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Equity Investment in Real Estate

9 Months Ended

Sep. 30, 2013

Note 5. Equity Investments in Real Estate

At September 30, 2013, together with unrelated third parties, we owned equity interests in two hotels, which we refer to as our Unconsolidated Hotels. We do not control the ventures that own these hotels, but we exercise significant influence over them, as described below. We account for these investments under the equity method of accounting (i.e., at cost, increased or decreased by our share of earnings or losses, less distributions, plus contributions and other adjustments required by equity method accounting, such as basis differences from acquisition costs paid to the advisor that we incur and other-than-temporary impairments, if any).

Under the conventional approach of accounting for equity method investments, an investor applies its percentage ownership interest to the venture's net income to determine the investor's share of the earnings or losses of the venture. This approach is inappropriate to use if the venture's capital structure gives different rights and priorities to its investors. We have priority returns on our equity method investments. Therefore, we follow the hypothetical liquidation at book value method in determining our share of the ventures' earnings or losses for the reporting period as this method better reflects our claim on the ventures' book value at the end of each reporting period. Earnings for our equity method investments are recognized in accordance with each respective investment agreement and, where applicable, based upon the allocation of the investment's net assets at book value as if the investment were hypothetically liquidated at the end of each reporting period. Due to our preferred interests, we are not responsible for, and will not reflect, losses to the extent our partners continue to have equity in the investments.

The following table sets forth our ownership interests in our equity investments in real estate and their respective carrying values. The carrying values of these ventures are affected by the timing and nature of distributions (dollars in thousands):


		Ownership Interest	Carrying Value at
Investment	Hotel	at September 30, 2013	September 30, 2013		December 31, 2012
Westin Atlanta Venture^(a)	Westin Atlanta Perimeter North	57%		10,982		11,978
Hyatt French Quarter Venture^(b)	Hyatt New Orleans French Quarter	80%		4,873		12,968
Long Beach Venture^(c)	DoubleTree Hotel Maya Long Beach Residence Inn Long Beach Downtown	—		-		20,202
			$	15,855	$	45,148

__________

We acquired our interest in this joint venture in October 2012. We received no cash distributions during the three and nine months ended September 30, 2013.
We received cash distributions of $0.5 million during the nine months ended September 30, 2013 that represent our equity earnings based on the hypothetical liquidation at book value model for the period. During the third quarter of 2013, we also received a distribution of $6.2 million representing a return of capital for our share of mortgage refinancing proceeds. We capitalized the refinancing fee paid to the advisor totaling $0.3 million. Additionally, the carrying value for this investment includes our share of Other comprehensive loss on an interest rate swap derivative instrument, which was entered into in connection with the refinancing discussed above, recognized by the venture of $0.6 million.
We sold our 49% interest in this venture on July 17, 2013 and recognized a gain on sale of $1.8 million in Net income from equity investments in the consolidated statement of operations.

The following table sets forth our share of equity earnings (loss) from our Unconsolidated Hotels, which are based on the hypothetical liquidation at book value model as well as certain depreciation and amortization adjustments related to basis differentials from acquisitions of certain investments (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
Venture	2013		2012		2013		2012
Long Beach Venture^(a)	$	1,928	$	900	$	2,601	$	1,268
Hyatt French Quarter Venture		(1,524)		28		(1,006)		77
Westin Atlanta Venture		(287)		-		(996)		-
	$	117	$	928	$	599	$	1,345

__________

Represents activity through the date of the sale of this investment on July 17, 2013. Both the three and nine months ended September 30, 2013 include the gain on the sale of our investment, which was $1.8 million.

No other-than-temporary impairments were recognized during either the three or nine months ended September 30, 2013 or 2012.

The following tables present combined summarized financial information of our equity method investment entities. Amounts provided are the total amounts attributable to the ventures since our respective dates of acquisition and do not represent our proportionate share (in thousands):


					September 30, 2013		December 31, 2012
Real estate, net					$	80,509	$	143,872
Other assets						13,492		21,620
Total assets						94,001		165,492
Debt						(63,490)		(98,211)
Other liabilities						(13,288)		(16,538)
Total liabilities						(76,778)		(114,749)
Members’ equity					$	17,223	$	50,743

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013^(a)		2012		2013^(a)		2012
Revenues	$	7,967	$	9,468	$	37,352	$	25,808
Expenses		(9,491)		(9,550)		(40,473)		(27,197)
Gain on sale of real estate
Net loss	$	(1,524)	$	(82)	$	(3,121)	$	(1,389)

__________

Includes revenues, expenses and net loss from the Long Beach Venture for the respective periods through the date of sale of this investment on July 17, 2013.

- Definition

The entire disclosure for equity method investments and joint ventures. Equity method investments are investments that give the investor the ability to exercise significant influence over the operating and financial policies of an investee. Joint ventures are entities owned and operated by a small group of businesses as a separate and specific business or project for the mutual benefit of the members of the group.

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