Fair Value Measurements

9 Months Ended

Sep. 30, 2015

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are utilized to determine the value of certain liabilities, to perform impairment assessments, and for disclosure purposes. In February 2012, the Company issued financial instruments with features that were determined to be derivative liabilities, and as a result must be measured at fair value on a recurring basis under Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) 820-10 Fair Value Measurements and Disclosures – Overall. In addition we apply the fair value provisions of ASC 820-10-35 Fair Value Measurements and Disclosures – Overall – Subsequent Measurement, for our nonfinancial assets, which include our held for sale hotels, and the disclosure of the fair value of our debt.

Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability. Level 2 inputs may include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, as well as inputs other than quoted prices that are observable for the asset or liability such as interest rates and yield curves that are observable at commonly quoted intervals.

Level 3 nonfinancial asset valuations use unobservable inputs that reflect our assumptions about the assumptions that market participants would use in pricing the asset or liability. We develop these inputs based on the best information available, including our own data. Financial asset and liability valuation inputs include unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the liability; this includes pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

Nonfinancial assets

Nonfinancial asset fair value measurements are discussed below in the note “Impairment.”

Financial instruments

As of September 30, 2015 and December 31, 2014, the fair value of the derivative liabilities in connection with the February 2012 issuance was determined by the Monte Carlo simulation method. The Monte Carlo simulation method is a generally accepted statistical method used to generate a defined number of stock price paths in order to develop a reasonable estimate of the range of future expected stock prices of the Company and its peer group and minimizes standard error.

The fair value of the Company’s financial liabilities carried at fair value and measured on a recurring basis as of September 30, 2015 and December 31, 2014 are as follows (in thousands):



	Fair Value at
	September 30, 2015		Level 1		Level 2		Level 3
Series C preferred embedded derivative	$	8,992	$	0	$	0	$	8,992
Warrant derivative		3,337		0		0		3,337
Derivative liabilities, at fair value	$	12,329	$	0	$	0	$	12,329

	Fair Value at
	December 31, 2014		Level 1		Level 2		Level 3
Series C preferred embedded derivative	$	13,804	$	0	$	0	$	13,804
Warrant derivative		6,533		0		0		6,533
Derivative liabilities, at fair value	$	20,337	$	0	$	0	$	20,337

There were no transfers between levels during the nine months ended September 30, 2015 and the twelve months ended December 31, 2014.

The following tables present a reconciliation of the beginning and ending balances of items measured at fair value on a recurring basis in the table above that used significant unobservable inputs (Level 3), and the realized and unrealized (gains) losses recorded in the Consolidated Statement of Operations in unrealized derivative gain (loss) for each of the three and nine months ending September 30, 2015 and 2014 (in thousands)



	Three months ended						Three months ended
	September 30, 2015						September 30, 2014
		Series C						Series C
		preferred						preferred
		embedded		Warrant				embedded		Warrant
		derivative		derivative		Total		derivative		derivative		Total
Fair value, beginning of period	$	14,209	$	6,015	$	20,224	$	10,297	$	5,213	$	15,510
Net unrealized (gains) losses on derivatives		(5,217)		(2,678)		(7,895)		3,277		1,338		4,615
Purchases and issuances		0		0		0		0		0		0
Sales and settlements, included in derivative gain (loss)		0		0		0		0		0		0
Gross transfers in		0		0		0		0		0		0
Gross transfers out		0		0		0		0		0		0
Fair value, end of period	$	8,992	$	3,337	$	12,329	$	13,574	$	6,551	$	20,125
Changes in realized losses, included in income on instruments held at end of period	$	0	$	0	$	0	$	0	$	0	$	0
Changes in unrealized (gains) losses, included in income on instruments held at end of period	$	(5,217)	$	(2,678)	$	(7,895)	$	3,277	$	1,338	$	4,615



	Nine months ended								Nine months ended
	September 30, 2015								September 30, 2014
		Series C				Convertible				Series C				Convertible
		preferred				loan				preferred				loan
		embedded		Warrant		embedded				embedded		Warrant		embedded
		derivative		derivative		derivative		Total		derivative		derivative		derivative		Total
Fair value, beginning of period	$	13,804	$	6,533	$	0	$	20,337	$	3,761	$	2,146	$	0	$	5,907
Net unrealized (gains) losses on derivatives		(4,812)		(3,196)		0		(8,008)		9,813		4,405		0		14,218
Purchases and issuances		0		0		0		0		0		0		151		151
Sales and settlements, included in derivative gain (loss)		0		0		0		0		0		0		(151)		(151)
Gross transfers in		0		0		0		0		0		0		0		0
Gross transfers out		0		0		0		0		0		0		0		0
Fair value, end of period	$	8,992	$	3,337	$	0	$	12,329	$	13,574	$	6,551	$	0	$	20,125
Changes in realized (gains) losses, included in income on instruments held at end of period	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0
Changes in unrealized (gains) losses, included in income on instruments held at end of period	$	(4,812)	$	(3,196)	$	0	$	(8,008)	$	9,813	$	4,405	$	0	$	14,218

The Company estimates the fair value of its fixed rate debt by discounting the future cash flows of each instrument at estimated market rates or credit spreads consistent with the maturity of the debt obligation with similar credit policies. Credit spreads take into consideration general market conditions and maturity. The inputs utilized in estimating the fair value of debt are classified in Level 2 of the hierarchy. The carrying value and estimated fair value of the Company’s debt as of September 30, 2015 and December 31, 2014 are presented in the table below (in thousands):



	Carrying value				Estimated fair value
	September 30,		December 31,		September 30,		December 31,
	2015		2014		2015		2014
Held for use	$	54,800	$	56,653	$	56,173	$	56,580
Held for sale		10,339		36,034		10,626		35,758
Total	$	65,139	$	92,687	$	66,799	$	92,338

- 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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