5. Fair Value Measurements and Interest Rate Derivative Agreements

Fair Value Measurements

As of December 31, 2015 and 2014, the carrying amount of certain financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, accounts payable, and accrued expenses were representative of their fair values due to the short-term maturity of these instruments.

The Company follows the requirements of the Fair Value Measurements and Disclosures Topic of the FASB ASC, which establishes a framework for measuring fair value and disclosing fair value measurements by establishing a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:


Level 1	Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2	Inputs reflect quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the asset or the liability; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level 3	Unobservable inputs reflecting the Company’s own assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.

As of December 31, 2015 and 2014, the only financial instruments that the Company measures at fair value are its interest rate derivative agreements, as well as a life insurance policy and a related retirement benefit agreement. In accordance with the Fair Value Measurement and Disclosure Topic of the FASB ASC, the Company estimates the fair value of its interest rate protection agreements using Level 2 measurements based on quotes obtained from the counterparties, which are based upon the consideration that would be required to terminate the agreements. Both the life insurance policy and the related retirement benefit agreement, which are for one of the Company’s former associates, are valued using Level 2 measurements.

The following table presents the Company’s assets measured at fair value on a recurring and non-recurring basis at December 31, 2015 and 2014 (in thousands):


			Fair Value Measurements at Reporting Date
	Total		Level 1		Level 2		Level 3
December 31, 2015:
Interest rate cap derivative agreements	$	1	$	—	$	1	$	—
Interest rate swap derivative agreement		759		—		759		—
Life insurance policy (1)		964		—		964		—
Total assets at December 31, 2015	$	1,724	$	—	$	1,724	$	—

December 31, 2014:
Interest rate cap derivative agreements	$	—	$	—	$	—	$	—
Life insurance policy (1)		1,198		—		1,198		—
Total assets at December 31, 2014	$	1,198	$	—	$	1,198	$	—

(1)

These amounts are included in other assets, net on the accompanying consolidated balance sheets, and will be used to reimburse the Company for payments made to the former associate from the related retirement benefit agreement, which is included in accrued payroll and employee benefits on the accompanying consolidated balance sheets.

The following table presents the Company’s liabilities measured at fair value on a recurring and non-recurring basis at December 31, 2015 and 2014 (in thousands):


			Fair Value Measurements at Reporting Date
	Total		Level 1		Level 2		Level 3
December 31, 2015:
Interest rate swap derivative agreement	$	437	$	—	$	437	$	—
Retirement benefit agreement (1)		964		—		964		—
Total liabilities at December 31, 2015	$	1,401	$	—	$	1,401	$	—

December 31, 2014:
Retirement benefit agreement (1)	$	1,198	$	—	$	1,198	$	—

(1)

The agreement calls for the balance of the retirement benefit agreement to be paid out to the former associate in 10 annual installments, beginning in 2011. As such, the Company has paid the former associate a total of $1.0 million through December 31, 2015, which was reimbursed to the Company using funds from the related split life insurance policy noted above. These amounts are included in accrued payroll and employee benefits in the accompanying consolidated balance sheets.

Interest Rate Derivative Agreements

The Company’s interest rate derivative agreements consisted of the following at December 31, 2015 and 2014 (dollars in thousands):


		Strike / Capped			Effective	Maturity	Notional		Estimated Fair Value
Hedged Debt	Type	Rate		Index	Date	Date	Amount		2015		2014
Hilton San Diego Bayfront (1)	Cap	3.750	%	3-Month LIBOR	April 15, 2013	April 15, 2015	$	117,000	$	N/A	$	—
Hilton San Diego Bayfront (1)	Cap	4.250	%	1-Month LIBOR	April 15, 2015	May 1, 2017	$	112,827	$	1	$	N/A
Doubletree Guest Suites Times Square (1)	Cap	4.000	%	1-Month LIBOR	October 7, 2011	October 7, 2015	$	177,395	$	N/A	$	—
Term loan #1 (1)	Swap	3.391	%	1-Month LIBOR	October 29, 2015	September 2, 2022	$	85,000	$	759	$	N/A
Term loan #2 (2)	Swap	3.653	%	1-Month LIBOR	January 29, 2016	January 31, 2023	$	100,000	$	(437)	$	N/A
									$	323	$	—

(1)

The fair values of the Hilton San Diego Bayfront cap agreement, the Doubletree Guest Suites Times Square cap agreement and the term loan #1 swap agreement are included in other assets, net on the accompanying consolidated balance sheets. The estimated fair value of the Hilton San Diego Bayfront cap agreement was de minimus at December 31, 2014. The Doubletree Guest Suites Times Square cap agreement was terminated in December 2015 upon the Company’s repayment of the related loan in conjunction with the Company’s sale of its interests in the hotel. The estimated fair value of the Doubletree Guest Suites Times Square cap agreement was de minimus at December 31, 2014. The 1-month LIBOR rate related to term loan #1 was swapped to a fixed rate of 1.591%.

(2)

While the term loan #2 was not drawn until January 2016 (see Notes 7 and 15), the related interest rate swap agreement was purchased in December 2015. The estimated fair value of the term loan #2 interest rate swap agreement is included in other liabilities on the Company’s consolidated balance sheets. The 1-month LIBOR rate related to term loan #2 was swapped to a fixed rate of 1.853%.

During 2014, the Company held an interest rate swap agreement on the JW Marriott New Orleans mortgage. The interest rate swap agreement capped the LIBOR interest rate on the underlying debt at a total interest rate of 5.45%, and the maturity date was in September 2015. In conjunction with the Company’s refinancing of the mortgage secured by the JW Marriott New Orleans in December 2014 (see Note 7), the Company paid a fee of $0.6 million to terminate the interest rate swap agreement.

Changes in the fair values of the Company’s interest rate derivative agreements resulted in decreases to interest expense for the years ended December 31, 2015, 2014 and 2013 as follows (in thousands):


	2015		2014		2013
Gain on derivatives, net	$	(309)	$	(529)	$	(525)

Fair Value of Debt

As of December 31, 2015 and 2014, 79.5% and 71.6% (including the effect of an interest rate swap agreement), respectively, of the Company’s outstanding debt had fixed interest rates. The Company’s carrying value of its debt totaled $1.1 billion and $1.4 billion as of December 31, 2015 and 2014, respectively. Using Level 3 measurements, including the Company’s weighted average cost of debt of 5.0% at December 31, 2015, and 4.5% at December 31, 2014, the Company estimates that the fair market value of its debt totaled $1.1 billion and $1.4 billion as of December 31, 2015 and 2014, respectively.