Fair Value Measurements and Interest Rate Derivatives

6 Months Ended

Jun. 30, 2023

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, 2023 and December 31, 2022, the carrying amount of certain financial instruments, including cash and cash equivalents, restricted cash, accounts receivable and 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, 2023 and December 31, 2022, 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.

Fair Value of Debt

As of June 30, 2023 and December 31, 2022, 51.2% and 42.4%, respectively, of the Company’s outstanding debt had fixed interest rates, including the effects of interest rate swap derivatives and forward starting interest rate swap derivatives. 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, 2023 (unaudited) and December 31, 2022 were as follows (in thousands):

	June 30, 2023				December 31, 2022
	Carrying Amount (1)		Fair Value (2)		Carrying Amount (1)		Fair Value (2)
Debt	$	820,100	$	801,197	$	816,136	$	809,141

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

(2) Due to prevailing market conditions and the current uncertain economic environment, 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.

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, 2023 (unaudited) and December 31, 2022 (in thousands):

Estimated Fair Value of Assets (1)

Strike / Capped

Effective

Maturity

Notional

June 30,

December 31,

Hedged Debt

Type

Rate

Index

Date

Date

Amount

2023

2022

Hilton San Diego Bayfront

Cap

6.000

%

1-Month LIBOR

December 9, 2022

December 9, 2023

$

N/A

$

N/A

$

60

Term Loan 1

Swap

3.675

%

CME Term SOFR

March 17, 2023

March 17, 2026

$

75,000

1,438

N/A

Term Loan 1

Swap

3.931

%

CME Term SOFR

September 14, 2023

September 14, 2026

$

100,000

709

N/A

Term Loan 2

Swap

1.853

%

1-Month LIBOR

January 29, 2016

January 31, 2023

N/A

N/A

208

$

2,147

$

268

(1) In May 2023, the cap derivative was terminated in conjunction with the Company’s repayment of the loan secured by the Hilton San Diego Bayfront (see Note 6). The fair value of the cap derivative is included in prepaid expenses and other current assets on the accompanying consolidated balance sheet as of December 31, 2022. The Term Loan 1 swap derivatives are included in other assets on the accompanying consolidated balance sheet as of June 30, 2023. The fair value of the Term Loan 2 swap derivative is included in prepaid expenses and other current assets on the accompanying consolidated balance sheet as of December 31, 2022.

Noncash changes in the fair values of the Company’s interest rate derivatives resulted in decreases to interest expense for the three and six months ended June 30, 2023 and 2022 as follows (unaudited and in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Noncash interest on derivatives, net	$	(3,711)	$	(1,023)	$	(1,879)	$	(2,865)