Fair Value Measurements and Interest Rate Derivatives

3 Months Ended

Mar. 31, 2020

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 March 31, 2020 and December 31, 2019, 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 both March 31, 2020 and December 31, 2019, the Company measured its interest rate derivatives at fair value on a recurring basis. The Company estimated 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.

During the first quarter of 2020, the Company identified indicators of impairment at the Hilton Times Square and the Renaissance Westchester related to deteriorating profitability exacerbated by the effects of the COVID-19 outbreak on the Company’s expected future operating cash flows. The Company prepared estimates of the future undiscounted cash flows expected to be generated by the two hotels during their anticipated holding periods, using assumptions for forecasted revenue and operating expenses as well as the estimated market values of the hotels. Based on this analysis, the Company concluded the Hilton Times Square and the Renaissance Westchester should be impaired as the estimated future undiscounted cash flows for each was less than such hotel’s carrying value.

To determine the impairment loss for the Hilton Times Square, the Company applied Level 3 measurements to estimate the fair value of the hotel, using a discounted cash flow analysis, taking into account the hotel’s expected cash flow and its estimated market value based upon a market participant’s holding period. The valuation approach included significant unobservable inputs, including revenue growth projections and prevailing market multiples. To determine the impairment loss for the Renaissance Westchester, the Company used Level 2 measurements to estimate the fair value of the hotel, using appraisal techniques to estimate its market value. The Company concluded that the estimated fair value of each hotel was less than its carrying value, resulting in the Company recording impairment charges of $107.9 million on the Hilton Times Square and $5.2 million on the Renaissance Westchester, which are included in impairment losses on the Company’s consolidated statements of operations for the three months ended March 31, 2020. The $107.9 million impairment on the Hilton Times Square is comprised of an $89.4 million write down of the Company’s investment in hotel properties, net (see Note 3), and an $18.5 million write down of the Company’s operating lease right-of-use assets, net (see Note 8). The $5.2 million impairment on the Renaissance Westchester consisted solely of a $5.2 million write down of the Company’s investment in hotel properties, net (see Note 3).

The following table presents the Company’s assets measured at fair value on a recurring and nonrecurring basis at March 31, 2020 and December 31, 2019 (in thousands):

			Fair Value Measurements at Reporting Date
	Total		Level 1		Level 2		Level 3
March 31, 2020 (unaudited):
Hilton Times Square (1)	$	61,261	$	—	$	—	$	61,261
Renaissance Westchester (1)		29,500		—		29,500		—
Total assets measured at fair value at March 31, 2020	$	90,761	$	—	$	29,500	$	61,261
December 31, 2019:
Renaissance Harborplace (1)	$	96,725	$	—	$	—	$	96,725
Total assets measured at fair value at December 31, 2019	$	96,725	$	—	$	—	$	96,725

(1) The fair market value of the Hilton Times Square is comprised of $63.5 million included in investment in hotel properties, net, $12.5 million included in operating lease right-of-use assets, net and $(14.7) million included in operating lease obligations on the Company’s consolidated balance sheets at March 31, 2020. The fair market values of the Renaissance Westchester and the Renaissance Harborplace are included in investment in hotel properties, net on the Company’s consolidated balance sheets at March 31, 2020 and December 31, 2019, respectively.

The following table presents the Company’s liabilities measured at fair value on a recurring and nonrecurring basis at March 31, 2020 and December 31, 2019 (in thousands):

			Fair Value Measurements at Reporting Date
	Total		Level 1		Level 2		Level 3
March 31, 2020 (unaudited):
Interest rate swap derivatives	$	7,161	$	—	$	7,161	$	—
Total liabilities measured at fair value at March 31, 2020	$	7,161	$	—	$	7,161	$	—
December 31, 2019:
Interest rate swap derivatives	$	1,081	$	—	$	1,081	$	—
Total liabilities measured at fair value at December 31, 2019	$	1,081	$	—	$	1,081	$	—

Interest Rate Derivatives

The Company’s interest rate derivatives, which are not designated as effective cash flow hedges, consisted of the following at March 31, 2020 (unaudited) and December 31, 2019 (in thousands):

									Estimated Fair Value of Liabilities (1)
		Strike / Capped			Effective	Maturity	Notional		March 31,		December 31,
Hedged Debt	Type	Rate		Index	Date	Date	Amount		2020		2019
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		(2,706)		(132)
$100.0 million term loan	Swap	1.853	%	1-Month LIBOR	January 29, 2016	January 31, 2023	$	100,000		(4,455)		(949)
									$	(7,161)	$	(1,081)

(1) The fair values of both swap agreements are included in other liabilities on the accompanying consolidated balance sheets as of both March 31, 2020 and December 31, 2019.

Noncash changes in the fair values of the Company’s interest rate derivatives resulted in increases to interest expense for the three months ended March 31, 2020 and 2019 as follows (unaudited and in thousands):

	Three Months Ended March 31,
	2020		2019
Noncash interest on derivatives	$	6,080	$	2,064

Fair Value of Debt

As of March 31, 2020 and December 31, 2019, 59.2% and 77.4%, 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 March 31, 2020 (unaudited) and December 31, 2019 were as follows (in thousands):

	March 31, 2020				December 31, 2019
	Carrying Amount (1)		Fair Value (2)		Carrying Amount (1)		Fair Value
Debt	$	1,272,965	$	1,247,507	$	974,863	$	976,012

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

(2) Due to prevailing market conditions and the uncertain economic environment caused by the COVID-19 pandemic, actual interest rates could vary materially from those estimated, which would result in variances in the Company’s calculations of the fair market value of its debt.