Fair Value Measurements and Interest Rate Derivatives

6 Months Ended

Jun. 30, 2019

Fair Value Measurements and Interest Rate Derivatives

Fair Value Measurements and Interest Rate Derivatives

4. Fair Value Measurements and Interest Rate Derivatives

Fair Value Measurements

As of June 30, 2019 and December 31, 2018, 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.

A fair value measurement is based on the assumptions that market participants would use in pricing an asset or liability in an orderly transaction. The hierarchy for inputs used in measuring fair value is as follows:

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 June 30, 2019 and December 31, 2018, the only financial instruments that the Company measures at fair value on recurring bases are its interest rate derivatives, along with a life insurance policy and a related retirement benefit agreement. The Company estimates the fair value of its interest rate derivatives 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 a former Company associate, are valued using Level 2 measurements.

The following table presents the Company’s assets measured at fair value on a recurring and nonrecurring basis at June 30, 2019 and December 31, 2018 (in thousands):

			Fair Value Measurements at Reporting Date
	Total		Level 1		Level 2		Level 3
June 30, 2019 (unaudited):
Interest rate cap derivative	$	—	$	—	$	—	$	—
Interest rate swap derivative		32		—		32		—
Life insurance policy (1)		398		—		398		—
Total assets measured at fair value at June 30, 2019	$	430	$	—	$	430	$	—
December 31, 2018:
Interest rate cap derivatives	$	—	$	—	$	—	$	—
Interest rate swap derivatives		4,789		—		4,789		—
Life insurance policy (1)		386		—		386		—
Total assets measured at fair value at December 31, 2018	$	5,175	$	—	$	5,175	$	—

(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.

The following table presents the Company’s liabilities measured at fair value on a recurring and nonrecurring basis at June 30, 2019 and December 31, 2018 (in thousands):

			Fair Value Measurements at Reporting Date
	Total		Level 1		Level 2		Level 3
June 30, 2019 (unaudited):
Interest rate swap derivative	$	885	$	—	$	885	$	—
Retirement benefit agreement (1)		398		—		398		—
Total liabilities measured at fair value at June 30, 2019	$	1,283	$	—	$	1,283	$	—
December 31, 2018:
Retirement benefit agreement (1)	$	386	$	—	$	386	$	—
Total liabilities measured at fair value at December 31, 2018	$	386	$	—	$	386	$	—

(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. As such, the Company has paid the former associate a total of $1.6 million through June 30, 2019, 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.

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, 2019 (unaudited) and December 31, 2018 (in thousands):

									Estimated Fair Value of Assets (Liabilities) (1)
		Strike / Capped			Effective	Maturity	Notional		June 30,		December 31,
Hedged Debt	Type	Rate		Index	Date	Date	Amount		2019		2018
Hilton San Diego Bayfront	Cap	4.250	%	1-Month LIBOR	May 1, 2017	May 1, 2019		N/A	$	N/A	$	—
Hilton San Diego Bayfront	Cap	6.000	%	1-Month LIBOR	November 10, 2017	December 9, 2020	$	220,000		—		—
$85.0 million term loan	Swap	1.591	%	1-Month LIBOR	October 29, 2015	September 2, 2022	$	85,000		32		2,521
$100.0 million term loan	Swap	1.853	%	1-Month LIBOR	January 29, 2016	January 31, 2023	$	100,000		(885)		2,268
									$	(853)	$	4,789

(1) The fair values of the cap agreements and the swap agreement related to the $85.0 million term loan are included in other assets, net on the accompanying consolidated balance sheets as of both June 30, 2019 and December 31, 2018. The swap agreement related to the $100.0 million term loan is included in other liabilities and in other assets, net on the accompanying consolidated balance sheets as of June 30, 2019 and December 31, 2018, respectively.

Noncash changes in the fair values of the Company’s interest rate derivatives resulted in increases (decreases) to interest expense for the three and six months ended June 30, 2019 and 2018 as follows (unaudited and in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
Noncash interest on derivatives	$	3,578	$	(1,090)	$	5,642	$	(4,277)

Fair Value of Debt

As of June 30, 2019 and December 31, 2018, 77.5% and 77.6%, respectively, of the Company’s outstanding debt had fixed interest rates, including the effects of interest rate swap agreements. The Company uses Level 3 measurements to estimate the fair value of its debt by discounting the future cash flows of each instrument at estimated market rates.

The Company’s principal balances and fair market values of its consolidated debt as of June 30, 2019 (unaudited) and December 31, 2018 were as follows (in thousands):

	June 30, 2019				December 31, 2018
	Carrying Amount (1)		Fair Value		Carrying Amount (1)		Fair Value
Debt	$	979,040	$	975,285	$	982,828	$	971,082

(1) The principal balance of debt is presented before any unamortized deferred financing costs.