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 September 30, 2014 and December 31, 2013, the Company had no outstanding borrowings under the revolving credit facility. As of September 30, 2014, the Company was in compliance with the credit agreement debt covenants. For the three and nine months ended September 30, 2014, the Company incurred unused commitment fees of $0.1 million and $0.4 million, respectively. For the three and nine months ended September 30, 2013, the Company incurred unused commitment fees of $0.2 million and $0.5 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 September 30, 2014, the Company's derivative instruments are in an asset position, with an aggregate fair value of $1.0 million, which is included in prepaid expenses and other assets in the accompanying consolidated balance sheets. For the three and nine months ended September 30, 2014, there was $0.4 million in unrealized gain and $0.1 million in unrealized loss, respectively, recorded in accumulated other comprehensive income. During the three and nine months ended September 30, 2014 the Company reclassified $0.1 million and $0.4 million, respectively, from accumulated other comprehensive income (loss) and to interest expense. During the three and nine months ended September 30, 2013, the Company reclassified $0.1 million and $0.4 million, respectively, from accumulated other comprehensive income to net income (loss) and to interest expense. The Company expects approximately $0.4 million will be reclassified from accumulated other comprehensive income to net income (loss) in the next 12 months.

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 Nines Hotel, the Company assumed three non-recourse mortgage loans totaling $50.7 million secured by the property. The three loans are scheduled to mature on March 5, 2015, bear interest at a weighted-average rate of 7.39% and require monthly interest-only payments until maturity. As the weighted-average interest rate of the loans were above market for loans with comparable terms, the Company recorded a loan premium of $0.9 million, which is amortized as a reduction of interest expense over the remaining term.

Debt Summary

Debt as of September 30, 2014 and December 31, 2013 consisted of the following (dollars in thousands):



			Balance Outstanding as of
	Interest Rate	Maturity Date	September 30, 2014		December 31, 2013
Senior unsecured revolving credit facility	Floating	July 2016	$	—	$	—

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

Mortgage loans
The Nines Hotel ⁽²⁾	7.39%	March 2015	50,725		—
InterContinental Buckhead	4.88%	January 2016	49,544		50,192
Skamania Lodge	5.44%	February 2016	29,465		29,811
DoubleTree by Hilton Bethesda-Washington DC	5.28%	February 2016	34,710		35,102
Embassy Suites San Diego Bay-Downtown	6.28%	June 2016	64,788		65,725
Hotel Modera	5.26%	July 2016	23,321		23,597
Monaco Washington DC	4.36%	February 2017	43,965		44,580
Argonaut Hotel	4.25%	March 2017	44,295		45,138
Sofitel Philadelphia	3.90%	June 2017	47,286		48,218
Hotel Palomar San Francisco	5.94%	September 2017	26,549		26,802
The Westin San Diego Gaslamp Quarter	3.69%	January 2020	77,674		79,194
Mortgage loans at stated value			492,322		448,359
Mortgage loan premiums ⁽³⁾			4,913		5,888
Total mortgage loans			$	497,235	$	454,247
Total debt			$	597,235	$	554,247

^{________________________}

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

⁽²⁾The interest rate of 7.39% represents a weighted-average interest rate of the three non-recourse mortgage loans assumed in conjunction with the acquisition of The Nines Hotel.

⁽³⁾Loan premiums on assumed mortgages recorded in purchase accounting for the Hotel Palomar San Francisco, Embassy Suites San Diego Bay - Downtown, Hotel Modera and The Nines Hotel.

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 September 30, 2014 and December 31, 2013 was $505.0 million and $460.9 million, respectively.

The Company was in compliance with all debt covenants as of September 30, 2014.