Fair Value Measurements

12 Months Ended

Dec. 31, 2015

NOTE 10. FAIR VALUE MEASUREMENTS

The carrying amount and estimated fair values of our financial assets and liabilities, which include related current portions, were as follows:

	December 31, 2015						December 31, 2014
	Carrying Amount			Fair Value			Carrying Amount			Fair Value
	(in thousands)
Cash and cash equivalents (1)	$	86,709		$	86,709		$	109,857		$	109,857
Interest rate swaps (2)		(11,440	)		(11,440	)		(4,811	)		(4,811	)
Long-term debt (3)(4)		1,712,099			1,675,760			1,859,511			1,846,181

(1)	Classified as Level 1 under the fair value hierarchy.

(2)	Classified as Level 2 under the fair value hierarchy.

(3)	Classified as Level 3 under the fair value hierarchy.

(4)	Carrying amount includes deferred debt issuance costs of $22.4 million and $26.2 million as of December 31, 2015 and 2014, respectively.

We believe the carrying amounts of our cash and cash equivalents and restricted cash approximated fair value as of December 31, 2015 and December 31, 2014, as applicable. Our estimates of the fair values were determined using available market information and valuation methods appropriate in the circumstances. Considerable judgment is necessary to interpret market data and develop estimated fair values. Proper placement of fair value measurements within the valuation hierarchy is considered each reporting period. Third-party information received for calculating Level 3 fair value measurements is reviewed to ensure it is in accordance with GAAP. The use of different market assumptions or estimation methods may have a material effect on the estimated fair value amounts.

The fair values of interest rate swaps are determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each instrument. This analysis reflects the contractual terms of the agreements, including the period to maturity, and uses observable market-based inputs, including forward interest rate curves. We incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements.

We estimate the fair value of our long-term debt using discounted cash flow analysis based on current market inputs for similar types of arrangements. The primary sensitivity in these calculations is based on the selection of appropriate discount rates. We estimated the discount rate to be approximately 4.4%, as of December 31, 2015 and December 31, 2014. Fluctuations in these assumptions will result in different estimates of fair value.

We test long-lived assets for impairment when events or changes in circumstances indicate that the asset might be impaired. In the second quarter of 2015, we identified a portfolio of 24 hotels where it became more likely than not the hotels would be sold significantly before the end of the previously estimated useful life. We recorded an impairment charge of $42.5 million to adjust the carrying value of these assets to their estimated fair value. The inputs used in determining the fair value in the second quarter for these 24 hotels were based on estimated selling prices ranging from $70.0 million to $75.0 million. During the third quarter of 2015, these assets met the criteria for classification as assets held for sale. In the fourth quarter, 11 of these hotels were sold. The inputs used in determining the fair value of the remaining 13 hotels are based on selling price, less estimated selling costs. The fair value estimate is considered to be Level 3 within the fair value measurement hierarchy.

In the third quarter of 2015, we identified a restaurant parcel where it became more likely than not the restaurant would be sold significantly before the end of the previously estimated useful life. We recorded an impairment charge of $1.6 million to adjust the carrying value of this restaurant parcel to its estimated fair value. During the third quarter of 2015, this restaurant parcel met the criteria for classification as assets held for sale. The fair value estimate is considered to be Level 3 within the fair value measurement hierarchy. The inputs used in determining the fair value these assets are based on estimated selling price, less selling costs.

In the fourth quarter of 2015, we identified a hotel where it became more likely than not that the carrying amount would not be recoverable due to a change in market and economic conditions. We recorded an impairment charge of $5.1 million to adjust the carrying value of this hotel to its estimated fair value. The fair value estimate is considered to be Level 3 within the fair value measurement hierarchy. The inputs used in determining the fair value are based on a combination of historical and projected cash flows and other available market information, such as recent sales prices for similar assets.

For this purpose, fair value of the property was estimated primarily using expected present value of future cash flows. The fair value estimate is considered to be Level 3 within the fair value measurement hierarchy.

The following fair value hierarchy table presents information about assets measured at fair value on a nonrecurring basis during the year ended December 31, 2015:

	Level 1		Level 2		Level 3		Total Fair Value		Impairment Charge
	(in thousands)
24 Owned Hotels Held for Sale⁽¹⁾	$	—	$	—	$	34,498	$	34,498	$	43,382
1 Owned Hotel		—		—		2,422		2,422		5,103
1 Owned Restaurant Parcel		—		—		1,025		1,025		1,636
	$	—	$	—	$	37,945	$	37,945	$	50,121

(1)	During 2015, we sold 11 of the 24 hotels that were designated as assets held for sale in the third quarter of 2015. The remaining 13 are included in assets held for sale as of December 31, 2015 and are subject to a definitive purchase agreement.

In June 2014 we determined that the long-lived assets associated with one of our owned hotels were partially impaired primarily due to unfavorable expected terms of the upcoming underlying ground lease renewal and the likelihood of the Company abandoning the hotel upon expiration of the ground lease. As a result, we recorded an impairment loss of approximately $5.2 million for the nine months ended September 30, 2014. Subsequent to September 30, 2014, the Company reached an agreement with the landlord and renewed the lease. For this purpose, fair value of the property was estimated primarily using expected present value of future cash flows. The fair value estimate is considered to be Level 3 within the fair value measurement hierarchy.

The following fair value hierarchy table presents information about assets measured at fair value on a nonrecurring basis during as of December 31, 2014:

Level 1

Level 2

Level 3

Total Fair

Value

Impairment

Charge

(in thousands)

1 La Quinta Inn

—

249

5,157

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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