Fair Value Measurements and Interest Rate Derivatives

6 Months Ended

Jun. 30, 2021

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, 2021 and December 31, 2020, 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 June 30, 2021 and December 31, 2020, 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.

The following table presents the Company’s assets measured at fair value on a recurring and nonrecurring basis at June 30, 2021 and December 31, 2020 (in thousands):

			Fair Value Measurements at Reporting Date
	Total		Level 1		Level 2		Level 3
June 30, 2021 (unaudited):
Interest rate cap derivative	$	—	$	—	$	—	$	—
Total assets measured at fair value at June 30, 2021	$	—	$	—	$	—	$	—
December 31, 2020:
Renaissance Westchester (1)	$	14,125	$	—	$	14,125	$	—
Interest rate cap derivative		—		—		—		—
Total assets measured at fair value at December 31, 2020	$	14,125	$	—	$	14,125	$	—

(1) The fair market value of the Renaissance Westchester is included in investment in hotel properties, net on the Company’s consolidated balance sheet at December 31, 2020.

The following table presents the Company’s liabilities measured at fair value on a recurring and nonrecurring basis at June 30, 2021 and December 31, 2020 (in thousands):

			Fair Value Measurements at Reporting Date
	Total		Level 1		Level 2		Level 3
June 30, 2021 (unaudited):
Interest rate swap derivatives	$	4,132	$	—	$	4,132	$	—
Total liabilities measured at fair value at June 30, 2021	$	4,132	$	—	$	4,132	$	—
December 31, 2020:
Interest rate swap derivatives	$	5,710	$	—	$	5,710	$	—
Total liabilities measured at fair value at December 31, 2020	$	5,710	$	—	$	5,710	$	—

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, 2021 (unaudited) and December 31, 2020 (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		2021		2020
Hilton San Diego Bayfront	Cap	6.000	%	1-Month LIBOR	December 9, 2020	December 15, 2021	$	220,000	$	—	$	—
$85.0 million term loan	Swap	1.591	%	1-Month LIBOR	October 29, 2015	September 2, 2022	$	85,000		(1,468)		(2,100)
$100.0 million term loan	Swap	1.853	%	1-Month LIBOR	January 29, 2016	January 31, 2023	$	100,000		(2,664)		(3,610)
									$	(4,132)	$	(5,710)

(1) The fair values of the cap agreement and both swap agreements are included in other assets, net and other liabilities, respectively, on the accompanying consolidated balance sheets as of both June 30, 2021 and December 31, 2020.

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, 2021 and 2020 as follows (unaudited and in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
Noncash interest on derivatives	$	(709)	$	216	$	(1,578)	$	6,296

Fair Value of Debt

As of June 30, 2021 and December 31, 2020, 70.5% and 70.6%, 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, 2021 (unaudited) and December 31, 2020 were as follows (in thousands):

	June 30, 2021				December 31, 2020
	Carrying Amount (1)		Fair Value (2)		Carrying Amount (1)		Fair Value (2)
Debt	$	746,303	$	720,551	$	747,945	$	715,042

(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.