Debt

Senior Unsecured Revolving Credit Facility

The Company's $300.0 million credit facility provides for a $200.0 million unsecured revolving credit facility and a $100.0 million unsecured term loan. The revolving credit facility matures in July 2016, and the Company has a one-year extension option. The Company has the ability to increase the aggregate borrowing capacity under the credit agreement up to $600.0 million, subject to lender approval. Borrowings on the revolving credit facility bear interest at LIBOR plus 1.75% to 2.50%, depending on the Company’s leverage ratio. Additionally, the Company is required to pay an unused commitment fee at an annual rate of 0.25% or 0.35% of the unused portion of the revolving credit facility, depending on the amount of borrowings outstanding. The credit agreement contains certain financial covenants, including a maximum leverage ratio, a maximum debt service coverage ratio, a minimum fixed charge coverage ratio, and a minimum net worth. As of March 31, 2013 and December 31, 2012, the Company had no outstanding borrowings under the revolving credit facility. As of March 31, 2013, the Company was in compliance with the credit agreement debt covenants. For the three months ended March 31, 2013 and 2012, the Company incurred unused commitment fees of $0.2 million and $0.2 million, respectively.

Term Loan

On August 13, 2012, the Company drew the entire $100.0 million unsecured term loan provided for under its amended senior credit agreement. The five-year term loan matures in July 2017 and bears interest at a variable rate, but was swapped to an effective fixed interest rate for the full five-year term (see “Derivative and Hedging Activities” below).

Derivative and Hedging Activities

The Company enters into interest rate swap agreements to hedge against interest rate fluctuations. Unrealized gains and losses on the effective portion of hedging instruments are reported in other comprehensive income (loss) and are subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. Ineffective portions of changes in the fair value of a cash flow hedge are recognized as interest expense. Effective August 13, 2012, the Company entered into three interest rate swap agreements with an aggregate notional amount of $100.0 million for the term loan's full five-year term, resulting in an effective fixed interest rate of 2.55% at the Company's current leverage ratio (as defined in the agreement). The Company has designated its pay-fixed, receive-floating interest rate swap derivatives as cash flow hedges.

The Company records all derivative instruments at fair value in the consolidated balance sheets. Fair values of interest rate swaps are determined using the standard market methodology of netting the discounted future fixed cash receipts/payments and the discounted expected variable cash payments/receipts. Variable interest rates used in the calculation of projected receipts and payments on the swaps are based on an expectation of future interest rates derived from observable market interest rate curves (Overnight Index Swap curves) and volatilities (level 2 inputs). Derivatives expose the Company to credit risk in the event of non-performance by the counterparties under the terms of the interest rate hedge agreements. The Company believes it minimizes the credit risk by transacting with major creditworthy financial institutions.

As of March 31, 2013, the Company's derivative instruments are in a liability position, with an aggregate fair value of $0.2 million which is included in accounts payable and accrued expenses in the accompanying consolidated balance sheets. As of March 31, 2013, there was $0.2 million in unrealized loss included in accumulated other comprehensive loss. During the three months ended March 31, 2013, the Company reclassified $0.1 million from accumulated other comprehensive income to net income (loss) and is included in interest expense.

Mortgage Debt

Each of the Company’s mortgage loans is secured by a first mortgage lien or by leasehold interests under the ground lease on the underlying property. The mortgages are non-recourse to the Company except for customary carve-outs such as fraud or misapplication of funds.

In conjunction with the acquisition of the Embassy Suites San Diego Bay-Downtown, the Company assumed a $66.7 million first mortgage loan secured by the property. The loan has a remaining term of three years, bears interest at an annual fixed rate of 6.28% and requires monthly principal and interest payments of $0.5 million. As the loan's interest rate is above market for loans with comparable terms, the Company recorded a loan premium of $4.8 million, which is amortized to interest expense over the remaining term of the loan.

Debt Summary

Debt as of March 31, 2013 and December 31, 2012 consisted of the following (dollars in thousands):



			Balance Outstanding as of
	Interest Rate	Maturity Date	March 31, 2013		December 31, 2012
Senior unsecured revolving credit facility	Floating	July 2016	$	—	$	—

Term loan	Floating⁽¹⁾	July 2017	100,000		100,000

Mortgage loans
InterContinental Buckhead	4.88%	January 2016	50,810		51,022
Skamania Lodge	5.44%	February 2016	30,138		30,252
DoubleTree by Hilton Bethesda-Washington DC	5.28%	February 2016	35,473		35,602
Embassy Suites San Diego Bay-Downtown	6.28%	June 2016	66,608		—
Monaco Washington DC	4.36%	February 2017	45,174		45,368
Argonaut Hotel	4.25%	March 2017	45,950		46,223
Sofitel Philadelphia	3.90%	June 2017	49,117		49,419
Hotel Palomar San Francisco	5.94%	September 2017	27,039		27,124
Westin Gaslamp Quarter, San Diego	3.69%	January 2020	80,662		81,000
Mortgage loans at stated value			430,971		366,010
Mortgage loan premiums ⁽²⁾			6,866		2,498
Total mortgage loans			$	437,837	$	368,508
Total debt			$	537,837	$	468,508

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⁽¹⁾We entered into interest rate swaps to effectively fix the interest rate at 2.55% for the full five-year term, based on our current leverage ratio.

⁽²⁾Loan premiums on assumed mortgages recorded in purchase accounting and secured by the leasehold interest on the Hotel Palomar San Francisco and Embassy Suites San Diego Bay - Downtown.

The Company estimates the fair value of its fixed rate debt by discounting the future cash flows of each instrument at estimated market rates, taking into consideration general market conditions and maturity of the debt with similar credit terms and is classified within level 2 of the fair value hierarchy. The estimated fair value of the Company’s mortgage debt as of March 31, 2013 and December 31, 2012 was $444.7 million and $372.3 million, respectively.

The Company was in compliance with all debt covenants as of March 31, 2013.