectively, a special class of operating partnership units, were held by executive officers. The 2017 Time-Based LTIP Unit
Awards will vest ratably on each of March 1, 2018, March 1, 2019 and March 1, 2020. 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-29
11.
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
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. 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
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,
2017
2016
2015
$
$
29,478
(235)
29,243
$
$
31,483
(189)
31,294
$
$
32,966
(151)
32,815
39,859,143
38,299,067
37,917,871
253,123
183,808
404,414
40,112,266
38,482,875
38,322,285
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
$
$
0.73
$
0.82
$
0.87
0.73
$
0.81
$
0.86
12.
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 plan provides for the grant of options to purchase common shares, share
awards, share appreciation rights, performance units, and other equity-based awards. The plan was amended and restated as of
May 17, 2013 to increase the maximum number of shares available under the 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
and outperformance based units, for which dividends on unvested performance-based shares and units are accrued and not paid
until those shares or units vest. 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, 2017, there were 1,871,942
common shares available for issuance under the Equity Incentive Plan.
F-30
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, 2017 are:
Award Type
2014 Time-based Awards
2014 Performance-based Awards
2015 Time-based Awards
2015 Performance-based Awards
2015 Time-based Awards
2017 Restricted Board Awards
Award Date
Total Shares
Granted
1/31/2014
1/31/2014
1/30/2015
1/30/2015
6/1/2015
1/11/2017
48,213
38,805
40,161
36,144
8,949
5,000
Vested as of
December 31, 2017
48,213
12,935
26,774
—
5,966
—
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 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 2014 performance-
based shares did not meet the vesting criteria for 2015 or 2016 causing the last two tranches of the 2014 performance grants not
to be eligible for future vesting. Neither of the first two tranches of the 2015 performance grants vested.
The grant date fair values of the performance-based share 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 unvested
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.
A summary of the Company’s restricted share awards for the years ended December 31, 2017, 2016 and 2015 is as
follows:
December 31, 2017
December 31, 2016
December 31, 2015
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
Forfeited
Unvested at end of the period
110,825
5,000
(32,441)
(25,870)
57,514
$
$
22.05
20.20
25.77
13.17
23.78
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
F-31
As of December 31, 2017 and 2016, there were $0.1 million and $0.9 million, respectively, of unrecognized
compensation costs related to restricted share awards. As of December 31, 2017, these costs were expected to be recognized
over a weighted–average period of approximately 1.1 years. For the years ended December 31, 2017, 2016 and 2015, the
Company recognized approximately $0.8 million, $1.3 million and $1.6 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. 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, 2017, 2016 and
2015 is as follows:
December 31, 2017
December 31, 2016
December 31, 2015
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 period
295,551
223,922
(37,417)
482,056
$
$
14.36
19.20
14.73
16.58
183,300
112,251
—
295,551
$
$
14.13
14.73
—
14.36
51,555
183,300
(51,555)
183,300
$
$
15.18
14.13
(15.18)
14.13
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 vested ratably over a five year period beginning on the date of grant. All of these
LTIP units have vested.
F-32
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.
On March 1, 2017, the Company's Operating Partnership, upon recommendation of the Compensation Committee,
granted 89,574 time-based awards (the "2017 Time-Based LTIP Unit Awards"). The grants were made pursuant to the award
agreements that provided for time-based vesting.
The 2017 Time-Based LTIP Unit Awards will vest ratably on each March 1, 2018, March 1, 2019 and March 1, 2020
(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 in control of the Company). Prior to vesting, a holder is entitled to receive distributions on the LTIP Units
that comprise the 2017 Time-Based LTIP Unit Awards. Compensation expense is based on an estimated value of $18.53 per
2017 Time-Based LTIP Unit Award.
F-33
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.
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. These Performance-Based LTIP Unit Awards vested on January 27, 2017.
(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.
On March 1, 2017, the Company's Operating Partnership, upon the recommendation of the Compensation Committee,
also granted 134,348 performance-based awards (the "2017 Performance-Based LTIP Unit Awards"). The grants were made
pursuant to award agreements that provide for performance-based vesting. The 2017 Performance-Based LTIP Unit Awards are
comprised of 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 (ii) the recipient remains employed by the
Company through the 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 $19.65 per 2017 Performance-Based LTIP Unit Award, 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 2017 Performance-Based LTIP Unit Awards may be earned based on the Company's relative TSR performance for
the three-year period beginning on March 1, 2017 and ending on February 28, 2020. The 2017 Performance-Based LTIP Unit
Awards, if earned, will be paid out between 50% and 150% of target value as follows:
F-34
Threshold
Target
Maximum
Relative TSR Hurdles (Percentile)
Payout Percentage
25th
50th
75th
50%
100%
150%
Payouts at performance levels in between the hurdles will be calculated by straight-line interpolation. The TSR
hurdles are based on the Company's performance relative to the average TSR for the companies included in the SNL US Hotel
REIT Index. TSR will be calculated to include share price appreciation plus dividends assuming the reinvestment of dividends
as calculated by a third-party such as SNL Financial. The Company will estimate the aggregate compensation cost to be
recognized over the service period determined as of the grant date under ASC 718, excluding the effect of estimate forfeitures,
and will calculate the value at the grant date based on the probable outcome of the performance conditions.
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):
Grant Date
Volatility
Outperformance Plan
2016 Time-Based LTIP Unit Awards
2016 Performance-Based LTIP Unit Awards
2017 Time-Based LTIP Unit Awards
2017 Performance-Based LTIP Unit Awards
6/1/2015
1/28/16
1/28/16
3/1/17
3/1/17
26%
28%
30%
24%
25%
Dividend
Yield
Risk Free
Interest
Rate
Discount
4.5%
—%
5.8%
—%
5.8%
0.95%
0.79%
1.13%
0.92%
1.47%
—%
7.5%
—%
7.5%
—%
The Company recorded $2.5 million, $1.2 million and $0.7 million in compensation expense related to the LTIP units
for years ended December 31, 2017, 2016 and 2015, respectively. As of December 31, 2017 and 2016, there was $4.4 million
and $2.6 million, respectively, of total unrecognized compensation cost related to LTIP units. This cost is expected to be
recognized over approximately 1.9 years, which represents the weighted average remaining vesting period of the LTIP units.
As of June 1, 2017, the Company determined that a revaluation event occurred as defined in the Code, and 112,251 and
223,922 LTIP units awarded in 2016 and 2017, respectively, and held by six officers of the Company had achieved full parity
with the common units of the Operating Partnership with respect to liquidating distributions and all other purposes. As of
December 31, 2017, 33% and 0% of these units awarded in 2016 and 2017, respectively, have vested. Accordingly, these LTIP
units awarded in 2010, 2016 and 2017 were allocated their pro-rata share of the Company's net income. The cumulative
number of LTIPs that have achieved full parity are 593,948 of the total LTIPs granted of 777,248.
F-35
Board of Trustee Share Compensation
For 2017, 2016 and 2015, each independent trustee was compensated $0.1 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 2017, 2016 and 2015, the Company issued 23,980, 26,488 and 16,542 common shares, respectively, to its independent
trustees as compensation for services performed in 2016, 2015 and 2014, 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 16, 2018, the Company distributed 21,670 common shares to its independent trustees
for services performed in 2017.
13.
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. IHM is currently a defendant in a class
action lawsuit pending in the Santa Clara County Superior Court. The class action lawsuit was filed on October 21, 2016 under
the title Ruffy, et al, v. Island Hospitality Management, LLC, et al. Case No. 16-CV-301473. The class action relates to hotels
operated by IHM in the state of California and owned by affiliates of the Company and the NewINK JV, and/or certain third
parties. The complaint alleges various wage and hour law violations based on alleged misclassification of certain hotel
managerial staff and violation of certain California statutes regarding incorrect information contained on employee paystubs.
The plaintiffs seek injunctive relief, money damages, penalties, and interest. None of the potential classes has been certified and
we are defending our case vigorously. As of December 31, 2017, included in accounts payable and expenses is $0.2 million
which represents an estimate of the Company’s exposure to the litigation and is also its estimated maximum possible loss that
the Company may incur.
Hotel Ground Rent
The Courtyard Altoona hotel is subject to a ground lease with an expiration date of April 30, 2029 with an extension
option by the Company of up to 12 additional terms of five years each. Monthly payments are determined by the quarterly
average room occupancy of the hotel. Rent 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 2017 under these leases amounted
to approximately $26,000 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.
Office Lease
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.
F-36
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 office lease as
of December 31, 2017, for each of the next five calendar years and thereafter (in thousands):
2018
2019
2020
2021
2022
Thereafter
Total
Other Leases(1) Office Lease
Amount
$
$
1,217 $
1,220
1,267
1,273
1,276
68,178
74,431 $
772
792
812
832
853
3,310
7,371
(1) Other leases included ground, garage and air rights leases at our hotels.
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 the hotels previously managed by Concord 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 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.
F-37
As of December 31, 2017, 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
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
Hilton Garden Inn Portsmouth
Courtyard Summerville
Embassy Suites Springfield
Management
Company
Base
Management
Fee
Monthly
Accounting
Fee
Monthly
Revenue
Management Fee
Incentive
Management Fee
Cap
3.0% $
3.0%
1,500 $
1,200
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%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
1,200
1,200
1,200
1,200
1,200
1,200
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
1,500
1,500
1,500
1,000
1,000
1,000
1,000
1,000
1,000
1,000
1,000
—
—
876
876
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
1,000
1,000
1,000
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
IHM
IHM
IHM
IHM
F-38
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%
1.0%
1.0%
1.0%
1.0%
Management fees totaled approximately $9.9 million, $9.4 million and $8.7 million, respectively, for the years ended
December 31, 2017, 2016 and 2015. Incentive management fees paid to IHM for the years ended years ended December 31,
2017, 2016 and 2015 were $0.2 million, $0.3 million and $0.3 million, respectively. There have been no incentive management
fees accrued or paid to Concord.
F-39
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, 2017:
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
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
Hilton Garden Inn Portsmouth
Courtyard Summerville
Embassy Suites Springfield
F-40
Franchise/
Royalty Fee
Marketing/
Program Fee Expiration
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%
5.5%
6.0%
5.5%
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%
4.0%
2.5%
4.0%
2025
2025
2025
2025
2025
2025
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
2037
2037
2037
Franchise and marketing/program fees totaled approximately $23.2 million, $22.4 million and $21.2 million,
respectively, for the years ended December 31, 2017, 2016 and 2015.
14.
Related Party Transactions
Mr. Fisher owns 51% of IHM. As of December 31, 2017, the Company had hotel management agreements with IHM
to manage 40 of its wholly owned hotels. As of December 31, 2017, 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, 2017, 2016 and 2015 were $9.9
million, $9.2 million and $8.5 million, respectively. At December 31, 2017 and 2016, the amounts due to IHM were $1.2
million and $0.9 million, respectively. Incentive management fees paid to IHM by the Company for the years ended December
31, 2017, 2016 and 2015 were $0.2 million, $0.3 million and $0.3 million, respectively.
Cost reimbursements from unconsolidated real estate entities revenue represents reimbursements of costs incurred on
behalf of the NewINK and Inland JVs and an entity Castleblack Owner Holding, LLC. ("Castleblack") which is 97.5% owned
by affiliates of CLNS and 2.5% owned by Mr. Fisher. These costs relate primarily to corporate payroll costs at the 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 JVs 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, 2017, 2016 and 2015 were $6.8 million, $6.9 million and $4.7 million, respectively.
F-41
15.
Quarterly Operating Results (unaudited)
Quarter Ended - 2017
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)
$
69,222
$
77,909
$
81,404
$
57,195
12,027
4,613
0.12
0.12
67,000
10,909
5,034
0.13
0.13
61,044
20,360
14,393
0.36
0.36
70,321
60,579
9,742
5,438
0.12
0.12
Weighted average number of common shares outstanding:
Basic
Diluted
38,361,113
38,573,928
38,525,306
38,749,661
39,298,974
39,550,494
43,205,683
43,522,022
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
57,861
10,989
3,300
0.09
0.08
$
78,001
59,429
18,572
12,168
0.32
0.31
$
79,733
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
(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.
16.
Subsequent Events
In January 2018, the Company issued 460,738 shares under the New DRSPP at a weighted average price of $22.62 per
share, which generated $10.4 million of gross proceeds.
F-42
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[ THIS PAGE INTENTIONALLY LEFT BLANK ]
Corporate Information
MANAGEMENT
BOARD OF TRUSTEES
Jeffrey H. Fisher
Chairman of the Board,
Chief Executive Officer
and President
Dennis Craven
Executive Vice President
and Chief Operating Officer
Peter Willis
Executive Vice President
and Chief Investment Officer
Eric Kentoff
Senior Vice President,
General Counsel
and Secretary
Jeremy Wegner
Senior Vice President
and Chief Financial Officer
INDEPENDENT REGISTERED CPA
PricewaterhouseCoopers LLP
401 East Las Olas Boulevard
Fort Lauderdale, FL 33301
Miles Berger
Chairman
and Chief Executive Officer
Berger Management
Services LLC
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
SHAREHOLDER INFORMATION
Investor Relations
Chatham Lodging Trust
222 Lakeview Avenue
Suite 200
West Palm Beach, FL 33401
Tel: 561.802.4477
Fax: 561.835.4125
ANNUAL MEETING
The annual meeting will be held
on Thursday, May 17, 2018 at
9:00 a.m. in the Palms Meeting
Room. Address above.
TRANSFER AGENT
EQ Shareholder Services
PO Box 64945
St. Paul, MN 55164-0945
Locations
Seattle, WA: 5%
Minnesota: 2%
Denver, CO: 4%
Nashville, TN: 1%
Silicon Valley, CA: 22%
Los Angeles, CA: 7%
San Diego, CA: 10%
Dallas, TX: 3%
Houston, TX: 7%
San Antonio, TX: 2%
New Hampshire: 4%
Portland, ME: 2%
Massachusetts: 5%
Connecticut: 1%
New York: 5%
Pennsylvania: 4%
Washington, D.C.: 9%
Charleston, SC: 1%
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