Fair Value Measurements and Interest Rate Derivatives (Tables)

6 Months Ended

Jun. 30, 2018

Fair Value Measurements and Interest Rate Derivatives

Schedule of assets measured at fair value on a recurring and nonrecurring basis

Due to weakness in the Houston market, the Company identified indicators of impairment and reviewed both of its Houston hotels for possible impairment. Using Level 3 measurements, including each hotel’s undiscounted cash flow, which took into account each hotel’s expected cash flow from operations, anticipated holding period and estimated proceeds from disposition, the Company determined that neither hotel’s carrying value was fully recoverable. As such, during the second quarter of 2018, the Company recorded an impairment charge of $1.4 million on the Houston hotels, which is included in impairment loss on the Company’s consolidated statements of operations for the three and six months ended June 30, 2018.

The following table presents the Company’s assets measured at fair value on a recurring and nonrecurring basis at June 30, 2018 and December 31, 2017 (in thousands):

			Fair Value Measurements at Reporting Date
	Total		Level 1		Level 2		Level 3
June 30, 2018 (unaudited):
Houston hotels, net	$	32,396	$	—		—	$	32,396
Interest rate cap derivatives		2		—		2		—
Interest rate swap derivatives		7,669		—		7,669		—
Life insurance policy (1)		408		—		408		—
Total assets measured at fair value at June 30, 2018	$	40,475	$	—	$	8,079	$	32,396
December 31, 2017:
Houston hotels, net	$	34,473	$	—		—	$	34,473
Interest rate cap derivatives		4		—		4		—
Interest rate swap derivatives		3,390		—		3,390		—
Life insurance policy (1)		645		—		645		—
Total assets measured at fair value at December 31, 2017	$	38,512	$	—	$	4,039	$	34,473

(1) Includes the split life insurance policy for a former Company associate. 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.

Schedule of liabilities measured at fair value on a recurring and nonrecurring basis

The following table presents the Company’s liabilities measured at fair value on a recurring and nonrecurring basis at June 30, 2018 and December 31, 2017 (in thousands):

			Fair Value Measurements at Reporting Date
	Total		Level 1		Level 2		Level 3
June 30, 2018 (unaudited):
Retirement benefit agreement (1)	$	408	$	—	$	408	$	—
Total liabilities measured at fair value at June 30, 2018	$	408	$	—	$	408	$	—
December 31, 2017:
Retirement benefit agreement (1)	$	645	$	—	$	645	$	—
Total liabilities measured at fair value at December 31, 2017	$	645	$	—	$	645	$	—

(1) Includes the retirement benefit agreement for a former Company associate. The agreement calls for the balance of the retirement benefit to be paid out to the former associate in ten annual installments, beginning in 2011. The Company has paid the former associate a total of $1.6 million through June 30, 2018, 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 on the accompanying consolidated balance sheets.

Schedule of interest rate derivatives

The Company’s interest rate derivatives, which are not designated as effective cash flow hedges, consisted of the following at June 30, 2018 (unaudited) and December 31, 2017 (in thousands):

									Estimated Fair Value Asset
		Strike / Capped			Effective	Maturity	Notional		June 30,		December 31,
Hedged Debt	Type	Rate		Index	Date	Date	Amount		2018		2017
Hilton San Diego Bayfront (1)	Cap	4.250	%	1-Month LIBOR	May 1, 2017	May 1, 2019	$	108,834	$	—	$	—
Hilton San Diego Bayfront (1)	Cap	6.000	%	1-Month LIBOR	November 10, 2017	December 9, 2020	$	220,000		2		4
$85.0 million term loan (2)	Swap	3.391	%	1-Month LIBOR	October 29, 2015	September 2, 2022	$	85,000		3,841		2,010
$100.0 million term loan (3)	Swap	3.653	%	1-Month LIBOR	January 29, 2016	January 31, 2023	$	100,000		3,828		1,380
									$	7,671	$	3,394

(1) In November 2017, the Company refinanced the existing loan secured by the Hilton San Diego Bayfront. Coterminous with the loan refinance, the Company purchased a new interest rate cap agreement with a strike rate of 6.0% and an expiration date in December 2020. The fair values of both Hilton San Diego Bayfront cap agreements are included in other assets, net on the accompanying consolidated balance sheets as of both June 30, 2018 and December 31, 2017.  

(2) The fair value of the $85.0 million term loan swap agreement is included in other assets, net on the Company’s consolidated balance sheets as of both June 30, 2018 and December 31, 2017. The 1-month LIBOR rate was swapped to a fixed rate of 1.591%.

(3) The fair value of the $100.0 million term loan swap agreement is included in other assets, net on the Company’s consolidated balance sheets as of both June 30, 2018 and December 31, 2017. The 1-month LIBOR rate was swapped to a fixed rate of 1.853%.

Schedule of changes in fair value of interest rate derivatives

Noncash changes in the fair values of the Company’s interest rate derivatives resulted in (decreases) increases to interest expense for the three and six months ended June 30, 2018 and 2017 as follows (unaudited and in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017
Noncash interest on derivatives	$	(1,090)	$	1,006	$	(4,277)	$	349

Schedule of principal values and estimated fair values of debt

The Company’s principal balances and fair market values of its consolidated debt as of June 30, 2018 (unaudited) and December 31, 2017 were as follows (in thousands):

	June 30, 2018				December 31, 2017
	Carrying Amount (1)		Fair Value		Carrying Amount (1)		Fair Value
Debt	$	986,638	$	991,320	$	990,402	$	997,922

The principal balance of debt is presented before any unamortized deferred financing fees.