Business Combinations and Acquisition and Disposition of Hotel Properties

12 Months Ended

Dec. 31, 2019

Business Combinations and Acquisition and Disposition of Hotel Properties

Merger with LaSalle Hotel Properties

On November 30, 2018, the Company completed its merger with LaSalle Hotel Properties (“LaSalle”) pursuant to the Agreement and Plan of Merger, dated as of September 6, 2018, as amended on September 18, 2018 (the “Merger Agreement”), by and among the Company, the Operating Partnership, Ping Merger Sub, LLC (“Merger Sub”), Ping Merger OP, LP (“Merger OP”), LaSalle and LaSalle Hotel Operating Partnership, L.P. (“LaSalle OP”).

Pursuant to the Merger Agreement, on November 30, 2018, Merger OP merged with and into LaSalle OP (the “Partnership Merger”) with LaSalle OP surviving as a subsidiary of the Operating Partnership. Immediately following the Partnership Merger, LaSalle merged with and into Merger Sub (the “Company Merger” and, together with the Partnership Merger, the “Mergers”) with Merger Sub surviving as a wholly owned subsidiary of the Company. On December 3, 2018, Merger Sub assigned all of its rights and obligations to the Company and was liquidated and dissolved.

Upon completion of the Company Merger and pursuant to the Merger Agreement, each issued and outstanding LaSalle common share of beneficial interest, $0.01 par value per share ("LaSalle common shares") (other than the 10.8 million LaSalle common shares held by the Company) was converted into the right to receive either (i) 0.92 of the Company's common shares and cash in lieu of fractional shares, if any; or (ii) $37.80 in cash, subject to certain adjustments and to any applicable withholding tax (the “Cash Consideration”). The maximum number of LaSalle common shares that were eligible to be converted into the right to receive the Cash Consideration was equal to 30% of the aggregate number of LaSalle common shares issued and outstanding immediately prior to completion of the Company Merger. The LaSalle common shares held by the Company were excluded from the cash election in the Company Merger and were cancelled. In addition, each issued and outstanding LaSalle 6.375% Series I cumulative redeemable preferred share was converted into the right to receive one of the Company's 6.375% Series E cumulative redeemable preferred shares and each issued and outstanding LaSalle 6.3% Series J cumulative redeemable preferred share was converted into the right to receive one of the Company's 6.3% Series F cumulative redeemable preferred shares.

Upon completion of the Partnership Merger and pursuant to the Merger Agreement, each common unit of LaSalle OP (a “LaSalle OP Common Unit”) that was issued and outstanding immediately prior to completion of the Partnership Merger, other than LaSalle OP Common Units held by LaSalle and its subsidiaries, was cancelled and converted into the right to receive 0.92 common units of the Operating Partnership, without interest. No fractional common shares or OP units were issued in the Mergers, and the value of any fractional interests was paid in cash.

The Company accounted for the Mergers under the acquisition method of accounting in ASC 805, Business Combinations. As a result of the Mergers, the Company acquired an ownership interest in the following 36 hotel properties:



Property		Location	Ownership Interest		Guest Rooms
Villa Florence San Francisco on Union Square		San Francisco, CA	100	%	189
Hotel Vitale		San Francisco, CA	100	%	200
The Marker San Francisco		San Francisco, CA	100	%	208
Hotel Spero		San Francisco, CA	100	%	236
Chaminade Resort & Spa		Santa Cruz, CA	100	%	156
Harbor Court Hotel San Francisco		San Francisco, CA	100	%	131
Viceroy Santa Monica Hotel		Santa Monica, CA	100	%	162
Le Parc Suite Hotel		West Hollywood, CA	100	%	154
Montrose West Hollywood		West Hollywood, CA	100	%	133
Chamberlain West Hollywood Hotel		West Hollywood, CA	100	%	115
Grafton on Sunset		West Hollywood, CA	100	%	108
The Westin Copley Place, Boston		Boston, MA	100	%	803
The Liberty, A Luxury Collection Hotel, Boston		Boston, MA	99.99	%	298
Hyatt Regency Boston Harbor		Boston, MA	100	%	270
Sofitel Washington DC Lafayette Square		Washington, DC	100	%	237
George Hotel		Washington, DC	100	%	139
Mason & Rook Hotel		Washington, DC	100	%	178
Donovan Hotel	(8)	Washington, DC	100	%	193
Paradise Point Resort & Spa		San Diego, CA	100	%	462
Hilton San Diego Gaslamp Quarter		San Diego, CA	100	%	286
Solamar Hotel		San Diego, CA	100	%	235
L'Auberge Del Mar		Del Mar, CA	100	%	121
Hilton San Diego Mission Bay Resort		San Diego, CA	100	%	357
The Heathman Hotel		Portland, OR	100	%	151
Southernmost Beach Resort		Key West, FL	100	%	262
The Marker Key West		Key West, FL	100	%	96
The Roger New York		New York, NY	100	%	194
Hotel Chicago Downtown, Autograph Collection		Chicago, IL	100	%	354
The Westin Michigan Avenue Chicago		Chicago, IL	100	%	752
Hotel Palomar Washington DC	(1)	Washington, DC	100	%	335
The Liaison Capitol Hill	(2)	Washington, DC	100	%	343
Onyx Hotel	(3)	Boston, MA	100	%	112
Hotel Amarano Burbank	(4)	Burbank, CA	100	%	132
Rouge Hotel	(5)	Washington, DC	100	%	137
Hotel Madera	(6)	Washington, DC	100	%	82
Topaz Hotel	(7)	Washington, DC	100	%	99
					8,420

⁽¹⁾ In February 2019, the Company sold this hotel property for $141.5 million.

⁽²⁾ In February 2019, the Company sold this hotel property for $111.0 million.

⁽³⁾ In May 2019, the Company sold this hotel property for $58.3 million.

⁽⁴⁾ In July 2019, the Company sold this hotel property for $72.9 million.

⁽⁵⁾ In September 2019, the Company sold this hotel property for $42.0 million.

⁽⁶⁾ In September 2019, the Company sold this hotel property for $23.3 million.

⁽⁷⁾ In November 2019, the Company sold this hotel property for $33.1 million.

⁽⁸⁾This hotel property was closed in November 2019 for renovation and is expected to re-open in the second quarter of 2020 as Hotel Zena.

The total consideration for the Mergers was approximately $4.1 billion, which included the Company's issuance of approximately 61.4 million common shares valued at $34.92 per share to LaSalle common shareholders, the Company's issuance of 4.4 million Series E Preferred Shares valued at $23.10 per share to former LaSalle Series I preferred shareholders and 6.0 million Series F Preferred Shares valued at $22.10 per share to former LaSalle Series J preferred shareholders, the Operating Partnership's issuance of approximately 0.1 million OP units valued at $34.92 per unit to former LaSalle limited partners, and cash. Additionally, the Company's investment of 10.8 million of LaSalle common shares valued at $346.5 million is included in the total consideration.

The total consideration, excluding the net working capital assumed, consisted of the following (in thousands):



	Total Consideration
Common shares	$	2,144,057
Series E preferred shares	101,622
Series F preferred shares	132,600
OP units	4,665
Cash	1,719,150
Total consideration	$	4,102,094

The Company determined the acquisition date fair values as follows (in thousands):



	November 30, 2018
Investment in hotel properties	$	4,095,721
Restricted cash reserves	14,784
Hotel and other receivables	34,669
Intangible assets	158,920
Prepaid expenses and other assets	54,808
Accounts payable and accrued expenses	(227,647		)
Deferred revenues	(23,816		)
Accrued interest	(2,496		)
Distributions payable	(2,744		)
Other	(105		)
Total consideration	$	4,102,094

During the year ended December 31, 2019, the Company finalized the purchase price accounting and recorded an adjustment to decrease the preliminary fair value of investment in hotel properties by $24.6 million, decrease intangible assets by $12.7 million, increase prepaid expenses and other assets by $7.0 million and decrease accounts payable and accrued expenses by $30.3 million.

The Company used the following valuation methodologies, inputs, and assumptions to estimate the fair value of the assets acquired, the liabilities assumed, and the equity interests acquired:

•

Investment in hotel properties — The Company estimated the fair values of the land and improvements, buildings and improvements, and furniture, fixtures, and equipment at the hotel properties by using a combination of the market, cost, and income approaches. These valuation methodologies are based on significant Level 2 and Level 3 inputs in the fair value hierarchy, such as estimates of future income growth, capitalization rates, discount rates, capital expenditures, and cash flow projections, including hotel revenues and net operating income, at the respective hotel properties.

•

Intangible assets — The Company estimated the fair value of its lease intangible assets by calculating the present value of the difference between the contractual rental amounts paid according to the in-place lease agreements and the market rental rates for similar leased space, measured over a period equal to the remaining non-cancellable term of the lease. This valuation methodology is based on Level 2 and Level 3 inputs in the fair value hierarchy. The below market lease intangible assets are amortized as adjustments to ground rent expense over the remaining terms of the respective leases.

•

Above market lease liabilities — The Company estimated the fair value of its above market lease liabilities by calculating the present value of the difference between the contractual rental amounts paid according to the in-place lease agreements and the market rental rates for similar leased space, measured over a period equal to the remaining non-cancellable term of the lease. This valuation methodology is based on Level 2 and Level 3 inputs in the fair value hierarchy. The above market lease liabilities were included in accounts payable and other liabilities in the accompanying consolidated balance sheet prior to the adoption of ASC 842, Leases. The above market lease liabilities are amortized as adjustments to ground rent expense over the remaining terms of the respective leases.


•	Restricted cash reserves, hotel and other receivables, prepaid expenses and other assets, accounts payable and other liabilities, deferred revenues, accrued interest, and distributions payable — the carrying amounts of the assets acquired, the liabilities assumed, and the equity interests acquired approximate fair value because of their short term maturities.

For the hotel properties acquired during the Mergers, total revenues of $56.7 million and operating income of $15.9 million for the year ended December 31, 2018 are included in the accompanying consolidated statements of operations and comprehensive income.

There were no acquisitions of hotel properties during the year ended December 31, 2019. For the year ended December 31, 2019, the Company incurred $0.6 million in transaction costs and $7.7 million in integration costs in connection with the Mergers. For the year ended December 31, 2018, the Company incurred $72.7 million in transaction costs and $2.0 million in integration costs in connection with the Mergers. The transaction costs are primarily related to transfer taxes, financial advisory fees, loan commitment fees, legal, and other professional service fees in connection with the Mergers. The integration costs are primarily related to professional fees and employee-related costs. The merger-related costs noted above are included in transaction costs in the accompanying consolidated statements of operations and comprehensive income.

The following unaudited condensed pro forma financial information presents the results of operations as if the Mergers, excluding all dispositions after the Mergers, had taken place on January 1, 2017. The unaudited condensed pro forma financial information is not necessarily indicative of what the actual results of operations of the Company would have been assuming the Mergers had taken place on January 1, 2017, nor is it indicative of the results of operations for future periods. The unaudited condensed pro forma financial information is as follows (in thousands):



		For the year ended December 31,
		2019		2018

	(unaudited)
Total revenues		$	1,612,213	$	1,677,663
Operating income (loss)		$	229,342	$	255,333
Net income (loss) attributable to common shareholders		$	82,886	$	89,767
Net income (loss) per share available to common shareholders — basic		$	0.63	$	0.69
Net income (loss) per share available to common shareholders — diluted		$	0.63	$	0.69

Disposition of Hotel Properties

The Company will report a disposed or held for sale hotel property or group of hotel properties in discontinued operations only if the disposal represents a strategic shift that has, or will have, a major effect on its operations and financial results. All other disposed hotel properties will have their operating results reflected within continuing operations on the Company's consolidated statements of operations and comprehensive income for all periods presented.

During the year ended December 31, 2019, the Company sold seven hotel properties for an aggregate sales price of $481.9 million. In connection with these transactions, the Company recorded an aggregate of $2.8 million net gain on sales, which is included in (gain) loss on sale of hotel properties, net, in the accompanying consolidated statements of operations and comprehensive income.

The following table discloses the hotel properties that were sold during the year ended December 31, 2019 (in thousands):



Hotel Property Name	Location	Sale Date	Sale Price
The Liaison Capitol Hill	Washington, DC	February 14, 2019	$	111,000
Hotel Palomar Washington DC	Washington, DC	February 22, 2019	141,450
Onyx Hotel	Boston, MA	May 29, 2019	58,255
Hotel Amarano Burbank	Burbank, CA	July 16, 2019	72,866
Rouge Hotel	Washington, DC	September 12, 2019	42,000
Hotel Madera	Washington, DC	September 26, 2019	23,250
Topaz Hotel	Washington, DC	November 22, 2019	33,100
Total			$	481,921

During the year ended December 31, 2018, the Company sold The Grand Hotel Minneapolis for $30.0 million and recognized a loss of $2.1 million related to this hotel property.

For the years ended December 31, 2019, 2018 and 2017, the Company's consolidated statements of operations and comprehensive income included operating (loss) income of $9.9 million, $5.5 million and $8.5 million, respectively, related to the hotel properties sold.

The sales of the hotel properties described above did not represent a strategic shift that had a major effect on the Company’s operations and financial results, and therefore, did not qualify as discontinued operations.