Acquisition of Hotel Properties

9 Months Ended

Sep. 30, 2014

Business Combinations [Abstract]

ACQUISITION OF HOTEL PROPERTIES

Acquisition of Hotel Properties

On May 22, 2014, the Company acquired the 160-room Prescott Hotel located in San Francisco, California for $49.0 million. In addition, the Company paid certain costs of the seller of $1.3 million. The transaction included a fee simple acquisition of 96 guest rooms in one building and a leasehold interest acquisition of 64 guest rooms in an adjacent attached building. In connection with the acquisition of the leasehold interest, the Company assumed a long-term hotel lease with an unaffiliated third party that expires in 2059, with a one time extension option of 30 years. The Company is required to pay annual base rent of approximately $0.5 million, beginning in October 2017. The annual base rent is subject to a fixed increase every year during the remaining lease term. This transaction was funded with available cash and borrowings under the Company's senior unsecured revolving credit facility. The hotel will continue to be managed by Kimpton Hotel & Restaurant Group, LLC, the Hotel's current manager.

As noted above, the Prescott Hotel is subject to a long-term hotel lease of 64 rooms located in an adjacent attached building. The building portion of the long-term hotel lease assumed was determined to be a capital lease under the criteria in ASC 840 - Leases. At acquisition, the Company recorded a capital lease obligation of $10.8 million related to this leasehold interest, based on the estimated fair value of the payments for the remaining term, and is included in accounts payable and accrued expenses. The Company recorded a capital asset of $11.0 million based on an estimated fair value for the right to use the leased property, which is included in investment in hotel properties, net, in the accompanying consolidated balance sheets.

On July 17, 2014, the Company acquired the 331-room The Nines Hotel located in Portland, Oregon for $127.0 million. The acquisition was funded with $76.3 million of borrowings under the Company's senior unsecured revolving credit facility and assumption of three non-recourse mortgage loans totaling $50.7 million. The hotel will continue to be managed by Sage Hospitality, the Hotel's current manager.

In conjunction with the acquisition of The Nines Hotel, the Company is required to indemnify certain tax credit investors for certain income tax liabilities and related expenses such investors will incur if the Company were to repay the three mortgage loans before March 5, 2015 or engage in certain businesses prohibited under the New Markets Tax Credit program. Owning and operating a hotel is not one of those prohibited businesses. The potential indemnification obligation could range from zero to $28.3 million (plus interest, penalties and related expenses) and will expire on March 5, 2015, which is the end of the New Markets Tax Credit compliance period. Due to the nature of these requirements and because compliance with them is within the Company’s control, the Company believes that the likelihood that the Company will be required to pay under this indemnity is remote.

The allocation of fair value to the acquired assets and liabilities is as follows (in thousands):

	2014 Acquisitions
Land	$	31,055
Buildings and improvements	136,004
Furniture, fixtures and equipment	9,851
Below (Above) market rate contracts	10,731
Assumed debt	(50,725		)
Capital lease obligation	(10,758		)
Net working capital	(627		)
Net assets acquired	$	125,531

The following unaudited pro forma financial information presents the results of operations of the Company for the three and nine months endedSeptember 30, 2014 and 2013 as if the hotels acquired in 2014 and 2013 were acquired on January 1, 2013 and 2012, respectively. The following hotels' pro forma results are included in the pro forma table below: Embassy Suites San Diego Bay-Downtown, Redbury Hotel, Hotel Modera, Radisson Hotel Fisherman's Wharf, Prescott Hotel and The Nines Hotel. The pro forma results below exclude acquisition costs of $0.5 million and $0.3 million for the three months ended September 30, 2014 and 2013, respectively, and $1.0 million and $1.4 million for the nine months ended September 30, 2014 and 2013, respectively. The unaudited pro forma results have been prepared for comparative purposes only and do not purport to be indicative of either the results of operations that would have actually occurred had these transactions occurred or the future results of operations (in thousands, except per-share data).

	For the three months ended September 30,				For the nine months ended September 30,
	2014		2013		2014		2013
Total revenues	$	171,501	$	157,016	$	468,070	$	435,089
Operating income (loss)	36,136		29,605		76,695		61,910
Net income (loss) attributable to common shareholders	23,438		18,006		39,526		28,216
Net income (loss) per share available to common shareholders — basic	$	0.36	$	0.28	$	0.61	$	0.44
Net income (loss) per share available to common shareholders — diluted	$	0.36	$	0.27	$	0.61	$	0.43

For both the three and nine months endedSeptember 30, 2014, the Company's consolidated statements of operations included $13.6 million and $15.1 million of revenues, respectively, and $7.9 million and $8.8 million of hotel operating expenses, respectively, related to the operations of the Prescott Hotel and The Nines Hotel acquired in 2014.