3. Investment in Hotel Properties

Investment in hotel properties, net consisted of the following (in thousands):


	December 31,
	2014		2013
Land	$	570,011	$	439,304
Buildings and improvements		3,237,596		2,977,458
Furniture, fixtures and equipment		450,057		414,192
Intangibles		147,947		171,889
Franchise fees		1,167		1,346
Construction in process		68,275		34,643
		4,475,053		4,038,832
Accumulated depreciation and amortization		(936,924)		(807,450)
	$	3,538,129	$	3,231,382

Acquisitions - 2014

In June 2014, the Company acquired approximately seven acres of land underlying the Fairmont Newport Beach for $11.0 million, using net proceeds from the March 2014 issuance of its common stock in connection with its Equity Distribution Agreements, combined with cash on hand. Prior to the Company’s acquisition, the land was leased to the Company by a third party.

In July 2014, the Company purchased the 544-room Marriott Wailea for a net purchase price of $325.6 million, which was comprised of $265.6 million in cash, including $4.4 million of proration credits and unrestricted and restricted cash received from the seller, and $60.0 million of the Company’s common stock issued directly to the seller (the “Wailea stock consideration”). The acquisition was funded with proceeds received from the Company’s June 2014 common stock offering, as well as with the Wailea stock consideration, consisting of 4,034,970 shares of the Company’s common stock valued at $60.0 million. The Wailea stock consideration was determined by dividing $60.0 million by $14.87, which was the NYSE closing price of the Company’s common stock on June 19, 2014, the date the Marriott Wailea purchase and sale agreement was executed. In connection with this acquisition, the Company entered into a registration rights agreement requiring the Company to register the Wailea stock consideration. On July 17, 2014, the Company filed a prospectus supplement with the SEC, which registered the shares comprising the Wailea stock consideration for resale in accordance with the registration rights agreement. Based on the $14.87 closing price of the Company’s common stock on the NYSE on July 17, 2014, the date the acquisition closed, the total purchase price of the Marriott Wailea for accounting purposes was also $325.6 million. The Company recorded the acquisition at fair value using an independent third-party analysis, with the purchase price allocated to investment in hotel properties and hotel working capital assets and liabilities. The Company recognized acquisition related costs of $0.5 million during 2014, which are included in corporate overhead on the Company’s consolidated statements of operations. The results of operations for the Marriott Wailea have been included in the Company’s statements of operations from the acquisition date of July 17, 2014 through the year ended December 31, 2014. Subsequent to the Company’s acquisition of the hotel, three rooms were temporarily taken out of service, leaving 541 rooms available to sell.

The fair values of the assets acquired and liabilities assumed at the Marriott Wailea’s acquisition date were allocated based on an independent third-party analysis. The following table summarizes the fair values of assets acquired, liabilities assumed and equity issued in this acquisition (in thousands):


Assets:
Investment in hotel properties	$	327,035
Accounts receivable		3,122
Inventory		75
Prepaid expenses		238
Other assets		150
Total assets acquired		330,620

Liabilities:
Accounts payable		3,534
Accrued payroll and employee benefits		142
Other current liabilities		1,371
Other liabilities		15
Total liabilities assumed		5,062

Total equity issued directly to seller		60,000

Total cash paid for acquisition	$	265,558

Investment in hotel properties was allocated to land ($119.7 million), buildings and improvements ($194.2 million), furniture, fixtures and equipment ($8.2 million), and intangibles ($4.9 million) related to advanced bookings, above/(below) market lease agreements, and in-place lease agreements. Details of the intangibles acquired are as follows (in thousands):


	Value at		Weighted Average
	Acquisition		Expected Life
Advanced bookings	$	4,207	41 months
Above/(Below) market lease agreements, net		15	1 month
In-place lease agreements		686	3 to 14 months
Total intangibles related to the 2014 acquisition		4,908	44 to 55 months
Accumulated amortization		(533)
Net book value of intangibles related to 2014 acquisition	$	4,375

During the year ended December 31, 2014, the Company recorded amortization expense related to its Marriott Wailea intangibles as follows (in thousands):


	2014
Advanced bookings	$	481
Above/(Below) market lease agreements, net		(21)
In-place lease agreements		73
Total amortization expense on intangibles related to the 2014 acquisition	$	533

Acquisitions - 2013

In May 2013, the Company purchased the 250-room Hilton New Orleans St. Charles for a net purchase price of $59.1 million, including $0.2 million of proration credits and unrestricted cash received from the seller. The acquisition was funded with $53.2 million of proceeds generated by the Company’s January 2013 sale of four hotels and a commercial laundry facility located in Rochester, Minnesota (see Note 4), as well as with proceeds received from the Company’s February 2013 issuance of common stock. The Company recorded the acquisition at fair value using an independent third-party analysis, with the purchase price allocated to investment in hotel properties and hotel working capital assets and liabilities. The Company incurred acquisition-related costs of $0.4 million during 2013, which are included in corporate overhead on the Company’s consolidated statements of operations. The results of operations for the Hilton New Orleans St. Charles have been included in the Company’s consolidated statements of operations from the acquisition date of May 1, 2013 through the year ended December 31, 2014.

In July 2013, the Company purchased the 1,053-room Boston Park Plaza for a net purchase price of $248.0 million, including $2.0 million of proration credits, unrestricted and restricted cash and other adjustments received from the seller. The acquisition was funded with $92.3 million of proceeds generated by the Company’s January 2013 sale of four hotels and a commercial laundry facility located in Rochester, Minnesota (see Note 4), the assumption of a $119.2 million non-recourse loan secured by the hotel, as well as with proceeds received from the Company’s February 2013 issuance of common stock and with cash on hand. The Company recorded the acquisition at fair value using an independent third-party analysis, with the purchase price allocated to investment in hotel properties, hotel working capital assets, notes payable and hotel working capital liabilities. The Company incurred acquisition-related costs of $0.9 million during 2013, which are included in corporate overhead on the Company’s consolidated statements of operations. The results of operations for the Boston Park Plaza have been included in the Company’s consolidated statements of operations from the acquisition date of July 2, 2013 through the year ended December 31, 2014.

In December 2013, the Company purchased the 802-room Hyatt Regency San Francisco for a net purchase price of $262.5 million, including $5.5 million of purchase price adjustments comprised of restricted cash and other adjustments received from the seller. The acquisition was funded with proceeds generated by the Company’s November 2013 issuance of common stock. The Company recorded the acquisition at fair value using an independent third-party analysis, with the purchase price and other adjustments allocated to investment in hotel properties, prepaid expenses and other current liabilities. The Company incurred acquisition-related costs of $0.5 million during 2013, which are included in corporate overhead on the Company’s consolidated statements of operations. The results of operations for the Hyatt Regency San Francisco have been included in the Company’s consolidated statements of operations from the acquisition date of December 2, 2013 through the year ended December 31, 2014.

Acquisitions - 2012

In June 2012, the Company purchased the leasehold interest in the 417-room Wyndham Chicago for a contractual purchase price of $88.425 million. The Company funded the acquisition with $29.7 million of cash on hand (including $0.3 million of proration credits) and the issuance of 5,454,164 shares of the Company’s common stock, the “Wyndham stock consideration.” The Wyndham stock consideration was determined by dividing $58.425 million by the product of (1) the closing price of $10.40 on the NYSE of the Company’s common stock on May 2, 2012 and (2) 1.03. In connection with this acquisition, the Company entered into a registration rights agreement requiring the Company to register the Wyndham stock consideration. The Company prepared the registration statement on Form S-3, which was filed with the SEC as required on June 4, 2012. Based on the $9.38 closing price of the Company’s common stock on the NYSE on June 4, 2012, the date the acquisition closed, the total purchase price of the Wyndham Chicago hotel for accounting purposes was $81.16 million, excluding proration adjustments and closing costs. Immediately upon acquisition, the Company rebranded the hotel the Hyatt Chicago Magnificent Mile. The Company recorded the acquisition at fair value using an independent third-party analysis, with the purchase price allocated to investment in hotel properties, hotel working capital assets and liabilities, obligations under capital lease and the Company’s common stock. During 2012, the Company incurred acquisition-related costs of $1.3 million, which are included in corporate overhead on the Company’s consolidated statements of operations. The results of operations for the Hyatt Chicago Magnificent Mile have been included in the Company’s consolidated statements of operations from the acquisition date of June 4, 2012 through the year ended December 31, 2014.

In July 2012, the Company purchased the 357-room Hilton Garden Inn Chicago Downtown/Magnificent Mile for a net purchase price of $90.3 million, including $1.45 million of proration credits. The Company recorded the acquisition at fair value using an independent third-party analysis, with the purchase price allocated to investment in hotel properties and hotel working capital assets and liabilities. The Company incurred acquisition-related costs of $0.7 million and $0.2 million during 2012 and 2011, respectively, which are included in corporate overhead on the Company’s consolidated statements of operations. The results of operations for the Hilton Garden Inn Chicago Downtown/Magnificent Mile have been included in the Company’s consolidated statements of operations from the acquisition date of July 19, 2012 through the year ended December 31, 2014.

Acquired properties are included in the Company’s results of operations from the date of acquisition. The following unaudited pro forma results of operations reflect the Company’s results as if the acquisitions of the Marriott Wailea in July 2014, the Hilton New Orleans St. Charles in May 2013, the Boston Park Plaza in July 2013, the Hyatt Regency San Francisco in December 2013, the Hyatt Chicago Magnificent Mile in June 2012 and the Hilton Garden Inn Chicago Downtown/Magnificent Mile in July 2012 had occurred on January 1, 2012. In the Company’s opinion, all significant adjustments necessary to reflect the effects of the acquisitions have been made (in thousands, except per share data):


	2014		2013		2012
Revenues	$	1,175,367	$	1,100,354	$	1,063,094

Income available (loss attributable) to common stockholders from continuing operations	$	74,811	$	19,931	$	(9,742)

Income (loss) per diluted share available (attributable) to common stockholders from continuing operations	$	0.39	$	0.12	$	(0.08)

For the year ended December 31, 2014, the Company included $27.0 million of revenues, and net income of $3.5 million in its consolidated statements of operations related to the Company’s 2014 acquisitions. For the year ended December 31, 2013, the Company included $51.0 million of revenues, and net income of $2.8 million in its consolidated statements of operations related to the Company’s 2013 acquisitions. For the year ended December 31, 2012, the Company included $27.7 million of revenues, and a net loss of $1.1 million in its consolidated statements of operations related to the Company’s 2012 acquisitions.

Intangible Assets

As of December 31, 2014 and 2013, intangible assets included in the Company’s investment in hotel properties, net consisted of the following (in thousands):


	2014		2013
Advanced bookings (1)	$	10,621	$	35,154
Easement agreement (2)		9,727		9,727
Ground/air lease agreements (3)		121,850		121,850
In-place lease agreements (4)		6,795		6,223
Above/(below) market lease agreements, net (5)		(3,896)		(3,915)
Below market management agreement (6)		2,850		2,850
		147,947		171,889
Accumulated amortization		(22,453)		(44,426)
	$	125,494	$	127,463

Amortization expense on these intangible assets for the years ended December 31, 2014, 2013 and 2012 consisted of the following (in thousands):


	2014		2013		2012
Advanced bookings (1)	$	1,769	$	4,560	$	14,824
Ground/air lease agreements (3)		4,113		4,113		4,113
In-place lease agreements (4)		830		454		348
Above/(below) market lease agreements, net (5)		(304)		(148)		(6)
Below market management agreement (6)		469		469		212
	$	6,877	$	9,448	$	19,491

(1)

Advanced bookings consist of advance deposits related to the purchases of the Boston Park Plaza, the Hyatt Regency San Francisco, and the Marriott Wailea. The contractual advanced hotel bookings were recorded at a discounted present value based on estimated collectability, and are amortized using the straight-line method based over the periods the amounts are expected to be collected. The amortization expense for contractual advanced hotel bookings is included in depreciation and amortization expense in the Company’s consolidated statements of operations. The amounts will be fully amortized for the Boston Park Plaza, the Hyatt Regency San Francisco and the Marriott Wailea by June 2018, December 2017 and July 2018, respectively.

(2)

The Easement agreement at the Hilton Times Square was valued at fair value at the date of acquisition. The Hilton Times Square easement agreement has an indefinite useful life, and, therefore, is not amortized. This non-amortizable intangible asset is reviewed annually for impairment and more frequently if events or circumstances indicate that the asset may be impaired. If a non-amortizable intangible asset is subsequently determined to have a finite useful life, the intangible asset will be written down to the lower of its fair value or carrying amount and then amortized prospectively, based on the remaining useful life of the intangible asset.

(3)

Ground/air lease agreements at the Doubletree Guest Suites Times Square, the Hilton Times Square and the JW Marriott New Orleans were valued at fair value at the dates of acquisition. The agreements are amortized using the straight-line method over the remaining non-cancelable terms of the related agreements, which range from between approximately 22 and 76 years as of December 31, 2014. The amortization expense for the agreements is included in property tax, ground lease and insurance expense in the Company’s consolidated statements of operations.

(4)

In-place lease agreements at the Boston Park Plaza, the Doubletree Guest Suites Times Square, the Hilton New Orleans St. Charles, the Hilton San Diego Bayfront, the Hyatt Regency San Francisco and the Marriott Wailea, were valued at fair value at the dates of acquisition. The agreements are amortized using the straight-line method over the remaining non-cancelable terms of the related agreements, which range from between approximately two months and 13 years as of December 31, 2014. The amortization expense for the agreements is included in depreciation and amortization expense in the Company’s consolidated statements of operations.

(5)

The above/(below) market lease agreements, net consist of unfavorable tenant lease liabilities at the Boston Park Plaza, the Hilton Garden Inn Chicago Downtown/Magnificent Mile, the Hyatt Regency San Francisco and the Marriott Wailea, and favorable tenant lease assets at the Hilton New Orleans St. Charles, the Hyatt Regency San Francisco and the Marriott Wailea. These agreements were valued at fair value at the dates of acquisition, and are amortized using the straight-line method over the remaining non-cancelable terms of the related agreements, which range from between approximately two months and 17 years as of December 31, 2014. The amortization expense for the agreements is included in other operating revenue in the Company’s consolidated statements of operations.

(6)

The below market management agreement at the Hilton Garden Inn Chicago Downtown/Magnificent Mile was valued at fair value at the acquisition date. The agreement is comprised of two components, one for the management of the Hilton Garden Inn Chicago Downtown/Magnificent Mile, and the other for the potential management of a future hotel. The agreement is amortized using the straight-line method over the remaining non-cancelable terms of the two components, approximately 3 and 8 years each as of December 31, 2014. The amortization expense for the agreement is included in property general and administrative expense in the Company’s consolidated statements of operations.

For the next five years, amortization expense for the intangible assets noted above is expected to be as follows (in thousands):


2015	$	7,334
2016	$	7,239
2017	$	7,206
2018	$	5,673
2019	$	4,341