10-Q 1 cwi2018q310-q.htm 10-Q Document


 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
For the quarterly period ended September 30, 2018
 
 
 
or
 
 
 
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
For the transition period from                     to                       
Commission File Number: 000-54263
cwihighreslogo20.jpg
CAREY WATERMARK INVESTORS INCORPORATED
(Exact name of registrant as specified in its charter)
Maryland
 
26-2145060
(State of incorporation)
 
(I.R.S. Employer Identification No.)
 
 
 
50 Rockefeller Plaza
 
 
New York, New York
 
10020
(Address of principal executive office)
 
(Zip Code)
Investor Relations (212) 492-8920
(212) 492-1100
(Registrant’s telephone numbers, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
Accelerated filer o
Non-accelerated filer þ
 
 
 
Smaller reporting company o
Emerging growth company o
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

Registrant has 140,296,352 shares of common stock, $0.001 par value, outstanding at November 2, 2018.
 




INDEX

Forward-Looking Statements

This Quarterly Report on Form 10-Q, or this Report, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, in Item 2 of Part I of this Report, contains forward-looking statements within the meaning of the federal securities laws. These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result” and similar expressions. These statements are based on the current expectations of our management. Forward-looking statements in this Report include, among others, statements about the impact of Hurricane Irma on certain hotels, including the condition of the properties, cost estimates and the timing of resumption of operations. It is important to note that our actual results could be materially different from those projected in such forward-looking statements. You should exercise caution in relying on forward-looking statements, as they involve known and unknown risks, uncertainties, and other factors that may materially affect our future results, performance, achievements or transactions. Information on factors that could impact actual results and cause them to differ from what is anticipated in the forward-looking statements contained herein is included in this Report as well as in our other filings with the Securities and Exchange Commission, or the SEC, including but not limited to those described in Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2017, as filed with the SEC on March 27, 2018, or the 2017 Annual Report. Except as required by federal securities laws and the rules and regulations of the SEC, we do not undertake to revise or update any forward-looking statements.

All references to “Notes” throughout the document refer to the footnotes to the consolidated financial statements of the registrant in Part I, Item 1. Financial Statements (Unaudited).



CWI 9/30/2018 10-Q 1





PART I — FINANCIAL INFORMATION
Item 1. Financial Statements.

CAREY WATERMARK INVESTORS INCORPORATED
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except share and per share amounts)
 
September 30, 2018
 
December 31, 2017
Assets
 
 
 
Investments in real estate:
 
 
 
Hotels, at cost
$
2,176,322

 
$
2,172,740

Accumulated depreciation
(256,738
)
 
(227,616
)
Net investments in hotels
1,919,584

 
1,945,124

Equity investments in real estate
116,017

 
131,344

Cash and cash equivalents
69,824

 
47,994

Intangible assets, net
77,100

 
78,386

Restricted cash, inclusive of $0 and $3,293, respectively, attributable to Assets held for sale
63,630

 
84,382

Accounts receivable
40,592

 
38,359

Other assets
23,455

 
29,208

Assets held for sale

 
105,124

Total assets
$
2,310,202

 
$
2,459,921

Liabilities and Equity
 
 
 
Non-recourse debt, net, including debt attributable to Assets held for sale (Note 4)
$
1,329,838

 
$
1,420,913

WPC Credit Facility
41,637

 
68,637

Accounts payable, accrued expenses and other liabilities
134,543

 
136,343

Due to related parties and affiliates
4,667

 
3,611

Distributions payable
19,826

 
19,640

Other liabilities held for sale

 
2,889

Total liabilities
1,530,511

 
1,652,033

Commitments and contingencies (Note 10)

 


Common stock, $0.001 par value; 300,000,000 shares authorized; 139,139,949 and 137,826,503 shares, respectively, issued and outstanding
139

 
138

Additional paid-in capital
1,169,258

 
1,153,652

Distributions and accumulated losses
(444,592
)
 
(399,884
)
Accumulated other comprehensive income (loss)
59

 
(455
)
Total stockholders’ equity
724,864

 
753,451

Noncontrolling interests
54,827

 
54,437

Total equity
779,691

 
807,888

Total liabilities and equity
$
2,310,202

 
$
2,459,921


See Notes to Consolidated Financial Statements.


CWI 9/30/2018 10-Q 2





CAREY WATERMARK INVESTORS INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except share and per share amounts)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Revenues
 
 
 
 
 
 
 
Hotel Revenues
 
 
 
 
 
 
 
Rooms
$
94,465

 
$
102,791

 
$
287,031

 
$
320,043

Food and beverage
34,943

 
37,445

 
118,564

 
123,555

Other operating revenue
12,752

 
14,593

 
34,057

 
42,289

Business interruption income
6,075

 

 
18,273

 

Total Hotel Revenues
148,235

 
154,829

 
457,925

 
485,887

Operating Expenses
 
 
 
 
 
 
 
Hotel Expenses
 
 
 
 
 
 
 
Rooms
22,161

 
23,276

 
66,204

 
71,095

Food and beverage
27,056

 
27,725

 
84,083

 
87,315

Other hotel operating expenses
6,922

 
7,486

 
19,704

 
22,413

Property taxes, insurance, rent and other
14,640

 
15,887

 
45,906

 
49,041

Sales and marketing
14,066

 
14,784

 
43,381

 
45,589

General and administrative
13,247

 
14,202

 
39,739

 
42,373

Repairs and maintenance
4,956

 
5,077

 
14,866

 
15,652

Management fees
4,502

 
3,248

 
13,963

 
13,516

Utilities
4,025

 
4,413

 
10,991

 
12,531

Depreciation and amortization
18,642

 
20,478

 
57,615

 
61,510

Total Hotel Expenses
130,217

 
136,576

 
396,452

 
421,035

 
 
 
 
 
 
 
 
Other Operating Expenses
 
 
 
 
 
 
 
Asset management fees to affiliate and other expenses
3,770

 
3,660

 
11,524

 
11,679

Corporate general and administrative expenses
2,839

 
2,579

 
8,555

 
7,898

(Gain) loss on hurricane-related property damage
(41
)
 
7,609

 
(1,106
)
 
7,609

Total Other Operating Expenses, Net
6,568

 
13,848

 
18,973

 
27,186

Operating Income
11,450

 
4,405

 
42,500

 
37,666

Other Income and (Expenses)
 
 
 
 
 
 
 
Interest expense
(16,557
)
 
(16,957
)
 
(49,826
)
 
(49,820
)
Equity in (losses) earnings of equity method investments in real estate
(589
)
 
(3,464
)
 
(538
)
 
1,072

Net loss on extinguishment of debt
(322
)
 

 
(511
)
 
(225
)
Other income
140

 
33

 
508

 
93

Total Other Income and (Expenses)
(17,328
)
 
(20,388
)
 
(50,367
)
 
(48,880
)
Loss from Operations Before Income Taxes and Net Gain on Sale of Real Estate
(5,878
)
 
(15,983
)
 
(7,867
)
 
(11,214
)
(Provision for) benefit from income taxes
(986
)
 
162

 
(3,516
)
 
(630
)
Loss from Operations Before Net Gain on Sale of Real Estate
(6,864
)
 
(15,821
)
 
(11,383
)
 
(11,844
)
Net (loss) gain on sale of real estate
(669
)
 

 
31,260

 
5,164

Net (Loss) Income
(7,533
)
 
(15,821
)
 
19,877

 
(6,680
)
Loss (income) attributable to noncontrolling interests (inclusive of Available Cash Distributions to a related party of $2,478, $2,498, $3,450, and $5,743, respectively)
323

 
7,052

 
(5,180
)
 
2,881

Net (Loss) Income Attributable to CWI Stockholders
$
(7,210
)
 
$
(8,769
)
 
$
14,697

 
$
(3,799
)
Basic and Diluted (Loss) Income Per Share
$
(0.05
)
 
$
(0.06
)
 
$
0.11

 
$
(0.03
)
Basic and Diluted Weighted-Average Shares Outstanding
139,439,615

 
137,326,890

 
139,175,017

 
136,759,817

Distributions Declared Per Share
$
0.1425

 
$
0.1425

 
$
0.4275

 
$
0.4275


See Notes to Consolidated Financial Statements.


CWI 9/30/2018 10-Q 3





CAREY WATERMARK INVESTORS INCORPORATED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (UNAUDITED)
(in thousands)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Net (Loss) Income
$
(7,533
)
 
$
(15,821
)
 
$
19,877

 
$
(6,680
)
Other Comprehensive Income
 
 
 
 
 
 
 
Unrealized gain on derivative instruments
85

 
248

 
511

 
585

Comprehensive (Loss) Income
(7,448
)
 
(15,573
)
 
20,388

 
(6,095
)
 
 
 
 
 
 
 
 
Amounts Attributable to Noncontrolling Interests
 
 
 
 
 
 
 
Net loss (income)
323

 
7,052

 
(5,180
)
 
2,881

Unrealized (gain) loss on derivative instruments
(1
)
 
(5
)
 
3

 
(9
)
Comprehensive loss (income) attributable to noncontrolling interests
322

 
7,047

 
(5,177
)
 
2,872

Comprehensive (Loss) Income Attributable to CWI Stockholders
$
(7,126
)
 
$
(8,526
)
 
$
15,211

 
$
(3,223
)

See Notes to Consolidated Financial Statements.


CWI 9/30/2018 10-Q 4





CAREY WATERMARK INVESTORS INCORPORATED
CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)
Nine Months Ended September 30, 2018 and 2017
(in thousands, except share and per share amounts)
 
CWI Stockholders
 
 
 
 
 
Shares
 
Common
Stock
 
Additional
Paid-In
Capital
 
Distributions
and Accumulated
Losses
 
Accumulated
Other
Comprehensive Income (Loss)
 
Total CWI
Stockholders
 
Noncontrolling
Interests
 
Total
Balance at January 1, 2018
137,826,503

 
$
138

 
$
1,153,652

 
$
(399,884
)
 
$
(455
)
 
$
753,451

 
$
54,437

 
$
807,888

Net income
 
 
 
 
 
 
14,697

 
 
 
14,697

 
5,180

 
19,877

Shares issued, net of offering costs
3,135,146

 
3

 
33,000

 
 
 
 
 
33,003

 
 
 
33,003

Shares issued to affiliates
1,016,974

 
1

 
10,717

 
 
 
 
 
10,718

 
 
 
10,718

Distributions to noncontrolling interests
 
 
 
 
 
 
 
 
 
 

 
(4,787
)
 
(4,787
)
Shares issued under share incentive plans
18,971

 

 
175

 
 
 
 
 
175

 
 
 
175

Stock-based compensation to directors
17,291

 

 
180

 
 
 
 
 
180

 
 
 
180

Distributions declared ($0.4275 per share)
 
 
 
 
 
 
(59,405
)
 
 
 
(59,405
)
 
 
 
(59,405
)
Other comprehensive income (loss)
 
 
 
 
 
 
 
 
514

 
514

 
(3
)
 
511

Repurchase of shares
(2,874,936
)
 
(3
)
 
(28,466
)
 
 
 
 
 
(28,469
)
 
 
 
(28,469
)
Balance at September 30, 2018
139,139,949

 
$
139

 
$
1,169,258

 
$
(444,592
)
 
$
59

 
$
724,864

 
$
54,827

 
$
779,691

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2017
135,379,038

 
$
135

 
$
1,125,835

 
$
(326,748
)
 
$
(1,128
)
 
$
798,094

 
$
65,163

 
$
863,257

Net loss
 
 
 
 
 
 
(3,799
)
 
 
 
(3,799
)
 
(2,881
)
 
(6,680
)
Shares issued, net of offering costs
3,179,252

 
4

 
34,065

 
 
 
 
 
34,069

 
 
 
34,069

Shares issued to affiliates
1,078,350

 
1

 
11,614

 
 
 
 
 
11,615

 
 
 
11,615

Distributions to noncontrolling interests
 
 
 
 
 
 
 
 
 
 

 
(8,051
)
 
(8,051
)
Shares issued under share incentive plans
23,710

 
 
 
176

 
 
 
 
 
176

 
 
 
176

Stock-based compensation to directors
16,667

 
 
 
180

 
 
 
 
 
180

 
 
 
180

Distributions declared ($0.4275 per share)
 
 
 
 
 
 
(58,427
)
 
 
 
(58,427
)
 
 
 
(58,427
)
Other comprehensive income
 
 
 
 
 
 
 
 
576

 
576

 
9

 
585

Repurchase of shares
(2,638,839
)
 
(3
)
 
(27,073
)
 
 
 
 
 
(27,076
)
 
 
 
(27,076
)
Balance at September 30, 2017
137,038,178

 
$
137

 
$
1,144,797

 
$
(388,974
)
 
$
(552
)
 
$
755,408

 
$
54,240

 
$
809,648


See Notes to Consolidated Financial Statements.


CWI 9/30/2018 10-Q 5





CAREY WATERMARK INVESTORS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)

Nine Months Ended September 30,
 
2018
 
2017
Cash Flows — Operating Activities
 
 
 
Net income (loss)
$
19,877

 
$
(6,680
)
Adjustments to net income (loss):
 
 
 
Depreciation and amortization
57,615

 
61,510

Net gain on sale of real estate (Note 4)
(31,260
)
 
(5,164
)
Business interruption income
(18,273
)
 

Asset management fees to affiliates settled in shares
10,628

 
10,777

Straight-line rent adjustments
4,316

 
3,939

Amortization of deferred financing costs, ground lease intangible and other
2,296

 
2,250

(Gain) loss on hurricane-related property damage
(1,106
)
 
7,609

Equity in losses (earnings) of equity method investments in real estate
538

 
(1,072
)
Net loss on extinguishment of debt
511

 
222

Amortization of stock-based compensation expense
455

 
482

Acquisition fees to affiliates settled in shares

 
2,065

Funding of hurricane/fire related remediation work
(10,738
)
 

Business interruption insurance proceeds
9,323

 
133

Net changes in other operating assets and liabilities
6,396

 
1,843

Insurance proceeds for remediation work due to hurricane damage
4,031

 

Distributions of earnings from equity method investments
2,802

 
1,526

Increase (decrease) in due to related parties and affiliates
1,087

 
(473
)
Receipt of key money and other deferred incentive payments
58

 
66

Net Cash Provided by Operating Activities
58,556

 
79,033

 
 
 
 
Cash Flows — Investing Activities
 
 
 
Proceeds from the sale of real estate investments (Note 4)
156,756

 
23,081

Capital expenditures
(60,311
)
 
(33,038
)
Hurricane/fire related property insurance proceeds
14,379

 

Distributions received from equity investments in excess of cumulative equity income
12,893

 
5,428

Capital contributions to equity investments in real estate
(732
)
 

Repayments of loan receivable
238

 
203

Purchase of equity interest

 
(66,332
)
Net Cash Provided by (Used in) Investing Activities
123,223

 
(70,658
)
 
 
 
 
Cash Flows — Financing Activities
 
 
 
Scheduled payments and prepayments of mortgage principal
(166,332
)
 
(90,463
)
Proceeds from mortgage financing
75,250

 
83,500

Distributions paid
(59,219
)
 
(58,192
)
Repayment of note payable to affiliate
(37,000
)
 

Proceeds from issuance of shares, net of offering costs
33,003

 
34,075

Repurchase of shares
(28,464
)
 
(27,076
)
Proceeds from note payable to affiliate
10,000

 
97,835

Distributions to noncontrolling interests
(4,787
)
 
(8,051
)
Deferred financing costs
(1,959
)
 
(1,302
)
Debt extinguishment costs
(511
)
 

Scheduled payments of loan
(350
)
 
(234
)
Purchase of interest rate caps
(232
)
 
(11
)
Withholding on restricted stock units
(100
)
 
(126
)
Repayment of senior credit facility

 
(22,785
)
Deposits released for mortgage financing

 
1,610

Deposits for mortgage financing

 
(1,510
)
Net Cash (Used In) Provided by Financing Activities
(180,701
)
 
7,270

 
 
 
 
Change in Cash and Cash Equivalents and Restricted Cash During the Period
 
 
 
Net increase in cash and cash equivalents and restricted cash
1,078

 
15,645

Cash and cash equivalents and restricted cash, beginning of period
132,376

 
120,347

Cash and cash equivalents and restricted cash, end of period
$
133,454

 
$
135,992

See Notes to Consolidated Financial Statements.


CWI 9/30/2018 10-Q 6





CAREY WATERMARK INVESTORS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1. Business

Organization

Carey Watermark Investors Incorporated, or CWI, together with its consolidated subsidiaries, is a publicly-owned, non-listed real estate investment trust, or REIT, that invests in, manages and seeks to enhance the value of, interests in lodging and lodging-related properties, in the United States. We conduct substantially all of our investment activities and own all of our assets through CWI OP, LP, or the Operating Partnership. We are a general partner and a limited partner of, and own a 99.985% capital interest in, the Operating Partnership. Carey Watermark Holdings, LLC, or Carey Watermark Holdings, which is owned indirectly by both W. P. Carey Inc., or WPC, and Watermark Capital Partners, LLC, or Watermark Capital Partners, holds a special general partner interest in the Operating Partnership.

We are managed by Carey Lodging Advisors, LLC, or our Advisor, an indirect subsidiary of WPC. Our Advisor manages our overall portfolio, including providing oversight and strategic guidance to the independent hotel operators that manage our hotels. CWA, LLC, a subsidiary of Watermark Capital Partners, or the Subadvisor, provides services to our Advisor, primarily relating to acquiring, managing, financing and disposing of our hotels and overseeing the independent operators that manage the day-to-day operations of our hotels. In addition, the Subadvisor provides us with the services of Mr. Michael G. Medzigian, our Chief Executive Officer, subject to the approval of our independent directors.

We held ownership interests in 27 hotels at September 30, 2018, including 23 hotels that we consolidate, or our Consolidated Hotels, and four hotels that we record as equity investments, or our Unconsolidated Hotels.

Public Offerings

We raised $575.8 million through our initial public offering, which ran from September 15, 2010 through September 15, 2013, and $577.4 million through our follow-on offering, which ran from December 20, 2013 through December 31, 2014. We have fully invested the proceeds from both our initial public offering and follow-on offering. In addition, from inception through September 30, 2018, $202.8 million of distributions were reinvested in our common stock as a result of our distribution reinvestment plan, or DRIP.

Note 2. Basis of Presentation

Basis of Presentation

Our interim consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not necessarily include all information and footnotes necessary for a fair statement of our consolidated financial position, results of operations and cash flows in accordance with generally accepted accounting principles in the United States, or GAAP.

In the opinion of management, the unaudited financial information for the interim periods presented in this Report reflects all normal and recurring adjustments necessary for a fair statement of financial position, results of operations and cash flows. Our interim consolidated financial statements should be read in conjunction with our audited consolidated financial statements and accompanying notes for the year ended December 31, 2017, which are included in our 2017 Annual Report, as certain disclosures that would substantially duplicate those contained in the audited consolidated financial statements have not been included in this Report. Operating results for interim periods are not necessarily indicative of operating results for an entire year.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts and the disclosure of contingent amounts in our consolidated financial statements and the accompanying notes. Actual results could differ from those estimates.



CWI 9/30/2018 10-Q 7




Notes to Consolidated Financial Statements (Unaudited)

Basis of Consolidation

Our consolidated financial statements reflect all of our accounts, including those of our controlled subsidiaries. The portions of equity in consolidated subsidiaries that are not attributable, directly or indirectly, to us are presented as noncontrolling interests. All significant intercompany accounts and transactions have been eliminated.

When we obtain an economic interest in an entity, we evaluate the entity to determine if it should be deemed a variable interest entity, or VIE, and, if so, whether we are the primary beneficiary and are therefore required to consolidate the entity. We apply accounting guidance for consolidation of VIEs to certain entities in which the equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. Certain decision-making rights within a loan or joint-venture agreement can cause us to consider an entity a VIE. Limited partnerships and other similar entities which operate as a partnership will be considered a VIE unless the limited partners hold substantive kick-out rights or participation rights. Significant judgment is required to determine whether a VIE should be consolidated. We review the contractual arrangements provided for in the partnership agreement or other related contracts to determine whether the entity is considered a VIE, and to establish whether we have any variable interests in the VIE. We then compare our variable interests, if any, to those of the other variable interest holders to determine which party is the primary beneficiary of the VIE based on whether the entity (i) has the power to direct the activities that most significantly impact the economic performance of the VIE and (ii) has the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. The liabilities of these VIEs are non-recourse to us and can only be satisfied from each VIE’s respective assets.

At both September 30, 2018 and December 31, 2017, we considered five entities to be VIEs, four of which we consolidated as we are considered the primary beneficiary. The following table presents a summary of selected financial data of consolidated VIEs included in the consolidated balance sheets (in thousands):
 
September 30, 2018
 
December 31, 2017
Net investments in hotels
$
498,551

 
$
501,287

Intangible assets, net
38,047

 
38,649

Total assets
580,309

 
579,807

 
 
 
 
Non-recourse debt, net
$
344,707

 
$
341,563

Total liabilities
374,355

 
373,548


Accounting Policy Update

In May 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 supersedes or replaces nearly all GAAP revenue recognition guidance. The new guidance establishes a new control-based revenue recognition model that changes the basis for deciding when revenue is recognized over time or at a point in time and expands the disclosures about revenue. The new guidance also applies to sales of real estate and the new principles-based approach is largely based on the transfer of control of the real estate to the buyer. We adopted this guidance for our interim and annual periods beginning January 1, 2018 using the modified retrospective method. We performed a comprehensive evaluation of the impact of the new standard across our revenue streams and determined that the timing of revenue recognition and its classification in our consolidated financial statements will remain substantially unchanged. The adoption of ASU 2014-09 did not have a material impact on our consolidated financial statements.

Revenue consists of amounts derived from hotel operations, including the sale of rooms, food and beverage and revenue from other operating departments, such as parking, spa, resort fees and gift shops, and are presented on a disaggregated basis on the consolidated statements of operations. These revenues are recorded net of any sales or occupancy taxes, which are collected from our guests as earned. All rebates or discounts are recorded as a reduction in revenue and there are no material contingent obligations with respect to rebates or discounts offered by us.

We recognize revenue when control of the promised good or service is transferred to the guest, in an amount that reflects the consideration we expect to receive in exchange for the promised good or service. Room revenue is generated through contracts with guests whereby the guest agrees to pay a daily rate for the right to use a hotel room for an agreed upon length of stay. Our contract performance obligations are fulfilled at the end of the day that the guest is provided the room and revenue is


CWI 9/30/2018 10-Q 8




Notes to Consolidated Financial Statements (Unaudited)

recognized daily at the contract rate. Food and beverage revenue, including restaurant and banquet and catering services, are recognized at a point in time once food and beverage has been provided. Other operating department revenue for services such as parking, spa and other ancillary services, is recognized at a point in time when the goods and services are provided to the guest. We may engage third parties to provide certain services at the hotel, for example, audiovisual services. We evaluate each of these contracts to determine if the hotel is the principal or the agent in the transaction, and record the revenues as appropriate (i.e. gross vs. net).

Payment is due at the time that goods or services are rendered or billed. For room revenue, payment is typically due and paid in full at the end of the stay with some guests prepaying for their rooms prior to the stay. For package revenue, where ancillary guest services are included with the guests’ hotel reservations in a package arrangement, we allocate revenue based on the stand-alone selling price for each of the components of the package. We applied a practical expedient to not disclose the value of unsatisfied performance obligations for contracts that have an original expected length of one year or less. Any contracts that have an original expected length of greater than one year are insignificant.

Reclassifications

Certain prior period amounts have been reclassified to conform to the current period presentation.

Restricted Cash — In connection with our adoption of ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, as described below, we revised our consolidated statements of cash flows to include restricted cash when reconciling the beginning-of-period and end-of-period cash amounts shown on the statement of cash flows. As a result, we retrospectively revised prior periods presented to conform to the current period presentation. Restricted cash consists primarily of amounts escrowed pursuant to the terms of our mortgage debt to fund planned renovations and improvements (including at hotels damaged by Hurricane Irma), property taxes, insurance, and normal replacement of furniture, fixtures and equipment at our hotels. The following table provides a reconciliation of cash and restricted cash reported within the consolidated balance sheets to the consolidated statements of cash flows (in thousands):
 
September 30, 2018
 
December 31, 2017
Cash and cash equivalents
$
69,824

 
$
47,994

Restricted cash
63,630

 
84,382

Total cash and cash equivalents and restricted cash
$
133,454

 
$
132,376


Recent Accounting Pronouncements

Pronouncements Adopted as of September 30, 2018

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 intends to reduce diversity in practice for certain cash flow classifications, including, but not limited to (i) debt prepayment or debt extinguishment costs, (ii) contingent consideration payments made after a business combination, (iii) proceeds from the settlement of insurance claims, (iv) distributions received from equity method investees and (v) separately identifiable cash flows and application of the predominance principle. We retrospectively adopted this guidance for our interim and annual periods beginning January 1, 2018. As a result, we reclassified distributions received from equity method investments of $0.6 million from net cash provided by operating activities to net cash used in investing activities on the consolidated statement of cash flows for the nine months ended September 30, 2017. The adoption of ASU 2016-15 did not have a material impact on our consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. ASU 2016-18 intends to reduce diversity in practice for the classification and presentation of changes in restricted cash on the statement of cash flows. ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. We retrospectively adopted this guidance for our interim and annual periods beginning January 1, 2018. See Restricted Cash above for additional information.



CWI 9/30/2018 10-Q 9




Notes to Consolidated Financial Statements (Unaudited)

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. ASU 2017-01 clarifies the definition of a business with the objective of adding guidance to assist companies and other reporting organizations with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The changes to the definition of a business will likely result in more acquisitions being accounted for as asset acquisitions across all industries. The guidance is effective for annual reporting periods beginning after December 15, 2017, and the interim periods within those annual periods. We adopted this guidance for our interim and annual periods beginning January 1, 2018. We have had no hotel acquisitions since the adoption of this guidance; however, we expect that certain future hotel acquisitions may be considered asset acquisitions rather than business combinations, which would affect the capitalization of acquisition costs (such costs are expensed for business combinations and capitalized for asset acquisitions).

In February 2017, the FASB issued ASU 2017-05, Other Income — Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20). ASU 2017-05 clarifies that a financial asset is within the scope of Subtopic 610-20 if it meets the definition of an in substance nonfinancial asset. The amendments define the term “in substance nonfinancial asset,” in part, as a financial asset promised to a counterparty in a contract if substantially all of the fair value of the assets (recognized and unrecognized) that are promised to the counterparty in the contract is concentrated in nonfinancial assets. If substantially all of the fair value of the assets that are promised to the counterparty in a contract is concentrated in nonfinancial assets, then all of the financial assets promised to the counterparty are in substance nonfinancial assets within the scope of Subtopic 610-20. This amendment also clarifies that nonfinancial assets within the scope of Subtopic 610-20 may include nonfinancial assets transferred within a legal entity to a counterparty. For example, a parent company may transfer control of nonfinancial assets by transferring ownership interests in a consolidated subsidiary. We adopted this guidance for our interim and annual periods beginning January 1, 2018. The adoption of ASU 2017-05 did not have a material impact on our consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 removes, modifies, and adds certain fair value disclosure requirements. We adopted this guidance for our interim period beginning July 1, 2018. The adoption of this standard did not have a material impact on our consolidated financial statements.

Pronouncements to be Adopted after September 30, 2018

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 modifies the principles for the recognition, measurement, presentation, and disclosure of leases for both parties to a contract, the lessee and the lessor. ASU 2016-02 provides new guidelines that change the accounting for leasing arrangements for lessees, whereby their rights and obligations under substantially all leases, existing and new, would be capitalized and recorded on the balance sheet. For lessors, however, the accounting remains largely equivalent to the current model, with the distinction between operating, sales-type and direct financing leases retained, but updated to align with certain changes to the lessee model and the new revenue recognition standard.

Early application is permitted for all entities. ASU 2016-02 provides two transition methods. The first transition method allows for application of the new model at the beginning of the earliest comparative period presented. Under the second transition method, comparative periods would not be restated, with any cumulative effect adjustments recognized in the opening balance of retained earnings in the period of adoption. In addition, a practical expedient was recently issued by the FASB which allows lessors to combine non-lease components with related lease components if certain conditions are met. We will adopt this guidance for our interim and annual periods beginning January 1, 2019 and expect to use the second transition method. We are evaluating the impact of ASU 2016-02 and have determined that the application of the new standard will result in the recording of a material right-of-use asset and a lease liability on the consolidated balance sheet for each of our ground leases and will require additional quantitative and qualitative disclosures.

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. ASU 2017-12 will make more financial and nonfinancial hedging strategies eligible for hedge accounting. It also amends the presentation and disclosure requirements and changes how companies assess hedge effectiveness. It is intended to more closely align hedge accounting with companies’ risk management strategies, simplify the application of hedge accounting, and increase transparency as to the scope and results of hedging programs. ASU 2017-12 will be effective in fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. We are in the process of evaluating the impact of adopting ASU 2017-12 on our consolidated financial statements and will adopt the standard for the fiscal year beginning January 1, 2019.



CWI 9/30/2018 10-Q 10




Notes to Consolidated Financial Statements (Unaudited)

Note 3. Agreements and Transactions with Related Parties

Agreements with our Advisor and Affiliates

We have an advisory agreement with our Advisor, which we refer to herein as the Advisory Agreement, to perform certain services for us under a fee arrangement, including managing our overall business, our investments and certain administrative duties. The Advisory Agreement has a term of one year and may be renewed for successive one-year periods. Our Advisor also has a subadvisory agreement with the Subadvisor, which we refer to herein as the Subadvisory Agreement, whereby our Advisor pays 20% of its fees earned under the Advisory Agreement to the Subadvisor in return for certain personnel services.

The following tables present a summary of fees we paid; expenses we reimbursed; and distributions we made to our Advisor, the Subadvisor and other affiliates, as described below, in accordance with the terms of those agreements (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Amounts Included in the Consolidated Statements of Operations
 
 
 
 
 
 
 
Asset management fees
$
3,534

 
$
3,578

 
$
10,628

 
$
10,777

Available Cash Distributions
2,478

 
2,498

 
3,450

 
5,743

Personnel and overhead reimbursements
1,681

 
1,563

 
4,584

 
4,473

Interest expense
325

 
170

 
1,015

 
299

Disposition fees (Note 4)
110

 

 
300

 
225

 
$
8,128

 
$
7,809

 
$
19,977

 
$
21,517

 
 
 
 
 
 
 
 
Other Transaction Fees Incurred
 
 
 
 
 
 
 
Capitalized loan refinancing fees
$

 
$

 
$
653

 
$
340

Capitalized acquisition fees for equity investment(a)

 
4,131

 

 
4,131

 
$

 
$
4,131

 
$
653

 
$
4,471

___________
(a)
Our Advisor elected to receive 50% of the acquisition fee related to our investment in the Ritz-Carlton Bacara, Santa Barbara Venture in shares of our common stock and 50% in cash.

The following table presents a summary of the amounts included in Due to related parties and affiliates in the consolidated financial statements (in thousands):
 
September 30, 2018
 
December 31, 2017
Amounts Due to Related Parties and Affiliates
 
 
 
Accrued interest on WPC Credit Facility
$
1,730

 
$
715

Reimbursable costs
1,456

 
1,239

Other amounts due to our Advisor
1,302

 
1,282

Due to other affiliates
179

 
375

 
$
4,667

 
$
3,611




CWI 9/30/2018 10-Q 11




Notes to Consolidated Financial Statements (Unaudited)

Asset Management Fees, Dispositions Fees and Loan Refinancing Fees

We pay our Advisor an annual asset management fee equal to 0.5% of the aggregate Average Market Value of our Investments, (as defined in the Advisory Agreement). Our Advisor is also entitled to receive disposition fees of up to 1.5% of the contract sales price of a property, as well as a loan refinancing fee of up to 1.0% of the principal amount of a refinanced loan, if certain conditions described in the Advisory Agreement are met. If our Advisor elects to receive all or a portion of its fees in shares of our common stock, the number of shares issued is determined by dividing the dollar amount of fees by our most recently published estimated net asset value per share, or NAV. For the nine months ended September 30, 2018 and 2017, we settled $10.7 million and $9.5 million, respectively, of asset management fees in shares of our common stock at our Advisor’s election. At September 30, 2018, our Advisor owned 3,937,243 shares (2.8%) of our outstanding common stock. Asset management fees are included in Asset management fees to affiliate and other expenses in the consolidated financial statements.

Available Cash Distributions

Carey Watermark Holdings’ special general partner interest entitles it to receive distributions of 10% of Available Cash (as defined in the limited partnership agreement of the Operating Partnership), or Available Cash Distributions, generated by the Operating Partnership, subject to certain limitations. In addition, in the event of the dissolution of the Operating Partnership, Carey Watermark Holdings will be entitled to receive distributions of up to 15% of net proceeds, provided certain return thresholds are met for the initial investors in the Operating Partnership. Available Cash Distributions are included in Income attributable to noncontrolling interests in the consolidated financial statements.

Personnel and Overhead Reimbursements/Reimbursable Costs

Under the terms of the Advisory Agreement, our Advisor generally allocates expenses of dedicated and shared resources, including the cost of personnel, rent and related office expenses, between us and our affiliate, Carey Watermark Investors 2 Incorporated, or CWI 2, based on total pro rata hotel revenues on a quarterly basis. CWI 2 is a publicly owned, non-listed REIT that is also advised by our Advisor and invests in lodging and lodging-related properties. Pursuant to the Subadvisory Agreement, after we reimburse our Advisor, it will subsequently reimburse the Subadvisor for personnel costs and other charges, including the services of our Chief Executive Officer, subject to the approval of our board of directors. We have also granted restricted stock units to employees of the Subadvisor pursuant to our 2010 Equity Incentive Plan. These reimbursements are included in Corporate general and administrative expenses and Due to related parties and affiliates in the consolidated financial statements.

Other Amounts Due to our Advisor

This balance primarily represented asset management fees payable to our Advisor.

Other Transactions with Affiliates

WPC Credit Facility

During the third quarter of 2017, our board of directors and the board of directors of WPC approved secured loans from WPC to us of up to $100.0 million for acquisition funding purposes and $25.0 million for working capital purposes. On September 26, 2017, we entered into a secured credit facility, or the WPC Credit Facility, with our Operating Partnership as borrower and WPC as lender. The WPC Credit Facility consists of (i) a bridge term loan of up to $75.0 million, or the Bridge Loan, for the purpose of acquiring an interest in the Ritz-Carlton Bacara, Santa Barbara Venture and (ii) a $25.0 million revolving working capital facility, or the Working Capital Facility, to be used for our working capital needs. As amended, the Bridge Loan is currently scheduled to mature on June 30, 2019, with one three-month extension available at our option. As amended, the Working Capital Facility is currently scheduled to mature on December 31, 2019. If the Advisory Agreement expires or is terminated, both the Bridge Loan and the Working Capital Facility would mature at that time. Both loans bear interest at the London Interbank Offered Rate, or LIBOR, plus 1.0%; provided however, that upon the occurrence of certain events of default (as defined in the loan agreement), all outstanding amounts will be subject to a 2.0% annual interest rate increase. We serve as guarantor of the WPC Credit Facility and have pledged our unencumbered equity interests in certain properties as collateral, as further described in the pledge and security agreement entered into between the borrower and lender. At December 31, 2017, the outstanding balances under the Bridge Loan and Working Capital Facility were $60.8 million and $7.8 million, respectively. At September 30, 2018, the outstanding balances under the Bridge Loan and Working Capital Facility were $40.8 million and $0.8 million, respectively, with $24.2 million available to be drawn under the Working Capital Facility.



CWI 9/30/2018 10-Q 12




Notes to Consolidated Financial Statements (Unaudited)

The WPC Credit Facility includes various customary affirmative and negative covenants. We were in compliance with all applicable covenants at September 30, 2018.

Jointly Owned Investments

At September 30, 2018, we owned interests in three ventures with our affiliate, CWI 2: the Ritz-Carlton Key Biscayne, a Consolidated Hotel, and the Marriott Sawgrass Golf Resort & Spa and the Ritz-Carlton Bacara, Santa Barbara, both Unconsolidated Hotels. A third party also owns an interest in the Ritz-Carlton Key Biscayne.

Note 4. Net Investments in Hotels

Net investments in hotels are summarized as follows (in thousands):
 
September 30, 2018
 
December 31, 2017
Buildings
$
1,560,735

 
$
1,554,798

Land
355,082

 
359,383

Building and site improvements
136,692

 
122,273

Furniture, fixtures and equipment
115,025

 
123,595

Construction in progress
8,788

 
12,691

Hotels, at cost
2,176,322

 
2,172,740

Less: Accumulated depreciation
(256,738
)
 
(227,616
)
Net investments in hotels
$
1,919,584

 
$
1,945,124


During the nine months ended September 30, 2018, we retired fully depreciated furniture, fixtures and equipment aggregating $24.7 million.

Hurricane/Fire Related Disruption

Hurricane Irma made landfall in September 2017, impacting five of our Consolidated Hotels: Hawks Cay Resort, Marriott Boca Raton at Boca Center (sold during the first quarter of 2018), Ritz-Carlton Key Biscayne, Ritz-Carlton Fort Lauderdale and Staybridge Suites Savannah Historic District (sold during the third quarter of 2018). All five hotels sustained damage and all were forced to close for a period of time, except for Marriott Boca Raton at Boca Center. All hotels reopened shortly after Hurricane Irma, with varying degrees of damage, with the exception of the Hawks Cay Resort, which reopened in August 2018. During the three and nine months ended September 30, 2018, we recognized gains of less than $0.1 million and $1.1 million, respectively, resulting from changes in our estimates of the total aggregate damage incurred at the properties. During both the three and nine months ended September 30, 2017, we recognized losses of $7.6 million, representing the property damage insurance deductibles as well as damage to certain hotels that was below the related deductible. Below is a summary of the items that comprised our aggregate damage incurred at the properties (in thousands):
 
Three Months Ended September 30,
 
2018
 
2017
Net write-off of fixed assets
$
3,351

 
$
15,966

Remediation work performed (a)
(1,062
)
 
5,806

Property damage insurance receivables
(2,330
)
 
(14,163
)
(Gain) loss on hurricane-related property damage
$
(41
)
 
$
7,609

 
Nine Months Ended September 30,
 
2018
 
2017
Net write-off of fixed assets
$
8,811

 
$
15,966

Remediation work performed

5,428

 
5,806

Property damage insurance receivables
(15,345
)
 
(14,163
)
(Gain) loss on hurricane-related property damage
$
(1,106
)
 
$
7,609

___________
(a)
For the three months ended September 30, 2018, this represents a change in estimated costs for remediation work incurred.


CWI 9/30/2018 10-Q 13




Notes to Consolidated Financial Statements (Unaudited)


As of September 30, 2018, we have received business interruption insurance proceeds related to the Hawks Cay Resort of $16.0 million, of which we recorded $5.8 million and $16.3 million in the consolidated financial statements as Business interruption income during the three and nine months ended September 30, 2018, respectively.

Additionally, as of September 30, 2018, we have received business interruption insurance proceeds related to the Fairmont Sonoma Mission Inn & Spa, resulting from lost revenue caused by wildfires in Northern California during 2017, of $1.8 million, of which we recorded $1.5 million in the consolidated financial statements as Business interruption income during the second quarter of 2018.

As the restoration work continues to be performed, the estimated total costs will change. Any changes to property damage estimates will be recorded in the periods in which they are determined and any additional remediation work will be recorded in the periods in which it is performed. 

Property Dispositions and Assets and Liabilities Held for Sale

On January 25, 2018, we sold our 100% ownership interest in the Marriott Boca Raton at Boca Center to an unaffiliated third party for a contractual sales price of $76.0 million, with net proceeds after the repayment of the related mortgage loan of approximately $35.4 million, including the release of $1.4 million of restricted cash. We recognized a gain on sale of $12.3 million during the first quarter of 2018 in connection with this transaction. This property was classified as held for sale at December 31, 2017.

On February 5, 2018, we sold our 100% ownership interests in the Hampton Inn Memphis Beale Street and Hampton Inn Atlanta Downtown to an unaffiliated third party for a contractual sales price totaling $63.0 million, with net proceeds after the repayment of the related mortgage loans of approximately $31.8 million, including the release of $2.0 million of restricted cash. We recognized a gain on sale totaling $19.6 million during the first quarter of 2018 in connection with this transaction. These properties were classified as held for sale at December 31, 2017.

On September 27, 2018, we sold our 100% ownership interest in the Staybridge Suites Savannah Historic District to an unaffiliated third party for a contractual sales price of $22.0 million, with net proceeds after the defeasance of the related mortgage loan of approximately $6.7 million. We recognized a loss on sale of $0.7 million during the third quarter of 2018 in connection with this transaction, as well as a $0.3 million loss on extinguishment of debt in connection with the defeasance of the loan.

At September 30, 2018, no properties were classified as held for sale.

Below is a summary of our assets and liabilities held for sale (in thousands):
 
September 30, 2018
 
December 31, 2017
Net investments in hotels
$

 
$
104,062

Accounts receivable

 
681

Other assets

 
377

Intangible assets, net

 
4

Assets held for sale
$

 
$
105,124

 
 
 
 
Restricted cash attributable to Assets held for sale
$

 
$
3,293

 
 
 
 
Non-recourse debt, net attributable to Assets held for sale
$

 
$
71,887

 
 
 
 
Other liabilities held for sale
$

 
$
2,889




CWI 9/30/2018 10-Q 14




Notes to Consolidated Financial Statements (Unaudited)

Construction in Progress

At September 30, 2018 and December 31, 2017, construction in progress, recorded at cost, was $8.8 million and $12.7 million, respectively, and related primarily to planned renovations at the Ritz-Carlton Fort Lauderdale and Ritz-Carlton Key Biscayne and the restoration of the Hawks Cay Resort as a result of the damage caused by Hurricane Irma at September 30, 2018, and planned renovations at the Marriott Raleigh City Center, the Equinox, a Luxury Collection Golf Resort & Spa, the Sheraton Austin Hotel at the Capitol and the Ritz-Carlton Fort Lauderdale at December 31, 2017. Upon substantial completion of renovation work, costs are reclassified from construction in progress to buildings, building and site improvements and furniture, fixture and equipment, as applicable, and depreciation will commence.

We capitalize interest expense and certain other costs, such as property taxes, property insurance, utilities expense and hotel incremental labor costs, related to hotels undergoing major renovations. We capitalized $1.1 million and $0.3 million of such costs during the three months ended September 30, 2018 and 2017, respectively, and $2.6 million and $1.0 million during the nine months ended September 30, 2018 and 2017, respectively. At September 30, 2018 and December 31, 2017, accrued capital expenditures were $7.7 million and $6.0 million, respectively, representing non-cash investing activity.

Note 5. Equity Investments in Real Estate

At September 30, 2018, we owned equity interests in four Unconsolidated Hotels, two with unrelated third parties and two with CWI 2. We do not control the ventures that own these hotels, but we exercise significant influence over them. 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 our Advisor that we incur and other-than-temporary impairment charges, 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 if the venture’s capital structure gives different rights and priorities to its investors. We have priority returns on several of our equity method investments. Therefore, we follow the hypothetical liquidation at book value method in determining our share of these 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.

We classify distributions received from equity method investments using the cumulative earnings approach. Distributions received are considered returns on the investment and classified as cash inflows from operating activities. If, however, the investor’s cumulative distributions received, less distributions received in prior periods determined to be returns of investment, exceeds cumulative equity in earnings recognized, the excess is considered a return of investment and is classified as cash inflows from investing activities.



CWI 9/30/2018 10-Q 15




Notes to Consolidated Financial Statements (Unaudited)

Hurricane-Related Disruption

The Marriott Sawgrass Golf Resort & Spa was impacted by Hurricane Irma when it made landfall in September 2017. The hotel sustained damage and was forced to close for a short period of time. During the three and nine months ended September 30, 2018, the venture recognized losses on hurricane-related property damage of $0.2 million and $0.7 million, respectively. During both the three and nine months ended September 30, 2017, the venture recognized losses on hurricane-related damage of $3.8 million.
 
Three Months Ended September 30,
(in thousands)
2018
 
2017
Net write-off of fixed assets
$
147

 
$
6,160

Remediation work performed

6

 
990

Decrease (increase) in property damage insurance receivables
5

 
(3,305
)
Loss on hurricane-related property damage
$
158

 
$
3,845

 
Nine Months Ended September 30,
(in thousands)
2018
 
2017
Net (write-up) write-off of fixed assets
$
(279
)
 
$
6,160

Remediation work performed

118

 
990

Decrease (increase) in property damage insurance receivables
909

 
(3,305
)
Loss on hurricane-related property damage
$
748

 
$
3,845


As the restoration work continues to be performed, the estimated total costs will change. Any changes to property damage estimates will be recorded in the periods in which they are determined and any additional remediation work will be recorded in the periods in which it is performed. 

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):
Unconsolidated Hotels
 
State
 
Number
of Rooms
 
% Owned
 
Acquisition Date
 
Hotel Type
 
Carrying Value at
 
 
 
 
 
 
September 30, 2018
 
December 31, 2017
Ritz-Carlton Bacara, Santa Barbara Venture (a) (b)
 
CA
 
358

 
40%
 
9/28/2017
 
Resort
 
$
59,145

 
$
65,126

Ritz-Carlton Philadelphia Venture (c)
 
PA
 
301

 
60%
 
5/15/2015
 
Full-service
 
31,092

 
38,469

Marriott Sawgrass Golf Resort & Spa Venture (d) (e)
 
FL
 
514

 
50%
 
4/1/2015
 
Resort
 
25,250

 
27,162

Hyatt Centric French Quarter Venture (f)
 
LA
 
254

 
80%
 
9/6/2011
 
Full-service
 
530

 
587

 
 
 
 
1,427

 
 
 
 
 
 
 
$
116,017

 
$
131,344

___________
(a)
This investment represents a tenancy-in-common interest; the remaining 60% interest is owned by CWI 2.
(b)
We received net cash distributions of $0.1 million and $3.1 million from this investment during the three and nine months ended September 30, 2018, respectively.
(c)
We received cash distributions of $0.7 million and $2.3 million from this investment during the three and nine months ended September 30, 2018, respectively. During the first quarter of 2018, we also received a distribution of $4.4 million representing our share of proceeds from a mortgage refinancing in January 2018. We capitalized the refinancing fee paid to the Advisor totaling $0.4 million.
(d)
We received cash distributions of $0.7 million and $3.5 million from this investment during the three and nine months ended September 30, 2018, respectively.
(e)
This investment is considered a VIE (Note 2). We do not consolidate this entity because we are not the primary beneficiary and the nature of our involvement in the activities of the entity allows us to exercise significant influence, but does not give us power over decisions that significantly affect the economic performance of the entity.
(f)
We received cash distributions of $0.4 million and $1.5 million from this investment during the three and nine months ended September 30, 2018, respectively.



CWI 9/30/2018 10-Q 16




Notes to Consolidated Financial Statements (Unaudited)

The following table sets forth our share of equity in (losses) earnings from our Unconsolidated Hotels, which are based on the hypothetical liquidation at book value model, as well as certain amortization adjustments related to basis differentials from acquisitions of investments (in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Venture
 
2018
 
2017
 
2018
 
2017
Marriott Sawgrass Golf Resort & Spa Venture
 
$
(497
)
 
$
(3,255
)
 
$
1,614

 
$
(1,549
)
Hyatt Centric French Quarter Venture
 
387

 
(239
)
 
1,443

 
490

Ritz-Carlton Philadelphia Venture
 
(283
)
 
396

 
(1,066
)
 
2,025

Ritz-Carlton Bacara, Santa Barbara Venture
 
(196
)
 
(532
)
 
(3,034
)
 
(532
)
Westin Atlanta Venture (a)
 

 
166

 
505

 
638

Total equity in (losses) earnings of equity method investments in real estate
 
$
(589
)
 
$
(3,464
)
 
$
(538
)
 
$
1,072

___________
(a)
On October 19, 2017, the venture sold the Westin Atlanta Perimeter North to an unaffiliated third party.

No other-than-temporary impairment charges related to our investments in these ventures were recognized during the three or nine months ended September 30, 2018 or 2017.

At September 30, 2018 and December 31, 2017, the unamortized basis differences on our equity investments were $7.4 million and $7.2 million, respectively. Net amortization of the basis differences reduced the carrying values of our equity investments by $0.1 million during both the three months ended September 30, 2018 and 2017, and by $0.2 million during both the nine months ended September 30, 2018 and 2017.

The following tables present combined summarized financial information of our Marriott Sawgrass Golf Resort & Spa Venture and Ritz-Carlton Philadelphia Venture. Amounts provided are the total amounts attributable to the ventures and do not represent our proportionate share (in thousands):
 
 
September 30, 2018
 
December 31, 2017
Real estate, net
 
$
224,024

 
$
229,356

Other assets
 
23,155

 
20,839

Total assets
 
247,179

 
250,195

Debt
 
142,159

 
135,705

Other liabilities
 
25,456

 
23,399

Total liabilities
 
167,615

 
159,104

Members’ equity
 
$
79,564

 
$
91,091

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Revenues
$
22,122

 
$
18,590

 
$
76,116

 
$
68,420

Expenses
(23,208
)
 
(22,085
)
 
(72,947
)
 
(70,666
)
Loss on hurricane-related property damage
(159
)
 
(3,845
)
 
(748
)
 
(3,845
)
Net (loss) income attributable to equity method investments
$
(1,245
)
 
$
(7,340
)
 
$
2,421

 
$
(6,091
)



CWI 9/30/2018 10-Q 17




Notes to Consolidated Financial Statements (Unaudited)

Note 6. Intangible Assets and Liabilities

Intangible assets and liabilities, included in Intangible assets, net and Accounts payable, accrued expenses and other liabilities, respectively, in the consolidated financial statements, are summarized as follows (dollars in thousands):
 
 
 
September 30, 2018
 
December 31, 2017
 
Amortization Period (Years)
 
Gross Carrying Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Finite-Lived Intangible Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
Villa/condo rental programs
45 - 55
 
$
72,400

 
$
(6,144
)
 
$
66,256

 
$
72,400

 
$
(5,015
)
 
$
67,385

Below-market hotel ground leases and parking garage lease
10 - 93
 
11,656

 
(873
)
 
10,783

 
11,655

 
(726
)
 
10,929

In-place leases
8 - 15
 
135

 
(74
)
 
61

 
135

 
(63
)
 
72

Total intangible assets, net
 
 
$
84,191

 
$
(7,091
)
 
$
77,100

 
$
84,190

 
$
(5,804
)
 
$
78,386

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Finite-Lived Intangible Liability
 
 
 
 
 
 
 
 
 
 
 
 
 
Above-market hotel ground lease
85
 
$
(2,100
)
 
$
107

 
$
(1,993
)
 
$
(2,100
)
 
$
89

 
$
(2,011
)

Net amortization of intangibles was $0.4 million for both the three months ended September 30, 2018 and 2017, and $1.3 million for both the nine months ended September 30, 2018 and 2017. Amortization of the villa/condo rental programs and in-place lease intangibles are included in Depreciation and amortization, and amortization of below-market hotel ground lease, below-market hotel parking garage lease and above-market hotel ground lease intangibles are included in Property taxes, insurance, rent, and other in the consolidated financial statements.

Note 7. Fair Value Measurements

The fair value of an asset is defined as the exit price, which is the amount that would either be received when an asset is sold or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The guidance establishes a three-tier fair value hierarchy based on the inputs used in measuring fair value. These tiers are: Level 1, for which quoted market prices for identical instruments are available in active markets, such as money market funds, equity securities and U.S. Treasury securities; Level 2, for which there are inputs other than quoted prices included within Level 1 that are observable for the instrument, such as certain derivative instruments, including interest rate caps and swaps; and Level 3, for securities that do not fall into Level 1 or Level 2 and for which little or no market data exists, therefore requiring us to develop our own assumptions.

Items Measured at Fair Value on a Recurring Basis

Derivative Assets and Liabilities — Our derivative assets and liabilities are comprised of interest rate swaps and caps that were measured at fair value using readily observable market inputs, such as quotations on interest rates. These derivative instruments were classified as Level 2 as these instruments are custom, over-the-counter contracts with various bank counterparties that are not traded in an active market (Note 8).

We did not have any transfers into or out of Level 1, Level 2 and Level 3 category of measurements during the three or nine months ended September 30, 2018 or 2017. Gains and losses (realized and unrealized) recognized on items measured at fair value on a recurring basis included in earnings are reported in Other income and (expenses) in the consolidated financial statements.

Our non-recourse debt, net, which we have classified as Level 3, had a carrying value of $1.3 billion and $1.4 billion, and an estimated fair value of $1.3 billion and $1.4 billion at September 30, 2018 and December 31, 2017, respectively. We determined the estimated fair value using a discounted cash flow model with rates that take into account the interest rate risk. We also considered the value of the underlying collateral, taking into account the quality of the collateral and the then-current interest rate.



CWI 9/30/2018 10-Q 18




Notes to Consolidated Financial Statements (Unaudited)

We estimated that our other financial assets and liabilities had fair values that approximated their carrying values at both September 30, 2018 and December 31, 2017.

Items Measured at Fair Value on a Non-Recurring Basis (Including Impairment Charges)

We periodically assess whether there are any indicators that the value of our real estate investments may be impaired or that their carrying value may not be recoverable. Where the undiscounted cash flows for an asset are less than the asset’s carrying value when considering and evaluating the various alternative courses of action that may occur, we recognize an impairment charge to reduce the carrying value of the asset to its estimated fair value. Further, when we classify an asset as held for sale, we carry the asset at the lower of its current carrying value or its fair value, less estimated cost to sell. We did not recognize any impairment charges during the three and nine months ended September 30, 2018 or 2017.

Note 8. Risk Management and Use of Derivative Financial Instruments

Risk Management

In the normal course of our ongoing business operations, we encounter economic risk. There are two main components of economic risk that impact us: interest rate risk and market risk. We are primarily subject to interest rate risk on our interest-bearing assets and liabilities. Market risk includes changes in the value of our properties and related loans.

Derivative Financial Instruments

When we use derivative instruments, it is generally to reduce our exposure to fluctuations in interest rates. We have not entered into, and do not plan to enter into, financial instruments for trading or speculative purposes. In addition to entering into derivative instruments on our own behalf, we may also be a party to derivative instruments that are embedded in other contracts, which are considered to be derivative instruments. The primary risks related to our use of derivative instruments include: (i) a counterparty to a hedging arrangement defaulting on its obligation and (ii) a downgrade in the credit quality of a counterparty to such an extent that our ability to sell or assign our side of the hedging transaction is impaired. While we seek to mitigate these risks by entering into hedging arrangements with large financial institutions that we deem to be creditworthy, it is possible that our hedging transactions, which are intended to limit losses, could adversely affect our earnings. Furthermore, if we terminate a hedging arrangement, we may be obligated to pay certain costs, such as transaction or breakage fees. We have established policies and procedures for risk assessment, as well as the approval, reporting and monitoring of derivative financial instrument activities.

We measure derivative instruments at fair value and record them as assets or liabilities, depending on our rights or obligations under the applicable derivative contract. Derivatives that are not designated as hedges must be adjusted to fair value through earnings. For a derivative designated, and that qualified, as a cash flow hedge, the effective portion of the change in fair value of the derivative is recognized in Other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of the change in fair value of any derivative is immediately recognized in earnings.

The following table sets forth certain information regarding our derivative instruments on our Consolidated Hotels (in thousands):
Derivatives Designated as Hedging Instruments 
 
 
 
Asset Derivatives Fair Value at
 
Liability Derivatives Fair Value at
 
Balance Sheet Location
 
September 30, 2018
 
December 31, 2017
 
September 30, 2018
 
December 31, 2017
Interest rate caps
 
Other assets
 
$
128

 
$
1

 
$

 
$

Interest rate swap
 
Other assets
 
16

 

 

 

Interest rate swap
 
Accounts payable, accrued expenses and other liabilities
 

 

 

 
(2
)
 
 
 
 
$
144

 
$
1

 
$

 
$
(2
)

All derivative transactions with an individual counterparty are governed by a master International Swap and Derivatives Association agreement, which can be considered as a master netting arrangement; however, we report all our derivative instruments on a gross basis in our consolidated financial statements. At both September 30, 2018 and December 31, 2017, no cash collateral had been posted nor received for any of our derivative positions.



CWI 9/30/2018 10-Q 19




Notes to Consolidated Financial Statements (Unaudited)

We recognized unrealized income of less than $0.1 million and $0.1 million in Other comprehensive income on derivatives in connection with our interest rate swaps and caps during the three months ended September 30, 2018 and 2017, respectively, and unrealized income of $0.1 million and unrealized losses of $0.1 million during the nine months ended September 30, 2018 and 2017, respectively.

We reclassified less than $0.1 million and $0.1 million from Other comprehensive income on derivatives into Interest expense during the three months ended September 30, 2018 and 2017, respectively, and $0.4 million and $0.5 million during the nine months ended September 30, 2018 and 2017, respectively.

Amounts reported in Other comprehensive income related to interest rate swaps and caps will be reclassified to Interest expense as interest expense is incurred on our variable-rate debt. At September 30, 2018, we estimated that an additional $0.1 million will be reclassified as Interest expense during the next 12 months related to our interest rate swaps and caps.

Interest Rate Swaps and Caps

We are exposed to the impact of interest rate changes primarily through our borrowing activities. To limit this exposure, we attempt to obtain mortgage financing on a long-term, fixed-rate basis. However, from time to time, we or our investment partners may obtain variable-rate non-recourse mortgage loans and, as a result, may enter into interest rate swap or cap agreements with counterparties. Interest rate swaps, which effectively convert the variable-rate debt service obligations of a loan to a fixed rate, are agreements in which one party exchanges a stream of interest payments for a counterparty’s stream of cash flow over a specific period. The notional, or face, amount on which the swaps are based is not exchanged. An interest rate cap limits the effective borrowing rate of variable-rate debt obligations while allowing participants to share in downward shifts in interest rates. Our objective in using these derivatives is to limit our exposure to interest rate movements.

The interest rate swaps and caps that we had outstanding on our Consolidated Hotels at September 30, 2018 were designated as cash flow hedges and are summarized as follows (dollars in thousands): 
 
 
Number of
 Instruments
 
 
 
Fair Value at
Interest Rate Derivatives
 
 
Notional Amount
 
September 30, 2018
Interest rate caps
 
5
 
$
244,630

 
$
128

Interest rate swap
 
1
 
46,640

 
16

 
 
 
 
 
 
$
144


Credit Risk-Related Contingent Features

We measure our credit exposure on a counterparty basis as the net positive aggregate estimated fair value of our derivatives, net of any collateral received. No collateral was received as of September 30, 2018. At September 30, 2018, both our total credit exposure and the maximum exposure to any single counterparty were $0.1 million.

Some of the agreements we have with our derivative counterparties contain cross-default provisions that could trigger a declaration of default on our derivative obligations if we default, or are capable of being declared in default, on certain of our indebtedness. At September 30, 2018, we had not been declared in default on any of our derivative obligations. At September 30, 2018, we had no derivatives that were in a net liability position. At December 31, 2017, the estimated fair value of our derivatives in a net liability position was less than $0.1 million, which included accrued interest and any nonperformance risk adjustments. If we had breached any of these provisions at December 31, 2017, we could have been required to settle our obligations under these agreements at their aggregate termination value of less than $0.1 million.



CWI 9/30/2018 10-Q 20




Notes to Consolidated Financial Statements (Unaudited)

Note 9. Debt

Non-Recourse Debt

Our non-recourse debt consists of mortgage notes payable, which are collateralized by the assignment of hotel properties. The following table presents the non-recourse debt, net on our Consolidated Hotel investments (dollars in thousands):
 
 
 
 
 
 
Carrying Amount at
 
 
Interest Rate Range
 
Current Maturity Date Range (a)
 
September 30, 2018
 
December 31, 2017
Fixed rate
 
3.6% – 6.5%
 
6/2019 – 4/2024
 
$
1,029,369

 
$
1,082,367

Variable rate (b)
 
4.5% – 7.9%
 
12/2018 – 6/2021
 
300,469

 
338,546

 
 
 
 
 
 
$
1,329,838

 
$
1,420,913

___________
(a)
Many of our mortgage loans have extension options, which are subject to certain conditions. The maturity dates in the table do not reflect the extension options.
(b)
The interest rate range presented for these mortgage loans reflect the rates in effect at September 30, 2018 through the use of an interest rate cap or swap, when applicable.

Lake Arrowhead Resort and Spa

On August 17, 2018, the $15.0 million outstanding mortgage loan on Lake Arrowhead Resort and Spa that matured on June 23, 2018 was modified to extend the maturity date to February 28, 2019 and increase the interest rate from LIBOR plus 2.25% to LIBOR plus 3.0%. Additionally, $0.5 million that was previously in a lender-held reserve account was applied to the loan balance, thereby reducing the outstanding principal balance to $14.5 million.

Covenants

Pursuant to our mortgage loan agreements, our consolidated subsidiaries are subject to various operational and financial covenants, including minimum debt service coverage and debt yield ratios. Most of our mortgage loan agreements contain “lock-box” provisions, which permit the lender to access or sweep a hotel’s excess cash flow and would be triggered under limited circumstances, including the failure to maintain minimum debt service coverage ratios. If a provision were triggered, we would generally be permitted to spend an amount equal to our budgeted hotel operating expenses, taxes, insurance and capital expenditure reserves for the relevant hotel. The lender would then hold all excess cash flow after the payment of debt service in an escrow account until certain performance hurdles are met. Except as discussed below, at September 30, 2018, we were in compliance with the applicable covenants for each of our mortgage loans.

At March 31, 2018, the minimum debt service coverage ratio for the Courtyard Pittsburgh Shadyside was not met; therefore, we entered into a cash management agreement that permits the lender to sweep the hotel’s excess cash flow. As of September 30, 2018, this ratio was still not met and the cash management agreement remained in effect.

At September 30, 2018, the minimum debt service coverage ratios for Holiday Inn Manhattan 6th Avenue Chelsea, Westin Minneapolis and Equinox, a Luxury Collection Golf Resort & Spa were not met; therefore, we entered into cash management agreements that permit each respective lender to sweep the excess cash flow from these hotels.

At September 30, 2018, the minimum debt yield ratio for the Sanderling Resort was not met; therefore, beginning in November 2018, the loan will begin to amortize in an amount equal to the original loan amount over a twenty-five year period and will continue to amortize until such time as the minimum debt yield ratio is met.

WPC Credit Facility

At September 30, 2018, we had outstanding balances under the Bridge Loan and Working Capital Facility of $40.8 million and $0.8 million, respectively, with $24.2 million available to be drawn on the Working Capital Facility. These loans are described in Note 3.



CWI 9/30/2018 10-Q 21




Notes to Consolidated Financial Statements (Unaudited)

Financing Activity During 2018

On June 15, 2018, we refinanced the Ritz-Carlton Fort Lauderdale senior mortgage and mezzanine loans totaling $49.0 million and $21.0 million, respectively, with new senior mortgage and mezzanine loans totaling $47.0 million and $28.3 million, respectively, which have floating annual interest rates of LIBOR plus 2.3% and LIBOR plus 5.8%, respectively, although we have entered into interest rate cap agreements with respect to each of these loans. Both loans have terms of three years. We recognized a net loss on extinguishment of debt of $0.2 million on these refinancings during the nine months ended September 30, 2018.

On September 27, 2018, in connection with the sale of the Staybridge Suites Savannah Historic District (Note 4), we defeased the outstanding $14.4 million mortgage loan on the hotel and recognized a $0.3 million loss on extinguishment of debt during both the three and nine months ended September 30, 2018.

Scheduled Debt Principal Payments

Scheduled debt principal payments during the remainder of 2018, each of the next four calendar years following December 31, 2018 and thereafter are as follows (in thousands):
Years Ending December 31,
 
Total
2018 (remainder) (a)
 
$
50,146

2019 (b)
 
151,387

2020
 
222,362

2021
 
533,503

2022
 
244,104

Thereafter through 2024
 
176,870

 
 
1,378,372

Unamortized deferred financing costs
 
(6,897
)
Total
 
$
1,371,475

___________
(a)
Balance includes $46.1 million for a scheduled balloon payment on one consolidated mortgage loan. We currently intend to refinance this mortgage loan, although there can be no assurance that we will be able to do so on favorable terms, if at all.
(b)
Includes $40.8 million and $0.8 million of scheduled payments on the Bridge Loan and Working Capital Facility, respectively, to WPC (Note 3).

Note 10. Commitments and Contingencies

At September 30, 2018, we were not involved in any material litigation. Various claims and lawsuits arising in the normal course of business are pending against us, including liens for which we may obtain a bond, provide collateral or provide an indemnity, but we do not expect the results of such proceedings to have a material adverse effect on our consolidated financial position, results of operations or cash flows.

Hotel Management Agreements

As of September 30, 2018, our Consolidated Hotel properties were operated pursuant to long-term management agreements with 12 different management companies, with initial terms ranging from five to 30 years. For hotels operated with separate franchise agreements, each management company receives a base management fee, generally ranging from 1.5% to 3.5% of hotel revenues. Four of our management agreements contain the right and license to operate the hotels under specified brands; no separate franchise agreements exist and no separate franchise fee is required for these hotels. The management agreements that include the benefit of a franchise agreement incur a base management fee ranging from 3.0% to 3.5% of hotel revenues. The management companies are generally also eligible to receive an incentive management fee, which is typically calculated as a percentage of operating profit, either (i) in excess of projections with a cap or (ii) after the owner has received a priority return on its investment in the hotel. We incurred management fee expense, including amortization of deferred management fees, of $4.5 million and $3.2 million for the three months ended September 30, 2018 and 2017, respectively, and $14.0 million and $13.5 million for the nine months ended September 30, 2018 and 2017, respectively.



CWI 9/30/2018 10-Q 22




Notes to Consolidated Financial Statements (Unaudited)

Franchise Agreements

As of September 30, 2018, we had 11 franchise agreements with Marriott-owned brands, three with Hilton-owned brands, one with an InterContinental Hotels-owned brand and one with a Hyatt-owned brand related to our Consolidated Hotels. The franchise agreements have initial terms ranging from 15 to 25 years (excluding four hotels that receive the benefits of a franchise agreement pursuant to management agreements, as discussed above). Also, three of our Consolidated Hotels are independent and not subject to franchise agreements. Our franchise agreements grant us the right to the use of the brand name, systems and marks with respect to specified hotels and establish various management, operational, record-keeping, accounting, reporting and marketing standards and procedures that the licensed hotel must comply with. In addition, the franchisor establishes requirements for the quality and condition of the hotel and its furniture, fixtures and equipment, and we are obligated to expend such funds as may be required to maintain the hotel in compliance with those requirements. Typically, our franchise agreements provide for a license fee, or royalty, of 3.0% to 6.0% of room revenues and, if applicable, 2.0% to 3.0% of food and beverage revenue. In addition, we generally pay 1.0% to 4.5% of room revenues as marketing and reservation system contributions for the system-wide benefit of brand hotels. Franchise fees are included in sales and marketing expense in our consolidated financial statements. We incurred franchise fee expense, including amortization of deferred franchise fees, of $3.9 million and $4.4 million for the three months ended September 30, 2018 and 2017, respectively, and $12.3 million and $14.1 million for the nine months ended September 30, 2018 and 2017, respectively.

Capital Expenditures and Reserve Funds

With respect to our hotels that are operated under management or franchise agreements with major international hotel brands and for most of our hotels subject to mortgage loans, we are obligated to maintain furniture, fixtures and equipment reserve accounts for future capital expenditures at these hotels, sufficient to cover the cost of routine improvements and alterations at the hotels. The amount funded into each of these reserve accounts is generally determined pursuant to the management agreements, franchise agreements and/or mortgage loan documents for each of the respective hotels and typically ranges between 3% and 5% of the respective hotel’s total gross revenue. As of September 30, 2018 and December 31, 2017$37.8 million and $32.9 million, respectively, was held in furniture, fixtures and equipment reserve accounts for future capital expenditures, and is included in Restricted cash in the consolidated financial statements.

Renovation Commitments

Certain of our hotel franchise and loan agreements require us to make planned renovations to our hotels. Additionally, from time to time, certain of our hotels may undergo renovations as a result of our decision to upgrade portions of the hotels, such as guestrooms, public space, meeting space, and/or restaurants, in order to better compete with other hotels and alternative lodging options in our markets. At September 30, 2018, we had various contracts outstanding with third parties in connection with the renovation of certain of our hotels. The remaining commitments under these contracts at September 30, 2018 totaled $23.3 million. Funding for a renovation will first come from our furniture, fixtures and equipment reserve accounts, to the extent permitted by the terms of the management agreement. Should these reserves be unavailable or insufficient to cover the cost of the renovation, we will fund all or the remaining portion of the renovation with existing cash resources, proceeds available under our Working Capital Facility and/or other sources of available capital.

Ground Lease Commitments

Three of our hotels are subject to ground leases. Scheduled future minimum ground lease payments during the remainder of 2018, each of the next four calendar years following December 31, 2018 and thereafter are as follows (in thousands):
Years Ending December 31,
 
Total
2018 (remainder)
 
$
1,010

2019
 
4,111

2020
 
4,210

2021
 
4,312

2022
 
4,417

Thereafter through 2106
 
815,831

Total
 
$
833,891




CWI 9/30/2018 10-Q 23




Notes to Consolidated Financial Statements (Unaudited)

For the three months ended September 30, 2018 and 2017, we recorded rent expense of $1.2 million and $1.0 million respectively, both inclusive of percentage rents of $0.2 million, related to these ground leases, which are included in Property taxes, insurance, rent and other in the consolidated financial statements. For the nine months ended September 30, 2018 and 2017, we recorded rent expense of $3.2 million and $2.9 million respectively, both inclusive of percentage rents of $0.6 million, related to these ground leases. Additionally, we recorded straight-line rent adjustment expense related to these ground leases of $1.7 million and $1.3 million for the three months ended September 30, 2018 and 2017, respectively, and $4.3 million and $3.9 million for the nine months ended September 30, 2018 and 2017, respectively.

Note 11. Equity

Reclassifications Out of Accumulated Other Comprehensive Income (Loss)

The following tables present a reconciliation of changes in Accumulated other comprehensive income (loss) by component for the periods presented (in thousands):
 
 
Three Months Ended September 30,
Gains and Losses on Derivative Instruments
 
2018
 
2017
Beginning balance
 
$
(26
)
 
$
(795
)
Other comprehensive income before reclassifications
 
40

 
89

Amounts reclassified from accumulated other comprehensive income (loss) to:
 
 
 
 
Interest expense
 
46

 
110

Equity in earnings of equity method investments in real estate
 

 
49

Total
 
46

 
159

Net current period other comprehensive income
 
86

 
248

Net current period other comprehensive income attributable to noncontrolling interests
 
(1
)
 
(5
)
Ending balance
 
$
59

 
$
(552
)
 
 
Nine Months Ended September 30,
Gains and Losses on Derivative Instruments
 
2018
 
2017
Beginning balance
 
$
(455
)
 
$
(1,128
)
Other comprehensive income (loss) before reclassifications
 
85

 
(74
)
Amounts reclassified from accumulated other comprehensive income (loss) to:
 
 
 
 
Interest expense
 
426

 
466

Equity in earnings of equity method investments in real estate
 

 
193

Total
 
426

 
659

Net current period other comprehensive income
 
511

 
585

Net current period other comprehensive loss (income) attributable to noncontrolling interests
 
3

 
(9
)
Ending balance
 
$
59

 
$
(552
)

Distributions Declared

During the third quarter of 2018, our board of directors declared a quarterly distribution of $0.1425 per share, which was paid on October 15, 2018 to stockholders of record on September 28, 2018, in the aggregate amount of $19.8 million.

During the nine months ended September 30, 2018, our board of directors declared distributions in the aggregate amount of $59.4 million, which equates to $0.4275 per share.



CWI 9/30/2018 10-Q 24




Notes to Consolidated Financial Statements (Unaudited)

Note 12. Income Taxes

We elected to be treated as a REIT and believe that we have been organized and have operated in such a manner to maintain our qualification as a REIT for federal and state income tax purposes. As a REIT, we are generally not subject to corporate level federal income taxes on earnings distributed to our stockholders. Since inception, we have distributed at least 100% of our taxable income annually and intend to do so for the tax year ending December 31, 2018. Accordingly, we have not included any provisions for federal income taxes related to the REIT in the accompanying consolidated financial statements for the three and nine months ended September 30, 2018 and 2017. We conduct business in various states and municipalities within the United States, and, as a result, we or one or more of our subsidiaries file income tax returns in the U.S. federal jurisdiction and various state jurisdictions. As a result, we are subject to certain state and local taxes and a provision for such taxes is included in the consolidated financial statements.

Certain of our subsidiaries have elected taxable REIT subsidiary, or TRS, status. A TRS may provide certain services considered impermissible for REITs and may hold assets that REITs may not hold directly. The accompanying consolidated financial statements include an interim tax provision for our TRSs for both the three and nine months ended September 30, 2018 and 2017. Current income tax benefit was $0.4 million and $0.2 million for the three months ended September 30, 2018 and 2017, respectively and current income tax expense was $1.8 million and $1.4 million for the nine months ended September 30, 2018 and 2017, respectively.

Our TRSs are subject to U.S. federal and state income taxes. As such, deferred tax assets and liabilities are established for temporary differences between the financial reporting basis and the tax basis of assets and liabilities at the enacted tax rates expected to be in effect when the temporary differences reverse. A valuation allowance for deferred tax assets is provided if we believe that it is more likely than not that we will not realize the tax benefit of deferred tax assets based on available evidence at the time the determination is made. A change in circumstances may cause us to change our judgment about whether a deferred tax asset will more likely than not be realized. We generally report any change in the valuation allowance through our income statement in the period in which such changes in circumstances occur. In December 2017, the Tax Cuts and Jobs Act was enacted, which reduced the federal corporate income tax rate from 35% to 21%, effective January 1, 2018. Tax reform also contained other provisions that may have an impact on the future realizability of our deferred tax assets. The majority of our deferred tax assets relate to net operating losses, interest expense limitation and accrued expenses. The majority of our deferred tax liabilities relate to differences between the tax basis and financial reporting basis of our villa/condo rental management agreements. Provision for income taxes included deferred income tax expense of $1.4 million and $0.1 million for the three months ended September 30, 2018 and 2017, respectively, and a deferred income tax expense of $1.7 million and a deferred income tax benefit of $0.8 million for the nine months ended September 30, 2018 and 2017, respectively.



CWI 9/30/2018 10-Q 25





Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to provide the reader with information that will assist in understanding our financial statements and the reasons for changes in certain key components of our financial statements from period to period. Management’s Discussion and Analysis of Financial Condition and Results of Operations also provides the reader with our perspective on our financial position and liquidity, as well as certain other factors that may affect our future results. Our Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the 2017 Annual Report and subsequent reports filed under the Securities Exchange Act of 1934, as amended, or the Exchange Act.

Business Overview

As described in more detail in Item 1 of the 2017 Annual Report, we are a publicly-owned, non-listed REIT that invests in, manages and seeks to enhance the value of interests in lodging and lodging-related properties. We have invested the proceeds from our initial public offering and follow-on offering in a diversified lodging portfolio, including full-service, select-service and resort hotels. Our results of operations are significantly impacted by seasonality and hotel renovations. We have invested in and then initiated significant renovations at certain hotels. Generally, during the renovation period, a portion of total rooms are unavailable and hotel operations are often disrupted, negatively impacting our results of operations. At September 30, 2018, we held ownership interests in 27 hotels, with a total of 7,715 rooms.

Our board of directors is beginning the process of evaluating strategic alternatives, including a combination with CWI 2, and intends to form a special committee of independent directors to undertake the evaluation. There can be no assurance as to the form or timing of any transaction or that a transaction will be pursued at all. We do not intend to discuss the evaluation process unless and until the board completes its evaluation.

Significant Developments

Dispositions

On January 25, 2018, we sold our 100% ownership interest in the Marriott Boca Raton at Boca Center to an unaffiliated third party for a contractual sales price of $76.0 million, with net proceeds after the repayment of the related mortgage loan of approximately $35.4 million, including the release of $1.4 million of restricted cash. We recognized a gain on sale of $12.3 million during the first quarter of 2018 in connection with this transaction (Note 4).

On February 5, 2018, we sold our 100% ownership interests in the Hampton Inn Memphis Beale Street and Hampton Inn Atlanta Downtown to an unaffiliated third party for a contractual sales price totaling $63.0 million, with net proceeds after the repayment of the related mortgage loans totaling approximately $31.8 million, including the release of $2.0 million of restricted cash. We recognized a gain on sale of $19.6 million during the first quarter of 2018 in connection with this transaction (Note 4).

On September 27, 2018, we sold our 100% ownership interest in the Staybridge Suites Savannah Historic District to an unaffiliated third party for a contractual sales price of $22.0 million, with net proceeds after the defeasance of the related mortgage loan of approximately $6.7 million. We recognized a loss on sale of $0.7 million during the third quarter of 2018 in connection with this transaction, as well as a $0.3 million loss on extinguishment of debt in connection with the defeasance of the loan.

WPC Credit Facility

During the nine months ended September 30, 2018, our Operating Partnership drew down an additional $10.0 million from the Working Capital Facility and repaid a total of $20.0 million towards the Bridge Loan and $17.0 million towards the Working Capital Facility.

At September 30, 2018, the outstanding balances under the Bridge Loan and Working Capital Facility were $40.8 million and $0.8 million, respectively, with $24.2 million available to be drawn on the Working Capital Facility (Note 3). As amended, the Bridge Loan is currently scheduled to mature on June 30, 2019, with one three-month extension available at our option. As amended, the Working Capital Facility is currently scheduled to mature on December 31, 2019.



CWI 9/30/2018 10-Q 26





Financial and Operating Highlights

(Dollars in thousands, except average daily rate, or ADR, and revenue per available room, or RevPAR)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
Hotel revenues (a)
 
$
148,235

 
$
154,829

 
$
457,925

 
$
485,887

(Gain) loss on hurricane-related property damage (Note 4)
 
(41
)
 
7,609

 
(1,106
)
 
7,609

Net (loss) income attributable to CWI stockholders
 
(7,210
)
 
(8,769
)
 
14,697

 
(3,799
)
 
 
 
 
 
 
 
 
 
Cash distributions paid
 
19,742

 
19,423

 
59,219

 
58,192

 
 
 
 
 
 
 
 
 
Net cash provided by operating activities (b)
 
 
 
 
 
58,556

 
79,033

Net cash provided by (used in) investing activities (b)
 
 
 
 
 
123,223

 
(70,658
)
Net cash (used in) provided by financing activities
 
 
 
 
 
(180,701
)
 
7,270

 
 
 
 
 
 
 
 
 
Supplemental financial measures: (c)
 
 
 
 
 
 
 
 
FFO attributable to CWI stockholders
 
16,733

 
11,480

 
46,381

 
50,736

MFFO attributable to CWI stockholders
 
18,915

 
18,739

 
50,818

 
60,913

 
 
 
 
 
 
 
 
 
Consolidated Hotel Operating Statistics (d)