Document
Table of Contents







UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________
FORM 10-Q 
___________________________________
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2018
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 1-14045 
___________________________________
LASALLE HOTEL PROPERTIES
(Exact name of registrant as specified in its charter) 
___________________________________
Maryland
 
36-4219376
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification No.)
 
 
 
7550 Wisconsin Avenue, 10th Floor
Bethesda, Maryland
 
20814
(Address of principal executive offices)
 
(Zip Code)
(301) 941-1500
(Registrant’s telephone number, including area code) 
___________________________________
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  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
  
Accelerated filer
¨
 
 
 
 
 
Non-accelerated filer
¨  (Do not check if a smaller reporting company)
  
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  x
Indicate the number of shares outstanding of each of the issuer’s classes of common and preferred shares as of the latest practicable date.
Class
 
Outstanding at May 10, 2018
Common Shares of Beneficial Interest ($0.01 par value)
 
110,382,519

6.375% Series I Cumulative Redeemable Preferred Shares ($0.01 par value)
 
4,400,000

6.3% Series J Cumulative Redeemable Preferred Shares ($0.01 par value)
 
6,000,000



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LASALLE HOTEL PROPERTIES
INDEX

PART I.
 
 
 
Item 1.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
PART II.
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 


Table of Contents







PART I.
Financial Information
 
Item 1.
Financial Statements
LASALLE HOTEL PROPERTIES
Consolidated Balance Sheets
(in thousands, except share and per share data)
 
March 31,
2018
 
December 31,
2017
 
(unaudited)
 
 
Assets:
 
 
 
Investment in hotel properties, net (Note 3)
$
3,297,028

 
$
3,265,615

Property under development
18,191

 
49,459

Cash and cash equivalents
228,985

 
400,667

Restricted cash reserves (Note 5)
13,871

 
14,262

Hotel receivables (net of allowance for doubtful accounts of $361 and $404, respectively)
30,875

 
35,916

Debt issuance costs for borrowings under credit facilities, net
3,001

 
3,274

Deferred tax assets
5,882

 
2,136

Prepaid expenses and other assets
58,756

 
43,612

Total assets
$
3,656,589

 
$
3,814,941

Liabilities:
 
 
 
Borrowings under credit facilities (Note 4)
$
0

 
$
0

Term loans, net of unamortized debt issuance costs (Note 4)
853,341

 
853,195

Bonds payable, net of unamortized debt issuance costs (Note 4)
0

 
42,494

Mortgage loan, net of unamortized debt issuance costs (Note 4)
224,671

 
224,432

Accounts payable and accrued expenses
144,043

 
134,216

Advance deposits
27,610

 
26,625

Accrued interest
2,497

 
2,383

Distributions payable
53,852

 
55,135

Total liabilities
1,306,014

 
1,338,480

Commitments and contingencies (Note 5)

 

Equity:
 
 
 
Shareholders’ Equity:
 
 
 
Preferred shares of beneficial interest, $0.01 par value (liquidation preference of $260,000), 40,000,000 shares authorized; 10,400,000 shares issued and outstanding (Note 6)
104

 
104

Common shares of beneficial interest, $0.01 par value, 200,000,000 shares authorized; 113,251,427 shares issued and 110,379,395 shares outstanding, and 113,251,427 shares issued and 113,209,392 shares outstanding, respectively (Note 6)
1,132

 
1,132

Treasury shares, at cost (Note 6)
(71,731
)
 
(1,181
)
Additional paid-in capital, net of offering costs of $82,865 and $82,842, respectively
2,765,336

 
2,767,924

Accumulated other comprehensive income (Note 4)
19,072

 
10,880

Distributions in excess of retained earnings
(366,590
)
 
(305,708
)
Total shareholders’ equity
2,347,323

 
2,473,151

Noncontrolling Interests:
 
 
 
Noncontrolling interests in consolidated entities
16

 
18

Noncontrolling interests of common units in Operating Partnership (Note 6)
3,236

 
3,292

Total noncontrolling interests
3,252

 
3,310

Total equity
2,350,575

 
2,476,461

Total liabilities and equity
$
3,656,589

 
$
3,814,941

The accompanying notes are an integral part of these consolidated financial statements.

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LASALLE HOTEL PROPERTIES
Consolidated Statements of Operations and Comprehensive Income
(in thousands, except share and per share data)
(unaudited)
 
For the three months ended
 
March 31,
 
2018
 
2017
Revenues:
 
 
 
Hotel operating revenues (Note 8):
 
 
 
Room
$
155,422

 
$
178,365

Food and beverage
43,632

 
52,304

Other operating department
20,107

 
20,367

Total hotel operating revenues
219,161

 
251,036

Other income
3,862

 
3,369

Total revenues
223,023

 
254,405

Expenses:
 
 
 
Hotel operating expenses:
 
 
 
Room
49,186

 
52,323

Food and beverage
34,816

 
39,148

Other direct
2,933

 
4,184

Other indirect (Note 9)
62,194

 
69,656

Total hotel operating expenses
149,129

 
165,311

Depreciation and amortization
45,315

 
47,263

Real estate taxes, personal property taxes and insurance
16,028

 
16,115

Ground rent (Note 5)
3,829

 
3,385

General and administrative
6,516

 
6,554

Costs related to unsolicited takeover offer
2,651

 
0

Other expenses
1,220

 
1,918

Total operating expenses
224,688

 
240,546

Operating (loss) income
(1,665
)
 
13,859

Interest income
834

 
142

Interest expense
(10,160
)
 
(9,827
)
Loss from extinguishment of debt (Note 4)
0

 
(1,706
)
(Loss) income before income tax benefit
(10,991
)
 
2,468

Income tax benefit (Note 10)
4,027

 
4,773

(Loss) income before gain on sale of properties
(6,964
)
 
7,241

Gain on sale of properties (Note 3)
0

 
74,358

Net (loss) income
(6,964
)
 
81,599

Noncontrolling interests of common units in Operating Partnership (Note 6)
2

 
(110
)
Net (loss) income attributable to the Company
(6,962
)
 
81,489

Distributions to preferred shareholders
(4,116
)
 
(5,405
)
Net (loss) income attributable to common shareholders
$
(11,078
)
 
$
76,084


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LASALLE HOTEL PROPERTIES
Consolidated Statements of Operations and Comprehensive Income - Continued
(in thousands, except share and per share data)
(unaudited)

 
For the three months ended
 
March 31,
 
2018
 
2017
Earnings per Common Share - Basic (Note 12):
 
 
 
Net (loss) income attributable to common shareholders excluding amounts attributable to unvested restricted shares
$
(0.10
)
 
$
0.67

Earnings per Common Share - Diluted (Note 12):
 
 
 
Net (loss) income attributable to common shareholders excluding amounts attributable to unvested restricted shares
$
(0.10
)
 
$
0.67

Weighted average number of common shares outstanding:
 
 
 
Basic
112,163,674

 
112,923,719

Diluted
112,163,674

 
113,306,209

 
 
 
 
Comprehensive Income:
 
 
 
Net (loss) income
$
(6,964
)
 
$
81,599

Other comprehensive income:
 
 
 
Unrealized gain on interest rate derivative instruments (Note 4)
8,209

 
1,124

Reclassification adjustment for amounts recognized in net (loss) income (Note 4)
(6
)
 
985

 
1,239

 
83,708

Noncontrolling interests of common units in Operating Partnership (Note 6)
(9
)
 
(112
)
Comprehensive income attributable to the Company
$
1,230

 
$
83,596

The accompanying notes are an integral part of these consolidated financial statements.

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LASALLE HOTEL PROPERTIES
Consolidated Statements of Equity
(in thousands, except per share/unit data)
(unaudited)
 
Preferred
Shares of Beneficial Interest
 
Common
Shares of
Beneficial
Interest
 
Treasury
Shares
 
Additional
Paid-In
Capital
 
Accumulated Other Comprehensive Income
 
Distributions
in Excess of
Retained
Earnings
 
Total
Shareholders’
Equity
 
Noncontrolling
Interests in
Consolidated
Entities
 
Noncontrolling Interests of Common Units in Operating Partnership
 
Total Noncontrolling Interests
 
Total Equity
Balance, December 31, 2016
$
132

 
$
1,131

 
$
(739
)
 
$
2,830,740

 
$
2,365

 
$
(275,564
)
 
$
2,558,065

 
$
17

 
$
3,277

 
$
3,294

 
$
2,561,359

Issuance of shares, net of offering costs
0

 
0

 
2,397

 
(1,157
)
 
0

 
0

 
1,240

 
0

 
0

 
0

 
1,240

Repurchase of common shares into treasury
0

 
0

 
(2,223
)
 
0

 
0

 
0

 
(2,223
)
 
0

 
0

 
0

 
(2,223
)
Deferred compensation, net
0

 
1

 
565

 
1,141

 
0

 
0

 
1,707

 
0

 
0

 
0

 
1,707

Distributions on earned shares from share awards with market conditions
0

 
0

 
0

 
0

 
0

 
(190
)
 
(190
)
 
0

 
0

 
0

 
(190
)
Distributions on common shares/units ($0.45 per share/unit)
0

 
0

 
0

 
0

 
0

 
(50,990
)
 
(50,990
)
 
0

 
(65
)
 
(65
)
 
(51,055
)
Distributions on preferred shares
0

 
0

 
0

 
0

 
0

 
(5,405
)
 
(5,405
)
 
0

 
0

 
0

 
(5,405
)
Net income
0

 
0

 
0

 
0

 
0

 
81,489

 
81,489

 
0

 
110

 
110

 
81,599

Other comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized gain on interest rate derivative instruments
0

 
0

 
0

 
0

 
1,123

 
0

 
1,123

 
0

 
1

 
1

 
1,124

Reclassification adjustment for amounts recognized in net income
0

 
0

 
0

 
0

 
984

 
0

 
984

 
0

 
1

 
1

 
985

Balance, March 31, 2017
$
132

 
$
1,132

 
$
0

 
$
2,830,724

 
$
4,472

 
$
(250,660
)
 
$
2,585,800

 
$
17

 
$
3,324

 
$
3,341

 
$
2,589,141

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2017
$
104

 
$
1,132

 
$
(1,181
)
 
$
2,767,924

 
$
10,880

 
$
(305,708
)
 
$
2,473,151

 
$
18

 
$
3,292

 
$
3,310

 
$
2,476,461

Issuance of shares, net of offering costs
0

 
0

 
999

 
(465
)
 
0

 
0

 
534

 
0

 
0

 
0

 
534

Repurchase of common shares into treasury
0

 
0

 
(75,370
)
 
0

 
0

 
0

 
(75,370
)
 
0

 
0

 
0

 
(75,370
)
Deferred compensation, net
0

 
0

 
3,821

 
(2,123
)
 
0

 
0

 
1,698

 
0

 
0

 
0

 
1,698

Distributions on earned shares from share awards with market conditions
0

 
0

 
0

 
0

 
0

 
(87
)
 
(87
)
 
0

 
0

 
0

 
(87
)
Distributions on common shares/units ($0.45 per share/unit)
0

 
0

 
0

 
0

 
0

 
(49,717
)
 
(49,717
)
 
0

 
(65
)
 
(65
)
 
(49,782
)
Distributions on preferred shares
0

 
0

 
0

 
0

 
0

 
(4,116
)
 
(4,116
)
 
(2
)
 
0

 
(2
)
 
(4,118
)
Net loss
0

 
0

 
0

 
0

 
0

 
(6,962
)
 
(6,962
)
 
0

 
(2
)
 
(2
)
 
(6,964
)
Other comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized gain on interest rate derivative instruments
0

 
0

 
0

 
0

 
8,198

 
0

 
8,198

 
0

 
11

 
11

 
8,209

Reclassification adjustment for amounts recognized in net loss
0

 
0

 
0

 
0

 
(6
)
 
0

 
(6
)
 
0

 
0

 
0

 
(6
)
Balance, March 31, 2018
$
104

 
$
1,132


$
(71,731
)

$
2,765,336


$
19,072


$
(366,590
)

$
2,347,323


$
16


$
3,236


$
3,252


$
2,350,575

The accompanying notes are an integral part of these consolidated financial statements.

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LASALLE HOTEL PROPERTIES
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
 
For the three months ended
 
March 31,
 
2018
 
2017
 
 
 
As Adjusted
(Note 2)
 
 
 
 
Cash flows from operating activities:
 
 
 
Net (loss) income
$
(6,964
)
 
$
81,599

Adjustments to reconcile net (loss) income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
45,315

 
47,263

Amortization of debt issuance costs
672

 
765

Loss from extinguishment of debt
0

 
1,706

Gain on sale of properties
0

 
(74,358
)
Amortization of deferred compensation
1,698

 
1,707

Deferred income tax benefit
(3,746
)
 
(5,090
)
Allowance for doubtful accounts
(43
)
 
17

Other
156

 
361

Business interruption insurance proceeds
135

 
45

Changes in assets and liabilities:
 
 
 
Assets held for sale
0

 
(2,765
)
Hotel receivables
5,084

 
(880
)
Prepaid expenses and other assets
(7,526
)
 
(7,127
)
Accounts payable and accrued expenses
3,680

 
2,288

Advance deposits
985

 
2,649

Accrued interest
114

 
(80
)
Net cash provided by operating activities
39,560

 
48,100

Cash flows from investing activities:
 
 
 
Additions to properties
(38,448
)
 
(12,674
)
Improvements to properties
(403
)
 
0

Purchase of office furniture and equipment
(44
)
 
0

Proceeds from sale of properties
0

 
251,960

Insurance proceeds received for damage of property
365

 
238

Net cash (used in) provided by investing activities
(38,530
)
 
239,524

Cash flows from financing activities:
 
 
 
Repayment of bonds payable
(42,500
)
 
0

Payment of debt issuance costs
(8
)
 
(4,510
)
Purchase of treasury shares
(75,370
)
 
(2,223
)
Distributions on earned shares from share awards with market conditions
(87
)
 
(190
)
Distributions on preferred shares
(4,118
)
 
(5,405
)
Distributions on common shares/units
(51,020
)
 
(50,955
)
Net cash used in financing activities
(173,103
)
 
(63,283
)
Net change in cash and cash equivalents and restricted cash reserves
(172,073
)
 
224,341

Cash and cash equivalents and restricted cash reserves, beginning of period
414,929

 
149,687

Cash and cash equivalents and restricted cash reserves, end of period
$
242,856

 
$
374,028

The accompanying notes are an integral part of these consolidated financial statements.

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LASALLE HOTEL PROPERTIES
Notes to Consolidated Financial Statements
(in thousands, except share/unit and per share/unit data)
(unaudited)
1.
Organization
LaSalle Hotel Properties (the “Company”), a Maryland real estate investment trust organized on January 15, 1998, primarily buys, owns, redevelops and leases upscale and luxury full-service hotels located in convention, resort and major urban business markets. The Company is a self-administered and self-managed real estate investment trust (“REIT”) as defined in the Internal Revenue Code of 1986, as amended (the “Code”). As a REIT, the Company is generally not subject to federal corporate income tax on that portion of its net income that is currently distributed to its shareholders. The income of LaSalle Hotel Lessee, Inc. (together with its wholly owned subsidiaries, “LHL”), the Company’s wholly owned taxable REIT subsidiary, is subject to taxation at normal corporate rates.
As of March 31, 2018, the Company owned interests in 41 hotels with approximately 10,450 guest rooms located in seven states and the District of Columbia. Each hotel is leased to LHL (see Note 9) under a participating lease that provides for rental payments equal to the greater of (i) a base rent or (ii) a participating rent based on hotel revenues. The LHL leases expire between December 2018 and December 2020. Lease revenue from LHL is eliminated in consolidation. A third-party non-affiliated hotel operator manages each hotel pursuant to a hotel management agreement.
Substantially all of the Company’s assets are held directly or indirectly by, and all of its operations are conducted through, LaSalle Hotel Operating Partnership, L.P. (the “Operating Partnership”). The Company is the sole general partner of the Operating Partnership. The Company owned, through a combination of direct and indirect interests, 99.9% of the common units of the Operating Partnership at March 31, 2018. The remaining 0.1% is held by limited partners who held 145,223 common units of the Operating Partnership at March 31, 2018. See Note 6 for additional disclosures related to common units of the Operating Partnership.
2.
Summary of Significant Accounting Policies
The accompanying unaudited interim 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”) applicable to interim financial information. As such, certain information and disclosures normally included in financial statements prepared in accordance with GAAP have been omitted in accordance with the rules and regulations of the SEC. These unaudited consolidated financial statements, in the opinion of management, include all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the consolidated balance sheets, consolidated statements of operations and comprehensive income (loss), consolidated statements of equity and consolidated statements of cash flows for the periods presented. Operating results for the three months ended March 31, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018 due to seasonal and other factors. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.
Basis of Presentation
The consolidated financial statements include the accounts of the Company, the Operating Partnership, LHL and their subsidiaries in which they have a controlling interest, including joint ventures. All significant intercompany balances and transactions have been eliminated.
Use of Estimates
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities, the amounts of contingent assets and liabilities at the balance sheet date and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Substantially all of the Company’s revenues and expenses are generated by the operations of the individual hotels. The Company records revenues and expenses that are estimated by the hotel operators and reviewed by the Company to produce quarterly financial statements because the management contracts do not require the hotel operators to submit actual results within a time frame that permits the Company to use actual results when preparing its Quarterly Reports on Form 10-Q for filing by the deadline prescribed by the SEC. Generally, the Company records actual revenue and expense amounts for the first two months of each quarter and estimated revenue and expense amounts for the last month of each quarter. Each quarter, the Company reviews the estimated revenue and expense amounts provided by the hotel operators for reasonableness based upon historical results for

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prior periods and internal Company forecasts. The Company records any differences between recorded estimated amounts and actual amounts in the following quarter; historically, these differences have not been material. The Company believes the quarterly revenues and expenses, recorded on the Company’s consolidated statements of operations and comprehensive income (loss) based on an aggregate estimate, are fairly stated.
Investment in Hotel Properties
Upon acquisition, the Company determines the fair value of the acquired long-lived assets, assumed debt and intangible assets and liabilities. The Company’s investments in hotel properties are carried at cost and depreciated using the straight-line method over an estimated useful life of 30 to 40 years for buildings, 15 years for building improvements, the shorter of the useful life of the improvement or the term of the related tenant lease for tenant improvements, seven years for land improvements, 20 years for swimming pool assets and three to five years for furniture, fixtures and equipment. For investments subject to land and building leases that qualify as capital leases, assets are recorded at the estimated fair value of the right to use the leased property at acquisition and depreciated over the shorter of the useful lives of the assets or the term of the respective lease. Renovations and/or replacements that improve or extend the life of the asset are capitalized and depreciated over their estimated useful lives.
The Company is required to make subjective assessments as to the useful lives and classification of its properties for purposes of determining the amount of depreciation expense to reflect each year with respect to those properties. These assessments have a direct impact on the Company’s net income. Should the Company change the expected useful life or classification of particular assets, it would result in a change in depreciation expense and annual net income.
Revenue Recognition
The Company recognizes hotel operating revenues when obligations under the terms of the contracts with hotel guests have been satisfied. Room revenue is recognized when the Company’s hotels satisfy their performance obligations of providing a hotel room. The hotel reservation defines the terms of the agreement including an agreed-upon rate and length of stay. Food and beverage services, including restaurant, outlet, and banquet and catering, are also provided by the Company’s hotels and revenue is recognized at a point in time once food and beverage has been provided. Other operating department revenue, including parking fees, spa services, daily fees and other incidental fees, is recognized at a point in time when the goods and services are provided to the customer. Payment is due at the time that goods or services are rendered or billed. For room revenue, payment is typically due and paid in full at the end of the stay with some guests prepaying for their rooms prior to the stay. For package revenue, where ancillary guest services are included with the guests’ hotel reservations in a package arrangement, the Company allocates revenue based on the stand-alone selling price for each of the components of the package. The Company presents revenue net of taxes and excludes any amounts collected on behalf of third parties. For rental income from retail leases, revenue is recognized on a straight-line basis over the lives of the retail leases and is included in other income in the consolidated statements of operations and comprehensive income (loss). The recognition of revenue from retail leases will be subject to the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842), which will take effect January 1, 2019 for the Company. See “Recently Issued Accounting Pronouncements” below for further discussion of revenue recognition.
Share-Based Compensation
From time to time, the Company awards shares under the 2014 Equity Incentive Plan, as amended (“2014 Plan”), which has approximately six years remaining, as compensation to executives, employees and members of the Board of Trustees (see Note 7). The shares issued to executives and employees generally vest over three years. The shares issued to members of the Board of Trustees vest immediately upon issuance. The Company recognizes compensation expense for nonvested shares with service conditions or service and market conditions on a straight-line basis over the vesting period based upon the fair value of the shares on the date of issuance, adjusted for forfeitures. Compensation expense for nonvested shares with service and performance conditions is recognized based on the fair value of the estimated number of shares expected to vest, as revised throughout the vesting period, adjusted for forfeitures. The Company estimates forfeiture amounts for the first three quarters of the year and adjusts for actual forfeiture amounts at year end. The 2014 Plan replaced the 2009 Equity Incentive Plan (“2009 Plan”) in May 2014.
Noncontrolling Interests
The Company’s consolidated financial statements include entities in which the Company has a controlling financial interest. Noncontrolling interest is the portion of equity (net assets) in a subsidiary not attributable, directly or indirectly, to a parent. Such noncontrolling interests are reported on the consolidated balance sheets within equity, separately from the Company’s equity. On the consolidated statements of operations and comprehensive income (loss), revenues, expenses and net income or loss from less-than-wholly-owned subsidiaries are reported at the consolidated amounts, including both the amounts attributable to the Company

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and noncontrolling interests. Income or loss is allocated to noncontrolling interests based on their weighted average ownership percentage for the applicable period. Consolidated statements of equity include beginning balances, activity for the period and ending balances for shareholders’ equity, noncontrolling interests and total equity.
However, the Company’s noncontrolling interests that are redeemable for cash or other assets at the option of the holder, not solely within the control of the issuer, must be classified outside of permanent equity. The Company makes this determination based on terms in applicable agreements, specifically in relation to redemption provisions. Additionally, with respect to noncontrolling interests for which the Company has a choice to settle the contract by delivery of its own shares, the Company evaluates whether the Company controls the actions or events necessary to issue the maximum number of shares that could be required to be delivered under share settlement of the contract.
As of March 31, 2018, the consolidated results of the Company include the following ownership interests held by owners other than the Company: (i) the common units in the Operating Partnership held by third parties, (ii) the outside preferred ownership interests in a subsidiary and (iii) the outside ownership interest in a joint venture.
Variable Interest Entities
The Operating Partnership is a variable interest entity. The Company’s only significant asset is its investment in the Operating Partnership, and consequently, substantially all of the Company’s assets and liabilities represent those assets and liabilities of the Operating Partnership. All of the Company’s debt is an obligation of the Operating Partnership.
Recently Issued Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU No. 2014-09 replaced most existing revenue recognition guidance in GAAP. Given the short-term, day-to-day nature of the Company’s hotel operating revenues, the pattern of revenue recognition did not change significantly, and therefore, the adoption of this standard did not have a material impact on the Company’s consolidated financial statements. Under ASU No. 2014-09, there was a recharacterization of certain revenue streams affecting both gross and net revenue reporting due to changes in principal versus agency guidance, which presentation is deemed immaterial for the Company and did not affect net income. The Company adopted ASU No. 2014-09 on its effective date of January 1, 2018 under the cumulative effect transition method. No adjustment was recorded to the Company’s opening balance of retained earnings on January 1, 2018 as there was no impact to net income for the Company.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires lessees to record operating and financing leases as assets and liabilities on the balance sheet and lessors to expense costs that are not initial direct leasing costs. The standard requires either a modified retrospective or proposed cumulative effect approach. This standard will be effective for the first annual reporting period beginning after December 15, 2018. The Company anticipates adopting the standard on January 1, 2019 under the proposed cumulative effect approach. In evaluating the effect that ASU No. 2016-02 will have on its consolidated financial statements and related disclosures, the Company believes the impact will be minimal to its consolidated statements of operations and comprehensive income. The Company will recognize a lease liability and right of use asset on its consolidated balance sheets due to the change in accounting treatment of the Companys operating ground leases and corporate office lease. The Company is analyzing its current lease obligations and, based on current assumptions of discount rates and lease terms, expects to record a right of use asset and a related liability between $200,000 and $240,000 on its consolidated balance sheets, which may change significantly by the date of adoption based on changes to the discount rate, lease terms and other variables.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. This standard is effective for the first annual reporting period beginning after December 15, 2017. The Company adopted this standard on January 1, 2018. As a result, the classification of certain insurance proceeds changed from investing activities to operating activities on the Companys consolidated statements of cash flows.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which requires that amounts generally described as restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This standard is effective for the first annual period beginning after December 15, 2017, including interim periods within those periods. The Company adopted this standard on January 1, 2018. As a result, restricted cash reserves are included with cash and cash equivalents on the Company’s consolidated statements of cash flows. The adoption did not change the presentation of the Company’s consolidated balance sheets.

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In February 2017, the FASB issued ASU No. 2017-05, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets, which clarifies the scope of asset derecognition and adds further guidance for recognizing gains and losses from the transfer of nonfinancial assets in contracts with non-customers. ASU No. 2017-05 will impact the recognition of gains and losses from hotel sales. The Company does not sell hotel properties to customers as defined by the FASB, but has historically disposed of hotel properties for cash and with no contingencies and no future involvement in the hotel operations. This standard is effective for the first annual period beginning after December 15, 2017, including interim periods within those periods. The Company adopted this standard on January 1, 2018.
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which improves the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements and simplifies the application of hedge accounting. This standard will be effective for the first annual period beginning after December 15, 2018, including interim periods within those periods. Early adoption is permitted. The Company adopted this standard on January 1, 2018 and aside from minor presentation changes in its disclosure on derivative and hedging activities, it does not have a material effect on the Company’s consolidated financial statements.
Reclassification
Certain amounts in the 2017 financial statements have been reclassified to conform with the 2018 presentation.
3.
Investment in Hotel Properties
Investment in hotel properties as of March 31, 2018 and December 31, 2017 consists of the following:
 
March 31, 2018
 
December 31, 2017
Land
$
624,847

 
$
624,843

Buildings and improvements
3,295,076

 
3,271,473

Furniture, fixtures and equipment
815,097

 
762,150

Investment in hotel properties, gross
4,735,020

 
4,658,466

Accumulated depreciation
(1,437,992
)
 
(1,392,851
)
Investment in hotel properties, net
$
3,297,028

 
$
3,265,615

As of March 31, 2018 and December 31, 2017, buildings and improvements included capital lease assets of $147,322 and accumulated depreciation included amounts related to capital lease assets of $28,040 and $26,973, respectively. Depreciation of the capital lease assets is included in depreciation and amortization expense in the accompanying consolidated statements of operations and comprehensive income for all periods presented.
Depreciation expense was $45,154 and $47,131 for the three months ended March 31, 2018 and 2017, respectively.
Dispositions
During the three months ended March 31, 2017, the Company sold Hotel Deca, Lansdowne Resort and Alexis Hotel. These dispositions do not represent a strategic shift in the Company’s business plan or primary markets, and therefore, do not qualify as discontinued operations. The sale of each property was recorded on the full accrual method.
On January 19, 2017, the Company sold Hotel Deca for $55,000. The Company recognized a gain of $30,607 related to the sale of this property, which is included in the accompanying consolidated statements of operations and comprehensive income for the three months ended March 31, 2017.
On March 22, 2017, the Company sold Lansdowne Resort for $133,000. The Company recognized a gain of $10,401 related to the sale of this property, which is included in the accompanying consolidated statements of operations and comprehensive income for the three months ended March 31, 2017.
On March 31, 2017, the Company sold Alexis Hotel for $71,625. The Company recognized a gain of $33,350 related to the sale of this property, which is included in the accompanying consolidated statements of operations and comprehensive income for the three months ended March 31, 2017.

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4.
Long-Term Debt
Debt Summary
Debt as of March 31, 2018 and December 31, 2017 consisted of the following:
 
 
 
 
 
 
Balance Outstanding as of
Debt                                                                                  
 
Interest
Rate
 
Maturity
Date
 
March 31,
2018
 
December 31,
2017
Credit facilities
 
 
 
 
 
 
 
 
Senior unsecured credit facility
 
Floating (a)
 
January 2021 (a)
 
$
0

 
$
0

LHL unsecured credit facility
 
Floating (b)
 
January 2021 (b)
 
0

 
0

Total borrowings under credit facilities
 
 
 
 
 
0

 
0

Term loans
 
 
 
 
 
 
 
 
First Term Loan
 
Floating/Fixed (c)
 
January 2022
 
300,000

 
300,000

Second Term Loan
 
Floating/Fixed (c)
 
January 2021
 
555,000

 
555,000

Debt issuance costs, net
 
 
 
 
 
(1,659
)
 
(1,805
)
Total term loans, net of unamortized debt issuance costs
 
 
 
853,341

 
853,195

Massport Bonds
 
 
 
 
 
 
 
 
Hyatt Regency Boston Harbor (taxable)
 
Floating (d)
 
- (d)
 
0

 
5,400

Hyatt Regency Boston Harbor (tax exempt)
 
Floating (d)
 
- (d)
 
0

 
37,100

Debt issuance costs, net
 
 
 
 
 
0

 
(6
)
Total bonds payable, net of unamortized debt issuance costs
 
 
 
0

 
42,494

Mortgage loan
 
 
 
 
 
 
 
 
Westin Copley Place
 
Floating (e)
 
August 2018 (e)
 
225,000

 
225,000

Debt issuance costs, net
 
 
 
 
 
(329
)
 
(568
)
Total mortgage loan, net of unamortized debt issuance costs
 
 
 
224,671

 
224,432

Total debt
 
 
 
 
 
$
1,078,012

 
$
1,120,121


(a) 
Borrowings bear interest at floating rates equal to, at the Company’s option, either (i) LIBOR plus an applicable margin, or (ii) an Adjusted Base Rate (as defined in the credit agreement) plus an applicable margin. There were no borrowings outstanding at March 31, 2018 and December 31, 2017. The Company has the option, pursuant to certain terms and conditions, to extend the maturity date for two six-month extensions.
(b) 
Borrowings bear interest at floating rates equal to, at LHL’s option, either (i) LIBOR plus an applicable margin, or (ii) an Adjusted Base Rate (as defined in the credit agreement) plus an applicable margin. There were no borrowings outstanding at March 31, 2018 and December 31, 2017. LHL has the option, pursuant to certain terms and conditions, to extend the maturity date for two six-month extensions.
(c) 
Term loans bear interest at floating rates equal to LIBOR plus an applicable margin. The Company entered into interest rate swaps to effectively fix the interest rates for the First Term Loan (as defined below) and the Second Term Loan (as defined below). At March 31, 2018 and December 31, 2017, the Company had interest rate swaps on the full amounts outstanding. See “Derivative and Hedging Activities” below. At March 31, 2018 and December 31, 2017, the fixed all-in interest rates for the First Term Loan and Second Term Loan were 3.23% and 2.95%, respectively, at the Company’s current leverage ratio (as defined in the swap agreements).
(d) 
The Company repaid the Massport Bonds on their maturity date, March 1, 2018, with available cash. The bonds bore interest based on weekly floating rates. The interest rates as of December 31, 2017 were 1.70% and 1.78% for the $5,400 and $37,100 bonds, respectively.
(e) 
The mortgage loan matures on August 14, 2018 with three options to extend the maturity date to January 5, 2021, pursuant to certain terms and conditions. The Company anticipates exercising all available options. The interest-only mortgage loan bears interest at a variable rate ranging from LIBOR plus 1.75% to LIBOR plus 2.00%, depending on Westin Copley Place’s net cash flow (as defined in the loan agreement). The interest rate as of March 31, 2018 was LIBOR plus 1.75%, which equaled 3.53%. The interest rate as of December 31, 2017 was LIBOR plus 1.75%, which equaled 3.23%. The mortgage loan allows for prepayments without penalty, subject to certain terms and conditions.

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Future scheduled debt principal payments as of March 31, 2018 (refer to previous table for extension options) are as follows:
2018
$
225,000

2019
0

2020
0

2021
555,000

2022
300,000

Total debt
$
1,080,000

A summary of the Company’s interest expense and weighted average interest rates for unswapped variable rate debt for the three months ended March 31, 2018 and 2017 is as follows:
 
For the three months ended
 
March 31,
 
2018
 
2017
Interest Expense:
 
 
 
Interest incurred
$
9,668

 
$
9,140

Amortization of debt issuance costs
672

 
765

Capitalized interest
(180
)
 
(78
)
Interest expense
$
10,160

 
$
9,827

 
 
 
 
Weighted Average Interest Rates for Unswapped Variable Rate Debt:
 
 
 
Senior unsecured credit facility
N/A

 
N/A

LHL unsecured credit facility
N/A

 
N/A

Massport Bonds (1)
1.25
%
 
0.70
%
Mortgage loan (Westin Copley Place)
3.35
%
 
2.54
%
(1) The Massport Bonds were repaid on March 1, 2018.
Credit Facilities
The Company has a $750,000 senior unsecured credit facility with a syndicate of banks. The credit facility matures on January 8, 2021, subject to two six-month extensions that the Company may exercise at its option, pursuant to certain terms and conditions, including payment of an extension fee. The credit facility, with a current commitment of $750,000, includes an accordion feature which, subject to certain conditions, entitles the Company to request additional lender commitments, allowing for total commitments of up to $1,250,000. Borrowings under the credit facility bear interest at floating rates equal to, at the Company’s option, either (i) LIBOR plus an applicable margin, or (ii) an Adjusted Base Rate (as defined in the credit agreement) plus an applicable margin. Additionally, the Company is required to pay a variable unused commitment fee of 0.20% or 0.30% of the unused portion of the credit facility, depending on the average daily unused portion of the credit facility.
LHL has a $25,000 unsecured revolving credit facility to be used for working capital and general lessee corporate purposes. The LHL credit facility matures on January 10, 2021, subject to two six-month extensions that LHL may exercise at its option, pursuant to certain terms and conditions, including payment of an extension fee. Borrowings under the LHL credit facility bear interest at floating rates equal to, at LHL’s option, either (i) LIBOR plus an applicable margin, or (ii) an Adjusted Base Rate (as defined in the credit agreement) plus an applicable margin. Additionally, LHL is required to pay a variable unused commitment fee of 0.20% or 0.30% of the unused portion of the credit facility, depending on the average daily unused portion of the LHL unsecured credit facility.
The Company’s senior unsecured credit facility and LHL’s unsecured credit facility contain certain financial and other covenants, including covenants relating to net worth requirements, debt ratios and fixed charge coverage ratios. In addition, pursuant to the terms of the agreements, if a default or event of default occurs or is continuing, the Company may be precluded from paying certain distributions or other payments to its shareholders.
The Company and certain of its subsidiaries guarantee the obligations under the Company’s senior unsecured credit facility. While the senior unsecured credit facility did not initially include any pledges of equity interests in the Company’s subsidiaries, such pledges and additional subsidiary guarantees would be required in the event that the Company’s leverage ratio later exceeds

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6.50:1.00 for two consecutive fiscal quarters. In the event that such pledge and guarantee requirement is triggered, the pledges and additional guarantees would ratably benefit the Company’s senior unsecured credit facility, the First Term Loan and the Second Term Loan. If at any time the Company’s leverage ratio falls below 6.50:1.00 for two consecutive fiscal quarters, such pledges and additional guarantees may be released.
Term Loans
The Company has a $300,000 unsecured term loan (the “First Term Loan”) that matures on January 10, 2022. The First Term Loan includes an accordion feature, which subject to certain conditions, entitles the Company to request additional lender commitments, allowing for total commitments of up to $500,000. The First Term Loan bears interest at variable rates.
The Company has a $555,000 unsecured term loan (the “Second Term Loan”) that matures on January 29, 2021. The Second Term Loan includes an accordion feature, which subject to certain conditions, entitles the Company to request additional lender commitments, allowing for total commitments of up to $700,000. The Second Term Loan bears interest at variable rates.
The Company has entered into interest rate swap agreements to effectively fix the LIBOR rates for the term loans (see “Derivative and Hedging Activities” below).
The Company’s term loans contain certain financial and other covenants, including covenants relating to net worth requirements, debt ratios and fixed charge coverage ratios. In addition, pursuant to the terms of the agreements, if a default or event of default occurs or is continuing, the Company may be precluded from paying certain distributions or other payments to its shareholders.
The Company and certain of its subsidiaries guarantee the obligations under the Company’s term loans. While the term loans did not initially include any pledges of equity interests in the Company’s subsidiaries, such pledges and additional subsidiary guarantees would be required in the event that the Company’s leverage ratio later exceeds 6.50:1.00 for two consecutive fiscal quarters. In the event that such pledge and guarantee requirement is triggered, the pledges and additional guarantees would ratably benefit the Company’s senior unsecured credit facility, the First Term Loan and the Second Term Loan. If at any time the Company’s leverage ratio falls below 6.50:1.00 for two consecutive fiscal quarters, such pledges and additional guarantees may be released.
Derivative and Hedging Activities
The Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. Unrealized gains and losses of hedging instruments are reported in other comprehensive income (loss) (“OCI”). Amounts reported in accumulated other comprehensive income (loss) (“AOCI”) related to currently outstanding derivatives are recognized as an adjustment to income (loss) as interest payments are made on the Company’s variable rate debt. As of March 31, 2018, the Company has interest rate swap agreements with an aggregate notional amount of $300,000 to hedge the variable interest rate on the First Term Loan through January 10, 2022, resulting in a fixed all-in interest rate based on the Company’s current leverage ratio (as defined in the swap agreements), which interest rate was 3.23%. As of March 31, 2018, the Company has interest rate swaps with an aggregate notional amount of $555,000 to hedge the variable interest rate on the Second Term Loan and, as a result, the fixed all-in interest rate based on the Company’s current leverage ratio (as defined in the swap agreements) is 2.95% through May 16, 2019. From May 16, 2019 through the term of the Second Term Loan, the Company has interest rate swaps with an aggregate notional amount of $377,500 to hedge a portion of the variable interest rate debt on the Second Term Loan. The Company has designated its pay-fixed, receive-floating interest rate swap derivatives as cash flow hedges. The interest rate swaps were entered into with the intention of eliminating the variability of the terms loans, but can also limit the exposure to any amendments, supplements, replacements or refinancings of the Company’s debt.

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The following table presents the effect of derivative instruments on the Company’s accompanying consolidated statements of operations and comprehensive income, including the location and amount of unrealized gain on outstanding derivative instruments in cash flow hedging relationships, for the three months ended March 31, 2018 and 2017:
 
 
Amount of Gain Recognized in OCI on Derivative Instruments
 
Location of (Gain) Loss Reclassified from AOCI into Net (Loss) Income
 
Amount of (Gain) Loss Reclassified from AOCI into Net (Loss) Income
 
Total Amount of Interest Expense Line Item Presented in the Statement of Operations
 
 
For the three months ended
 
 
 
 
For the three months ended
 
For the three months ended
 
 
March 31,
 
 
 
 
March 31,
 
March 31,
 
 
2018
 
2017
 
 
 
 
2018
 
2017
 
2018
 
2017
Derivatives in cash flow hedging relationships:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
$
8,209

 
$
1,124

 
Interest expense
 
$
(6
)
 
$
985

 
$
10,160

 
$
9,827

As of March 31, 2018, there was $19,096 in cumulative unrealized gain of which $19,072 was included in AOCI and $24 was attributable to noncontrolling interests. As of December 31, 2017, there was $10,893 in cumulative unrealized gain of which $10,880 was included in AOCI and $13 was attributable to noncontrolling interests. The Company expects that approximately $1,314 will be reclassified from AOCI and noncontrolling interests and recognized as an increase to income in the next 12 months, calculated as estimated interest expense using the interest rates on the derivative instruments as of March 31, 2018.
Extinguishment of Debt
On January 10, 2017, the Company refinanced its senior unsecured credit facility and First Term Loan and LHL refinanced its unsecured revolving credit facility. The refinancing arrangements for the senior unsecured credit facility and First Term Loan were considered substantial modifications. The Company recognized a loss from extinguishment of debt of $1,706, which is included in the accompanying consolidated statements of operations and comprehensive income for the three months ended March 31, 2017. The loss from extinguishment of debt represents a portion of the unamortized debt issuance costs incurred for the senior unsecured credit facility when the original agreement was executed and the debt issuance costs incurred in connection with the refinancing of the First Term Loan.
Mortgage Loan
The Company’s mortgage loan is secured by the property. The mortgage is non-recourse to the Company except for fraud or misapplication of funds.
The Company’s mortgage loan contains debt service coverage ratio tests related to the mortgaged property. If the debt service coverage ratio for the property fails to exceed a threshold level specified in the mortgage, cash flows from that hotel may automatically be directed to the lender to (i) satisfy required payments, (ii) fund certain reserves required by the mortgage and (iii) fund additional cash reserves for future required payments, including final payment. Cash flows may be directed to the lender (“cash trap”) until such time as the property again complies with the specified debt service coverage ratio or the mortgage is paid off.
Financial Covenants
Failure of the Company to comply with financial and other covenants contained in its credit facilities, term loans and non-recourse secured mortgage could result from, among other things, changes in its results of operations, the incurrence of additional debt or changes in general economic conditions.
If the Company violates financial and other covenants contained in any of its credit facilities or term loans described above, the Company may attempt to negotiate waivers of the violations or amend the terms of the applicable credit facilities or term loans with the lenders thereunder; however, the Company can make no assurance that it would be successful in any such negotiations or that, if successful in obtaining waivers or amendments, such amendments or waivers would be on terms attractive to the Company. If a default under the credit facilities or term loans were to occur, the Company would possibly have to refinance the debt through additional debt financing, private or public offerings of debt securities, or additional equity financings. If the Company is unable to refinance its debt on acceptable terms, including at maturity of the credit facilities and term loans, it may be forced to dispose of hotel properties on disadvantageous terms, potentially resulting in losses that reduce cash flow from operating activities. If, at the time of any refinancing, prevailing interest rates or other factors result in higher interest rates upon refinancing, increases in interest expense would lower the Company’s cash flow, and, consequently, cash available for distribution to its shareholders.

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A cash trap associated with a mortgage loan may limit the overall liquidity for the Company as cash from the hotel securing such mortgage would not be available for the Company to use. If the Company is unable to meet mortgage payment obligations, including the payment obligation upon maturity of the mortgage borrowing, the mortgage securing the specific property could be foreclosed upon by, or the property could be otherwise transferred to, the mortgagee with a consequent loss of income and asset value to the Company.
As of March 31, 2018, the Company is in compliance with all debt covenants, current on all loan payments and not otherwise in default under the credit facilities, term loans and mortgage loan.
5.
Commitments and Contingencies
Ground, Land and Building, and Air Rights Leases
A summary of the Company’s hotels subject to non-cancelable operating leases as of March 31, 2018 is as follows:
Lease Properties
 
Lease Type
 
Lease Expiration Date
Southernmost Beach Resort Key West (Restaurant facility)
 
Ground lease
 
April 2019 (1)
Hyatt Regency Boston Harbor
 
Ground lease
 
April 2077
The Hilton San Diego Resort and Spa
 
Ground lease
 
December 2045
San Diego Paradise Point Resort and Spa
 
Ground lease
 
May 2050
Hotel Vitale
 
Ground lease
 
March 2056 (2)
Viceroy Santa Monica
 
Ground lease
 
September 2065
Westin Copley Place (3)
 
Air rights lease
 
December 2077
The Liberty Hotel
 
Ground lease
 
May 2080
Hotel Solamar
 
Ground lease
 
December 2102
(1) The Company can begin negotiating a renewal one year in advance of the lease expiration date.
(2) The Company has the option, subject to certain terms and conditions, to extend the ground lease for 14 years to 2070.
(3) No payments are required through maturity.
The ground leases at Viceroy Santa Monica, The Liberty Hotel and Hotel Vitale are subject to minimum annual rent increases, resulting in noncash straight-line rent expense of $454 and $465 for the three months ended March 31, 2018 and 2017, respectively, which is included in total ground rent expense. Total ground rent expense, which is included in the accompanying consolidated statements of operations and comprehensive income, for the three months ended March 31, 2018 and 2017 was $3,829 and $3,385, respectively. Certain rent payments are based on the hotel’s performance. Actual payments of rent may exceed the minimum required rent due to meeting specified thresholds.
A summary of the Company’s hotels subject to capital leases of land and building as of March 31, 2018 is as follows:
Lease Properties
 
Estimated Present Value of Remaining Rent Payments (1)
 
Lease Expiration Date
The Roger
 
$
4,892

 
December 2044
Harbor Court Hotel
 
$
18,603

 
August 2052
(1) At acquisition or as amended, the estimated present value of the remaining rent payments was recorded as capital lease obligations. These obligations, net of amortization, are included in accounts payable and accrued expenses in the accompanying consolidated balance sheets.

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Actual base and participating ground rent payments related to The Roger and Harbor Court Hotel were $99 and $235 for the three months ended March 31, 2018, respectively, and $99 and $288 for the three months ended March 31, 2017, respectively.
As of March 31, 2018, future minimum rent payments, including capital lease payments, (without reflecting future applicable Consumer Price Index increases) are as follows:
2018
$
8,518

2019
11,282

2020
11,586

2021
11,682

2022
11,747

Thereafter
513,389

 
$
568,204

Reserve Funds for Future Capital Expenditures
Certain of the Company’s agreements with its hotel managers, franchisors and lenders have provisions for the Company to provide funds, generally 4.0% of hotel revenues, sufficient to cover the cost of (i) certain non-routine repairs and maintenance to the hotels and (ii) replacements and renewals to the hotels’ capital assets. Certain of the agreements require that the Company reserve this cash in separate accounts. As of March 31, 2018, $12,141 was available in restricted cash reserves for future capital expenditures. The Company has sufficient cash on hand and availability on its credit facilities to cover capital expenditures under agreements that do not require that the Company separately reserve cash.
Restricted Cash Reserves
At March 31, 2018, the Company held $13,871 in restricted cash reserves. Included in such amounts are $12,141 of reserve funds for future capital expenditures and $1,730 held by insurance and management companies on the Company’s behalf to be refunded or applied to future liabilities.
Litigation
The nature of hotel operations exposes the Company and its hotels to the risk of claims and litigation in the ordinary course of business. The Company is not presently subject to any material litigation nor, to the Company’s knowledge, is any litigation threatened against the Company, other than routine actions for negligence or other claims and administrative proceedings arising in the ordinary course of business, some of which are expected to be covered by liability insurance and all of which collectively are not expected to have a material adverse effect on the liquidity, results of operations, business or financial condition of the Company.
6.
Equity
Common Shares of Beneficial Interest
On January 1, 2018, the Company issued 19,125 common shares and authorized an additional 5,832 deferred shares to the independent members of its Board of Trustees for their 2017 compensation. These common shares were issued under the 2014 Plan.
On March 2, 2018, the Company issued 16,410 common shares to executives related to the nonvested share awards with either market or performance conditions granted on March 19, 2015 (see Note 7 for additional details, including vesting information). These common shares were issued under the 2014 Plan.
On March 21, 2018, the Company issued 148,591 nonvested shares with service conditions to the Company’s executives and employees. The nonvested shares will vest in three annual installments starting January 1, 2019, subject to continued employment. These common shares were issued under the 2014 Plan.

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Common Dividends
The Company paid the following dividends on common shares/units during the three months ended March 31, 2018:
Dividend per
Share/Unit
 
 
For the Quarter Ended
 
Record Date
 
Date Paid
$
0.45

 
December 31, 2017
 
December 29, 2017
 
January 16, 2018
Treasury Shares
Treasury shares are accounted for under the cost method. During the three months ended March 31, 2018, the Company received 31,323 common shares related to employees surrendering shares to pay minimum withholding taxes on the vesting date.
The Company’s Board of Trustees has authorized an expanded share repurchase program (the “Repurchase Program”) to acquire up to $600,000 of the Company’s common shares, with repurchased shares recorded at cost in treasury. During the three months ended March 31, 2018, the Company repurchased 2,982,800 common shares under the Repurchase Program for a total of $74,515, including commissions of $60. As of March 31, 2018, the Company has availability under the Repurchase Program to acquire up to $495,351 of common shares. The timing, manner, price and actual number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements, market conditions, and other corporate liquidity requirements and priorities. The Repurchase Program may be suspended, modified or terminated at any time for any reason without prior notice. The Repurchase Program does not obligate the Company to acquire any specific number of shares, and all open market repurchases will be made in accordance with applicable rules and regulations setting forth certain restrictions on the method, timing, price and volume of open market share repurchases.
During the three months ended March 31, 2018, the Company re-issued 19,125 treasury shares related to earned 2017 compensation for the Board of Trustees, 16,410 treasury shares related to the earned share awards with either market or performance conditions and 148,591 treasury shares related to the grants of nonvested shares with service conditions.
At March 31, 2018, there were 2,872,032 common shares in treasury.
Preferred Shares
The following preferred shares of beneficial interest were outstanding as of March 31, 2018:
Security Type                                             
 
Number of
Shares
6.375% Series I Preferred Shares
 
4,400,000

6.3% Series J Preferred Shares
 
6,000,000

The 6.375% Series I Cumulative Redeemable Preferred Shares (the “Series I Preferred Shares”) and the 6.3% Series J Cumulative Redeemable Preferred Shares (the “Series J Preferred Shares”) (collectively, the “Preferred Shares”) rank senior to the common shares and on parity with each other with respect to payment of distributions. The Company will not pay any distributions, or set aside any funds for the payment of distributions, on its common shares unless it has also paid (or set aside for payment) the full cumulative distributions on the Preferred Shares for all past dividend periods. The outstanding Preferred Shares do not have any maturity date, and are not subject to mandatory redemption. The difference between the carrying value and the redemption amount of the Preferred Shares is the offering costs. In addition, the Company is not required to set aside funds to redeem the Preferred Shares.
As of March 4, 2018, the Company may optionally redeem the Series I Preferred Shares, in whole or from time to time in part, by payment of $25.00 per share, plus any accumulated, accrued and unpaid distributions to and including the redemption date. The Company may not optionally redeem the Series J Preferred Shares prior to May 25, 2021, except in limited circumstances relating to the Company’s continuing qualification as a REIT or as discussed below. After May 25, 2021, the Company may, at its option, redeem the Series J Preferred Shares, in whole or from time to time in part, by payment of $25.00 per share, plus any accumulated, accrued and unpaid distributions to, but not including, the redemption date. In addition, upon the occurrence of a change of control (as defined in the Company’s declaration of trust), the result of which the Company’s common shares and the common securities of the acquiring or surviving entity are not listed on the New York Stock Exchange, the NYSE American LLC or the NASDAQ Stock Market, or any successor exchanges, the Company may, at its option, redeem the Series J Preferred Shares in whole or in part within 120 days after the change of control occurred, by paying $25.00 per share, plus any accrued and unpaid distributions to, but not including, the redemption date. If the Company does not exercise its right to redeem the Preferred Shares upon such a change of control, the holders of Series I Preferred Shares and Series J Preferred Shares have the right to convert some or all of their shares into a number of the Company’s common shares based on a defined formula, subject to a cap of 8,835,200 common shares and 12,842,400 common shares, respectively.

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Preferred Dividends
The Company paid the following dividends on preferred shares during the three months ended March 31, 2018:
Security Type        
 
Dividend per Share (1)
 
For the Quarter Ended
 
Record Date
 
Date Paid
6.375% Series I
 
$
0.40

 
December 31, 2017
 
December 29, 2017
 
January 16, 2018
6.3% Series J
 
$
0.39

 
December 31, 2017
 
December 29, 2017
 
January 16, 2018
(1) Amounts are rounded to the nearest whole cent for presentation purposes.
Noncontrolling Interests of Common Units in Operating Partnership
As of March 31, 2018, the Operating Partnership had 145,223 common units of limited partnership interest outstanding, representing a 0.1% partnership interest, held by the limited partners. As of March 31, 2018, approximately $4,213 of cash or the equivalent value in common shares, at the Company’s option, would be paid to the limited partners of the Operating Partnership if the partnership were terminated. The approximate value of $4,213 is based on the Company’s closing common share price of $29.01 on March 31, 2018, which is assumed to be equal to the value provided to the limited partners upon liquidation of the Operating Partnership. Subject to certain limitations, the outstanding common units of limited partnership interest are redeemable for cash, or at the Company’s option, for a like number of common shares of the Company.
7.
Equity Incentive Plan
The 2014 Plan permits the Company to issue equity-based awards to executives, employees, non-employee members of the Board of Trustees and any other persons providing services to or for the Company and its subsidiaries. The 2014 Plan provides for a maximum of 2,900,000 common shares to be issued in the form of share options, share appreciation rights, restricted or unrestricted share awards, phantom shares, performance awards, incentive awards, other share-based awards, or any combination of the foregoing. In addition, the maximum number of common shares subject to awards of any combination that may be granted under the 2014 Plan during any fiscal year to any one individual is limited to 500,000 shares. The 2014 Plan terminates on February 17, 2024. The 2014 Plan authorized, among other things: (i) the grant of share options that qualify as incentive options under the Code, (ii) the grant of share options that do not so qualify, (iii) the grant of common shares in lieu of cash for trustees’ fees, (iv) grants of common shares in lieu of cash compensation and (v) the making of loans to acquire common shares in lieu of compensation (to the extent permitted by law and applicable provisions of the Sarbanes Oxley Act of 2002). The exercise price of share options is determined by the Compensation Committee of the Board of Trustees, but may not be less than 100% of the fair value of the common shares on the date of grant. Restricted share awards and options under the 2014 Plan vest over a period determined by the Compensation Committee of the Board of Trustees, generally a three year period. The duration of each option is also determined by the Compensation Committee, subject to applicable laws and regulations. At March 31, 2018, there were 2,325,873 common shares available for future grant under the 2014 Plan. The 2014 Plan replaced the 2009 Plan. The Company will no longer make any grants under the 2009 Plan (although awards previously made under the 2009 Plan that are outstanding will remain in effect in accordance with the terms of that plan and the applicable award agreements).
Nonvested Share Awards with Service Conditions
From time to time, the Company awards nonvested shares under the 2014 Plan to executives, employees and members of the Board of Trustees. The nonvested shares issued to executives and employees generally vest over three years based on continued employment. The shares issued to the members of the Board of Trustees vest immediately upon issuance. The Company determines the grant date fair value of the nonvested shares based upon the closing price of its common shares on the New York Stock Exchange on the date of grant and number of shares per the award agreements. Compensation costs are recognized on a straight-line basis over the requisite service period and are included in general and administrative expense in the accompanying consolidated statements of operations and comprehensive income.

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A summary of the Company’s nonvested share awards with service conditions as of March 31, 2018 is as follows:
 
Number of
Shares
 
Weighted -
Average Grant
Date Fair Value
Nonvested at January 1, 2018
170,414

 
$
28.95

Granted
148,591

 
25.46

Vested
(55,380
)
 
31.08

Forfeited
0

 
0.00

Nonvested at March 31, 2018
263,625

 
$
26.53

As of March 31, 2018 and December 31, 2017, there were $6,182 and $3,214, respectively, of total unrecognized compensation costs related to nonvested share awards with service conditions. As of March 31, 2018 and December 31, 2017, these costs were expected to be recognized over a weighted-average period of 1.6 years and 1.4 years, respectively. The total intrinsic value of shares vested (calculated as number of shares multiplied by vesting date share price) during the three months ended March 31, 2018 and 2017 was $1,555 and $2,681, respectively. Compensation costs (net of forfeitures) related to nonvested share awards with service conditions that have been included in general and administrative expense in the accompanying consolidated statements of operations and comprehensive income were $800 and $848 for the three months ended March 31, 2018 and 2017, respectively.
Nonvested Share Awards with Market or Performance Conditions
On March 19, 2015, the Company’s Board of Trustees granted a target of 49,225 nonvested share awards, exclusive of the 12,435 shares granted to the former Chief Financial Officer, with either market or performance conditions to executives (the “March 19, 2015 Awards”). On March 2, 2018, the executives earned 66.7% of the 24,612 target number of shares with a performance period through December 31, 2017, or 16,410 shares, and all of the earned shares vested immediately. The portion of the share awards representing the difference between 66.7% and 100% of the target number of shares, or 8,202 shares, was forfeited on March 2, 2018. The executives also received a cash payment of $87 on the earned shares equal to the value of all dividends paid on common shares from January 1, 2015 until the determination date, March 2, 2018. As of March 3, 2018, the executives are entitled to receive dividends as declared and paid on the earned shares and to vote the shares. The actual number of shares earned with respect to the remaining 24,613 of the 49,225 target number of shares with a performance period from July 1, 2015 through June 30, 2018 will be determined during the latter half of the third quarter 2018, in accordance with the terms of the award agreements. The actual number of shares awarded will range from 0% to 200% of the target amounts, depending on the performance analysis stipulated in the award agreements, and none of the shares are outstanding until issued in accordance with award agreements based on performance. After the actual number of shares are determined (or earned) at the end of the performance measurement period, all of the earned shares will be issued and outstanding on the date. The executives will receive cash payments on the earned shares equal to the value of all dividends paid on common shares from the grant date through the determination date. Such amounts will be paid to the awardees during the latter half of the third quarter 2018. Thereafter, the executives will be entitled to receive dividends as declared and paid on the earned shares and to vote the shares. With respect to 24,612 shares, amortization commenced on March 19, 2015, the beginning of the requisite service period, and, with respect to 24,613 shares, amortization commenced on July 1, 2015, the beginning of the requisite service period.
On March 21, 2018, the Company’s Board of Trustees granted a target of 152,024 nonvested share awards with either market or performance conditions to executives (the “March 21, 2018 Awards”). The actual number of shares awarded with respect to 76,013 of the 152,024 target number of shares will be determined during the latter half of the first quarter 2021, based on the performance measurement period of January 1, 2018 through December 31, 2020, in accordance with the terms of the agreements. The actual number of shares awarded with respect to the remaining 76,011 of the 152,024 shares will be determined during the latter half of the third quarter 2021, based on the performance measurement period of July 1, 2018 through June 30, 2021, in accordance with the terms of the agreements. The actual number of shares awarded will range from 0% to 200% of the target amounts, depending on the performance analysis stipulated in the agreements, and none of the shares are outstanding until issued in accordance with award agreements based on performance. After the actual number of shares are determined (or earned) at the end of the respective performance measurement period, all of the earned shares will be issued and outstanding on those dates. The executives will receive cash payments on the earned shares equal to the value of all dividends paid on common shares from the grant date through the respective determination date. Such amounts will be paid to the awardees during the latter half of the first quarter 2021 and during the latter half of the third quarter 2021, respectively. Thereafter, the executives will be entitled to receive dividends as declared and paid on the earned shares and to vote the shares. With respect to 76,013 shares, amortization commenced on March 21, 2018, the beginning of the requisite service period, and, with respect to 76,011 shares, amortization will commence on July 1, 2018, the beginning of the requisite service period.

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The terms stipulated in the March 21, 2018 Awards used to determine the total number of shares consist of the following three tranches: (1) a comparison of the Company’s total return to the total returns’ of up to 10 companies in a designated peer group of the Company, (2) the Company’s actual total return as compared to a Board-established total return goal and (3) a comparison of the Company’s return on invested capital to the return on invested capital of up to 10 companies in a designated peer group of the Company.
The tranches described in (1) and (2) are nonvested share awards with market conditions. For the March 21, 2018 Awards, the grant date fair value of the awards with market conditions were estimated by the Company using historical data under the Monte Carlo valuation method provided by a third party consultant. The final values will be determined during the second quarter of 2018 with an insignificant cumulative adjustment to compensation cost anticipated. The third tranche is based on “return on invested capital” discussed below, which is a performance condition. The grant date fair values of the tranches with performance conditions were calculated based on the targeted awards, and the valuation is adjusted on a periodic basis.
The capital market assumptions used in the valuations consisted of the following:
Factors associated with the underlying performance of the Company’s share price and shareholder returns over the term of the awards including total share return volatility and risk-free interest.
Factors associated with the relative performance of the Company’s share price and shareholder returns when compared to those companies which compose the index including beta as a means to breakdown total volatility into market-related and company specific volatilities.
The valuation has been performed in a risk-neutral framework.
Return on invested capital is a performance condition award measurement. The estimated value was calculated based on the initial face value at the date of grant. The valuation will be adjusted on a periodic basis as the estimated number of awards expected to vest is revised.
A summary of the Company’s nonvested share awards with either market or performance conditions as of March 31, 2018 is as follows:
 
Share Awards (Target Number 
of Shares)
 
Weighted-
Average Grant
Date Fair Value
Nonvested at January 1, 2018
263,948

 
$
27.04

Granted
152,024

 
25.46

Vested
(16,410
)
 
36.26

Forfeited
(8,202
)
 
36.26

Nonvested at March 31, 2018
391,360

 
$
26.05

As of March 31, 2018 and December 31, 2017, there were $7,913 and $4,941, respectively, of total unrecognized compensation costs related to nonvested share awards with market or performance conditions. As of March 31, 2018 and December 31, 2017, these costs were expected to be recognized over a weighted-average period of 2.4 years and 2.0 years, respectively. As of March 31, 2018 and December 31, 2017, there were 626,177 and 609,767 share awards with market or performance conditions vested, respectively. Compensation costs (net of forfeitures) related to nonvested share awards with market or performance conditions that have been included in general and administrative expense in the accompanying consolidated statements of operations and comprehensive income were $898 and $860 for the three months ended March 31, 2018 and 2017, respectively.

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8.
Revenues
The following tables set forth the Company’s disaggregated hotel operating revenues by the geographic location of its hotels for the three months ended March 31, 2018 and 2017:
 
For the three months ended March 31, 2018
 
Room
 
Food and beverage
 
Other operating department
 
Total hotel operating revenues
Boston
$
20,256

 
$
9,624

 
$
2,459

 
$
32,339

Chicago
8,010

 
2,234

 
827

 
$
11,071

Key West
11,421

 
2,685

 
1,336

 
$
15,442

Los Angeles
14,983

 
2,383

 
1,539

 
$
18,905

New York
16,254

 
1,215

 
3,663

 
$
21,132

San Diego Downtown
8,595

 
1,867

 
660

 
$
11,122

San Francisco
32,927

 
5,398

 
3,406

 
$
41,731

Washington, DC
23,038

 
5,796

 
1,987

 
$
30,821

Other (1)
19,938

 
12,430

 
4,230

 
$
36,598

 
$
155,422

 
$
43,632

 
$
20,107

 
$
219,161

(1) 
For the three months ended March 31, 2018, other includes Chaminade Resort and Conference Center in Santa Cruz, CA, Embassy Suites Philadelphia - Center City in Philadelphia, PA, L’Auberge Del Mar in Del Mar, CA, San Diego Paradise Point Resort and Spa and The Hilton San Diego Resort and Spa in San Diego, CA and The Heathman Hotel in Portland, OR.
 
For the three months ended March 31, 2017
 
Room
 
Food and beverage
 
Other operating department
 
Total hotel operating revenues
Boston
$
21,753

 
$
10,448

 
$
2,194

 
$
34,395

Chicago
7,790

 
2,277

 
1,039

 
$
11,106

Key West
12,635

 
2,643

 
1,283

 
$
16,561

Los Angeles
16,289

 
2,616

 
1,154

 
$
20,059

New York
15,776

 
1,220

 
3,015

 
$
20,011

San Diego Downtown
8,924

 
1,895

 
651

 
$
11,470

San Francisco (1)
37,002

 
6,099

 
2,957

 
$
46,058

Washington, DC
30,896

 
7,115

 
1,857

 
$
39,868

Other (2)
27,300

 
17,991

 
6,217

 
$
51,508

 
$
178,365

 
$
52,304

 
$
20,367

 
$
251,036

(1) 
Includes Hotel Triton which was sold on April 11, 2017.
(2) 
For the three months ended March 31, 2017, other includes Alexis Hotel (sold on March 31, 2017) and Hotel Deca (sold on January 19, 2017) in Seattle, WA, Chaminade Resort and Conference Center in Santa Cruz, CA, Embassy Suites Philadelphia - Center City and Westin Philadelphia (sold on June 29, 2017) in Philadelphia, PA, Lansdowne Resort (sold on March 22, 2017) in Lansdowne, VA , L’Auberge Del Mar in Del Mar, CA, San Diego Paradise Point Resort and Spa and The Hilton San Diego Resort and Spa in San Diego, CA and The Heathman Hotel in Portland, OR.
The Company’s contract liabilities primarily relate to advance deposits received from guests and groups for future stays or events to be held at the hotels. The contract liabilities are transferred to revenue as room nights are provided and events are held.  For the three months ended March 31, 2018 and 2017, the Company recognized $17,975 and $21,950, respectively, in revenue from the contract liabilities balance at the beginning of the year and expects the remaining contract liabilities to be recognized, generally, over the next 12 months.

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9.
LHL
Substantially all of the Company’s revenues are derived from operating revenues generated by the hotels, all of which are leased by LHL.
Other indirect hotel operating expenses consist of the following expenses incurred by the hotels:
 
For the three months ended
 
March 31,
 
2018
 
2017
General and administrative
$
22,263

 
$
24,591

Sales and marketing
15,896

 
17,944

Repairs and maintenance
8,928

 
9,758

Management and incentive fees
5,954

 
7,226

Utilities and insurance
7,164

 
7,843

Franchise fees
1,648

 
1,837

Other expenses
341

 
457

Total other indirect expenses
$
62,194

 
$
69,656


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As of March 31, 2018, LHL leased all 41 hotels owned by the Company as follows:
 
 
Hotel Properties
 
Location
1.
 
Hotel Amarano Burbank
 
Burbank, CA
2.
 
L’Auberge Del Mar
 
Del Mar, CA
3.
 
Hilton San Diego Gaslamp Quarter
 
San Diego, CA
4.
 
Hotel Solamar
 
San Diego, CA
5.
 
San Diego Paradise Point Resort and Spa
 
San Diego, CA
6.
 
The Hilton San Diego Resort and Spa
 
San Diego, CA
7.
 
Harbor Court Hotel
 
San Francisco, CA
8.
 
Hotel Vitale
 
San Francisco, CA
9.
 
Park Central San Francisco
 
San Francisco, CA
10.
 
Serrano Hotel
 
San Francisco, CA
11.
 
The Marker San Francisco
 
San Francisco, CA
12.
 
Villa Florence
 
San Francisco, CA
13.
 
Chaminade Resort and Conference Center
 
Santa Cruz, CA
14.
 
Viceroy Santa Monica
 
Santa Monica, CA
15.
 
Chamberlain West Hollywood
 
West Hollywood, CA
16.
 
Le Montrose Suite Hotel
 
West Hollywood, CA
17.
 
Le Parc Suite Hotel
 
West Hollywood, CA
18.
 
The Grafton on Sunset
 
West Hollywood, CA
19.
 
Hotel George
 
Washington, DC
20.
 
Hotel Madera
 
Washington, DC
21.
 
Hotel Palomar, Washington, DC
 
Washington, DC
22.
 
Hotel Rouge
 
Washington, DC
23.
 
Mason & Rook Hotel
 
Washington, DC
24.
 
Sofitel Washington, DC Lafayette Square
 
Washington, DC
25.
 
The Donovan
 
Washington, DC
26.
 
The Liaison Capitol Hill
 
Washington, DC
27.
 
Topaz Hotel
 
Washington, DC
28.
 
Southernmost Beach Resort Key West
 
Key West, FL
29.
 
The Marker Waterfront Resort
 
Key West, FL
30.
 
Hotel Chicago
 
Chicago, IL
31.
 
Westin Michigan Avenue
 
Chicago, IL
32.
 
Hyatt Regency Boston Harbor
 
Boston, MA
33.
 
Onyx Hotel
 
Boston, MA
34.
 
The Liberty Hotel
 
Boston, MA
35.
 
Westin Copley Place
 
Boston, MA
36.
 
Gild Hall
 
New York, NY
37.
 
The Roger
 
New York, NY
38.
 
Park Central Hotel New York (shared lease with WestHouse Hotel New York)
 
New York, NY
39.
 
WestHouse Hotel New York
 
New York, NY
40.
 
The Heathman Hotel
 
Portland, OR
41.
 
Embassy Suites Philadelphia - Center City
 
Philadelphia, PA

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10.
Income Taxes
Income tax benefit was comprised of the following for the three months ended March 31, 2018 and 2017:
 
For the three months ended
 
March 31,
 
2018
 
2017
LHL’s income tax benefit
$
(4,196
)
 
$
(5,071
)
Operating Partnership’s income tax expense
169

 
298

Total income tax benefit
$
(4,027
)
 
$
(4,773
)
The Company has estimated LHL’s income tax benefit for the three months ended March 31, 2018 by applying an estimated combined federal and state effective tax rate of 29.5% to LHL’s net loss of $14,245. From time to time, the Company may be subject to federal, state or local tax audits in the normal course of business.
11.
Fair Value Measurements
In evaluating fair value, GAAP outlines a valuation framework and creates a fair value hierarchy that distinguishes between market assumptions based on market data (observable inputs) and a reporting entity’s own assumptions about market data (unobservable inputs). The hierarchy ranks the quality and reliability of inputs used to determine fair value, which are then classified and disclosed in one of the three categories. The three levels are as follows:
Level 1—Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity has the ability to access at the measurement date.
Level 2—Observable inputs, other than quoted prices included in level 1, such as interest rates, yield curves, quoted prices in active markets for similar assets and liabilities, and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3—Unobservable inputs that are supported by limited market activity. This includes certain pricing models, discounted cash flow methodologies and similar techniques when observable inputs are not available.
The Company estimates the fair value of its financial instruments using available market information and valuation methodologies the Company believes to be appropriate for these purposes. Considerable judgment and subjectivity are involved in developing these estimates and, accordingly, such estimates are not necessarily indicative of amounts that would be realized upon disposition.
Recurring Measurements
For assets and liabilities measured at fair value on a recurring basis, quantitative disclosure of their fair value is as follows:
 
 
 
 
Fair Value Measurements at
 
 
 
 
March 31, 2018
 
December 31, 2017
 
 
 
 
Using Significant Other Observable
 
 
 
 
Inputs (Level 2)
Description
 
Consolidated Balance Sheet Location
 
 
 
 
Derivative interest rate instruments
 
Prepaid expenses and other assets
 
$
19,096

 
$
10,893

Derivative interest rate instruments
 
Accounts payable and accrued expenses
 
$
0

 
$
0

The fair value of each derivative instrument is based on a discounted cash flow analysis of the expected cash flows under each arrangement. This analysis reflects the contractual terms of the derivative instrument, including the period to maturity, and utilizes observable market-based inputs, including interest rate curves and implied volatilities, which are classified within level 2 of the fair value hierarchy. The Company also incorporates credit value adjustments to appropriately reflect each parties’ nonperformance risk in the fair value measurement, which utilizes level 3 inputs such as estimates of current credit spreads. However, the Company has assessed that the credit valuation adjustments are not significant to the overall valuation of the derivatives. As a result, the Company has determined that its derivative valuations in their entirety are classified within level 2 of the fair value hierarchy.

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Financial Instruments Not Measured at Fair Value
The following table represents the fair value, derived using level 2 inputs, of financial instruments presented at carrying value in the Company’s consolidated financial statements as of March 31, 2018 and December 31, 2017:
 
March 31, 2018
 
December 31, 2017
 
Carrying Value
 
Estimated Fair Value
 
Carrying Value
 
Estimated Fair Value
Borrowings under credit facilities
$
0

 
$
0

 
$
0

 
$
0

Term loans
$
855,000

 
$
857,479

 
$
855,000

 
$
857,577

Bonds payable
$
0

 
$
0

 
$
42,500

 
$
42,500

Mortgage loan
$
225,000

 
$
224,707

 
$
225,000

 
$
224,429

The Company estimated the fair value of its borrowings under credit facilities, term loans, bonds payable and mortgage loan using interest rates ranging from 1.4% to 2.3% as of March 31, 2018 and December 31, 2017 with a weighted average effective interest rate of 1.6%. The assumptions reflect the terms currently available on similar borrowings to borrowers with credit profiles similar to the Company’s.
At March 31, 2018 and December 31, 2017, the carrying amounts of certain of the Company’s financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued expenses and distributions payable were representative of their fair values due to the short-term nature of these instruments and the recent acquisition of these items.
12.
Earnings Per Common Share
The limited partners’ outstanding common units in the Operating Partnership (which may be converted to common shares ) have been excluded from the diluted earnings per share calculation as there would be no effect on the amounts since the limited partners’ share of income or loss would also be added back to net income or loss. Any anti-dilutive shares have been excluded from the diluted earnings per share calculation. Unvested share-based payment awards expected to vest that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. Accordingly, distributed and undistributed earnings attributable to unvested restricted shares (participating securities) have been excluded, as applicable, from net income or loss attributable to common shareholders used in the basic and diluted earnings per share calculations. Net income or loss figures are presented net of noncontrolling interests in the earnings per share calculations.
For the three months ended March 31, 2018, diluted weighted average common shares do not include the impact of outstanding unvested compensation-related shares because the Company is in a net loss position, the effect of these items on diluted earnings per share would be anti-dilutive. For the three months ended March 31, 2018, there were 405,637 anti-dilutive compensation-related shares outstanding.

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The computation of basic and diluted earnings per common share is as follows:
 
For the three months ended
 
March 31,
 
2018
 
2017
Numerator:
 
 
 
Net (loss) income attributable to common shareholders
$
(11,078
)
 
$
76,084

Dividends paid on unvested restricted shares
(119
)
 
(122
)
Undistributed earnings attributable to unvested restricted shares
0

 
(37
)
Net (loss) income attributable to common shareholders excluding amounts attributable to unvested restricted shares
$
(11,197
)
 
$
75,925

Denominator:
 
 
 
Weighted average number of common shares - basic
112,163,674

 
112,923,719

Effect of dilutive securities:
 
 
 
Compensation-related shares
0

 
382,490

Weighted average number of common shares - diluted
112,163,674

 
113,306,209

Earnings per Common Share - Basic:
 
 
 
Net (loss) income attributable to common shareholders excluding amounts attributable to unvested restricted shares
$
(0.10
)
 
$
0.67

Earnings per Common Share - Diluted:
 
 
 
Net (loss) income attributable to common shareholders excluding amounts attributable to unvested restricted shares
$
(0.10
)
 
$
0.67

13.
Supplemental Information to Statements of Cash Flows
 
For the three months ended
 
March 31,
 
2018
 
2017
Interest paid, net of capitalized interest
$
9,374

 
$
9,142

Interest capitalized
180

 
78

Income taxes refunded, net
(3,227
)
 
(57
)
(Decrease) increase in distributions payable on common shares
(1,283
)
 
59

Write-off of fully amortized debt issuance costs
669

 
5,057

Increase in accrued capital expenditures
6,605

 
433

Grant of nonvested shares and awards to employees and executives, net
7,653

 
7,180

Issuance of common shares for Board of Trustees compensation
557

 
1,240

In conjunction with the sale of properties, the Company disposed of the following assets and liabilities:
 
 
 
Sale proceeds, net of closing costs
$
0

 
$
252,407

Other assets
0

 
5,803

Liabilities
0

 
(6,250
)
Proceeds from sale of properties
$
0

 
$
251,960

14.
Subsequent Events
The Company paid the following common and preferred dividends subsequent to March 31, 2018:
Security Type                                
 
Dividend per Share/Unit (1)
 
For the Quarter Ended
 
Record Date
 
Date Paid
Common Shares/Units
 
$
0.45

 
March 31, 2018
 
March 29, 2018
 
April 16, 2018
6.375% Series I Preferred Shares
 
$
0.40

 
March 31, 2018
 
March 29, 2018
 
April 16, 2018
6.3% Series J Preferred Shares
 
$
0.39

 
March 31, 2018
 
March 29, 2018
 
April 16, 2018
(1) Amounts are rounded to the nearest whole cent for presentation purposes.

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Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following should be read in conjunction with the consolidated financial statements and notes thereto appearing in Part I - Item 1 of this report.
Forward-Looking Statements
This report, together with other statements and information publicly disseminated by LaSalle Hotel Properties (the “Company”), contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and includes this statement for purposes of complying with these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe the Company’s future plans, strategies and expectations, are generally identifiable by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” “may,” “plan,” “seek,” “should,” “will” or similar expressions. Forward-looking statements in this report include, among others, statements about the Company’s business strategy, including its acquisition and development strategies, industry trends, estimated revenues and expenses, estimated costs and durations of renovation or restoration projects, estimated insurance recoveries, ability to realize deferred tax assets, expected liquidity needs and sources (including capital expenditures and the ability to obtain financing or raise capital), the amount and timing of future cash distributions and the review of the unsolicited proposal from Pebblebrook Hotel Trust (“Pebblebrook”). You should not rely on forward-looking statements since they involve known and unknown risks, uncertainties and other factors that are, in some cases, beyond the Company’s control and which could materially affect actual results, performances or achievements. Factors that may cause actual results to differ materially from current expectations include, but are not limited to:
uncertainties regarding future actions that may be taken by Pebblebrook in furtherance of its unsolicited proposal;
risks associated with the hotel industry, including competition for guests and meetings from other hotels and alternative lodging companies, increases in wages, energy costs and other operating costs, potential unionization or union disruption, actual or threatened terrorist attacks, any type of flu or disease-related pandemic and downturns in general and local economic conditions;
the availability and terms of financing and capital and the general volatility of securities markets;
the Company’s dependence on third-party managers of its hotels, including its inability to implement strategic business decisions directly;
risks associated with the real estate industry, including environmental contamination and costs of complying with the Americans with Disabilities Act of 1990, as amended, and similar laws;
interest rate increases;
the possible failure of the Company to maintain its qualification as a real estate investment trust (“REIT”) as defined in the Internal Revenue Code of 1986, as amended (the “Code”) and the risk of changes in laws affecting REITs;
the possibility of uninsured losses;
risks associated with redevelopment and repositioning projects, including delays and cost overruns;
the risk of a material failure, inadequacy, interruption or security failure of the Company’s or the hotel managers’ information technology networks and systems; and
the risk factors discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, as updated elsewhere in this report.

Accordingly, there is no assurance that the Company’s expectations will be realized. Any forward-looking statement speaks only as of the date on which it is made. New risks and uncertainties arise over time, and it is not possible for the Company to predict those events or how they may affect the Company. Except as otherwise required by law, the Company disclaims any obligations or undertaking to publicly release any updates or revisions to any forward-looking statement contained herein (or elsewhere) to reflect any change in the Company’s expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. Accordingly, investors should use caution in relying on past forward-looking statements, which were based on results and trends at the time they were made, to anticipate future events or trends.

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Overview
The Company, a Maryland real estate investment trust organized on January 15, 1998, primarily buys, owns, redevelops and leases upscale and luxury full-service hotels located in convention, resort and major urban business markets. The Company is a self-administered and self-managed REIT as defined in the Code. As a REIT, the Company is generally not subject to federal corporate income tax on that portion of its net income that is currently distributed to its shareholders. The income of LaSalle Hotel Lessee, Inc. (together with its wholly owned subsidiaries, “LHL”), the Company’s wholly owned taxable REIT subsidiary, is subject to taxation at normal corporate rates.
As of March 31, 2018, the Company owned interests in 41 hotels with approximately 10,450 guest rooms located in seven states and the District of Columbia. Each hotel is leased to LHL under a participating lease that provides for rental payments equal to the greater of (i) a base rent or (ii) a participating rent based on hotel revenues. The LHL leases expire between December 2018 and December 2020. A third-party non-affiliated hotel operator manages each hotel pursuant to a hotel management agreement.
Substantially all of the Company’s assets are held directly or indirectly by, and all of its operations are conducted through, LaSalle Hotel Operating Partnership, L.P. (the “Operating Partnership”). The Company is the sole general partner of the Operating Partnership. The Company owned, through a combination of direct and indirect interests, 99.9% of the common units of the Operating Partnership at March 31, 2018. The remaining 0.1% is held by limited partners who held 145,223 common units of the Operating Partnership at March 31, 2018.
In addition to measuring the Company’s net income (loss), the Company also measures hotel performance by evaluating financial metrics such as room revenue per available room (“RevPAR”), funds from operations (“FFO”), earnings before interest, taxes, depreciation and amortization (“EBITDA”) and EBITDA for real estate (“EBITDAre”). The Company evaluates the hotels in its portfolio and potential acquisitions using these metrics to determine each hotel’s contribution or potential contribution toward reaching the Company’s goals of providing income to its shareholders through increases in distributable cash flow and increasing long-term total returns to shareholders through appreciation in the value of its common shares. The Company invests in capital improvements throughout the portfolio to continue to increase the competitiveness of its hotels and improve their financial performance. The Company actively seeks to acquire hotel properties, but continues to face significant competition for acquisitions that meet its investment criteria.
During the first quarter of 2018, the Company’s hotels continued to operate within a generally positive environment. All of the economic indicators the Company tracks were encouraging throughout the quarter. On the more positive side, consumer confidence remains at an elevated level and corporate profits reported thus far for the first quarter have been strong. Unemployment remains low at 3.9% and enplanements have been steady, with airline capacity increases expected to continue in 2018. Similarly, U.S. GDP growth estimates for 2018 have been stable, with a slight increase since the beginning of the year. The U.S. lodging industry benefited from a positive economic landscape overall. The industry RevPAR grew at a rate of 3.5% during the quarter, with lodging industry demand up by 3.0% and supply increasing by 2.0%. Industry-wide pricing was moderate, leading to average daily rate (“ADR”) growth of 2.5%. The Company’s portfolio benefited from the operating environment, with portfolio-wide occupancy of 74.9% for the quarter. The Company’s RevPAR decreased during the quarter by 7.6% due to lower ADR and occupancy, partially due to the comparison to the Presidential Inauguration in January 2017, slow demand recovery in Key West following Hurricane Irma and increased renovation displacement in 2018.
For the first quarter of 2018, the Company had net loss attributable to common shareholders of $11.1 million, or $0.10 per diluted share. FFO attributable to common shareholders and unitholders was $34.2 million, or $0.30 per diluted share/unit (based on 112,714,534 weighted average shares and units outstanding during the three months ended March 31, 2018) and EBITDAre was $44.5 million. RevPAR for the hotel portfolio was $165.23, which was a decrease of 7.6% compared to the first quarter of 2017. Occupancy declined by 3.7% and ADR was down by 4.0%
Please refer to “Non-GAAP Financial Measures” for a detailed discussion of the Company’s use of FFO, EBITDA and EBITDAre and a reconciliation of FFO, EBITDA and EBITDAre to net income or loss, a measurement computed in accordance with U.S. generally accepted accounting principles (“GAAP”).
Unsolicited Takeover Offer
On March 6, 2018, the Company received an unsolicited proposal from Pebblebrook Hotel Trust (“Pebblebrook”) to acquire all of the Company’s outstanding common shares in an all-stock transaction. In consultation with its financial and legal advisors, the Company’s Board of Trustees unanimously determined that the Pebblebrook proposal was insufficient in both price and mix of consideration and was not in the best interests of the Company’s shareholders. Subsequently, the Company received a revised unsolicited proposal from Pebblebrook on April 13, 2018 and a further revised unsolicited proposal from Pebblebrook on April 20, 2018. Consistent with its fiduciary duties and in consultation with its financial and legal advisors, the Company’s Board of

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Trustees will carefully review Pebblebrook’s revised proposal to determine the course of action that it believes is in the best interest of the Company’s shareholders. 
Update on Key West Resorts
After both resorts closed on September 6, 2017 to comply with all mandatory evacuations of the island ahead of Hurricane Irma, the Southernmost Beach Resort Key West and The Marker Waterfront Resort were fully open as of the end of December 2017 and operated at full availability throughout the first quarter of 2018.
The Company maintains property, flood, fire and business interruption insurance at its two resorts in Key West. For the combined properties, insurance is subject to deductibles of approximately $5.0 million in total which encompasses both property and business interruption coverage. The Company has filed its initial claim for lost revenue under its business interruption coverage for both of the Key West properties and for property damage in excess of its deductible for the Southernmost Beach Resort Key West and will continue working with its consultants and insurance carriers to finalize and maximize its claim.
Critical Accounting Estimates
Substantially all of the Company’s revenues and expenses are generated by the operations of the individual hotels. The Company records revenues and expenses that are estimated by the hotel operators and reviewed by the Company to produce quarterly financial statements because the management contracts do not require the hotel operators to submit actual results within a time frame that permits the Company to use actual results when preparing its Quarterly Reports on Form 10-Q for filing by the deadline prescribed by the SEC. Generally, the Company records actual revenue and expense amounts for the first two months of each quarter and estimated revenue and expense amounts for the last month of each quarter. Each quarter, the Company reviews the estimated revenue and expense amounts provided by the hotel operators for reasonableness based upon historical results for prior periods and internal Company forecasts. The Company records any differences between recorded estimated amounts and actual amounts in the following quarter; historically, these differences have not been material. The Company believes the quarterly revenues and expenses, recorded on the Company’s consolidated statements of operations and comprehensive income (loss) based on an aggregate estimate, are fairly stated.
The Company’s management has discussed the policy of using estimated hotel operating revenues and expenses with the Audit Committee of its Board of Trustees. The Audit Committee has reviewed the Company’s disclosure relating to the estimates in this “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” section.
See “Critical Accounting Policies” in the “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” section of the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 for other critical accounting policies and estimates of the Company.
Comparison of the Three Months Ended March 31, 2018 to the Three Months Ended March 31, 2017
Industry travel was stronger during the three months ended March 31, 2018, compared to the same prior year period. Industry demand grew at a faster rate than industry supply grew, which kept industry occupancy at a high level, and led to moderate pricing power and ADR growth during the period. With respect to the Company’s hotels, occupancy was lower by 3.7% during the three months ended March 31, 2018 and ADR decreased 4.0%, which resulted in a RevPAR decline of 7.6% year-over-year. The Company’s hotels were more heavily impacted than the overall industry by the comparison to the Presidential Inauguration in January 2017, slow demand recovery in Key West following Hurricane Irma and increased renovation displacement in 2018. Excluding these anomalies, the Company’s RevPAR grew by 0.2%.
Hotel Operating Revenues
Hotel operating revenues, including room, food and beverage and other operating department revenues, decreased $31.8 million from $251.0 million in 2017 to $219.2 million in 2018. This decrease is primarily due to the sale of the 2017 hotel dispositions, which consist of the sales of Hotel Deca, Lansdowne Resort, Alexis Hotel, Hotel Triton and Westin Philadelphia (collectively, the “2017 Disposition Properties”). The 2017 Disposition Properties, which are not comparable year-over-year, contributed $18.5 million to the decrease in hotel operating revenues. Additionally, three of the Company’s markets experienced significant decreases in hotel operating revenues. The nine Washington, DC hotel properties had a combined $9.0 million decrease primarily due to the 2017 Presidential Inauguration, an overall softer market and certain issues with the IHG and Kimpton reservation system integration; the six San Francisco hotel properties had a combined $2.2 million decrease primarily due to decreased city wide events, which resulted in lower ADR and RevPAR throughout the market; and lastly, the two Key West hotel properties experienced a decrease of $1.1 million as the market is slowly recovering from the impact of Hurricane Irma.

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In addition, hotel operating revenues for Westin Copley Place and Chamberlain West Hollywood decreased $3.2 million and $1.1 million, respectively, as a result of guest room renovations that commenced in the fourth quarter of 2017.
These decreases are partially offset by a $1.1 million increase at Park Central New York and WestHouse Hotel New York due to stronger market conditions and superior revenue management.
Hotel operating revenues across the remainder of the portfolio remained relatively constant, increasing a net $2.2 million across the 20 additional hotels in the portfolio.
Other Income
Other income increased $0.5 million from $3.4 million in 2017 to $3.9 million in 2018 primarily due to higher gains from insurance proceeds, higher retail lease income and increased miscellaneous revenue. The Comp