Fair Value Measurements

3 Months Ended

Mar. 31, 2017

NOTE 7. FAIR VALUE MEASUREMENTS

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

	March 31, 2017				December 31, 2016
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
	(in thousands)
Cash and cash equivalents ⁽¹⁾	$	161,495	$	161,495	$	160,596	$	160,596
Interest rate swaps ⁽²⁾		7,068		7,068		9,803		9,803
Long-term debt ⁽³⁾⁽⁴⁾		1,696,937		1,722,616		1,699,950		1,716,815

⁽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 $17.5 million and $18.5 million as of March 31, 2017 and December 31, 2016, respectively.

We believe the carrying amounts of our cash and cash equivalents approximated fair value as of March 31, 2017 and December 31, 2016, 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. 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 rates to be approximately 3.6% and 3.7%, as of March 31, 2017 and December 31, 2016, respectively. Fluctuations in these assumptions will result in different estimates of fair value.

We test long-lived assets for impairment if events or changes in circumstances indicate that the asset might be impaired. The following fair value hierarchy table presents information about assets measured at fair value on a nonrecurring basis and related impairment charges during the periods ended March 31, 2017 and 2016:

March 31, 2017	Level 1		Level 2		Level 3		Total Fair Value		Impairment Charge
	(in thousands)
Owned hotels identified for possible sale	$	—	$	—	$	227,816	$	227,816	$	—
Assets held for sale⁽¹⁾		—		—		9,048		9,048		—
	$	—	$	—	$	236,864	$	236,864	$	—

⁽¹⁾ Assets held for sale include three hotels and a restaurant parcel designated as held for sale. As of December 31, 2016 we had five hotels and one restaurant parcel in assets held for sale and during the first quarter of 2017 we added one additional hotel to held for sale.

March 31, 2016	Level 1		Level 2		Level 3		Total Fair Value		Impairment Charge
	(in thousands)
Owned hotels identified for possible sale	$	—	$	—	$	251,163	$	251,163	$	80,383
Assets held for sale⁽¹⁾		—		—		43,477		43,477		2,960
	$	—	$	—	$	294,640	$	294,640	$	83,343

⁽¹⁾

Assets held for sale include 13 hotels and a restaurant parcel designated as held for sale in the third quarter of 2015, in addition to the one owned hotel the Company entered into an agreement to sell during the first quarter of 2016. The impairment charge for assets held for sale is related to updating the fair value to be net of estimated transaction cost.

Additional Hotel Sales

In June of 2016, we began negotiations to sell two of our owned hotels, located in Elmsford, New York and Wayne, New Jersey. As such, it became more likely than not that the holding period for these hotels will be significantly shorter than the previously estimated useful lives. During the second quarter of 2016, we recorded an impairment charge of $13.7 million to adjust the carrying value of these hotels to their estimated fair value. These hotels did not meet the criteria for classification as assets held for sale as of June 30, 2016. During the third quarter of 2016, we entered into agreements to sell these two hotels for $18.4 million, net of transaction costs. We recorded an additional impairment charge of $0.5 million to adjust the carrying value of these hotels to their estimated fair value including a reduction for transaction costs. The fair value estimate is considered to be Level 3 within the fair value measurement hierarchy. During the third quarter of 2016, these hotels met the criteria for classification as assets held for sale. The inputs used in determining the fair value of these assets are based on estimated selling price, less transaction costs. These hotels were sold during the first quarter of 2017 for approximately $17.9 million, net of transaction costs.

During the first quarter of 2016, we entered into an agreement to sell one of our owned hotels located in Orlando, Florida for approximately $8.0 million, net of estimated transaction costs. We recorded an impairment charge of $3.0 million to adjust the carrying value of this hotel to its estimated fair value. During the first quarter of 2016, this hotel met the criteria for classification within assets held for sale and was sold in the second quarter of 2016 for approximately $8.4 million, resulting in a gain on sale of $0.3 million.

Approximately 50 owned hotels identified as candidates for sale in 2016

In the first quarter of 2016, we identified approximately 50 hotels where it became more likely than not that the holding period will be significantly shorter than the previously estimated useful lives. We recorded an impairment charge of $80.3 million in the first quarter of 2016, to adjust the carrying value of these assets to the lesser of their estimated fair value or carrying value. These assets did not meet the criteria for classification as assets held for sale as of the date of impairment. The fair value estimate is considered to be Level 3 within the fair value measurement hierarchy. The inputs used in determining the fair value of these approximately 50 hotels are based on multiples of room revenues ranging from 3.70 to 1.50 for the identified assets.

During the first quarter of 2017, we sold one of these hotels for $4.1 million, net of transaction costs. As of March 31, 2017, of the approximately 50 hotels identified as candidates for sale in the first quarter of 2016, we have sold four hotels and two hotels are in assets held for sale.

- 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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