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 September 30, 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 November 1, 2018
Common Shares of Beneficial Interest ($0.01 par value)
 
110,397,737

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



Table of Contents







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)
 
September 30,
2018
 
December 31,
2017
 
(unaudited)
 
 
Assets:
 
 
 
Investment in hotel properties, net (Note 3)
$
3,253,874

 
$
3,265,615

Property under development
18,681

 
49,459

Cash and cash equivalents
248,164

 
400,667

Restricted cash reserves (Note 5)
14,996

 
14,262

Hotel receivables (net of allowance for doubtful accounts of $395 and $404, respectively)
41,732

 
35,916

Debt issuance costs for borrowings under credit facilities, net
2,456

 
3,274

Deferred tax assets
1,678

 
2,136

Prepaid expenses and other assets
77,870

 
43,612

Total assets
$
3,659,451

 
$
3,814,941

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

 
$
0

Term loans, net of unamortized debt issuance costs (Note 4)
853,634

 
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)
224,806

 
224,432

Accounts payable and accrued expenses
152,183

 
134,216

Advance deposits
33,371

 
26,625

Accrued interest
2,354

 
2,383

Distributions payable
4,116

 
55,135

Deferred deposit on Merger transaction (Note 1)
112,000

 
0

Total liabilities
1,382,464

 
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 110,397,737 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)
(71,403
)
 
(1,181
)
Additional paid-in capital, net of offering costs of $82,865 and $82,842, respectively
2,768,049

 
2,767,924

Accumulated other comprehensive income (Note 4)
23,242

 
10,880

Distributions in excess of retained earnings
(447,478
)
 
(305,708
)
Total shareholders’ equity
2,273,646

 
2,473,151

Noncontrolling Interests:
 
 
 
Noncontrolling interests in consolidated entities
16

 
18

Noncontrolling interests of common units in Operating Partnership (Note 6)
3,325

 
3,292

Total noncontrolling interests
3,341

 
3,310

Total equity
2,276,987

 
2,476,461

Total liabilities and equity
$
3,659,451

 
$
3,814,941

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

1

Table of Contents







LASALLE HOTEL PROPERTIES
Consolidated Statements of Operations and Comprehensive (Loss) Income
(in thousands, except share and per share data)
(unaudited)
 
For the three months ended
 
For the nine months ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
Revenues:
 
 
 
 
 
 
 
Hotel operating revenues (Note 8):
 
 
 
 
 
 
 
Room
$
214,283

 
$
209,019

 
$
589,371

 
$
609,769

Food and beverage
51,212

 
50,191

 
151,821

 
161,803

Other operating department
26,915

 
24,243

 
71,543

 
66,728

Total hotel operating revenues
292,410

 
283,453

 
812,735

 
838,300

Other income
5,588

 
2,403

 
12,895

 
9,005

Total revenues
297,998

 
285,856

 
825,630

 
847,305

Expenses:
 
 
 
 
 
 
 
Hotel operating expenses:
 
 
 
 
 
 
 
Room
57,347

 
55,474

 
162,418

 
163,068

Food and beverage
37,574

 
37,628

 
111,655

 
116,908

Other direct
3,683

 
2,793

 
10,055

 
9,631

Other indirect (Note 9)
71,576

 
69,207

 
204,823

 
212,040

Total hotel operating expenses
170,180

 
165,102

 
488,951

 
501,647

Depreciation and amortization
46,318

 
43,355

 
138,490

 
134,684

Real estate taxes, personal property taxes and insurance
17,600

 
16,663

 
49,936

 
46,867

Ground rent (Note 5)
4,790

 
4,788

 
12,864

 
11,996

General and administrative
6,313

 
6,475

 
19,496

 
19,946

Costs related to the Mergers and unsolicited takeover offers (Note 1)
9,917

 
0

 
21,248

 
0

Other expenses
1,351

 
3,179

 
4,160

 
6,656

Total operating expenses
256,469

 
239,562

 
735,145

 
721,796

Operating income
41,529

 
46,294

 
90,485

 
125,509

Interest income
670

 
951

 
2,073

 
1,408

Interest expense
(10,587
)
 
(10,026
)
 
(31,205
)
 
(29,276
)
Loss from extinguishment of debt (Note 4)
0

 
0

 
0

 
(1,706
)
Merger termination fee (Note 1)
(112,000
)
 
0

 
(112,000
)
 
0

(Loss) income before income tax expense
(80,388
)
 
37,219

 
(50,647
)
 
95,935

Income tax expense (Note 10)
(2,850
)
 
(1,978
)
 
(3,816
)
 
(2,208
)
(Loss) income before gain on sale of properties
(83,238
)
 
35,241

 
(54,463
)
 
93,727

Gain on sale of properties (Note 3)
0

 
31

 
0

 
85,545

Net (loss) income
(83,238
)
 
35,272

 
(54,463
)
 
179,272

Net income attributable to noncontrolling interests:
 
 
 
 
 
 
 
Noncontrolling interests in consolidated entities
0

 
0

 
(8
)
 
(8
)
Noncontrolling interests of common units in Operating Partnership (Note 6)
(55
)
 
(49
)
 
(114
)
 
(242
)
Net income attributable to noncontrolling interests
(55
)
 
(49
)
 
(122
)
 
(250
)
Net (loss) income attributable to the Company
(83,293
)
 
35,223

 
(54,585
)
 
179,022

Distributions to preferred shareholders
(4,116
)
 
(4,116
)
 
(12,347
)
 
(13,908
)
Issuance costs of redeemed preferred shares (Note 6)
0

 
0

 
0

 
(2,401
)
Net (loss) income attributable to common shareholders
$
(87,409
)
 
$
31,107

 
$
(66,932
)
 
$
162,713


2

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

 
For the three months ended
 
For the nine months ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
Earnings per Common Share - Basic (Note 12):
 
 
 
 
 
 
 
Net (loss) income attributable to common shareholders excluding amounts attributable to unvested restricted shares
$
(0.79
)
 
$
0.27

 
$
(0.61
)
 
$
1.44

Earnings per Common Share - Diluted (Note 12):
 
 
 
 
 
 
 
Net (loss) income attributable to common shareholders excluding amounts attributable to unvested restricted shares
$
(0.79
)
 
$
0.27

 
$
(0.61
)
 
$
1.43

Weighted average number of common shares outstanding:
 
 
 
 
 
 
 
Basic
110,124,868

 
113,007,475

 
110,793,969

 
112,961,365

Diluted
110,124,868

 
113,383,360

 
110,793,969

 
113,343,711

 
 
 
 
 
 
 
 
Comprehensive (Loss) Income:
 
 
 
 
 
 
 
Net (loss) income
$
(83,238
)
 
$
35,272

 
$
(54,463
)
 
$
179,272

Other comprehensive income:
 
 
 
 
 
 
 
Unrealized gain (loss) on interest rate derivative instruments (Note 4)
2,280

 
517

 
14,166

 
(34
)
Reclassification adjustment for amounts recognized in net (loss) income (Note 4)
(1,078
)
 
547

 
(1,787
)
 
2,030

 
(82,036
)
 
36,336

 
(42,084
)
 
181,268

Comprehensive income attributable to noncontrolling interests:
 
 
 
 
 
 
 
Noncontrolling interests in consolidated entities
0

 
0

 
(8
)
 
(8
)
Noncontrolling interests of common units in Operating Partnership (Note 6)
(57
)
 
(51
)
 
(131
)
 
(245
)
Comprehensive income attributable to noncontrolling interests
(57
)
 
(51
)
 
(139
)
 
(253
)
Comprehensive (loss) income attributable to the Company
$
(82,093
)
 
$
36,285

 
$
(42,223
)
 
$
181,015

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

3

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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

 
3,776

 
(2,536
)
 
0

 
0

 
1,240

 
0

 
0

 
0

 
1,240

Redemption of preferred shares
(28
)
 
0

 
0

 
(66,341
)
 
0

 
(2,401
)
 
(68,770
)
 
0

 
0

 
0

 
(68,770
)
Repurchase of common shares into treasury
0

 
0

 
(4,241
)
 
0

 
0

 
0

 
(4,241
)
 
0

 
0

 
0

 
(4,241
)
Deferred compensation, net
0

 
1

 
651

 
4,522

 
0

 
0

 
5,174

 
0

 
0

 
0

 
5,174

Distributions on earned shares from share awards with market conditions
0

 
0

 
0

 
0

 
0

 
(780
)
 
(780
)
 
0

 
0

 
0

 
(780
)
Distributions on common shares/units ($1.35 per share/unit)
0

 
0

 
0

 
0

 
0

 
(152,976
)
 
(152,976
)
 
0

 
(196
)
 
(196
)
 
(153,172
)
Distributions on preferred shares
0

 
0

 
0

 
0

 
0

 
(13,908
)
 
(13,908
)
 
(8
)
 
0

 
(8
)
 
(13,916
)
Net income
0

 
0

 
0

 
0

 
0

 
179,022

 
179,022

 
8

 
242

 
250

 
179,272

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

 
0

 
0

 
0

 
(34
)
 
0

 
(34
)
 
0

 
0

 
0

 
(34
)
Reclassification adjustment for amounts recognized in net income
0

 
0

 
0

 
0

 
2,027

 
0

 
2,027

 
0

 
3

 
3

 
2,030

Balance, September 30, 2017
$
104

 
$
1,132

 
$
(553
)
 
$
2,766,385

 
$
4,358

 
$
(266,607
)
 
$
2,504,819

 
$
17

 
$
3,326

 
$
3,343

 
$
2,508,162

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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

 
1,729

 
(1,195
)
 
0

 
0

 
534

 
0

 
0

 
0

 
534

Repurchase of common shares into treasury
0

 
0

 
(75,846
)
 
0

 
0

 
0

 
(75,846
)
 
0

 
0

 
0

 
(75,846
)
Deferred compensation, net
0

 
0

 
3,895

 
1,320

 
0

 
0

 
5,215

 
0

 
0

 
0

 
5,215

Distributions on earned shares from share awards with market conditions
0

 
0

 
0

 
0

 
0

 
(262
)
 
(262
)
 
0

 
0

 
0

 
(262
)
Distributions on common shares/units ($0.68 per share/unit)
0

 
0

 
0

 
0

 
0

 
(74,576
)
 
(74,576
)
 
0

 
(98
)
 
(98
)
 
(74,674
)
Distributions on preferred shares
0

 
0

 
0

 
0

 
0

 
(12,347
)
 
(12,347
)
 
(10
)
 
0

 
(10
)
 
(12,357
)
Net loss
0

 
0

 
0

 
0

 
0

 
(54,585
)
 
(54,585
)
 
8

 
114

 
122

 
(54,463
)
Other comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized gain on interest rate derivative instruments
0

 
0

 
0

 
0

 
14,147

 
0

 
14,147

 
0

 
19

 
19

 
14,166

Reclassification adjustment for amounts recognized in net loss
0

 
0

 
0

 
0

 
(1,785
)
 
0

 
(1,785
)
 
0

 
(2
)
 
(2
)
 
(1,787
)
Balance, September 30, 2018
$
104

 
$
1,132


$
(71,403
)

$
2,768,049


$
23,242


$
(447,478
)

$
2,273,646


$
16


$
3,325


$
3,341


$
2,276,987

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

4

Table of Contents







LASALLE HOTEL PROPERTIES
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
 
For the nine months ended
 
September 30,
 
2018
 
2017
 
 
 
As Adjusted
(Note 2)
 
 
 
 
Cash flows from operating activities:
 
 
 
Net (loss) income
$
(54,463
)
 
$
179,272

Adjustments to reconcile net (loss) income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
138,490

 
134,684

Amortization of debt issuance costs
1,884

 
2,098

Loss from extinguishment of debt
0

 
1,706

Gain on sale of properties
0

 
(85,545
)
Amortization of deferred compensation
5,215

 
5,174

Deferred income tax expense
458

 
172

Allowance for doubtful accounts
(9
)
 
118

Other
164

 
1,352

Business interruption insurance proceeds
3,337

 
1,399

Deferred deposit on Merger transaction
112,000

 
0

Changes in assets and liabilities:
 
 
 
Assets held for sale
0

 
(1,500
)
Hotel receivables
(5,807
)
 
(13,114
)
Prepaid expenses and other assets
(27,453
)
 
(16,548
)
Accounts payable and accrued expenses
21,754

 
7,088

Advance deposits
6,746

 
2,772

Accrued interest
(29
)
 
10

Net cash provided by operating activities
202,287

 
219,138

Cash flows from investing activities:
 
 
 
Additions to properties
(96,351
)
 
(67,023
)
Improvements to properties
(2,604
)
 
0

Purchase of office furniture and equipment
(68
)
 
(14
)
Proceeds from sale of properties
0

 
402,400

Insurance proceeds received for damage of property
1,826

 
1,336

Net cash (used in) provided by investing activities
(97,197
)
 
336,699

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

Payment of debt issuance costs
(247
)
 
(4,626
)
Purchase of treasury shares
(75,846
)
 
(4,241
)
Payment of common offering costs
(24
)
 
0

Distributions on earned shares from share awards with market conditions
(262
)
 
(780
)
Redemption of preferred shares
0

 
(68,750
)
Distributions on preferred shares
(12,357
)
 
(15,205
)
Distributions on common shares/units
(125,623
)
 
(152,983
)
Net cash used in financing activities
(256,859
)
 
(246,585
)
Net change in cash and cash equivalents and restricted cash reserves
(151,769
)
 
309,252

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
$
263,160

 
$
458,939

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

5

Table of Contents


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 September 30, 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 September 30, 2018. The remaining 0.1% is held by limited partners who held 145,223 common units of the Operating Partnership at September 30, 2018. See Note 6 for additional disclosures related to common units of the Operating Partnership.
Agreement and Plan of Merger
On September 6, 2018, the Company, the Operating Partnership, Pebblebrook Hotel Trust (“Pebblebrook”), Pebblebrook Hotel L.P. (“Pebblebrook OP”), Ping Merger Sub, LLC (“Merger Sub”) and Ping Merger OP, LP (“Merger OP”), entered into an Agreement and Plan of Merger (as amended on September 18, 2018, and as it may be amended from time to time, the “Merger Agreement”). The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, Merger OP will merge with and into the Operating Partnership (the “Partnership Merger”), and, immediately following the Partnership Merger, the Company will merge with and into Merger Sub (the “Company Merger” and, together with the Partnership Merger, the “Mergers”). Upon completion of the Partnership Merger, the Operating Partnership will survive and the separate existence of Merger OP will cease. Upon completion of the Company Merger, Merger Sub will survive and the separate existence of the Company will cease. The Mergers and the other transactions contemplated by the Merger Agreement were approved by the Company’s Board of Trustees.
The execution by the Company of the Merger Agreement followed a determination by the Company’s Board of Trustees that the proposal from Pebblebrook reflected in the Merger Agreement constituted a Superior Proposal, as defined in the previously announced Agreement and Plan of Merger, dated as of May 20, 2018 (the “Blackstone Merger Agreement”), by and among BRE Landmark Parent L.P. (“Blackstone”), BRE Landmark L.P., BRE Landmark Acquisition L.P., the Company and the Operating Partnership, and the termination by the Company, on September 6, 2018, of the Blackstone Merger Agreement in accordance with its terms. On September 5, 2018, the Company notified Blackstone that the Company’s Board of Trustees had concluded that the Pebblebrook proposal constituted a Superior Proposal and that, subject to Blackstone’s right to negotiate with the Company during the four business day period after Blackstone’s receipt of such notice, the Company’s Board of Trustees intended to terminate the Blackstone Merger Agreement and enter into a definitive agreement with Pebblebrook. On September 5, 2018, Blackstone delivered a notice to the Company waiving its rights to renegotiate its agreement with the Company subject to the Company’s compliance with the Blackstone Merger Agreement.
On September 6, 2018, in connection with the termination by the Company of the Blackstone Merger Agreement, Pebblebrook, on behalf of the Company, paid Blackstone a termination fee of $112,000 as required by the terms of the Blackstone Merger Agreement. The Company recorded an expense of $112,000 related to its obligation to pay the termination fee under the Blackstone Merger Agreement and a corresponding liability on its balance sheet as Pebblebrook was required to fund the termination fee under the terms of the Merger Agreement.
Pursuant to the terms and conditions in the Merger Agreement, at the effective time of the Company Merger (the “Company Merger Effective Time”), each common share of beneficial interest, par value $0.01 per share, of the Company, other than shares

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held by the Company or held by Pebblebrook, Pebblebrook OP, Merger Sub, Merger OP or any of their respective subsidiaries, that is issued and outstanding immediately prior to the Company Merger Effective Time (including common shares of the Company relating to compensatory awards of the Company that become or are deemed to be issued or outstanding) will be converted into the right to receive, at the election of the holder, either: (i) 0.92 (the “Exchange Ratio”) validly issued, fully paid and nonassessable common shares of beneficial interest, par value $0.01 per share, of Pebblebrook (the “Common Share Consideration”); or (ii) $37.80 in cash, subject to certain adjustments and to any applicable withholding tax (the “Cash Consideration” and, together with the Common Share Consideration, the “Merger Consideration”). The maximum number of common shares of the Company eligible to be converted into the right to receive the Cash Consideration will be equal to 30% of the aggregate number of common shares of the Company issued and outstanding as of immediately prior to the Company Merger Effective Time (including common shares of the Company relating to compensatory awards of the Company that become or are deemed to be issued or outstanding), subject to pro-rata reductions if such maximum is exceeded. Any common shares of the Company held by Pebblebrook or its affiliates immediately prior to the Company Merger Effective Time will be cancelled for no consideration in the Company Merger and excluded from the right to receive the Cash Consideration.
Pursuant to the terms and conditions in the Merger Agreement, at the Company Merger Effective Time, (i) each outstanding 6.375% Series I Cumulative Redeemable Preferred Share of Beneficial Interest, par value $0.01 per share, of the Company (the “Series I Preferred Shares”) will be converted into the right to receive one share of a newly designated class of preferred shares of Pebblebrook, the 6.375% Series E Cumulative Redeemable Preferred Shares of Beneficial Interest, par value $0.01 per share, of Pebblebrook (the “Pebblebrook Series E Preferred Shares”) having the rights, preferences, privileges and voting powers materially unchanged from those of the Series I Preferred Shares immediately prior to the Company Merger, and (ii) each outstanding 6.3% Series J Cumulative Redeemable Preferred Share of Beneficial Interest, par value $0.01 per share, of the Company (the “Series J Preferred Shares” and, together with the Series I Preferred Shares, the “Preferred Shares”) will be converted into the right to receive one share of a newly designated class of preferred shares of Pebblebrook, the 6.3% Series F Cumulative Redeemable Preferred Shares of Beneficial Interest, par value $0.01 per share, of Pebblebrook (the “Pebblebrook Series F Preferred Shares”) having the rights, preferences, privileges and voting powers materially unchanged from those of the Series J Preferred Shares immediately prior to the Company Merger.
Pursuant to the terms and conditions in the Merger Agreement, at the effective time of the Partnership Merger (the “Partnership Merger Effective Time”), each common unit of the Operating Partnership, other than common units held by the Company, that is issued and outstanding immediately prior to the Partnership Merger Effective Time will be cancelled and converted into, the right to receive 0.92 newly and validly issued common units of Pebblebrook OP, without interest. Alternatively, each common unit of the Operating Partnership, other than common units held by the Company, may at the holder’s election be converted into the right to receive a number of common shares of Pebblebrook equal to the Exchange Ratio, without interest.
Pursuant to the terms and conditions in the Merger Agreement, each restricted share award that is outstanding immediately prior to the Company Merger Effective Time will become fully vested and will be cancelled in exchange for the right to submit an election and receive the Merger Consideration with respect to such restricted share award. Each performance-based share award that is outstanding immediately prior to the Company Merger Effective Time will automatically become earned and vested with respect to 180% of the target number of common shares subject to such performance-based share award and thereafter will be cancelled and exchanged for the right to receive such number of earned and vested common shares of the Company, which shall be considered outstanding as of such time, and the right to submit an election and receive the Merger Consideration with respect to such common shares of the Company. Each award of deferred shares of the Company that is outstanding immediately prior to the Company Merger Effective Time will be cancelled in exchange for the number of common shares of the Company subject to such deferred share award (prior to its cancellation), which common shares of the Company shall be considered outstanding as of such time, and to submit an election and receive the Merger Consideration with respect to such common shares of the Company.
Each of the Company and Pebblebrook have made customary representations, warranties and covenants in the Merger Agreement, including, among others, covenants by each party to, in all material respects, use commercially reasonable efforts to carry on its business in the ordinary course of business consistent with past practice, subject to certain exceptions, during the period between the execution of the Merger Agreement and the consummation of the Mergers. The obligations of the parties to consummate the Mergers are not subject to any financing condition or the receipt of any financing by Pebblebrook, Pebblebrook OP, Merger Sub or Merger OP.
The consummation of the Mergers is subject to certain customary closing conditions, including, among others, (i) approval of the Company Merger and the other transactions contemplated by the Merger Agreement by the affirmative vote of the holders of at least sixty-six and two-thirds (66 2/3%) percent of the outstanding common shares of the Company entitled to vote on the matter at a special meeting of shareholders of the Company, which will be held on November 27, 2018, (ii) approval of the issuance of the Pebblebrook common shares in the Company Merger by the affirmative vote of not less than a majority of the votes cast by

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holders of the outstanding common shares of Pebblebrook entitled to vote on the matter at a special meeting of shareholders of Pebblebrook, which will be held on November 27, 2018, (iii) the absence of certain legal impediments to the consummation of the Mergers, (iv) the effectiveness of the registration statement on Form S-4 filed by Pebblebrook in connection with the Mergers, and (v) the approval for listing on the New York Stock Exchange of the Pebblebrook common and preferred shares to be issued in the Company Merger.
Each of the Company and Pebblebrook have agreed to covenants prohibiting the Company and Pebblebrook from soliciting, providing non-public information or entering into discussions or agreements concerning proposals relating to alternative business combination transactions, subject to certain limited exceptions. Prior to obtaining the requisite shareholder approval, the Company may terminate the Merger Agreement to enter into an agreement with respect to a Superior Proposal (as defined in the Merger Agreement) and either party’s board of trustees may effect a Change in Recommendation (as defined in the Merger Agreement) only if it has received an unsolicited written acquisition proposal that constitutes a Superior Proposal, and the failure to effect a Change in Recommendation would be inconsistent with the applicable board’s fiduciary obligations under applicable law. Under these no-solicitation provisions, a party must notify the other party if it receives an alternative acquisition proposal and allow for negotiations for a specified period before effecting a Change in Recommendation.
The Merger Agreement may be terminated under certain circumstances by either party, including prior to obtaining the requisite shareholder approval, if, after following certain procedures and adhering to certain restrictions, the board of trustees of either party effects a Change in Recommendation in connection with a Superior Proposal and, in the case of the Company, the Company enters into a definitive agreement providing for the implementation of a Superior Proposal, subject to complying with specified notice and other conditions set forth in the Merger Agreement.
Upon a termination of the Merger Agreement, under certain circumstances, the Company will be required to pay a termination fee to Pebblebrook of $112,000. In certain other circumstances, Pebblebrook will be required to pay the Company a termination fee of $81,000 upon termination of the Merger Agreement.
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 and nine months ended September 30, 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

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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.
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 five 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-

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than-wholly-owned subsidiaries are reported at the consolidated amounts, including both the amounts attributable to the Company 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 September 30, 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 (loss). 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 revised current assumptions of discount rates and lease terms, expects to record a right of use asset and a related liability between $150,000 and $200,000 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

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on the Company’s consolidated statements of cash flows. The adoption did not change the presentation of the Company’s consolidated balance sheets.
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 September 30, 2018 and December 31, 2017 consists of the following:
 
September 30, 2018
 
December 31, 2017
Land
$
624,922

 
$
624,843

Buildings and improvements
3,310,339

 
3,271,473

Furniture, fixtures and equipment
849,439

 
762,150

Investment in hotel properties, gross
4,784,700

 
4,658,466

Accumulated depreciation
(1,530,826
)
 
(1,392,851
)
Investment in hotel properties, net
$
3,253,874

 
$
3,265,615

As of September 30, 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 $30,174 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 (loss) income for all periods presented.
Depreciation expense was $46,139 and $137,988 for the three and nine months ended September 30, 2018, respectively, and $43,205 and $134,264 for the three and nine months ended September 30, 2017, respectively.
Dispositions
During the nine months ended September 30, 2017, the Company sold Hotel Deca, Lansdowne Resort, Alexis Hotel, Hotel Triton and Westin Philadelphia. 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 zero and $30,656 related to the sale of this property, which is included in the accompanying consolidated statements of operations and comprehensive (loss) income for the three and nine months ended September 30, 2017, respectively.
On March 22, 2017, the Company sold Lansdowne Resort for $133,000. The Company recognized a gain of zero and $10,253 related to the sale of this property, which is included in the accompanying consolidated statements of operations and comprehensive (loss) income for the three and nine months ended September 30, 2017, respectively.

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On March 31, 2017, the Company sold Alexis Hotel for $71,625. The Company recognized a gain of zero and $33,420 related to the sale of this property, which is included in the accompanying consolidated statements of operations and comprehensive (loss) income for the three and nine months ended September 30, 2017, respectively.
On April 11, 2017, the Company sold Hotel Triton for $14,250. The Company recognized a gain of zero and $6,739 related to the sale of this property, which is included in the accompanying consolidated statements of operations and comprehensive (loss) income for the three and nine months ended September 30, 2017, respectively.
On June 29, 2017, the Company sold Westin Philadelphia for $135,000. The Company recognized a gain of $31 and $4,477 related to the sale of this property, which is included in the accompanying consolidated statements of operations and comprehensive (loss) income for the three and nine months ended September 30, 2017, respectively.
4.
Long-Term Debt
Debt Summary
Debt as of September 30, 2018 and December 31, 2017 consisted of the following:
 
 
 
 
 
 
Balance Outstanding as of
Debt                                                                                  
 
Interest
Rate
 
Maturity
Date
 
September 30,
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
 
 
 
 
 
(1,366
)
 
(1,805
)
Total term loans, net of unamortized debt issuance costs
 
 
 
853,634

 
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 2019 (e)
 
225,000

 
225,000

Debt issuance costs, net
 
 
 
 
 
(194
)
 
(568
)
Total mortgage loan, net of unamortized debt issuance costs
 
 
 
224,806

 
224,432

Total debt
 
 
 
 
 
$
1,078,440

 
$
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 September 30, 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 September 30, 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 September 30, 2018 and December 31, 2017, the Company had interest rate swaps on the full amounts outstanding. See “Derivative and Hedging Activities” below. At September 30, 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).

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(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) 
On June 11, 2018, the Company exercised its first available option to extend the maturity date to August 14, 2019. There are two remaining options to extend the maturity date to January 5, 2021, pursuant to certain terms and conditions. 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). Effective the second quarter of 2018 through August 14, 2019, the mortgage loan bears interest at a variable rate of LIBOR plus 1.75%. The interest rate as of September 30, 2018 was LIBOR plus 1.75%, which equaled 3.91%. 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.
Future scheduled debt principal payments as of September 30, 2018 (refer to previous table for extension options) are as follows:
2018
$
0

2019
225,000

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 and nine months ended September 30, 2018 and 2017 is as follows:
 
For the three months ended
 
For the nine months ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
Interest Expense:
 
 
 
 
 
 
 
Interest incurred
$
10,116

 
$
9,561

 
$
29,646

 
$
27,553

Amortization of debt issuance costs
543

 
669

 
1,884

 
2,098

Capitalized interest
(72
)
 
(204
)
 
(325
)
 
(375
)
Interest expense
$
10,587

 
$
10,026

 
$
31,205

 
$
29,276

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

 
N/A

 
N/A

 
N/A

LHL unsecured credit facility
N/A

 
N/A

 
N/A

 
N/A

Massport Bonds (1)
N/A

 
0.95
%
 
1.25
%
 
0.84
%
Mortgage loan (Westin Copley Place)
3.84
%
 
2.97
%
 
3.62
%
 
2.76
%
(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

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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 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 September 30, 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 September 30, 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

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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.
The following tables present the effect of derivative instruments on the Company’s accompanying consolidated statements of operations and comprehensive (loss) income, including the location and amount of unrealized gain (loss) on outstanding derivative instruments in cash flow hedging relationships, for the three and nine months ended September 30, 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
 
 
September 30,
 
 
 
 
September 30,
 
September 30,
 
 
2018
 
2017
 
 
 
 
2018
 
2017
 
2018
 
2017
Derivatives in cash flow hedging relationships:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
$
2,280

 
$
517

 
Interest expense
 
$
(1,078
)

$
547

 
$
10,587

 
$
10,026

 
 
Amount of Gain (Loss) 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 nine months ended
 
 
 
 
For the nine months ended
 
For the nine months ended
 
 
September 30,
 
 
 
 
September 30,
 
September 30,
 
 
2018
 
2017
 
 
 
 
2018
 
2017
 
2018
 
2017
Derivatives in cash flow hedging relationships:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
$
14,166

 
$
(34
)
 
Interest expense
 
$
(1,787
)
 
$
2,030

 
$
31,205

 
$
29,276

As of September 30, 2018, there was $23,272 in cumulative unrealized gain of which $23,242 was included in AOCI and $30 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 $4,704 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 September 30, 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 zero and $1,706, which is included in the accompanying consolidated statements of operations and comprehensive (loss) income for the three and nine months ended September 30, 2017, respectively. 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.

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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.
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 September 30, 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 September 30, 2018 is as follows:
Lease Properties
 
Lease Type
 
Lease Expiration Date
Southernmost Beach Resort Key West (Restaurant facility)
 
Ground lease
 
April 2029 (1)
Hyatt Regency Boston Harbor
 
Ground lease
 
April 2077
The Hilton San Diego Resort and Spa
 
Ground lease
 
July 2068 (2)
San Diego Paradise Point Resort and Spa
 
Ground lease
 
May 2050
Hotel Vitale
 
Ground lease
 
March 2056 (3)
Viceroy Santa Monica
 
Ground lease
 
September 2065
Westin Copley Place (4)
 
Air rights lease
 
December 2077
The Liberty Hotel
 
Ground lease
 
May 2080
Hotel Solamar
 
Ground lease
 
December 2102
(1) On August 21, 2018, the Company entered into a new ground lease agreement, which commences on May 1, 2019.
The current ground lease agreement expires on April 30, 2019.
(2) The Company entered into a new 50 year ground lease agreement, which commenced on August 1, 2018.
(3) The Company has the option, subject to certain terms and conditions, to extend the ground lease for 14 years to 2070.
(4) 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 $449 and $1,352 for the three and nine months ended September 30, 2018, respectively, and $459 and $1,384 for the three and nine months ended September 30, 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 (loss) income, was $4,790 and $12,864 for the three and nine months ended September 30, 2018, respectively, and $4,788 and $11,996 for the three and nine months ended September 30, 2017, 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.

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A summary of the Company’s hotels subject to capital leases of land and building as of September 30, 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.
Actual base and participating ground rent payments related to The Roger and Harbor Court Hotel were $99 and $372 for the three months ended September 30, 2018, respectively, and $298 and $937 for the nine months ended September 30, 2018, respectively. Actual base and participating ground rent payments related to The Roger and Harbor Court Hotel were $99 and $335 for the three months ended September 30, 2017, respectively, and $298 and $921 for the nine months ended September 30, 2017, respectively.
As of September 30, 2018, future minimum rent payments, including capital lease payments, (without reflecting future applicable Consumer Price Index increases) are as follows:
2018
$
2,890

2019
11,730

2020
12,160

2021
12,256

2022
12,320

Thereafter
557,096

 
$
608,452

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 September 30, 2018, $13,267 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 September 30, 2018, the Company held $14,996 in restricted cash reserves. Included in such amounts are $13,267 of reserve funds for future capital expenditures and $1,729 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.
On June 29, 2018, a purported class action complaint, Erie County Employees Retirement System v. LaSalle Hotel Properties, et al., No. 24-C-18-003922, was filed in the Circuit Court for Baltimore City, Maryland by purported Company shareholder Erie County Employees Retirement System in connection with the Blackstone Merger Agreement. An amended complaint was filed on July 11, 2018. The amended complaint names as defendants the Company and the members of the Company’s Board of Trustees. The amended complaint alleges, among other things, that the Board of Trustees breached its duties in agreeing to the Blackstone

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Merger Agreement, in not agreeing to a transaction with Pebblebrook, and in failing to disclose certain supposedly material information to shareholders in the preliminary proxy statement filed in connection with the Blackstone Merger Agreement. The amended complaint sought declaratory and injunctive relief, including a preliminary injunction barring the shareholder vote on the Blackstone Merger Agreement, as well as damages and attorneys’ fees and costs. On August 21, 2018, the plaintiff filed a motion for a preliminary injunction barring the shareholder vote on the Blackstone Merger Agreement. On September 6, 2018, the plaintiff withdrew that motion. The plaintiff’s counsel have advised the Company’s counsel that they believe the Company’s agreement to enter into a transaction with Pebblebrook rendered the case moot and entitled them to an award of attorneys’ fees.  On October 10, 2018, the plaintiff’s counsel dismissed the complaint but advised the Court of their intent to seek an award of attorneys’ fees. The Company does not believe that the case played any role in the decision by its Board of Trustees to enter into a transaction with Pebblebrook and intends to oppose any request for an award of attorneys’ fees. The Company is unable to predict the developments in, outcome of, and/or economic or other consequences of this litigation or predict the developments in, outcome of, and/or other consequences arising out of any potential future litigation or government inquiries related to the Mergers.
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. Pursuant to the terms and conditions of the Merger Agreement, each award of deferred shares that is outstanding immediately prior to the Company Merger Effective Time will be cancelled in exchange for the number of common shares of the Company subject to such deferred share award (prior to its cancellation), which common shares of the Company shall be considered outstanding as of such time, and to receive the Merger Consideration with respect to such common shares of the Company.
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. These common shares were issued under the 2014 Plan. See Note 7 for additional details, including vesting information.
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. See Note 7 for additional details, including vesting information.
On August 7, 2018, the Company issued 29,044 common shares to executives related to the nonvested share awards with either market or performance conditions granted on March 19, 2015. These common shares were issued under the 2014 Plan. See Note 7 for additional details, including vesting information.
Common Dividends
The Company paid the following dividends on common shares/units during the nine months ended September 30, 2018:
Dividend per
Share/Unit
 (1)
 
For the Quarter Ended
 
Record Date
 
Date Paid
$
0.45

 
December 31, 2017
 
December 29, 2017
 
January 16, 2018
$
0.45

 
March 31, 2018
 
March 29, 2018
 
April 16, 2018
$
0.23

 
June 30, 2018
 
June 29, 2018
 
July 16, 2018
(1) Amounts are rounded to the nearest whole cent for presentation purposes.
Under the terms of the Merger Agreement, the Company may not declare or pay any future dividends to the holders of the Company’s common shares during the term of the Merger Agreement without the prior written consent of Pebblebrook, subject to certain exceptions.
Treasury Shares
Treasury shares are accounted for under the cost method. During the nine months ended September 30, 2018, the Company received 49,881 common shares related to employees surrendering shares to pay minimum withholding taxes on the vesting date and forfeiting nonvested shares upon resignation.
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 nine

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months ended September 30, 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 September 30, 2018, the Company has availability under the Repurchase Program to acquire up to $495,351 of common shares. Subject to the restrictions under the Merger Agreement, the timing, manner, price and actual number of shares repurchased, if any, 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 repurchase any specific dollar amount or 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 nine months ended September 30, 2018, the Company re-issued 19,125 treasury shares related to earned 2017 compensation for the Board of Trustees, 45,454 treasury shares related to the earned share awards with either market or performance conditions and 156,447 treasury shares related to the grants of nonvested shares with service conditions.
At September 30, 2018, there were 2,853,690 common shares in treasury.
Preferred Shares
The following Preferred Shares were outstanding as of September 30, 2018:
Security Type                                             
 
Number of
Shares
6.375% Series I Preferred Shares
 
4,400,000

6.3% Series J Preferred Shares
 
6,000,000

On May 4, 2017, the Company redeemed all of the outstanding 7.5% Series H Cumulative Redeemable Preferred Shares of Beneficial Interest, par value $0.01 per share (the “Series H Preferred Shares”), for $68,750 ($25.00 per share) plus $272 of accrued and unpaid dividends through the redemption date. The redemption value of the Series H Preferred Shares exceeded their carrying value by $2,401, which is included in the determination of net income attributable to common shareholders for the nine months ended September 30, 2017. The $2,401 represents the offering costs related to the redeemed Series H Preferred Shares.
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.
Pursuant to the terms and conditions in the Merger Agreement, at the Company Merger Effective Time, (i) each outstanding Series I Preferred Share will be converted into the right to receive one share of a newly designated class of preferred shares of Pebblebrook, the Pebblebrook Series E Preferred Shares, having the rights, preferences, privileges and voting powers materially unchanged from those of the Series I Preferred Shares immediately prior to the Company Merger, and (ii) each outstanding Series J Preferred Share will be converted into the right to receive one share of a newly designated class of preferred shares of Pebblebrook, the Pebblebrook Series F Preferred Shares, having the rights, preferences, privileges and voting powers materially unchanged from those of the Series J Preferred Shares immediately prior to the Company Merger.

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Preferred Dividends
The Company paid the following dividends on the Preferred Shares during the nine months ended September 30, 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
6.375% Series I
 
$
0.40

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

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

 
June 30, 2018
 
June 29, 2018
 
July 16, 2018
6.3% Series J
 
$
0.39

 
June 30, 2018
 
June 29, 2018
 
July 16, 2018
(1) Amounts are rounded to the nearest whole cent for presentation purposes.
Noncontrolling Interests of Common Units in Operating Partnership
As of September 30, 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 September 30, 2018, approximately $5,023 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 $5,023 is based on the Company’s closing common share price of $34.59 on September 30, 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.
Pursuant to the terms and conditions in the Merger Agreement, at the Partnership Merger Effective Time, each common unit of the Operating Partnership, other than common units held by the Company, that is issued and outstanding immediately prior to the Partnership Merger Effective Time will be cancelled and converted into the right to receive 0.92 newly and validly issued common units of Pebblebrook OP, without interest. Alternatively, each common unit of the Operating Partnership, other than common units held by the Company, may at the holder’s election be converted into the right to receive a number of Pebblebrook common shares equal to the Exchange Ratio, without interest.
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 September 30, 2018, there were 2,291,284 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 (loss) income.

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A summary of the Company’s nonvested share awards with service conditions as of September 30, 2018 is as follows:
 
Number of
Shares
 
Weighted -
Average Grant
Date Fair Value
Nonvested at January 1, 2018
170,414

 
$
28.95

Granted
156,447

 
25.46

Vested
(55,380
)
 
31.08

Forfeited
(4,732
)
 
26.73

Nonvested at September 30, 2018
266,749

 
$
26.50

As of September 30, 2018 and December 31, 2017, there were $4,613 and $3,214, respectively, of total unrecognized compensation costs related to nonvested share awards with service conditions. As of September 30, 2018 and December 31, 2017, these costs were expected to be recognized over a weighted-average period of 1.4 years. The total intrinsic value of shares vested (calculated as number of shares multiplied by vesting date share price) during the three and nine months ended September 30, 2018 was zero and $1,555, respectively, and during the three and nine months ended September 30, 2017 was $20 and $4,437, 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 (loss) income were $818 and $2,457 for the three and nine months ended September 30, 2018, respectively, and $732 and $2,415 for the three and nine months ended September 30, 2017, respectively.
Pursuant to the terms and conditions in the Merger Agreement, each restricted share award that is outstanding immediately prior to the Company Merger Effective Time will become fully vested and will be cancelled in exchange for the right to receive the Merger Consideration with respect to such restricted share award. 
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. On August 7, 2018, the executives earned 118.0% of the 24,613 target number of shares with a performance period through June 30, 2018, or 29,044 shares, and all of the earned shares vested immediately. The executives also received a cash payment of $175 on the earned shares equal to the value of all dividends paid on common shares from January 1, 2015 until the determination date, August 7, 2018. As of August 8, 2018, the executives are entitled to receive dividends as declared and paid on the earned shares and to vote the shares.
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 commenced on July 1, 2018, the beginning of the requisite service period.
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

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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 were determined during the second quarter of 2018 with an insignificant cumulative adjustment to compensation cost recorded. 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.
The assumptions used were as follows for each performance measure:
 
Volatility
 
Interest
Rates
 
Dividend
Yield
 
Stock
Beta
 
Fair Value of
Components
of Award
 
Weighting
of Total
Awards
March 21, 2018 Awards (performance period starting January 1, 2018)
 
 
 
 
Target amounts
27.70
%
 
2.46
%
 
N/A
 
N/A

 
$
20.00

 
33.40
%
Return on invested capital
N/A

 
N/A

 
N/A
 
N/A

 
$
25.46

 
33.30
%
Peer companies
27.70
%
 
2.46
%
 
N/A
 
1.105

 
$
21.43

 
33.30
%
March 21, 2018 Awards (performance period starting July 1, 2018)
 
 
 
 
Target amounts
27.70
%
 
2.46
%
 
N/A
 
N/A

 
$
24.11

 
33.40
%
Return on invested capital
N/A

 
N/A

 
N/A
 
N/A

 
$
25.46

 
33.30
%
Peer companies
27.70
%
 
2.46
%
 
N/A
 
1.105

 
$
23.67

 
33.30
%
A summary of the Company’s nonvested share awards with either market or performance conditions as of September 30, 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
156,455

 
23.75

Vested
(45,454
)
 
36.88

Forfeited
(8,202
)
 
36.26

Nonvested at September 30, 2018
366,747

 
$
24.65

As of September 30, 2018 and December 31, 2017, there were $6,159 and $4,941, respectively, of total unrecognized compensation costs related to nonvested share awards with market or performance conditions. As of September 30, 2018 and December 31, 2017, these costs were expected to be recognized over a weighted-average period of 2.0 years. As of September 30, 2018 and December 31, 2017, there were 655,221 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 (loss) income were $1,152 and $2,758 for the three and nine months ended September 30, 2018, respectively, and $798 and $2,638 for the three and nine months ended September 30, 2017, respectively.

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Pursuant to the terms and conditions of the Merger Agreement, each performance-based share award that is outstanding immediately prior to the Company Merger Effective Time will automatically become earned and vested with respect to 180% of the target number of common shares subject to such performance-based share award and thereafter will be cancelled and exchanged for the right to receive such number of earned and vested common shares of the Company, which shall be considered outstanding as of such time, and the right to receive the Merger Consideration with respect to such common shares of the Company. 
8.
Revenues
The following tables set forth the Company’s disaggregated hotel operating revenues by the geographic location of its hotels for the three and nine months ended September 30, 2018 and 2017:
 
For the three months ended September 30, 2018
 
Room
 
Food and beverage
 
Other operating department
 
Total hotel operating revenues
Boston
$
39,709

 
$
12,505

 
$
3,029

 
$
55,243

Chicago
18,723

 
4,471

 
1,106

 
$
24,300

Key West
7,060

 
2,136

 
1,326

 
$
10,522

Los Angeles
17,939

 
2,499

 
2,030

 
$
22,468

New York
25,929

 
1,089

 
3,975

 
$
30,993

San Diego Downtown
10,151

 
2,053

 
1,030

 
$
13,234

San Francisco
39,547

 
6,432

 
4,066

 
$
50,045

Washington, DC
24,110

 
5,883

 
3,213

 
$
33,206

Other (1)
31,115

 
14,144

 
7,140

 
$
52,399

 
$
214,283

 
$
51,212

 
$
26,915

 
$
292,410

 
For the nine months ended September 30, 2018
 
Room
 
Food and beverage
 
Other operating department
 
Total hotel operating revenues
Boston
$
99,019

 
$
37,606

 
$
8,443

 
$
145,068

Chicago
45,641

 
11,326

 
3,096

 
$
60,063

Key West
28,202

 
7,606

 
4,150

 
$
39,958

Los Angeles
49,166

 
7,159

 
5,205

 
$
61,530

New York
70,248

 
4,064

 
11,390

 
$
85,702

San Diego Downtown
28,346

 
5,664

 
2,554

 
$
36,564

San Francisco
107,851

 
17,876

 
11,352

 
$
137,079

Washington, DC
84,388

 
20,067

 
7,930

 
$
112,385