Interest Rate Derivative Agreements

6 Months Ended

Jun. 30, 2011

Interest Rate Derivative Agreements

Interest Rate Derivative Agreements

7. Interest Rate Derivative Agreements

At June 30, 2011, the Company held two interest rate cap agreements and one interest rate swap agreement to manage its exposure to the interest rate risks related to its floating rate debt. The first interest rate cap agreement was acquired in connection with the Company’s purchase of the outside 62.0% equity interests in the Doubletree Guest Suites Times Square as the purchase included the assumption of $270.0 million of non-recourse senior mortgage and mezzanine debt with a blended interest rate of LIBOR plus 115 basis points. The Company valued this interest rate cap agreement at $0.1 million at the acquisition date. The notional amount of the related debt totaled $270.0 million at June 30, 2011. The interest rate cap strike rates range from 3.3208% to 4.49%, and the maturity date is in January 2012. The second interest rate cap agreement was purchased in connection with the Company’s acquisition of the 75.0% majority interest in the entity that owns the Hilton San Diego Bayfront. Concurrent with the acquisition, the joint venture replaced the hotel’s $233.8 million construction loan (which was scheduled to mature on April 12, 2011) with a new $240.0 million mortgage financing secured by the hotel which bears a floating rate of interest of LIBOR plus 325 basis points. The Company paid $0.1 million for this interest rate cap agreement. The notional amount of the related debt totaled $120.0 million at June 30, 2011. The interest rate cap strike rate is 3.75%, and the maturity date is in April 2013. The interest rate swap agreement was acquired in connection with the Company’s purchase of the JW Marriott New Orleans, which included the assumption of $42.2 million of floating rate debt which was swapped to a fixed rate of 5.45%. The Company valued this interest rate swap agreement at $0.3 million at the acquisition date. The notional amount of the related debt totaled $41.9 million as of June 30, 2011. The interest rate swap agreement caps the LIBOR interest rate on the underlying debt at a total interest rate of 5.45%, and the maturity date is in September 2015. None of the interest rate derivative agreements qualify for effective hedge accounting treatment. Accordingly, changes in the fair value of the Company’s interest rate derivative agreements resulted in a net loss of $1.0 million for both the three and six months ended June 30, 2011, which has been reflected as an increase in interest expense. As of June 30, 2011, the fair values of the interest rate cap agreements totaled an asset of $22,000, and the fair value of the interest rate swap agreement was a liability of $0.5 million.