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10-Q
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q 
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2015

OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                   to                  
 
Commission File Number 001-35169
  
 

RLJ LODGING TRUST
(Exact Name of Registrant as Specified in Its Charter)

 
Maryland
 
27-4706509
(State or Other Jurisdiction of Incorporation or Organization)
 
(I.R.S. Employer Identification No.)
 
3 Bethesda Metro Center, Suite 1000
 
 
Bethesda, Maryland
 
20814
(Address of Principal Executive Offices)
 
(Zip Code)
 
(301) 280-7777
(Registrant’s Telephone Number, Including Area Code)
  
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ý Yes  o No 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  ý Yes  o No 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer” and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
ý
 
Accelerated filer
 
o
 
 
 
 
 
 
 
Non-accelerated filer
 
o (do not check if a smaller reporting company)
 
Smaller reporting company
 
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  o Yes  ý No 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 
As of October 28, 2015, 125,725,658 common shares of beneficial interest of the Registrant, $0.01 par value per share, were outstanding.
 


Table of Contents

TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
Consolidated Financial Statements (unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


ii
Table of Contents

PART I. FINANCIAL INFORMATION
 
Item 1.         Financial Statements.
RLJ Lodging Trust
Consolidated Balance Sheets
(Amounts in thousands, except share and per share data)
 
September 30,
2015
 
December 31, 2014
 
(unaudited)
 
 
Assets
 

 
 

Investment in hotel properties, net
$
3,677,386

 
$
3,518,803

Cash and cash equivalents
140,461

 
262,458

Restricted cash reserves
57,487

 
63,054

Hotel and other receivables, net of allowance of $182 and $166, respectively
39,514

 
25,691

Deferred financing costs, net
8,976

 
11,421

Deferred income tax asset
7,517

 
7,502

Prepaid expense and other assets
35,128

 
42,115

Assets of hotel properties held for sale
—

 
197,335

Total assets
$
3,966,469

 
$
4,128,379

Liabilities and Equity
 

 
 

Mortgage loans
$
407,389

 
$
532,747

Term loans
1,175,000

 
1,025,000

Accounts payable and other liabilities
142,663

 
129,388

Deferred income tax liability
7,242

 
7,879

Advance deposits and deferred revenue
12,234

 
9,984

Accrued interest
4,589

 
2,783

Distributions payable
41,776

 
42,114

Total liabilities
1,790,893

 
1,749,895

 
 
 
 
Commitments and Contingencies (Note 10)


 


 
 
 
 
Equity
 
 
 

Shareholders’ equity:
 
 
 

Preferred shares of beneficial interest, $0.01 par value, 50,000,000 shares authorized; zero shares issued and outstanding at September 30, 2015 and December 31, 2014, respectively
—

 
—

Common shares of beneficial interest, $0.01 par value, 450,000,000 shares authorized; 125,726,018 and 131,964,706 shares issued and outstanding at September 30, 2015 and December 31, 2014, respectively
1,257

 
1,319

Additional paid-in-capital
2,219,407

 
2,419,731

Accumulated other comprehensive loss
(32,294
)
 
(13,644
)
Distributions in excess of net earnings
(30,217
)
 
(46,415
)
Total shareholders’ equity
2,158,153

 
2,360,991

Noncontrolling interest
 

 
 

Noncontrolling interest in joint venture
6,126

 
6,295

Noncontrolling interest in Operating Partnership
11,297

 
11,198

Total noncontrolling interest
17,423

 
17,493

Total equity
2,175,576

 
2,378,484

Total liabilities and equity
$
3,966,469

 
$
4,128,379

 
The accompanying notes are an integral part of these consolidated financial statements.

1
Table of Contents

RLJ Lodging Trust
Consolidated Statements of Operations and Comprehensive Income
(Amounts in thousands, except share and per share data)
(unaudited)
 
For the three months ended September 30,
 
For the nine months ended September 30,
 
2015
 
2014
 
2015
 
2014
Revenue
 
 
 
 
 

 
 

Operating revenue
 
 
 
 
 

 
 

Room revenue
$
253,163

 
$
261,895

 
$
747,962

 
$
727,367

Food and beverage revenue
27,027

 
27,076

 
85,607

 
77,924

Other operating department revenue
9,230

 
8,695

 
27,508

 
23,795

Total revenue
$
289,420

 
$
297,666

 
$
861,077

 
$
829,086

Expense
 

 
 

 
 

 
 

Operating expense
 

 
 

 
 

 
 

Room expense
$
56,310

 
$
57,012

 
$
165,603

 
$
158,669

Food and beverage expense
19,494

 
19,397

 
60,750

 
55,016

Management and franchise fee expense
28,985

 
30,709

 
88,704

 
86,574

Other operating expense
61,676

 
64,133

 
181,485

 
180,346

Total property operating expense
166,465

 
171,251

 
496,542

 
480,605

Depreciation and amortization
39,847

 
37,243

 
114,828

 
105,541

Impairment loss
—

 
9,200

 
—

 
9,200

Property tax, insurance and other
19,458

 
17,874

 
57,782

 
53,064

General and administrative
8,249

 
11,029

 
29,041

 
31,293

Transaction and pursuit costs
2,017

 
480

 
3,005

 
4,375

Total operating expense
236,036

 
247,077

 
701,198

 
684,078

Operating income
53,384

 
50,589

 
159,879

 
145,008

Other income
557

 
48

 
1,103

 
563

Interest income
373

 
337

 
1,181

 
1,622

Interest expense
(14,042
)
 
(13,858
)
 
(39,885
)
 
(42,646
)
Income from continuing operations before income tax expense
40,272

 
37,116

 
122,278

 
104,547

Income tax expense
(151
)
 
(374
)
 
(615
)
 
(1,162
)
Income from continuing operations
40,121

 
36,742

 
121,663

 
103,385

Gain (loss) on disposal of hotel properties
812

 
322

 
23,782

 
(975
)
Net income
40,933

 
37,064

 
145,445

 
102,410

Net income attributable to noncontrolling interests
 

 
 

 
 

 
 

Noncontrolling interest in consolidated joint venture
(49
)
 
(57
)
 
(26
)
 
(102
)
Noncontrolling interest in common units of Operating Partnership
(290
)
 
(247
)
 
(984
)
 
(712
)
Net income attributable to common shareholders
$
40,594

 
$
36,760

 
$
144,435

 
$
101,596

 
 
 
 
 
 
 
 
Basic per common share data
 
 
 
 
 

 
 

Net income per share attributable to common shareholders
$
0.32

 
$
0.28

 
$
1.10

 
$
0.80

Weighted-average number of common shares
127,663,480

 
131,106,440

 
129,855,686


126,070,309

 
 
 
 
 
 
 
 

2
Table of Contents

Diluted per common share data
 
 
 
 
 

 
 

Net income per share attributable to common shareholders
$
0.31

 
$
0.28

 
$
1.10

 
$
0.79

Weighted-average number of common shares
128,143,154

 
132,386,843

 
130,410,613


127,297,901

 
 
 
 
 
 
 
 
Amounts attributable to the Company’s common shareholders
 
 
 
 
 

 
 

Income from continuing operations
$
39,788

 
$
36,440

 
$
120,819

 
$
102,564

Gain (loss) on disposal of hotel properties
806

 
320

 
23,616

 
(968
)
Net income attributable to common shareholders
$
40,594

 
$
36,760

 
$
144,435

 
$
101,596

 
 
 
 
 
 
 
 
Comprehensive income
 
 
 
 
 

 
 

Net income
$
40,933

 
$
37,064

 
$
145,445

 
$
102,410

Unrealized gain (loss) on interest rate derivatives
(15,166
)
 
5,567

 
(18,650
)
 
(1,346
)
Comprehensive income
25,767

 
42,631

 
126,795

 
101,064

Comprehensive income attributable to the noncontrolling interest in consolidated joint venture
(49
)
 
(57
)
 
(26
)
 
(102
)
Comprehensive income attributable to the noncontrolling interest in the Operating Partnership
(290
)
 
(247
)
 
(984
)
 
(712
)
Comprehensive income attributable to the Company
$
25,428

 
$
42,327

 
$
125,785

 
$
100,250

 
The accompanying notes are an integral part of these consolidated financial statements.

3
Table of Contents

RLJ Lodging Trust
Consolidated Statements of Changes in Equity
(Amounts in thousands, except share data)
(unaudited)
 
 
Shareholders’ Equity
 
 
 
Noncontrolling Interests
 
 
 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
Shares
 
Par Value
 
Additional Paid-in Capital
 
Distributions in Excess of
Net Earnings
 
Accumulated Other Comprehensive
Loss
 
Operating
Partnership
 
Consolidated
Joint Venture
 
Total Non-controlling
Interest
 
Total Equity
Balance at December 31, 2014
131,964,706

 
$
1,319

 
$
2,419,731

 
$
(46,415
)
 
$
(13,644
)
 
$
11,198

 
$
6,295

 
$
17,493

 
$
2,378,484

Net income
—

 
—

 
—

 
144,435

 
—

 
984

 
26

 
1,010

 
145,445

Unrealized loss on interest rate derivative
—

 
—

 
—

 
—

 
(18,650
)
 
—

 
—

 
—

 
(18,650
)
Distributions to joint venture partner
—

 
—

 
—

 
—

 
—

 
—

 
(195
)
 
(195
)
 
(195
)
Issuance of restricted stock
1,126,431

 
11

 
(11
)
 
—

 
—

 
—

 
—

 
—

 
—

Amortization of share-based compensation
—

 
—

 
10,488

 
—

 
—

 
—

 
—

 
—

 
10,488

Share grants to trustees
3,477

 
—

 
99

 
—

 
—

 
—

 
—

 
—

 
99

Shares acquired to satisfy minimum required federal and state tax withholding on vesting restricted stock
(363,512
)
 
(3
)
 
(11,026
)
 
—

 
—

 
—

 
—

 
—

 
(11,029
)
Shares acquired as part of a share repurchase program
(6,992,708
)
 
(70
)
 
(199,874
)
 
—

 
—

 
—

 
—

 
—

 
(199,944
)
Forfeiture of restricted stock
(12,376
)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Distributions on common shares and units
—

 
—

 
—

 
(128,237
)
 
—

 
(885
)
 
—

 
(885
)
 
(129,122
)
Balance at September 30, 2015
125,726,018

 
$
1,257

 
$
2,219,407

 
$
(30,217
)
 
$
(32,294
)
 
$
11,297

 
$
6,126

 
$
17,423

 
$
2,175,576

 
The accompanying notes are an integral part of these consolidated financial statements.














4
Table of Contents

RLJ Lodging Trust
Consolidated Statements of Changes in Equity
(Amounts in thousands, except share data)
(unaudited)
 
Shareholders’ Equity
 
 
 
Noncontrolling Interests
 
 
 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
Shares
 
Par Value
 
Additional Paid-in Capital
 
Distributions in Excess of
Net Earnings
 
Accumulated Other Comprehensive Loss
 
Operating
Partnership
 
Consolidated
Joint Venture
 
Total Non-controlling
Interests
 
Total Equity
Balance at December 31, 2013
122,640,042

 
$
1,226

 
$
2,178,004

 
$
(45,522
)
 
$
(5,941
)
 
$
11,261

 
$
7,306

 
$
18,567

 
$
2,146,334

Net income
—

 
—

 
—

 
101,596

 
—

 
712

 
102

 
814

 
102,410

Proceeds from sale of common stock, net
9,200,000

 
92

 
232,664

 
—

 
—

 
—

 
—

 
—

 
232,756

Unrealized loss on interest rate derivative
—

 
—

 
—

 
—

 
(1,346
)
 
—

 
—

 
—

 
(1,346
)
Distributions to joint venture partner
—

 
—

 
—

 
—

 
—

 
—

 
(1,182
)
 
(1,182
)
 
(1,182
)
Issuance of restricted stock
343,887

 
3

 
(3
)
 
—

 
—

 
—

 
—

 
—

 
—

Amortization of share-based compensation
—

 
—

 
11,244

 
—

 
—

 
—

 
—

 
—

 
11,244

Share grants to trustees
3,360

 
—

 
94

 
—

 
—

 
—

 
—

 
—

 
94

Shares acquired to satisfy minimum required federal and state tax withholding on vesting restricted stock
(154,277
)
 
(2
)
 
(4,244
)
 
—

 
—

 
—

 
—

 
—

 
(4,246
)
Forfeiture of restricted stock
(8,716
)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Distributions on common shares and units
—

 
—

 
—

 
(96,443
)
 
—

 
(664
)
 
—

 
(664
)
 
(97,107
)
Balance at September 30, 2014
132,024,296

 
$
1,319

 
$
2,417,759

 
$
(40,369
)
 
$
(7,287
)
 
$
11,309

 
$
6,226

 
$
17,535

 
$
2,388,957


The accompanying notes are an integral part of these consolidated financial statements.

5
Table of Contents

RLJ Lodging Trust
Consolidated Statements of Cash Flows
(Amounts in thousands)
(unaudited)
 
For the nine months ended September 30,
 
2015
 
2014
Cash flows from operating activities
 

 
 

Net income
$
145,445

 
$
102,410

Adjustments to reconcile net income to cash flow provided by operating activities:
 

 
 

Loss on defeasance
—

 
804

(Gain) loss on disposal of hotel properties
(23,782
)
 
975

Impairment loss
—

 
9,200

Depreciation and amortization
114,828

 
105,541

Amortization of deferred financing costs
3,111

 
3,312

Amortization of deferred management fees
595

 
719

Accretion of interest income on investment in loan
(275
)
 
(175
)
Share grants to trustees
99

 
94

Amortization of share-based compensation
10,488

 
11,244

Deferred income taxes
(652
)
 
(635
)
Changes in assets and liabilities:
 

 
 

Hotel and other receivables, net
(13,644
)
 
(14,005
)
Prepaid expense and other assets
1,773

 
(6,912
)
Accounts payable and other liabilities
(9,065
)
 
8,953

Advance deposits and deferred revenue
2,204

 
2,564

Accrued interest
1,806

 
16

Net cash flow provided by operating activities
232,931

 
224,105

Cash flows from investing activities
 

 
 

Acquisition of hotel properties, net
(143,769
)
 
(631,640
)
Proceeds from the disposal of hotel properties, net
232,938

 
124,076

Purchase deposits
—

 
6,246

Improvements and additions to hotel properties
(100,252
)
 
(70,987
)
Additions to property and equipment
(919
)
 
(26
)
Releases from restricted cash reserves, net
7,115

 
2,946

Net cash flow used in investing activities
(4,887
)
 
(569,385
)
Cash flows from financing activities
 

 
 

Borrowings under revolving credit facility
—

 
292,500

Repayments under revolving credit facility
—

 
(292,500
)
Borrowings on term loans
150,000

 
175,000

Proceeds from mortgage loans
7,000

 
—

Payment of mortgage principal
(165,747
)
 
(27,134
)
Repurchase of common shares under a share repurchase program
(199,944
)
 
—

Repurchase of common shares to satisfy employee withholding requirements
(11,029
)
 
(4,246
)
Distributions on common shares
(128,602
)
 
(85,532
)
Distributions on Operating Partnership units
(858
)
 
(611
)
Payment of deferred financing costs
(666
)
 
(1,579
)
Distribution to noncontrolling interest
(195
)
 
(1,182
)
Proceeds from issuance of common shares
—

 
232,756

Net cash flow (used in) provided by financing activities
(350,041
)
 
287,472

Net change in cash and cash equivalents
(121,997
)
 
(57,808
)
Cash and cash equivalents, beginning of period
262,458

 
332,248

Cash and cash equivalents, end of period
$
140,461

 
$
274,440

 The accompanying notes are an integral part of these consolidated financial statements.

6
Table of Contents

RLJ Lodging Trust
Notes to the Consolidated Financial Statements
(unaudited)

1.              Organization
 
RLJ Lodging Trust (the "Company") was formed as a Maryland real estate investment trust ("REIT") on January 31, 2011. The Company is a self-advised and self-administered REIT that acquires primarily premium-branded, focused-service and compact full-service hotels. The Company qualified and elected to be taxed as a REIT for U.S. federal income tax purposes, commencing with the portion of its taxable year ended December 31, 2011.
 
Substantially all of the Company’s assets are held by, and all of its operations are conducted through, RLJ Lodging Trust, L.P. (the "Operating Partnership"). The Company is the sole general partner of the Operating Partnership. As of September 30, 2015, there were 126,620,018 units of limited partnership interest in the Operating Partnership ("OP units") outstanding and the Company owned, through a combination of direct and indirect interests, 99.3% of the outstanding OP units.
 
As of September 30, 2015, the Company owned 127 hotel properties with approximately 21,100 rooms, located in 22 states and the District of Columbia, and an interest in one mortgage loan secured by a hotel.  The Company owned, through wholly-owned subsidiaries, 100% of the interests in all properties, with the exception of the DoubleTree Metropolitan Hotel-New York City, in which the Company, through wholly-owned subsidiaries, owned a 98.3% controlling interest in a joint venture, DBT Met Hotel Venture, LP, which was formed to engage in hotel operations related to the DoubleTree Metropolitan Hotel. An independent operator manages each property.
 
2.              Summary of Significant Accounting Policies
 
The Company's Annual Report on Form 10-K for the year ended December 31, 2014 contains a discussion of significant accounting policies. There have been no significant changes to the Company's significant accounting policies since December 31, 2014.

Basis of Presentation and Principles of Consolidation
 
The unaudited consolidated financial statements and related notes have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America ("GAAP") and in conformity with the rules and regulations of the Securities and Exchange Commission ("SEC") applicable to financial information. As such, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted in accordance with the rules and regulations of the SEC.  The unaudited financial statements include adjustments based on management’s estimates (consisting of normal recurring adjustments), which the Company considers necessary for the fair statement of the consolidated balance sheets, statements of operations and comprehensive income, statements of changes in equity and statements of cash flows for the periods presented. The unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto as of and for the year ended December 31, 2014, included in the Company's Annual Report on Form 10-K filed with the SEC on February 26, 2015. Operating results for the three and nine months ended September 30, 2015 are not necessarily indicative of actual operating results for the entire year.
 
The consolidated financial statements include all subsidiaries controlled by the Company. For controlled subsidiaries that are not wholly-owned, the noncontrolling interests in these subsidiaries are presented separately in the consolidated financial statements. As of September 30, 2015, the Company consolidated DBT Met Hotel Venture, LP, a majority-owned partnership that has a third-party, noncontrolling 1.7% ownership interest. The third-party partnership interest is included in noncontrolling interest in joint venture on the consolidated balance sheets. Profits and losses are allocated in proportion to each party's respective ownership interest.

As of September 30, 2015, the Company consolidated the Operating Partnership, which is a majority-owned partnership that has a third-party, noncontrolling 0.7% ownership interest. The third-party partnership interest is included in noncontrolling interest in Operating Partnership on the consolidated balance sheets. Profits and losses are allocated in proportion to each party's respective ownership interest.
 

7
Table of Contents

Reclassifications
 
Certain prior year amounts in these financial statements have been reclassified to conform to the current year presentation with no impact to net income, shareholders’ equity or cash flows.
 
Use of Estimates
 
The preparation of the Company’s financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and the amounts of contingent assets and liabilities at the balance sheet date and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
 
Recently Issued Accounting Pronouncements
 
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers, which supersedes or replaces nearly all GAAP revenue recognition guidance. The new guidance establishes a new control-based revenue recognition model, changes the basis for deciding when revenue is recognized over time or at a point in time and expands disclosures about revenue. The guidance is effective for annual reporting periods beginning after December 15, 2017, and interim periods within those annual periods. Early adoption is permitted for annual reporting periods beginning after December 15, 2016. The Company is currently evaluating whether this ASU will have a material impact on its financial position, results of operations or cash flows.

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. ASU 2014-15 requires management to evaluate whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern, and to provide certain disclosures when it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued. ASU 2014-15 is effective for the annual period ended December 31, 2016 and for annual periods and interim periods thereafter with early adoption permitted. The Company does not believe this ASU will have a material impact on its financial position, results of operations or cash flows.

In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. ASU 2015-02 requires reporting entities to reevaluate whether they should consolidate certain legal entities under the revised consolidation model. This standard modifies the evaluation of whether limited partnerships and similar legal entities are variable interest entities ("VIEs"), eliminates the presumption that a general partner should consolidate a limited partnership, and affects the consolidation analysis of reporting entities that are involved with VIEs, especially those that have fee arrangements and related party relationships. This ASU is effective for fiscal years beginning after December 15, 2015, and for interim periods within those fiscal years. The Company does not believe this ASU will have a material impact on its financial position, results of operations or cash flows.

In April 2015, the FASB issued ASU 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. ASU 2015-03 requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. The guidance is effective for fiscal years beginning after December 15, 2015 with early adoption permitted. The Company does not believe this ASU will have a material impact on its financial position, results of operations or cash flows.

In August 2015, the FASB issued ASU 2015-15, Interest - Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements. ASU 2015-15 allows debt issuance costs related to a line of credit arrangement to be presented in the balance sheet as an asset and amortized ratably over the term of the line of credit arrangement, regardless of whether there are any amounts outstanding on the line of credit arrangement. The guidance is effective for fiscal years beginning after December 15, 2015 with early adoption permitted. The Company does not believe this ASU will have a material impact on its financial position, results of operations or cash flows.

In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments. ASU 2015-16 requires that the cumulative impact of a measurement period adjustment be recognized in the period in which the adjustment is identified. The guidance is effective for fiscal years beginning after December 15, 2016 with early adoption permitted. The Company does not believe this ASU will have a material impact on its financial position, results of operations or cash flows.



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3.              Investment in Hotel Properties
 
Investment in hotel properties as of September 30, 2015 and December 31, 2014 consisted of the following (in thousands):
 
September 30, 2015
 
December 31, 2014
Land and improvements
$
735,068

 
$
706,497

Buildings and improvements
3,192,290

 
3,005,390

Furniture, fixtures and equipment
550,867

 
498,126

Intangible assets
2,507

 
2,507

 
4,480,732

 
4,212,520

Accumulated depreciation and amortization
(803,346
)
 
(693,717
)
Investment in hotels properties, net
$
3,677,386

 
$
3,518,803

 
For the three and nine months ended September 30, 2015, depreciation and amortization expense related to investment in hotel properties was approximately $39.7 million and $114.5 million, respectively. For the three and nine months ended September 30, 2014, depreciation and amortization expense related to investment in hotel properties was approximately $37.1 million and $105.2 million, respectively.
 
Impairment
 
The Company determined that there was no impairment of any assets for the three and nine months ended September 30, 2015.

In connection with the preparation of the unaudited consolidated financial statements for the three and nine months ended September 30, 2014, the Company evaluated the recoverability of the carrying values of hotels given the current expectation to sell certain hotels before the end of their previously estimated useful lives. Based on an analysis of estimated undiscounted net cash flows, the Company concluded that the carrying values of three hotels were not recoverable. The Company estimated the fair value of the hotels using a widely accepted revenue multiple approach with significant unobservable inputs, including revenue growth projections and prevailing market multiples, from third-party sources. During the three and nine months ended September 30, 2014, the Company recorded an impairment loss of $9.2 million related to these hotels.


4.              Acquisition of Hotel Properties
 
During the nine months ended September 30, 2015, the Company acquired a 100% interest in the following properties:

Property
 
Location
 
Acquisition Date
 
Management Company
 
Rooms
 
Purchase Price (in thousands)
Hyatt Place Washington DC Downtown K Street
 
Washington, DC
 
July 15, 2015
 
Aimbridge Hospitality
 
164

 
$
68,000

Homewood Suites Seattle Lynnwood
 
Lynnwood, WA
 
July 20, 2015
 
InnVentures
 
170

 
37,900

Residence Inn Palo Alto Los Altos
 
Los Altos, CA
 
September 25, 2015
 
InnVentures
 
156

 
70,000

 
 
 
 
 
 
 
 
490

 
$
175,900


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During the nine months ended September 30, 2014, the Company acquired a 100% interest in the following properties:

Property
 
Location
 
Acquisition Date
 
Management Company
 
Rooms
 
Purchase Price (in thousands)
Hyatt House Charlotte Center City
 
Charlotte, NC
 
March 12, 2014
 
Hyatt Affiliate
 
163

 
$
32,496

Hyatt House Cypress Anaheim
 
Cypress, CA
 
March 12, 2014
 
Hyatt Affiliate
 
142

 
14,753

Hyatt House Emeryville San Francisco Bay Area
 
Emeryville, CA
 
March 12, 2014
 
Hyatt Affiliate
 
234

 
39,274

Hyatt House San Diego Sorrento Mesa
 
San Diego, CA
 
March 12, 2014
 
Hyatt Affiliate
 
193

 
35,985

Hyatt House San Jose Silicon Valley
 
San Jose, CA
 
March 12, 2014
 
Hyatt Affiliate
 
164

 
44,159

Hyatt House San Ramon
 
San Ramon, CA
 
March 12, 2014
 
Hyatt Affiliate
 
142

 
20,833

Hyatt House Santa Clara
 
Santa Clara, CA
 
March 12, 2014
 
Hyatt Affiliate
 
150

 
40,570

Hyatt Market Street The Woodlands
 
The Woodlands, TX
 
March 12, 2014
 
Hyatt Corporation
 
70

 
25,817

Hyatt Place Fremont Silicon Valley
 
Fremont, CA
 
March 12, 2014
 
Hyatt Affiliate
 
151

 
23,525

Hyatt Place Madison Downtown
 
Madison, WI
 
March 12, 2014
 
Hyatt Affiliate
 
151

 
35,088

Courtyard Portland City Center
 
Portland, OR
 
May 22, 2014
 
Sage Hospitality
 
256

 
67,000

Embassy Suites Irvine Orange County
 
Irvine, CA
 
May 22, 2014
 
Sage Hospitality
 
293

 
53,000

Hilton Cabana Miami Beach
 
Miami, FL
 
June 19, 2014
 
Highgate Hotels
 
231

 
71,700

Hyatt Atlanta Midtown
 
Atlanta, GA
 
July 14, 2014
 
Interstate Hotels and Resorts
 
194

 
49,500

DoubleTree Grand Key Resort (1)
 
Key West, FL
 
September 11, 2014
 
Interstate Hotels and Resorts
 
215

 
78,250

 
 
 
 
 
 
 
 
2,749

 
$
631,950

(1)
Purchase price includes $1.3 million paid for five condominium units.

The allocation of the purchase price for the properties acquired during the nine months ended September 30, 2015 and 2014 was as follows (in thousands):
 
For the nine months ended September 30,
 
2015
 
2014
Land and improvements
$
28,696

 
$
164,335

Buildings and improvements
135,174

 
409,506

Furniture, fixtures and equipment
12,030

 
57,571

Intangible and other assets
—

 
538

Total purchase price
$
175,900

 
$
631,950

 
The allocation of the purchase price for Residence Inn Palo Alto Los Altos is preliminary given the short period of time between the acquisition date and the issuance of these financial statements.

For properties acquired during the nine months ended September 30, 2015, total revenues and net loss from the date of acquisition through September 30, 2015 are included in the accompanying consolidated statements of operations for the three and nine months ended September 30, 2015 as follows (in thousands):
 
2015 acquisitions
 
For the three months ended September 30, 2015
 
For the nine months ended September 30, 2015
Revenue
$
3,905

 
$
3,905

Net loss
$
(1,674
)
 
$
(1,674
)

For properties acquired during the nine months ended September 30, 2014, total revenues and net income from the date of acquisition through September 30, 2014 are included in the accompanying consolidated statements of operations for the three and nine months ended September 30, 2014 as follows (in thousands):

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Table of Contents

 
2014 acquisitions
 
For the three months ended September 30, 2014
 
For the nine months ended September 30, 2014
Revenue
$
38,181

 
$
67,988

Net income
$
8,628

 
$
11,639

 
The following unaudited condensed pro forma financial information presents the results of operations as if the 2015 acquisitions had taken place on January 1, 2014 and the 2014 acquisitions had taken place on January 1, 2013. The unaudited condensed pro forma financial information is not necessarily indicative of what actual results of operations of the Company would have been assuming the 2015 and 2014 acquisitions had taken place on January 1, 2014 and 2013, respectively, nor does it purport to represent the results of operations for future periods.  The unaudited condensed pro forma financial information is as follows (in thousands, except share and per share data): 
 
For the three months ended September 30,
 
For the nine months ended September 30,
 
2015
 
2014
 
2015
 
2014
Revenue
$
293,099

 
$
305,610

 
$
874,190

 
$
881,605

Net income attributable to common shareholders
$
43,341

 
$
38,391

 
$
148,103

 
$
111,083

Net income per share attributable to common shareholders - basic
$
0.34

 
$
0.29

 
$
1.14

 
$
0.88

Net income per share attributable to common shareholders - diluted
$
0.34

 
$
0.29

 
$
1.14

 
$
0.87

Weighted average number of shares outstanding - basic
127,663,480

 
131,106,440

 
129,855,686

 
126,070,309

Weighted average number of shares outstanding - diluted
128,143,154

 
132,386,843

 
130,410,613

 
127,297,901

 
5.            Disposal of Hotel Properties
 
During the nine months ended September 30, 2015, the Company sold 22 hotel properties in three transactions for a total sales price of approximately $238.5 million. In conjunction with these transactions, the Company recorded a $23.8 million gain on disposal which is included in the accompanying consolidated statement of operations.


11
Table of Contents

The following table provides a list of properties that were sold during the nine months ended September 30, 2015:

Property Name
 
Location
 
Disposal Date
 
Rooms
Courtyard Chicago Schaumburg
 
Schaumburg, IL
 
February 23, 2015
 
162

Courtyard Detroit Pontiac Bloomfield
 
Pontiac, MI
 
February 23, 2015
 
110

Courtyard Grand Junction
 
Grand Junction, CO
 
February 23, 2015
 
136

Courtyard Mesquite
 
Mesquite, TX
 
February 23, 2015
 
101

Courtyard San Antonio Airport Northstar
 
San Antonio, TX
 
February 23, 2015
 
78

Courtyard Tampa Brandon
 
Tampa, FL
 
February 23, 2015
 
90

Fairfield Inn & Suites Merrillville
 
Merrillville, IN
 
February 23, 2015
 
112

Fairfield Inn & Suites San Antonio Airport
 
San Antonio, TX
 
February 23, 2015
 
120

Fairfield Inn & Suites Tampa Brandon
 
Tampa, FL
 
February 23, 2015
 
107

Hampton Inn Merrillville
 
Merrillville, IN
 
February 23, 2015
 
64

Holiday Inn Grand Rapids Airport
 
Kentwood, MI
 
February 23, 2015
 
148

Homewood Suites Tampa Brandon
 
Tampa, FL
 
February 23, 2015
 
126

Marriott Auburn Hills Pontiac at Centerpoint
 
Pontiac, MI
 
February 23, 2015
 
290

Residence Inn Austin Round Rock
 
Round Rock, TX
 
February 23, 2015
 
96

Residence Inn Chicago Schaumburg
 
Schaumburg, IL
 
February 23, 2015
 
125

Residence Inn Detroit Pontiac Auburn Hills
 
Pontiac, MI
 
February 23, 2015
 
114

Residence Inn Grand Junction
 
Grand Junction, CO
 
February 23, 2015
 
104

Residence Inn Indianapolis Carmel
 
Carmel, IN
 
February 23, 2015
 
120

Springhill Suites Chicago Schaumburg
 
Schaumburg, IL
 
February 23, 2015
 
132

Springhill Suites Indianapolis Carmel
 
Carmel, IN
 
February 23, 2015
 
126

Fairfield Inn and Suites Valparaiso
 
Valparaiso, IN
 
May 22, 2015
 
63

Residence Inn South Bend
 
South Bend, IN
 
July 7, 2015
 
80

 
 
 
 
Total
 
2,604


During the nine months ended September 30, 2014, the Company sold 14 hotel properties in four separate transactions for a total sales price of approximately $128.0 million. In conjunction with these transactions, the Company recorded a $1.0 million loss on disposal, which is included in the accompanying consolidated statement of operations. Additionally, the Company defeased the mortgage indebtedness secured by three of the properties that were sold. The cost of the defeasance was approximately $0.8 million, which is included in interest expense in the accompanying consolidated statement of operations.


12
Table of Contents

The following table provides a list of properties that were sold during the nine months ended September 30, 2014:
Property Name

Location

Disposal Date

Rooms
Courtyard Denver Southwest Lakewood

Lakewood, CO

February 20, 2014

90

Residence Inn Denver Southwest Lakewood

Lakewood, CO

February 20, 2014

102

Hyatt House Colorado Springs

Colorado Springs, CO

February 20, 2014

125

SpringHill Suites Gainesville

Gainesville, FL

February 20, 2014

126

Residence Inn Indianapolis Airport

Indianapolis, IN

February 20, 2014

95

Fairfield Inn & Suites Indianapolis Airport

Indianapolis, IN

February 20, 2014

86

Courtyard Grand Rapids Airport

Kentwood, MI

February 20, 2014

84

Hampton Inn Suites Las Vegas Red Rock Summerlin

Las Vegas, NV

February 20, 2014

106

Courtyard Austin University Area

Austin, TX

February 20, 2014

198

Fairfield Inn & Suites Austin University Area

Austin, TX

February 20, 2014

63

Hyatt House Dallas Richardson

Richardson, TX

February 20, 2014

130

Hilton Garden Inn St. George

St. George, UT

February 25, 2014

150

Hilton Mystic

Mystic, CT

March 26, 2014

182

Holiday Inn Austin NW Arboretum Area
 
Austin, TX
 
June 18, 2014
 
194





Total

1,731


6.              Debt
 
Credit Facilities
 
The Company has in place the following unsecured credit agreements:

•
$300.0 million revolving credit facility with a scheduled maturity date of November 20, 2016 with a one-year extension option if certain conditions are satisfied (the "Revolver");
•
$400.0 million term loan with a scheduled maturity date of August 27, 2018 (the "2013 Five-Year Term Loan");
•
$400.0 million term loan with a scheduled maturity date of March 20, 2019 (which was originally scheduled to mature in 2017) (the "2012 Five-Year Term Loan");
•
$225.0 million term loan with a scheduled maturity date of November 20, 2019 (the "2012 Seven-Year Term Loan"); and
•
$150.0 million term loan with a scheduled maturity date of January 22, 2022 (the "2014 Seven-Year Term Loan").

The 2012 Five-Year Term Loan, the 2012 Seven-Year Term Loan, the 2013 Five-Year Term Loan and the 2014 Seven-Year Term loan are collectively the "Term Loans". The Revolver and Term Loans are subject to customary financial covenants. As of September 30, 2015, the Company was in compliance with all financial covenants.
 

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As of and for the three and nine months ended September 30, 2015 and 2014, details of the Revolver and Term Loans are as follows (in thousands):
 
 
 
 
 
 
 
 
Interest expense for the
 
 
 
 
 
 
 
 
three months ended September 30,
 
nine months ended September 30,
 
 
Outstanding Borrowings at September 30, 2015
 
Maturity Date
 
Interest Rate at September 30, 2015 (1)
 
2015
 
2014
 
2015
 
2014
Revolver (2)(3)
 
$
—

 
November 2016
 
n/a
 
$
268

 
$
287

 
$
793

 
$
906

2013 Five-Year Term Loan (4)
 
400,000

 
August 2018
 
3.07%
 
3,148

 
3,137

 
9,294

 
9,090

2012 Five-Year Term Loan (5)
 
400,000

 
March 2019
 
2.72%
 
2,783

 
1,748

 
7,659

 
4,898

2012 Seven-Year Term Loan (6)
 
225,000

 
November 2019
 
4.04%
 
2,324

 
2,320

 
6,865

 
6,870

2014 Seven-Year Term Loan (7)(8)
 
150,000

 
January 2022
 
3.43%
 
1,319

 
—

 
1,414

 
—

Total
 
$
1,175,000

 
 
 
 
 
$
9,842

 
$
7,492

 
$
26,025

 
$
21,764

 
(1)
Interest rate at September 30, 2015 gives effect to interest rate hedges, as applicable.
(2)
At September 30, 2015 there was $300.0 million of borrowing capacity on the Revolver.
(3)
Includes an unused facility fee of $0.3 million and $0.8 million for the three and nine months ended September 30, 2015, respectively, and $0.3 million and $0.8 million for the three and nine months ended September 30, 2014, respectively.
(4)
Includes interest expense related to an interest rate hedge of $1.3 million and $3.7 million for the three and nine months ended September 30, 2015, respectively, and $1.3 million and $3.8 million for the three and nine months ended September 30, 2014, respectively.
(5)
Includes interest expense related to an interest rate hedge of $1.0 million and $2.4 million for the three and nine months ended September 30, 2015, respectively.
(6)
Includes interest expense related to an interest rate hedge of $1.0 million and $3.1 million for the three and nine months ended September 30, 2015, respectively, and $1.0 million and $3.1 million for the three and nine months ended September 30, 2014, respectively.
(7)
Includes an unused facility fee of $0 and $0.1 million for the three and nine months ended September 30, 2015, respectively.
(8)
Includes interest expense related to an interest rate hedge of $0.6 million and $0.6 million for the three and nine months ended September 30, 2015, respectively.


Mortgage Loans
 
As of September 30, 2015 and December 31, 2014, the Company was subject to the following mortgage loans (in thousands):
 
 
 
 
 
 
 
 
 
 
 
 
Principal balance at
Lender
 
Number of Assets Encumbered
 
Interest Rate at September 30, 2015 (1)
 
Maturity Date
 
September 30, 2015
 
December 31, 2014
PNC Bank (2)
 
5
 
2.54
%
 
(3)
 
May 2016
 
(5)
 
$
74,000

 
$
74,000

Wells Fargo (6)
 
4
 
4.19
%
 
(4)
 
September 2016
 
(7)
 
150,000

 
150,000

Wells Fargo
 
4
 
3.98
%
 
(3)
 
October 2017
 
(7)
 
150,000

 
143,000

Wells Fargo
 
1
 
5.25
%
 
 
 
June 2022
 
 
 
33,389

 
—

Capmark Financial Group
 

 

 
 
 
May 2015
 

 
—

 
10,513

Capmark Financial Group
 

 

 
 
 
June 2015
 

 
—

 
4,561

Barclays Bank
 
 
 
 
 
 
 
June 2015
 
 
 
—

 
107,544

Barclays Bank
 

 

 
 
 
June 2015
 

 
—

 
26,775

Capmark Financial Group
 
 
 
 
 
 
 
July 2015
 
 
 
—

 
6,214

Barclays Bank
 

 

 
 
 
September 2015
 

 
—

 
10,140


 
14
 
 
 
 
 
 
 
 
 
$
407,389

 
$
532,747



14
Table of Contents

(1)
Interest rate at September 30, 2015 gives effect to interest rate hedges, as applicable.
(2)
The five hotels encumbered by the PNC Bank loan are cross-collateralized.
(3)
Requires payments of interest only until the commencement of the extension period(s).
(4)
Requires payments of interest only until October 2015.
(5)
Maturity date may be extended for a one-year term at the Company’s option, subject to certain lender requirements.
(6)
Two of the four hotels encumbered by the Wells Fargo loan are cross-collateralized.
(7)
Maturity date may be extended for four one-year terms at the Company’s option, subject to certain lender requirements.
 
Mortgage interest expense for the three and nine months ended September 30, 2015 was $3.7 million and $12.5 million, respectively, including interest expense related to interest rate hedges of $1.2 million and $3.6 million, respectively. Mortgage interest expense for the three and nine months ended September 30, 2014 was $5.8 million and $17.4 million, respectively, including interest expense related to interest rate hedges of $0.6 million and $1.9 million, respectively. Some mortgage agreements are subject to customary financial covenants. The Company was in compliance with these covenants at September 30, 2015 and December 31, 2014.
  
7.              Derivatives and Hedging
 
The Company employs derivative instruments to hedge against interest rate fluctuations. For derivative instruments designated as cash flow hedges, unrealized gains and losses on the effective portion are reported in accumulated other comprehensive loss, a component of shareholders’ equity.  Unrealized gains and losses on the ineffective portion of all designated hedges are recognized in earnings in the current period.  For derivative instruments not designated as hedging instruments, unrealized gains or losses are recognized in earnings in the current period. At September 30, 2015 and December 31, 2014, all derivative instruments were designated as cash flow hedges.
 
At September 30, 2015 and December 31, 2014, the aggregate fair value of interest rate swap liabilities of $32.3 million and $13.6 million, respectively, was included in accounts payable and other liabilities in the accompanying consolidated balance sheets.
 

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Table of Contents

As of September 30, 2015 and December 31, 2014, the Company had entered into the following derivative instruments (in thousands):
 
 
Notional value at
 
 
 
 
 
Fair value at
Hedge type
September 30, 2015
 
December 31, 2014
 
Interest rate
 
Maturity
 
September 30, 2015
 
December 31, 2014
Swap-cash flow
$
275,000

 
$
275,000

 
1.12%
 
November 2017
 
$
(2,810
)
 
$
(232
)
Swap-cash flow
175,000

 
175,000

 
1.56%
 
March 2018
 
(3,694
)
 
(2,182
)
Swap-cash flow
175,000

 
175,000

 
1.64%
 
March 2018
 
(4,015
)
 
(2,596
)
Swap-cash flow
16,500

 
16,500

 
1.83%
 
September 2018
 
(487
)
 
(315
)
Swap-cash flow
16,500

 
16,500

 
1.75%
 
September 2018
 
(451
)
 
(270
)
Swap-cash flow
40,500

 
40,500

 
1.83%
 
September 2018
 
(1,196
)
 
(772
)
Swap-cash flow
41,500

 
41,500

 
1.75%
 
September 2018
 
(1,134
)
 
(678
)
Swap-cash flow
18,000

 
18,000

 
1.83%
 
September 2018
 
(531
)
 
(343
)
Swap-cash flow
17,000

 
17,000

 
1.75%
 
September 2018
 
(464
)
 
(278
)
Swap-cash flow
125,000

 
125,000

 
2.02%
 
March 2019
 
(4,743
)
 
(3,073
)
Swap-cash flow
100,000

 
100,000

 
1.94%
 
March 2019
 
(3,534
)
 
(2,145
)
Swap-cash flow
125,000

 
—

 
1.27%
 
March 2019
 
(1,436
)
 
—

Swap-cash flow (1)
100,000

 
—

 
1.96%
 
March 2019
 
(691
)
 
—

Swap-cash flow (1)
50,000

 
—

 
1.85%
 
March 2019
 
(272
)
 
—

Swap-cash flow (1)
50,000

 
—

 
1.81%
 
March 2019
 
(246
)
 
—

Swap-cash flow (1)
25,000

 
—

 
1.74%
 
March 2019
 
(101
)
 
—

Swap-cash flow
143,000

 
143,000

 
1.81%
 
October 2020
 
(4,149
)
 
(760
)
Swap-cash flow
50,000

 
—

 
1.61%
 
June 2021
 
(742
)
 
—

Swap-cash flow
50,000

 
—

 
1.56%
 
June 2021
 
(577
)
 
—

Swap-cash flow
50,000

 
—

 
1.71%
 
June 2021
 
(1,021
)
 
—

 
$
1,643,000

 
$
1,143,000

 
 
 
 
 
$
(32,294
)
 
$
(13,644
)
     
(1)
Effective between the maturity of the existing swap in November 2017 and the maturity of the debt in March 2019.

As of September 30, 2015 and December 31, 2014, there was approximately $32.3 million and $13.6 million, respectively, in net unrealized losses included in accumulated other comprehensive loss related to interest rate hedges that are effective in offsetting the variable cash flows.  There was no ineffectiveness recorded on designated hedges during the three and nine month periods ended September 30, 2015 and 2014. For the three and nine months ended September 30, 2015, approximately $5.0 million and $13.3 million, respectively, of amounts included in accumulated other comprehensive loss were reclassified into interest expense. For the three and nine months ended September 30, 2014, approximately $3.0 million and $8.7 million, respectively, of amounts included in accumulated other comprehensive loss were reclassified into interest expense. Approximately $17.5 million of the net unrealized losses included in accumulated other comprehensive loss at September 30, 2015 is expected to be reclassified into interest expense within the next 12 months.
 
8.              Fair Value
 
Fair Value Measurement
 
Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or most advantageous market.  The fair value hierarchy has three levels of inputs, both observable and unobservable:
 
•
Level 1 — Inputs include quoted market prices in an active market for identical assets or liabilities.
 
•
Level 2 — Inputs are market data, other than Level 1, that are observable either directly or indirectly.  Level 2 inputs include quoted market prices for similar assets or liabilities, quoted market prices in an inactive market, and other observable information that can be corroborated by market data.

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Table of Contents


•
Level 3 — Inputs are unobservable and corroborated by little or no market data.
 
Fair Value of Financial Instruments
 
The estimated fair values of financial instruments have been determined by the Company using available market information and appropriate valuation methods.  Considerable judgment is required in interpreting market data to develop the estimates of fair value.  Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange.  The use of different market assumptions and/or estimation methods may have a material effect on the estimated fair value amounts.  The Company used the following market assumptions and/or estimation methods:
 
•
Cash and cash equivalents, restricted cash reserves, hotel and other receivables, accounts payable and other liabilities — The carrying amounts reported in the consolidated balance sheets for these financial instruments approximate fair value because of their short maturities.
 
•
Variable rate mortgage notes payable and borrowings under the Revolver and Term Loans — The carrying amounts reported in the consolidated balance sheets for these financial instruments approximate fair value, as they bear interest at market rates.  The Company determined that its variable rate mortgage notes payable and borrowings under the Revolver and Term Loans are classified in Level 3 of the fair value hierarchy.

•
Fixed rate mortgage notes payable — The fair value estimated at September 30, 2015 and December 31, 2014 of $36.1 million and $171.1 million, respectively, is calculated based on the net present value of payments over the term of the loans using estimated market rates for similar mortgage loans with similar terms and loan-to-value ratios. As a result, the Company determined that its fixed rate mortgage notes payable in their entirety are classified in Level 3 of the fair value hierarchy.  The carrying value of fixed rate mortgage notes payable at September 30, 2015 and December 31, 2014 was $33.4 million and $165.7 million, respectively.
 
Recurring Fair Value Measurements
 
The following table presents the Company’s fair value hierarchy for those financial liabilities measured at fair value on a recurring basis as of September 30, 2015 (in thousands):

 
Fair Value at September 30, 2015
 
Level 1
 
Level 2
 
Level 3
 
Total
Interest rate swap liability
$
—

 
$
(32,294
)
 
$
—

 
$
(32,294
)
 
The following table presents the Company’s fair value hierarchy for those financial liabilities measured at fair value on a recurring basis as of December 31, 2014 (in thousands):
 
Fair Value at December 31, 2014
 
Level 1
 
Level 2
 
Level 3
 
Total
Interest rate swap liability
$
—

 
$
(13,644
)
 
$
—

 
$
(13,644
)

The fair values of the derivative financial instruments are determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. The Company determined that the significant inputs, such as interest yield curves and discount rates, used to value its derivatives fall within Level 2 of the fair value hierarchy and that the credit valuation adjustments associated with the Company’s counterparties and its own credit risk utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. As of September 30, 2015, the Company assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and determined that the credit valuation adjustments were not significant to the overall valuation of its derivatives. As a result, the Company determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.


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9.              Income Taxes
 
The Company elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code when it filed its U.S. federal tax return for its short taxable year ended December 31, 2011.  To qualify as a REIT, the Company must meet a number of organizational and operational requirements, including a requirement that it distribute at least 90% of its adjusted taxable income to its shareholders, subject to certain adjustments and excluding any net capital gain.  The Company’s intention is to adhere to these requirements and maintain the qualification for taxation as a REIT.  As a REIT, the Company is not subject to federal corporate income tax on that portion of net income that is currently distributed to its shareholders.  However, the Company’s taxable REIT subsidiaries ("TRS") will generally be subject to federal, state, and local income taxes.
 
The Company accounts for income taxes using the asset and liability method.  Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities from a change in tax rates is recognized in earnings in the period when the new rate is enacted.
 
The Company had no accruals for tax uncertainties as of September 30, 2015 and December 31, 2014.
 
10.       Commitments and Contingencies
 
Restricted Cash Reserves
 
The Company is obligated to maintain reserve funds for capital expenditures at the hotels (including the periodic replacement or refurbishment of furniture, fixtures and equipment ("FF&E")) as determined pursuant to the management agreements, franchise agreements and/or mortgage loan documents. The management agreements, franchise agreements and/or mortgage loan documents require the Company to reserve restricted cash ranging typically from 3.0% to 5.0% of the individual hotel’s revenues and maintain the reserves in restricted cash reserve escrows. Any unexpended amounts will remain the property of the Company upon termination of the management agreements, franchise agreements or mortgage loan documents. As of September 30, 2015 and December 31, 2014, approximately $57.5 million and $63.1 million, respectively, was available in restricted cash reserves for future capital expenditures, real estate taxes and insurance.
 
Litigation
 
Neither the Company nor any of its subsidiaries are currently involved in any regulatory or legal proceedings that management believes will have a material adverse effect on the financial position, operations or liquidity of the Company.

Data Breach
 
During the first quarter of 2014, one of the Company's third-party hotel managers notified the Company of a data breach that occurred over a nine-month period ending in December 2013 affecting a number of hotels it manages, including seven hotels that are owned by the Company. During the first quarter of 2015, the same third-party hotel manager notified the Company of a second data breach that occurred over a seven-month period ending in February 2015 affecting a number of hotels it manages, including six hotels owned by the Company. The third-party hotel manager is cooperating with the relevant authorities in their investigations of these criminal cyber-attacks. The Company and its third-party hotel manager are continuing to take steps to assess and further strengthen information security systems.
The Company believes that each of the credit card companies impacted may seek to impose fines, fees or assessments in connection with the breach against various parties, including the Company. The Company may also incur other costs, including legal fees and other professional services fees, related to investigating the breach. Because the investigation into each of these matters is ongoing and certain factual and legal questions remain unanswered, the Company is unable to estimate with certainty the total costs, fines, fees or assessments that may be associated with any potential claims. However, the Company currently believes that any amounts that the Company may ultimately be required to pay as a result of this incident will not be material to its financial position, results of operations or cash flows.




18
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Management Agreements
As of September 30, 2015, 127 of the Company's hotel properties were operated pursuant to long-term agreements with initial terms ranging from 3 to 30 years. This number includes five Marriott and ten Hyatt hotels that receive the benefits of a franchise agreement pursuant to a management agreement. Each management company receives a base management fee generally between 3.0% and 3.5% of hotel revenues. Management agreements that include the benefits of a franchise agreement incur a base management fee generally equal to 7.0% of hotel revenues. The management companies are also eligible to receive an incentive management fee if hotel operating income, as defined in the management agreements, exceeds certain thresholds. The incentive management fee is generally calculated as a percentage of hotel operating income after the Company has received a priority return on their investment in the hotel. Management fees are included in management and franchise fee expense in the accompanying consolidated statements of operations. For the three and nine months ended September 30, 2015, the Company incurred management fee expense, including amortization of deferred management fees, of approximately $10.4 million and $33.8 million, respectively. For the three and nine months ended September 30, 2014, the Company incurred management fee expense, including amortization of deferred management fees, of approximately $11.6 million and $32.6 million, respectively.
Franchise Agreements
 
As of September 30, 2015, 112 of the Company’s hotel properties were operated under franchise agreements with initial terms ranging from 10 to 30 years. This number excludes five Marriott and ten Hyatt hotels that receive the benefits of a franchise agreement pursuant to their respective management agreements. Franchise agreements allow the properties to operate under the respective brands. Pursuant to the franchise agreements, the Company pays a royalty fee, generally between 4.0% and 6.0% of room revenue, plus additional fees for marketing, central reservation systems and other franchisor costs generally between 1.0% and 4.3% of room revenue. Certain hotels are also charged a royalty fee generally between 1.0% and 3.0% of food and beverage revenues.  Franchise fees are included in management and franchise fee expense in the accompanying consolidated statements of operations. For the three and nine months ended September 30, 2015, the Company incurred franchise fee expense of approximately $18.6 million and $54.9 million, respectively. For the three and nine months ended September 30, 2014, the Company incurred franchise fee expense of approximately $19.1 million and $53.9 million, respectively.

11.       Equity
 
On May 1, 2015, the Company's board of trustees authorized a share repurchase program to acquire up to $200.0 million of the Company's common shares through April 30, 2016. Between May 1, 2015 and September 30, 2015, the Company repurchased 6,992,708 of its common shares for approximately $199.9 million. On October 30, 2015, the Company's board of trustees extended the duration of the share repurchase program to December 31, 2016 and increased the amount by $200.0 million to a total of $400.0 million.

On May 22, 2014, the Company issued and sold 9,200,000 common shares of beneficial interest, $0.01 par value per share, at a price per share of $26.45, for total gross proceeds of $243.3 million. The Company received aggregate net proceeds of approximately $232.8 million.

12.       Equity Incentive Plan
 
On May 1, 2015, the Company’s shareholders approved the 2015 Equity Incentive Plan (the "2015 Plan"), which constitutes an amendment and restatement of the 2011 Equity Incentive Plan (the "2011 Plan"), including an increase in the total number of available shares under the 2015 Plan by 2,500,000 shares and changes to certain other terms of the 2011 Plan. The Company may issue equity-based awards to officers, employees, non-employee trustees and other eligible persons under the 2015 Plan. The 2015 Plan provides for a maximum of 7,500,000 common shares of beneficial interest to be issued in the form of share options, share appreciation rights, restricted share awards, unrestricted share awards, share units, dividend equivalent rights, long-term incentive units, other equity-based awards and cash bonus awards.
 
Share Awards
 
From time to time, the Company may award unvested restricted shares under the 2015 Plan as compensation to officers, employees and non-employee trustees. The shares issued to officers and employees vest over a period of time as determined by the board of trustees at the date of grant. The Company recognizes compensation expense for time-based unvested restricted shares on a straight-line basis over the vesting period based upon the fair market value of the shares on the date of issuance, adjusted for forfeitures.

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The Company may also award unrestricted shares under the 2015 Plan as compensation to non-employee trustees that would otherwise be paid in cash for their services. The shares issued to non-employee trustees are unrestricted and include no vesting conditions. The Company recognizes compensation expense for the unrestricted shares issued in lieu of cash compensation on the date of issuance based upon the fair market value of the shares on that date.
 
A summary of the unvested shares as of September 30, 2015 is as follows:
 
2015
 
Number of
Shares
 
Weighted-Average
Grant Date Fair
Value
Unvested at January 1,
731,459

 
$
21.21

Granted (1)
290,974

 
32.16

Vested (1)
(382,475
)
 
21.09

Forfeited
(12,376
)
 
25.65

Unvested at September 30,
627,582

 
$
26.27

 
(1)
Includes 3,477 unrestricted shares issued in lieu of cash compensation to non-employee trustees at a weighted-average grant date fair value of $28.55.

For the three and nine months ended September 30, 2015, the Company recognized approximately $2.0 million and $7.6 million, respectively, of share-based compensation expense related to restricted share awards. For the three and nine months ended September 30, 2014, the Company recognized approximately $2.7 million and $7.9 million, respectively, of share-based compensation expense related to restricted share awards. As of September 30, 2015, there was $15.6 million of total unrecognized compensation costs related to unvested restricted share awards and these costs are expected to be primarily recognized over a weighted-average period of 2.6 years. The total fair value of shares vested (calculated as number of shares multiplied by vesting date share price) during the nine months ended September 30, 2015 was approximately $11.8 million.
 
Performance Units
 
In July 2012, the Company awarded performance units to certain employees.  The performance units vested over a four-year period, including three years of performance-based vesting ("measurement period") plus an additional one year of time-based vesting. In July 2015, following the end of the measurement period, the Company issued 838,934 restricted shares upon conversion of the performance units. Half of the restricted shares vested immediately with the remaining half vesting in July 2016. As of September 30, 2015, there were 419,467 unvested restricted shares related to the conversion of the performance units.
 
For the three and nine months ended September 30, 2015, the Company recognized $0.7 million and $2.9 million of share-based compensation expense related to the performance units, respectively.  For the three and nine months ended September 30, 2014, the Company recognized $1.1 million and $3.4 million of share-based compensation expense related to the performance units, respectively. As of September 30, 2015, there was $1.6 million of total unrecognized compensation cost related to the performance units.
 
As of September 30, 2015, there were 4,123,948 common shares available for future grant under the 2015 Plan. 

13.       Earnings per Common Share
 
Basic earnings per common share is calculated by dividing income from continuing operations attributable to common shareholders, including gain or loss on disposal of hotel properties, by the weighted-average number of common shares outstanding during the period excluding the weighted-average number of unvested restricted shares outstanding during the period. Diluted earnings per common share is calculated by dividing income from continuing operations attributable to common shareholders, including gain or loss on disposal of hotel properties, by the weighted-average number of common shares outstanding during the period, plus any shares that could potentially be outstanding during the period. Potential shares consist of unvested restricted share grants and unvested performance units, calculated using the treasury stock method. Any anti-dilutive shares have been excluded from the diluted earnings per share calculation.
 

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Unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating shares and are considered in the computation of earnings per share pursuant to the two-class method. If there were any undistributed earnings allocable to participating shares, they would be deducted from net income attributable to common shareholders utilized in the basic and diluted earnings per share calculations.
 
For the three and nine months ended September 30, 2015, $0 and $0.1 million, respectively, represented undistributed earnings that were allocated to participating shares. For the three and nine months ended September 30, 2014, $0 and $39 thousand, respectively, represented undistributed earnings that were allocated to participating shares.
 
The limited partners’ outstanding OP units (which may be redeemed for common shares of beneficial interest under certain circumstances) have been excluded from the diluted earnings per share calculation as there was no effect on the amounts for the three and nine months ended September 30, 2015 and 2014, since the limited partners’ share of income would also be added back to net income attributable to common shareholders.
 
The computation of basic and diluted earnings per common share is as follows (in thousands, except share and per share data):
 
For the three months ended September 30,
 
For the nine months ended September 30,
 
2015
 
2014
 
2015
 
2014
Numerator
 
 
 
 
 

 
 

Net income attributable to common shareholders
$
40,594

 
$
36,760

 
$
144,435

 
$
101,596

Less: Dividends paid on unvested restricted shares
(346
)
 
(262
)
 
(863
)
 
(731
)
Less: Undistributed earnings attributable to unvested restricted shares
—

 
—

 
(136
)
 
(39
)
Net income attributable to common shareholders excluding amounts attributable to unvested restricted shares
$
40,248

 
$
36,498

 
$
143,436

 
$
100,826

Denominator
 
 
 
 
 

 
 

Weighted-average number of common shares - basic
127,663,480

 
131,106,440

 
129,855,686


126,070,309

Unvested restricted shares
479,674

 
318,145

 
554,927

 
306,630

Unvested performance units
—

 
962,258

 
—

 
920,962

Weighted-average number of common shares - diluted
128,143,154

 
132,386,843

 
130,410,613

 
127,297,901

 
 
 
 
 
 
 
 
Net income attributable to common shareholders - basic
$
0.32

 
$
0.28

 
$
1.10

 
$
0.80

 
 
 
 
 
 
 
 
Net income attributable to common shareholders - diluted
$
0.31

 
$
0.28

 
$
1.10

 
$
0.79


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14.       Supplemental Information to Statements of Cash Flows (in thousands)
 
 
For the nine months ended September 30,
 
2015
 
2014
Interest paid, net of capitalized interest
$
34,968

 
$
39,318

 
 
 
 
Income taxes paid
$
1,391

 
$
1,989

 
 
 
 
Supplemental investing and financing transactions
 
 
 
In conjunction with the acquisitions, the Company recorded the following:
 
 
 
Purchase of real estate
$
175,900

 
$
631,950

Restricted cash reserves
1,548

 
—

Accounts receivable
179

 
807

Other assets
120

 
1,671

Mortgage debt assumed
(33,389
)
 
—

Advance deposits
(46
)
 
(659
)
Accounts payable and other liabilities
(543
)
 
(2,129
)
Acquisition of hotel properties, net
$
143,769

 
$
631,640

 
 
 
 
In conjunction with the disposals, the Company recorded the following
 
 
 
Disposal of hotel properties
$
238,450

 
$
128,000

Disposition costs
(8,781
)
 
(2,846
)
Operating prorations
3,269

 
(1,078
)
Proceeds from the disposal of hotel properties, net
$
232,938

 
$
124,076

 
 
 
 
Supplemental non-cash transactions
 
 
 
Accrued capital expenditures
$
3,147

 
$
—

 
15.       Subsequent Events
 
On October 14 2015, the Company sold the 221-room Embassy Suites Columbus, located in Columbus, OH, for a sales price of $14.1 million.

On October 30, 2015, the Company's board of trustees extended the duration of the share repurchase program to December 31, 2016 and increased the amount by $200.0 million to a total of $400.0 million.





 



 

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Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this report, as well as the information contained in our Annual Report on Form 10-K for the year ended December 31, 2014, filed with the SEC on February 26, 2015 (the "Annual Report"), which is accessible on the SEC’s website at www.sec.gov.
 
Statement Regarding Forward-Looking Information
 
The following information contains certain statements, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, that are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements generally are identified by the use of the words "believe," "project," "expect," "anticipate," "estimate," "plan," "may," "will," "will continue," "intend," "should," or similar expressions.  Although we believe that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, beliefs and expectations, such forward-looking statements are not predictions of future events or guarantees of future performance and our actual results could differ materially from those set forth in the forward-looking statements.  Some factors that might cause such a difference include the following: the current global economic uncertainty, increased direct competition, changes in government regulations or accounting rules, changes in local, national and global real estate conditions, declines in the lodging industry, seasonality of the lodging industry, risks related to natural disasters, such as earthquakes and hurricanes, hostilities, including future terrorist attacks or fear of hostilities that affect travel, our ability to obtain lines of credit or permanent financing on satisfactory terms, changes in interest rates, access to capital through offerings of our common and preferred shares of beneficial interest, or debt, our ability to identify suitable acquisitions, our ability to close on identified acquisitions and integrate those businesses and inaccuracies of our accounting estimates.  Given these uncertainties, undue reliance should not be placed on such statements.
 
Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. We caution investors not to place undue reliance on these forward-looking statements and urge investors to carefully review the disclosures we make concerning risks and uncertainties in the sections entitled "Risk Factors," "Forward-Looking Statements," and "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report, as well as risks, uncertainties and other factors discussed in this Quarterly Report on Form 10-Q and identified in other documents filed by us with the SEC.
 
Overview
 
We are a self-advised and self-administered Maryland real estate investment trust ("REIT") that acquires primarily premium-branded, focused-service and compact full-service hotels. We are one of the largest U.S. publicly-traded lodging REITs in terms of both number of hotels and number of rooms. Our hotels are concentrated in markets that we believe exhibit multiple demand generators and high barriers to entry.
 
Our strategy is to acquire primarily premium-branded, focused-service and compact full-service hotels. Focused-service and compact full-service hotels typically generate most of their revenue from room rentals, have limited food and beverage outlets and meeting space and require fewer employees than traditional full-service hotels. We believe premium-branded, focused-service and compact full-service hotels have the potential to generate attractive returns relative to other types of hotels due to their ability to achieve Revenue per Available Room ("RevPAR") levels at or close to those achieved by traditional full-service hotels while achieving higher profit margins due to their more efficient operating model and less volatile cash flows.
 
Despite current geopolitical challenges, we are very encouraged by the positive momentum in the U.S. economy.  Lodging demand is at record levels and hotel supply currently remains below historical averages.  We expect to see increases in corporate profits over the upcoming years, which should continue to support lodging fundamentals. Accordingly, we remain cautiously optimistic that we are in a positive multi-year lodging cycle.

As of September 30, 2015, we owned 127 hotel properties with approximately 21,100 rooms, located in 22 states and the District of Columbia, and an interest in a mortgage loan secured by a hotel.  We own, through wholly-owned subsidiaries, 100% of the interests in all properties, with the exception of one property in which we own a 98.3% controlling interest in a joint venture.

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Table of Contents

 
We elected to be taxed as a REIT, for U.S. federal income tax purposes, when we filed our U.S. federal tax return for the taxable year ended December 31, 2011. Substantially all of our assets are held by, and all of our operations are conducted through, our operating partnership RLJ Lodging Trust, L.P. (the "Operating Partnership"). We are the sole general partner of our operating partnership. As of September 30, 2015, we owned, through a combination of direct and indirect interests, 99.3% of the units of limited partnership interest in the Operating Partnership ("OP units").

Recent Significant Activities
 
Our recent significant activities reflect our commitment to creating long-term shareholder value through enhancing our portfolio’s quality, recycling capital and maintaining a prudent capital structure. During the three months ended September 30, 2015, the following significant activities took place:

•
Acquired three hotels for an aggregate purchase price of $175.9 million;
•
Sold one hotel for a sale price of $5.8 million and recorded a gain on sale of approximately $0.8 million;
•Completed two major redevelopment projects in San Francisco and Houston;
•Repurchased 4.9 million common shares for $140.1 million at an average per share price of $28.03;
•Drew down the entire $150.0 million available on our 2014 Seven-Year Term Loan;
•Borrowed $7.0 million under a mortgage loan encumbered by a hotel property;
•Assumed mortgage debt of $33.4 million in conjunction with a hotel acquisition;
•Paid down approximately $9.9 million of property-level mortgage debt;
•Entered into four interest rate swaps with a total notional amount of $225.0 million; and
•Declared a cash dividend of $0.33 per common share for the quarter.
Our Customers
 
Substantially all of our hotels consist of premium-branded, focused-service and compact full-service hotels. As a result of this property profile, the majority of our customers are transient in nature. Transient business typically represents individual business or leisure travelers. The majority of our hotels are located in business districts within major metropolitan areas. Accordingly, business travelers represent the majority of the transient demand at our hotels. As a result, macroeconomic factors impacting business travel have a greater effect on our business than factors impacting leisure travel.
 
Group business is typically defined as a minimum of 10 guestrooms booked together as part of the same piece of business. Group business may or may not use the meeting space at any given hotel. Given the limited meeting space at the majority of our hotels, group business that utilizes meeting space represents a small component of our customer base.
 
A number of our hotels are affiliated with brands marketed toward extended-stay customers. Extended-stay customers are generally defined as those staying five nights or longer. Reasons for extended stays may include, but are not limited to, training and/or special project business, relocation, litigation and insurance claims.

Our Revenues and Expenses
 
Our revenue is primarily derived from hotel operations, including the sale of rooms, food and beverage revenue and other operating department revenue, which consists of telephone, parking and other guest services.
 
Our operating costs and expenses consist of the costs to provide hotel services, including room expense, food and beverage expense, management and franchise fees and other operating expenses. Room expense includes housekeeping and front office wages and payroll taxes, reservation systems, room supplies, laundry services and other costs. Food and beverage expense primarily includes the cost of food, the cost of beverages and associated labor costs. Other hotel expenses include

24
Table of Contents

labor and other costs associated with the other operating department revenue, as well as labor and other costs associated with administrative departments, sales and marketing, repairs and maintenance and utility costs. Our hotels that are subject to franchise agreements are charged a royalty fee plus additional fees for marketing, central reservation systems and other franchisor costs, that allow the properties to operate under the respective brands. Franchise fees are based on a percentage of room revenue and for certain hotels additional franchise fees are charged for food and beverage revenue. Our hotels are managed by independent, third-party management companies under long-term agreements under which the management companies typically earn base and incentive management fees based on the levels of revenues and profitability of each individual hotel. We generally receive a cash distribution from the hotel management companies on a monthly basis, which reflects hotel-level sales less hotel-level operating expenses.

Key Indicators of Financial Performance
 
We use a variety of operating and other information to evaluate the operating performance of our business. These key indicators include financial information that is prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") as well as other financial measures that are non-GAAP measures. In addition, we use other information that may not be financial in nature, including industry standard statistical information and comparative data. We use this information to measure the operating performance of our individual hotels, groups of hotels and/or business as a whole. We also use these metrics to evaluate the hotels in our portfolio and potential acquisitions to determine each hotel's contribution to the cash flow and its potential to provide attractive long-term total returns. These key indicators include:

•
Occupancy
•
Average Daily Rate ("ADR")
•
RevPAR
Occupancy, ADR and RevPAR are commonly used measures within the lodging industry to evaluate operating performance. RevPAR is an important statistic for monitoring operating performance at the individual hotel level and across our entire business. We evaluate individual hotel RevPAR performance on an absolute basis, comparing the results to our budget and RevPAR for prior periods, as well as on a regional and company-wide basis. ADR and RevPAR include only room revenue.

We also use FFO, Adjusted FFO, EBITDA and Adjusted EBITDA as non-GAAP measures of the operating performance of our business. See "Non-GAAP Financial Measures."

Critical Accounting Policies
 
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of our financial statements and the reported amounts of revenues and expenses during the reporting period. Actual amounts may differ significantly from these estimates and assumptions. We evaluate our estimates, assumptions and judgments on an ongoing basis, based on information that is then available to us, our experience and various matters that we believe are reasonable and appropriate for consideration under the circumstances. Our Annual Report on Form 10-K for the year ended December 31, 2014 contains a discussion of our critical accounting policies. There have been no significant changes to our critical accounting policies since December 31, 2014.


Results of Operations
 
At September 30, 2015, we owned 127 properties.  Based on when a property is acquired, sold or closed for renovation, operating results for certain properties are not comparable for the three and nine months ended September 30, 2015 and 2014.  The non-comparable properties include 18 acquisitions that were completed between January 1, 2014 and September 30, 2015, 40 dispositions that were completed between January 1, 2014 and September 30, 2015 and three properties that were closed for renovations during all or a portion of the period between January 1, 2014 and September 30, 2015.


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Comparison of the three months ended September 30, 2015 to the three months ended September 30, 2014
 
For the three months ended September 30,
 
 
 
 
 
2015
 
2014
 
$ change
 
% change
 
(amounts in thousands)
 
 

Revenue
 

 
 

 
 

 
 

Operating revenue
 

 
 

 
 

 
 

Room revenue
$
253,163

 
$
261,895

 
$
(8,732
)
 
(3.3
)%
Food and beverage revenue
27,027

 
27,076

 
(49
)
 
(0.2
)%
Other operating department revenue
9,230

 
8,695

 
535

 
6.2
 %
Total revenue
$
289,420

 
$
297,666

 
$
(8,246
)
 
(2.8
)%
Expense
 

 
 

 
 

 
 

Operating expense
 

 
 

 
 

 
 

Room expense
$
56,310

 
$
57,012

 
$
(702
)
 
(1.2
)%
Food and beverage expense
19,494

 
19,397

 
97

 
0.5
 %
Management and franchise fee expense
28,985

 
30,709

 
(1,724
)
 
(5.6
)%
Other operating expense
61,676

 
64,133

 
(2,457
)
 
(3.8
)%
Total property operating expense
166,465

 
171,251

 
(4,786
)
 
(2.8
)%
Depreciation and amortization
39,847

 
37,243

 
2,604

 
7.0
 %
Impairment loss
—

 
9,200

 
(9,200
)
 
—

Property tax, insurance and other
19,458

 
17,874

 
1,584

 
8.9
 %
General and administrative
8,249

 
11,029

 
(2,780
)
 
(25.2
)%
Transaction and pursuit costs
2,017

 
480

 
1,537

 
—
 %
Total operating expense
236,036

 
247,077

 
(11,041
)
 
(4.5
)%
Operating income
53,384

 
50,589

 
2,795

 
5.5
 %
Other income
557

 
48

 
509

 
—
 %
Interest income
373

 
337

 
36

 
10.7
 %
Interest expense
(14,042
)
 
(13,858
)
 
(184
)
 
1.3
 %
Income from continuing operations before income tax expense
40,272

 
37,116

 
3,156

 
8.5
 %
Income tax expense
(151
)
 
(374
)
 
223

 
(59.6
)%
Income from continuing operations
40,121

 
36,742

 
3,379

 
9.2
 %
Gain on disposal of hotel properties
812

 
322

 
490

 
—
 %
Net income
40,933

 
37,064

 
3,869

 
10.4
 %
Net income attributable to noncontrolling interests
 

 
 

 
 

 
 
Noncontrolling interest in joint venture
(49
)
 
(57
)
 
8

 
(14.0
)%
Noncontrolling interest in common units of Operating Partnership
(290
)
 
(247
)
 
(43
)
 
17.4
 %
Net income attributable to common shareholders
$
40,594

 
$
36,760

 
$
3,834

 
10.4
 %

Revenue
 
Total revenue decreased $8.2 million, or 2.8%, to $289.4 million for the three months ended September 30, 2015 from $297.7 million for the three months ended September 30, 2014. The decrease was the result of an $11.8 million net decrease in revenue attributable to non-comparable properties, offset by a $3.5 million increase in total revenue at comparable properties. The increase in total revenue at comparable properties was attributable to a 0.8% increase in RevPAR.





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The following are the quarter-to-date key hotel operating statistics for comparable properties owned at September 30, 2015 and 2014, respectively:
 
For the three months ended September 30,
 
 
 
2015
 
2014
 
% Change
Number of comparable properties (at end of period)
106

 
106

 
—

Occupancy
80.7
%
 
83.1
%
 
(2.9
)%
ADR
$
160.12

 
$
154.21

 
3.8
 %
RevPAR
$
129.19

 
$
128.11

 
0.8
 %

Room Revenue
 
Our portfolio consists primarily of focused-service and compact full-service hotels that generate the majority of their revenues through room sales.  Room revenue decreased $8.7 million, or 3.3%, to $253.2 million for the three months ended September 30, 2015 from $261.9 million for the three months ended September 30, 2014.  This decrease was a result of a $10.5 million net decrease in room revenue from non-comparable properties, offset by an $1.8 million increase in room revenue from comparable properties. The increase in room revenue at comparable properties was attributable to a 0.8% increase in RevPAR.
 
Food and Beverage Revenue
 
Food and beverage revenue decreased $49 thousand, or 0.2%, to $27.0 million for the three months ended September 30, 2015 from $27.1 million for the three months ended September 30, 2014. The decrease includes a $1.7 million net decrease in food and beverage revenue from non-comparable properties, offset by a $1.6 million increase for the comparable properties.
 
Other Operating Department Revenue
 
Other operating department revenue, which includes revenue derived from ancillary sources such as telephone charges and parking fees, increased $0.5 million, or 6.2%, to $9.2 million for the three months ended September 30, 2015 from $8.7 million for the three months ended September 30, 2014.  The increase was due to a $0.4 million net increase of other operating department revenue from non-comparable properties and a $0.2 million increase at comparable properties.
 
Property Operating Expense
 
Property operating expense decreased $4.8 million, or 2.8%, to $166.5 million for the three months ended September 30, 2015 from $171.3 million for the three months ended September 30, 2014. This decrease includes a $6.5 million net decrease in property operating expense attributable to non-comparable properties, offset by a $1.7 million increase in property operating expense at the comparable properties. The increase at the comparable properties was attributable to higher room expense, food and beverage expense, other operating department costs, and management and franchise fees.  Room expense, food and beverage expense and other operating department costs fluctuate based on various factors, including changes in occupancy, labor costs, utilities and insurance costs.  Management fees and franchise fees, which are computed as a percentage of gross revenue and room revenue, respectively, increased as a result of higher revenues.
 
Depreciation and Amortization
 
Depreciation and amortization expense increased $2.6 million, or 7.0%, to $39.8 million for the three months ended September 30, 2015 from $37.2 million for the three months ended September 30, 2014. The increase includes additional depreciation expense of $2.2 million as a result of capital expenditures to improve our comparable properties and a $0.4 million net increase in depreciation and amortization expense arising from non-comparable properties.

Impairment

For the three months ended September 30, 2014, we incurred $9.2 million of impairment loss on three hotels. The impairment was the result of an evaluation of the recoverability of the carrying values given the current expectation to sell the hotels before the end of their previously estimated useful lives. We did not incur an impairment loss for the three months ended September 30, 2015.


27
Table of Contents

Property Tax, Insurance and Other
 
Property tax, insurance and other expense increased $1.6 million, or 8.9%, to $19.5 million for the three months ended September 30, 2015 from $17.9 million for the three months ended September 30, 2014.  The increase includes the net impact of an increase in property taxes of $2.1 million, partially offset by a $0.5 million net decrease in property tax, insurance and other expense attributable to non-comparable properties. 
 
General and Administrative
 
General and administrative expense decreased $2.8 million, or 25.2%, to $8.2 million for the three months ended September 30, 2015 from $11.0 million for the three months ended September 30, 2014.  The decrease in general and administrative expense is primarily attributable to lower compensation costs, including a decrease in amortization of restricted share awards and performance units of $1.2 million and a decrease in salary and bonus expense of $1.7 million.
 
Interest Expense
 
The components of our interest expense for the three months ended September 30, 2015 and 2014 were as follows (in thousands):
 
For the three months ended September 30,
 
 
 
 
 
2015
 
2014
 
$ change
 
% change
Mortgage indebtedness
$
3,687

 
$
5,832

 
$
(2,145
)
 
(36.8
)%
Revolver and Term Loans
9,842

 
7,492

 
2,350

 
31.4
 %
Amortization of deferred financing fees
1,055

 
1,051

 
4

 
0.4
 %
Capitalized interest
(542
)
 
(517
)
 
(25
)
 
4.8
 %
Total interest expense
$
14,042

 
$
13,858

 
$
184

 
1.3
 %

Interest expense increased $0.2 million, or 1.3%, to $14.0 million for the three months ended September 30, 2015 from $13.9 million for the three months ended September 30, 2014.  The decrease in interest expense from mortgage indebtedness was due to decreases in principal balances as a result of mortgage amortization as well as mortgage principal balances that were paid down. The increase in interest expense from the Revolver and Term Loans was due to increased expense related to new interest rate swaps and additional borrowings on the Term Loans.
 

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Comparison of the nine months ended September 30, 2015 to the nine months ended September 30, 2014
 
For the nine months ended September 30,

 

 
 
2015

2014

$ change

% change
 
(amounts in thousands)

 

Revenue
 


 


 


 

Operating revenue
 


 


 


 

Room revenue
$
747,962


$
727,367


$
20,595


2.8
 %
Food and beverage revenue
85,607


77,924


7,683


9.9
 %
Other operating department revenue
27,508


23,795


3,713


15.6
 %
Total revenue
$
861,077


$
829,086


$
31,991


3.9
 %
Expense
 


 


 


 

Operating expense
 


 


 


 

Room
$
165,603


$
158,669


$
6,934


4.4
 %
Food and beverage
60,750


55,016


5,734


10.4
 %
Management and franchise fee expense
88,704


86,574


2,130


2.5
 %
Other operating expenses
181,485


180,346


1,139


0.6
 %
Total property operating expense
496,542


480,605


15,937


3.3
 %
Depreciation and amortization
114,828


105,541


9,287


8.8
 %
Impairment loss
—

 
9,200

 
(9,200
)
 
—

Property tax, insurance and other
57,782


53,064


4,718


8.9
 %
General and administrative
29,041


31,293


(2,252
)

(7.2
)%
Transaction and pursuit costs
3,005


4,375


(1,370
)

(31.3
)%
Total operating expense
701,198


684,078


17,120


2.5
 %
Operating income
159,879


145,008


14,871


10.3
 %
Other income
1,103


563


540


95.9
 %
Interest income
1,181


1,622


(441
)

(27.2
)%
Interest expense
(39,885
)

(42,646
)

2,761


(6.5
)%
Income from continuing operations before income tax expense
122,278


104,547


17,731


17.0
 %
Income tax expense
(615
)

(1,162
)

547


(47.1
)%
Income from continuing operations
121,663


103,385


18,278


17.7
 %
Gain (loss) on disposal of hotel properties
23,782


(975
)

24,757


—
 %
Net income
145,445


102,410


43,035


42.0
 %
Net income attributable to noncontrolling interests
 


 


 




Noncontrolling interest in joint venture
(26
)

(102
)

76


(74.5
)%
Noncontrolling interest in common units of Operating Partnership
(984
)

(712
)

(272
)

38.2
 %
Net income attributable to common shareholders
$
144,435


$
101,596


$
42,839


42.2
 %
 
Revenue
 
Total revenue increased $32.0 million, or 3.9%, to $861.1 million for the nine months ended September 30, 2015 from $829.1 million for the nine months ended September 30, 2014. The increase was a result of a $25.1 million increase in total revenue at the comparable properties, which was attributable to a 3.0% increase in RevPAR, and a $6.8 million net increase in revenue attributable to non-comparable properties.


29
Table of Contents

The following are the year-to-date key hotel operating statistics for comparable properties owned at September 30, 2015 and 2014, respectively:
 
For the nine months ended September 30,
 
 
 
2015
 
2014
 
% Change
Number of comparable properties (at end of period)
106

 
106

 
—

Occupancy
79.6
%
 
81.0
%
 
(1.7
)%
ADR
$
162.36

 
$
154.87

 
4.8
 %
RevPAR
$
129.18

 
$
125.37

 
3.0
 %
 
Room Revenue
 
Our portfolio consists primarily of focused-service and compact full-service hotels that generate the majority of their revenues through room sales.  Room revenue increased $20.6 million, or 2.8%, to $748.0 million for the nine months ended September 30, 2015 from $727.4 million for the nine months ended September 30, 2014.  This increase was a result of an $18.3 million increase in room revenue from comparable properties, which was attributable to a 3.0% increase in RevPAR, and a $2.3 million net increase in room revenue from non-comparable properties.
 
Food and Beverage Revenue
 
Food and beverage revenue increased $7.7 million, or 9.9%, to $85.6 million for the nine months ended September 30, 2015 from $77.9 million for the nine months ended September 30, 2014. The increase includes a $6.0 million increase for the comparable properties and a $1.7 million net increase in food and beverage revenue from non-comparable properties.
 
Other Operating Department Revenue
 
Other operating department revenue, which includes revenue derived from ancillary sources such as telephone charges and parking fees, increased $3.7 million, or 15.6%, to $27.5 million for the nine months ended September 30, 2015 from $23.8 million for the nine months ended September 30, 2014.  The increase was due to a $2.8 million net increase of other operating department revenue from non-comparable properties and a $0.9 million increase at comparable properties.
 
Property Operating Expense
 
Property operating expense increased $15.9 million, or 3.3%, to $496.5 million for the nine months ended September 30, 2015 from $480.6 million for the nine months ended September 30, 2014. This increase includes a $12.4 million increase in property operating expense attributable to higher room expense, food and beverage expense, other operating department costs, and management and franchise fees at the comparable properties.  Room expense, food and beverage expense and other operating department costs fluctuate based on various factors, including changes in occupancy, labor costs, utilities and insurance costs.  Management fees and franchise fees, which are computed as a percentage of gross revenue and room revenue, respectively, increased as a result of higher revenues. The remaining increase was primarily attributable to a $3.5 million net increase in property operating expense from non-comparable properties.
 
Depreciation and Amortization
 
Depreciation and amortization expense increased $9.3 million, or 8.8%, to $114.8 million for the nine months ended September 30, 2015 from $105.5 million for the nine months ended September 30, 2014. The increase includes additional depreciation expense of $6.6 million as a result of capital expenditures to improve our comparable properties and a $2.7 million net increase in depreciation and amortization expense arising from non-comparable properties.

Impairment

For the nine months ended September 30, 2014, we incurred $9.2 million of impairment loss on three hotels. The impairment was the result of an evaluation of the recoverability of the carrying values given the current expectation to sell the hotels before the end of their previously estimated useful lives. We did not incur an impairment loss for the nine months ended September 30, 2015.




30
Table of Contents


Property Tax, Insurance and Other
 
Property tax, insurance and other expense increased $4.7 million, or 8.9%, to $57.8 million for the nine months ended September 30, 2015 from $53.1 million for the nine months ended September 30, 2014.  The increase includes an increase of $5.4 million representing the net impact of increasing property taxes, partially offset by a $0.7 million net decrease in property tax, insurance and other expense attributable to non-comparable properties.
 
General and Administrative
 
General and administrative expense decreased $2.3 million, or 7.2%, to $29.0 million for the nine months ended September 30, 2015 from $31.3 million for the nine months ended September 30, 2014.  The decrease in general and administrative expense is primarily attributable to lower compensation costs, including a decrease in amortization of restricted share awards and performance units of $0.8 million and a decrease in salary and bonus expense of $1.6 million.
 
Interest Expense
 
The components of our interest expense for the nine months ended September 30, 2015 and 2014 were as follows (in thousands):
 
For the nine months ended September 30,
 
 
 
 
 
2015
 
2014
 
$ change
 
% change
Mortgage indebtedness
$
12,523

 
$
17,425

 
$
(4,902
)
 
(28.1
)%
Revolver and Term Loans
26,025

 
21,764

 
4,261

 
19.6
 %
Loss on defeasance
—

 
804

 
(804
)
 
—

Amortization of deferred financing fees
3,111

 
3,312

 
(201
)
 
(6.1
)%
Capitalized interest
(1,774
)
 
(659
)
 
(1,115
)
 
—

Total interest expense
$
39,885

 
$
42,646

 
$
(2,761
)
 
(6.5
)%

Interest expense decreased $2.8 million, or 6.5%, to $39.9 million for the nine months ended September 30, 2015 from $42.6 million for the nine months ended September 30, 2014.  The decrease in interest expense from mortgage indebtedness was due to decreases in principal balances as a result of mortgage amortization as well as mortgage principal balances that were paid down. The increase in interest expense from the Revolver and Term Loans was due to increased expense related to new interest rate swaps and additional borrowings on the Term Loans. The loss on defeasance related to costs incurred to extinguish the mortgage indebtedness in conjunction with the disposal of certain properties during the nine months ended September 30, 2014. The increase in capitalized interest was due to the two major redevelopment projects underway during the nine months ended September 30, 2015. Both projects were completed in the third quarter of 2015.
 
Non-GAAP Financial Measures
 
We consider the following non-GAAP financial measures useful to investors as key supplemental measures of our performance: (1) FFO, (2) Adjusted FFO, (3) EBITDA, and (4) Adjusted EBITDA. These non-GAAP financial measures should be considered along with, but not as alternatives to, net income or loss as a measure of our operating performance. FFO, Adjusted FFO, EBITDA and Adjusted EBITDA, as calculated by us, may not be comparable to FFO, Adjusted FFO, EBITDA and Adjusted EBITDA as reported by other companies that do not define such terms exactly as we define such terms.

Funds From Operations
 
We calculate funds from operations ("FFO") in accordance with standards established by the National Association of Real Estate Investment Trusts ("NAREIT") which defines FFO as net income or loss (calculated in accordance with GAAP), excluding gains or losses from sales of real estate, impairment, the cumulative effect of changes in accounting principles, plus depreciation and amortization, and adjustments for unconsolidated partnerships and joint ventures. Historical cost accounting for real estate assets implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, most real estate industry investors consider FFO to be helpful in evaluating a real estate company’s operations. We believe that the presentation of FFO provides useful information to investors regarding our operating performance and can facilitate comparisons of operating performance between periods and between REITs, even though FFO does not represent an amount that accrues directly to common shareholders. Our calculation

31
Table of Contents

of FFO may not be comparable to measures calculated by other companies who do not use the NAREIT definition of FFO or do not calculate FFO per diluted share in accordance with NAREIT guidance. Additionally, FFO may not be helpful when comparing us to non-REITs. We present FFO attributable to common shareholders, which includes our OP units, because our OP units may be redeemed for common shares. We believe it is meaningful for the investor to understand FFO attributable to all common shares and OP units.
 
We further adjust FFO for certain additional items that are not in NAREIT’s definition of FFO, such as hotel transaction and pursuit costs, the amortization of share-based compensation, and certain other expenses that we consider outside the normal course of business. We believe that Adjusted FFO provides useful supplemental information to investors regarding our ongoing operating performance that, when considered with net income and FFO, is beneficial to an investor’s understanding of our operating performance.
 
The following is a reconciliation of our GAAP net income to FFO and Adjusted FFO for the three and nine months ended September 30, 2015 and 2014 (in thousands):
 
For the three months ended September 30,
 
For the nine months ended September 30,
 
2015
 
2014
 
2015
 
2014
Net income
$
40,933

 
$
37,064

 
$
145,445

 
$
102,410

Depreciation and amortization
39,847

 
37,243

 
114,828

 
105,541

(Gain) loss on disposal of hotel properties
(812
)
 
(322
)
 
(23,782
)
 
975

Impairment loss
—

 
9,200

 
—

 
9,200

Noncontrolling interest in consolidated joint venture
(49
)
 
(57
)
 
(26
)
 
(102
)
Adjustments related to consolidated joint venture (1)
(43
)
 
(47
)
 
(128
)
 
(139
)
FFO attributable to common shareholders
79,876

 
83,081

 
236,337


217,885

Transaction and pursuit costs
2,017

 
480

 
3,005

 
4,375

Amortization of share-based compensation
2,697

 
3,851

 
10,488

 
11,244

Loan related costs (2)
—

 
—

 
97

 
1,073

Adjusted FFO attributable to common shareholders
$
84,590

 
$
87,412

 
$
249,927

 
$
234,577

 
(1)
Includes depreciation and amortization expense allocated to the noncontrolling interest in joint venture.
(2)
Represents debt extinguishment costs and accelerated amortization of deferred financing fees.
 
Earnings Before Interest, Taxes, Depreciation and Amortization
 
EBITDA is defined as net income or loss excluding: (1) interest expense; (2) provision for income taxes, including income taxes applicable to sales of assets; and (3) depreciation and amortization. We consider EBITDA useful to an investor in evaluating and facilitating comparisons of our operating performance between periods and between REITs by removing the impact of our capital structure (primarily interest expense) and asset base (primarily depreciation and amortization) from our operating results.  In addition, EBITDA is used as one measure in determining the value of hotel acquisitions and disposals. We present EBITDA attributable to common shareholders, which includes our OP units, because our OP units may be redeemed for common shares.  We believe it is meaningful for the investor to understand EBITDA attributable to all common shares and OP units.
 
We further adjust EBITDA for certain additional items such as gains or losses on disposals, hotel transaction and pursuit costs, impairment, the amortization of share-based compensation and certain other expenses that we consider outside the normal course of business. We believe that Adjusted EBITDA provides useful supplemental information to investors regarding our ongoing operating performance that, when considered with net income and EBITDA, is beneficial to an investor’s understanding of our operating performance.
 

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Table of Contents

The following is a reconciliation of our GAAP net income to EBITDA and Adjusted EBITDA for the three and nine months ended September 30, 2015 and 2014 (in thousands):
 
For the three months ended September 30,
 
For the nine months ended September 30,
 
2015
 
2014
 
2015
 
2014
Net income
$
40,933

 
$
37,064

 
$
145,445

 
$
102,410

Depreciation and amortization
39,847

 
37,243

 
114,828

 
105,541

Interest expense, net (1)
14,035

 
13,850

 
39,859

 
41,991

Income tax expense
151

 
374

 
615

 
1,162

Noncontrolling interest in consolidated joint venture
(49
)
 
(57
)
 
(26
)
 
(102
)
Adjustments related to consolidated joint venture (2)
(43
)
 
(47
)
 
(128
)
 
(139
)
EBITDA attributable to common shareholders
94,874

 
88,427

 
300,593

 
250,863

Transaction and pursuit costs
2,017

 
480

 
3,005

 
4,375

Impairment loss
—

 
9,200

 
—

 
9,200

(Gain) loss on disposal of hotel properties
(812
)
 
(322
)
 
(23,782
)
 
975

Amortization of share-based compensation
2,697

 
3,851

 
10,488

 
11,244

Adjusted EBITDA attributable to common shareholders
$
98,776

 
$
101,636

 
$
290,304

 
$
276,657


(1)
Interest expense is net of interest income, excluding amounts attributable to investment in loans of $0.4 million and $1.2 million for the three and nine months ended September 30, 2015, respectively, and $0.3 million and $1.0 million for the three and nine months ended September 30, 2014, respectively.
(2)
Includes depreciation, amortization and interest expense allocated to the noncontrolling interest in joint venture.

 
Liquidity and Capital Resources
 
Our short-term liquidity requirements consist primarily of funds necessary to pay for operating expenses and other expenditures directly associated with our properties, including:
 
•
recurring maintenance and capital expenditures necessary to maintain our properties in accordance with brand standards;
 
•
interest expense and scheduled principal payments on outstanding indebtedness;
 
•
distributions necessary to qualify for taxation as a REIT; and
 
•
capital expenditures to improve our properties, including capital expenditures required by our franchisors in connection with our formation transactions and recent property acquisitions.
 
We expect to meet our short-term liquidity requirements generally through net cash provided by operations, existing cash balances and, if necessary, short-term borrowings under our unsecured revolving credit facility.
 
Our long-term liquidity requirements consist primarily of funds necessary to pay for the costs of acquiring additional properties and redevelopments, renovations, expansions and other capital expenditures that need to be made periodically with respect to our properties and scheduled debt payments, at maturity or otherwise. We expect to meet our long-term liquidity requirements through various sources of capital, including our unsecured revolving credit facility and future equity (including OP units) or debt offerings, existing working capital, net cash provided by operations, long-term hotel mortgage indebtedness and other secured and unsecured borrowings. However, there are a number of factors that may have a material adverse effect on our ability to access these capital sources, including the current state of overall equity and credit markets, our degree of leverage, the value of our unencumbered assets and borrowing restrictions imposed by lenders, general market conditions for REITs, our operating performance and liquidity and market perceptions about us. The success of our business strategy will depend, in part, on our ability to access these various capital sources.
 
Our properties will require periodic capital expenditures and renovation to remain competitive. In addition, acquisitions, redevelopments or expansions of properties will require significant capital outlays. We may not be able to fund

33
Table of Contents

such capital outlays solely from net cash provided by operations because we must distribute annually at least 90% of our REIT taxable income, determined without regard to the deductions for dividends paid and excluding net capital gain, to qualify and maintain our qualification as a REIT, and we are subject to tax on any retained income and gain. As a result, our ability to fund capital expenditures, acquisitions or property redevelopment through retained earnings is very limited. Consequently, we expect to rely heavily upon the availability of debt or equity capital for these purposes. If we are unable to obtain the necessary capital on favorable terms, or at all, our financial condition, liquidity, results of operations and prospects could be materially and adversely affected.
 
Sources and Uses of Cash
 
As of September 30, 2015, we had $140.5 million of cash and cash equivalents compared to $262.5 million at December 31, 2014.
 
Cash flows from Operating Activities
 
Net cash flow provided by operating activities totaled $232.9 million for the nine months ended September 30, 2015. Net income of $145.4 million included significant non-cash expenses, including $114.8 million of depreciation and amortization, $10.5 million of amortization of share-based compensation and $3.1 million of amortization of deferred financing costs. These amounts were partially offset by a $23.8 million gain on disposal of hotel properties. In addition, changes in operating assets and liabilities due to the timing of cash receipts and payments from our properties resulted in net cash outflow of $16.9 million.
 
Net cash flow provided by operating activities totaled $224.1 million for the nine months ended September 30, 2014. Net income of $102.4 million included significant non-cash expenses, including $105.5 million of depreciation and amortization, $11.2 million of amortization of share-based compensation, $3.3 million of amortization of deferred financing costs and a $1.0 million loss on disposal of hotel properties. In addition, changes in operating assets and liabilities due to the timing of cash receipts and payments from our hotels resulted in net cash outflow of $9.4 million.
 
Cash flows from Investing Activities
 
Net cash flow used in investing activities totaled $4.9 million for the nine months ended September 30, 2015 primarily due to $143.8 million used for the purchase of three properties, $77.3 million in routine capital improvements and additions to hotels properties and $22.9 million related to two major redevelopment projects. This was partially offset by $232.9 million of net proceeds from the sale of 22 properties and the net releases from restricted cash reserves of $7.1 million.

For the two major redevelopment projects we had underway, we incurred $22.9 million of costs for the nine months ended September 30, 2015, and total costs of $43.9 million since the inception of the projects. Both projects were completed in the third quarter of 2015.
 
Net cash flow used in investing activities totaled $569.4 million for the nine months ended September 30, 2014 primarily due to $631.6 million used for the purchase of 15 properties, $60.0 million in routine capital improvements and additions to hotels properties and $11.0 million related to three major redevelopment projects. This was partially offset by $124.1 million of proceeds from the sale of 14 properties and the net release from restricted cash reserves of $2.9 million.
 
Cash flows from Financing Activities
 
Net cash flow used in financing activities totaled $350.0 million for the nine months ended September 30, 2015 primarily due to $165.7 million in payments of mortgage principal, $129.5 million of distributions on common shares and OP units, $199.9 million paid to repurchase common shares under a share repurchase program and $11.0 million paid to repurchase common shares to satisfy employee statutory minimum federal and state tax obligations of certain employees in connection with the vesting of restricted shares issued to such employees under our 2015 Plan. This was partially offset by $150.0 million in borrowings on the Term Loans and $7.0 million in additional mortgage debt.

Net cash flow provided by financing activities totaled $287.5 million for the nine months ended September 30, 2014 primarily due to $232.8 million provided from the issuance and sale of common shares, $175.0 million in borrowings on the Term Loans and $292.5 million of borrowings under the Revolver. This was partially offset by $292.5 million of repayments on the Revolver, $86.1 million of distributions on common shares and OP units, $27.1 million of mortgage loan repayments, $4.2 million paid to repurchase common shares to satisfy employee statutory minimum federal and state tax obligations of

34
Table of Contents

certain employees in connection with the vesting of restricted shares issued to such employees under our 2015 Plan, $1.6 million paid for deferred financing fees and a $1.2 million distribution related to the joint venture noncontrolling interest.
 
Capital Expenditures and Reserve Funds
 
We maintain each of our properties in good repair and condition and in conformity with applicable laws and regulations, franchise agreements and management agreements. The cost of such routine improvements and alterations are typically paid out of furniture, fixtures and equipment ("FF&E") reserves, which are funded by a portion of each property’s gross revenues. Routine capital expenditures are administered by the property management companies. However, we have approval rights over the capital expenditures as part of the annual budget process for each of our properties.
 
From time to time, certain of our hotels may be undergoing renovations as a result of our decision to upgrade portions of the hotels, such as guestrooms, public space, meeting space, and/or restaurants, in order to better compete with other hotels in our markets. In addition, upon acquisition of a hotel we often are required to complete a property improvement plan in order to bring the hotel up to the respective franchisor’s standards. If permitted by the terms of the management agreement, funding for a renovation will first come from the FF&E reserves. To the extent that the FF&E reserves are not available or adequate to cover the cost of the renovation, we will fund all or the remaining portion of the renovation with cash and cash equivalents on hand, our Revolver and/or other sources of available liquidity.
 
With respect to some of our hotels that are operated under franchise agreements with major national hotel brands and for some of our hotels subject to first mortgage liens, we are obligated to maintain FF&E reserve accounts for future capital expenditures at these hotels. The amount funded into each of these reserve accounts is generally determined pursuant to the management agreements, franchise agreements and/or mortgage loan documents for each of the respective hotels, and typically ranges between 3.0% and 5.0% of the respective hotel’s total gross revenue. As of September 30, 2015, approximately $57.5 million was held in FF&E reserve accounts for future capital expenditures.
 
Off-Balance Sheet Arrangements
 
As of September 30, 2015, we had no off-balance sheet arrangements.
 
Inflation
 
We rely entirely on the performance of the properties and their ability to increase revenues to keep pace with inflation. Increases in the costs of operating our hotels due to inflation would adversely affect the operating performance of our TRSs, which in turn, could inhibit the ability of our TRSs to make required rent payments to us. Hotel management companies, in general, possess the ability to adjust room rates daily to reflect the effects of inflation. However, competitive pressures may limit the ability of our hotel management companies to raise room rates.
 
Seasonality
 
Depending on a hotel’s location and market, operations for the hotel may be seasonal in nature. This seasonality can be expected to cause fluctuations in our quarterly operating performance. Demand is generally lower in the winter months for hotels located in non-resort markets due to decreased travel and higher in the spring and summer months during the peak travel season. Accordingly, we expect that we will have lower revenue, operating income and cash flow in the first and fourth quarters and higher revenue, operating income and cash flow in the second and third quarters.
 
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
 
Market risk includes risks that arise from changes in interest rates, equity prices and other market changes that affect market sensitive instruments. Our primary market risk exposure is to changes in interest rates on our variable rate debt. As of September 30, 2015, we had approximately $1.5 billion of total variable rate debt outstanding (or 97.9% of total indebtedness) with a weighted-average interest rate of 3.33% per annum. After taking into consideration the effect of interest rate swaps, $131.0 million (or 8.3% of total indebtedness) was subject to variable rates. If market rates of interest on our variable rate debt outstanding as of September 30, 2015 were to increase by 1.00%, or 100 basis points, interest expense would decrease future earnings and cash flows by approximately $1.1 million annually, taking into account our existing contractual hedging arrangements.
 
Our interest rate risk objectives are to limit the impact of interest rate fluctuations on earnings and cash flows and to lower our overall borrowing costs. To achieve these objectives, we manage our exposure to fluctuations in market interest rates

35
Table of Contents

through the use of fixed rate debt instruments to the extent that reasonably favorable rates are obtainable. We have entered into derivative financial instruments such as interest rate swaps to mitigate our interest rate risk or to effectively lock the interest rate on a portion of our variable rate debt. We do not enter into derivative or interest rate transactions for speculative purposes.
 
The following table provides information about our financial instruments that are sensitive to changes in interest rates. For debt obligations outstanding as of September 30, 2015, the following table presents principal repayments and related weighted-average interest rates by contractual maturity dates (in thousands):
 
2015
 
2016
 
2017
 
2018
 
2019
 
Thereafter
 
Total
Fixed rate debt
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
33,389

 
$
33,389

Weighted-average interest rate
—

 
—

 
—

 
—

 
—

 
5.25
%
 
5.25
%
Variable rate debt
$
—

 
$
224,000

 
$
150,000

 
$
400,000

 
$
625,000

 
$
150,000

 
$
1,549,000

Weighted-average interest rate (1)
—

 
3.63
%
 
3.98
%
 
3.07
%
 
3.19
%
 
3.43
%
 
3.33
%
Total
$
—

 
$
224,000

 
$
150,000

 
$
400,000

 
$
625,000

 
$
183,389

 
$
1,582,389


(1)
The weighted-average interest rate gives effect to interest rate hedges, as applicable.
 
The foregoing table reflects indebtedness outstanding as of September 30, 2015 and does not consider indebtedness, if any, incurred or repaid after that date. Our ultimate realized gain or loss with respect to interest rate fluctuations will depend on the exposures that arise during future periods, prevailing interest rates, and our hedging strategies at that time.
 
Changes in market interest rates on our fixed rate debt impact the fair value of the debt, but such changes have no impact on our consolidated financial statements. As of September 30, 2015, the estimated fair value of our fixed rate debt was $36.1 million, which is based on having the same debt service requirements that could have been borrowed at the date presented, at prevailing current market interest rates. If interest rates were to rise by 1.00%, or 100 basis points, and our fixed rate debt balance remains constant, we expect the fair value of our debt to decrease by approximately $2.7 million.
 
Item 4.            Controls and Procedures.
 
Disclosure Controls and Procedures
 
In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Company’s management, with the participation of the Chief Executive Officer and the Chief Financial Officer, carried out an evaluation of the effectiveness of the Company’s "disclosure controls and procedures," as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act, as of the end of the period covered by this report. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2015.
 
Changes in Internal Control over Financial Reporting
 
There have been no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15 and 15d-15 of the Exchange Act) during the period ended September 30, 2015 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II.  OTHER INFORMATION
 
Item 1.                     Legal Proceedings.
 
The nature of the operations of the hotels exposes our hotels, the Company and the Operating Partnership to the risk of claims and litigation in the normal course of their business. Neither the Company nor any of its subsidiaries are currently involved in any legal proceedings that management believes will have a material adverse effect on the financial position, operations or liquidity of the Company.


36
Table of Contents

Item 1A.            Risk Factors.
 
For a discussion of our potential risks and uncertainties, see the information under the heading "Risk Factors" in the  Annual Report which is accessible on the SEC’s website at www.sec.gov. There have been no material changes to the risk factors previously disclosed in the Annual Report.

Item 2.                     Unregistered Sales of Equity Securities and Use of Proceeds.
 
Unregistered Sales of Equity Securities
 
The Company did not sell any securities during the quarter ended September 30, 2015 that were not registered under the Securities Act of 1933, as amended.
 
Issuer Purchases of Equity Securities
 
On May 1, 2015, the Company's board of trustees authorized a share repurchase program to acquire up to $200.0 million of the Company's common shares through April 30, 2016. Between May 1, 2015 and September 30, 2015, the Company repurchased 6,992,708 of its common shares for approximately $199.9 million under the authorized share repurchase program. On October 30, 2015, the Company's board of trustees extended the duration of the share repurchase program to December 31, 2016 and increased the amount by $200.0 million to a total of $400.0 million.

Additionally, during the nine months ended September 30, 2015, certain of the Company's employees surrendered common shares owned by them to satisfy their statutory minimum federal and state tax obligations in connection with the vesting of restricted common shares issued to such employees under our 2015 Plan.
 
The following table summarizes all of these repurchases during the nine months ended September 30, 2015:
Period
 
Total number
of shares
purchased (1)
 
Average price
paid per share
 
Total number of
shares purchased as
part of publicly
announced plans or
programs
 
Maximum number
of shares that may
yet be purchased
under the plans or
programs (2)
 
January 1, 2015 through January 31, 2015
 
—

 
—

 
N/A

 
N/A

 
February 1, 2015 through February 28, 2015
 
43,009

 
$
33.48

 
N/A

 
N/A

 
March 1, 2015 through March 31, 2015
 
10,459

 
$
31.78

 
N/A

 
N/A

 
April 1, 2015 through April 30, 2015
 
—

 
—

 
N/A

 
N/A

 
May 1, 2015 through May 31, 2015
 
944,121

 
$
29.95

 
888,408

 
5,736,341

 
June 1, 2015 through June 30, 2015
 
1,117,837

 
$
30.05

 
1,106,769

 
4,706,502

 
July 1, 2015 through July 31, 2015
 
203,158

 
$
30.06

 
—

 
4,698,613

 
August 1, 2015 through August 31, 2015
 
3,370,792

 
$
28.26

 
3,342,428

 
1,659,500

 
September 1, 2015 through September 30, 2015
 
1,666,844

 
$
27.57

 
1,655,103

 
—

 
Total
 
7,356,220

 
 

 
6,992,708

 
 

 
 
(1)
The number of shares purchased includes common shares surrendered by certain of our employees to satisfy their statutory minimum federal and state tax obligations associated with the vesting of restricted common shares issued under our 2015 Plan. With respect to these common shares, the price paid per common share is based on the closing price of our common shares as of the date of the determination of the statutory minimum federal income tax.
(2)
The maximum number of shares that may yet be repurchased under the stock repurchase plan is calculated by dividing the total dollar amount available to repurchase shares by the closing price of our common shares on the last business day of the respective month.
 
Item 3.                     Defaults Upon Senior Securities.
 
None.
 
Item 4.                     Mine Safety Disclosures.
 
Not Applicable.

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Table of Contents


Item 5.                     Other Information.
 
None.

Item 6.                     Exhibits.
 
The exhibits required to be filed by Item 601 of Regulation S-K are listed in the Exhibit Index on page 40 of this report, which is incorporated by reference herein. 


38
Table of Contents

SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
RLJ LODGING TRUST
 
 
Dated: November 5, 2015
/s/ THOMAS J. BALTIMORE, JR.
 
Thomas J. Baltimore, Jr.
 
President, Chief Executive Officer and Trustee
 
 
 
 
Dated: November 5, 2015
/s/ LESLIE D. HALE
 
Leslie D. Hale
 
Executive Vice President, Chief Financial Officer and Treasurer
 
(Principal Financial Officer)
 
 
 
 
Dated: November 5, 2015
/s/ CHRISTOPHER A. GORMSEN
 
Christopher A. Gormsen
 
Chief Accounting Officer
 
(Principal Accounting Officer)

39
Table of Contents


Exhibit Index
Exhibit
Number
 
Description of Exhibit
 
 
 
3.1
 
Articles of Amendment and Restatement of Declaration of Trust of RLJ Lodging Trust (incorporated by reference to Exhibit 3.1 to Amendment No. 4 to the Registrant's Registration Statement on Form S-11 (File. No. 333-172011) filed on May 5, 2011)
3.2
 
Articles of Amendment to Articles of Amendment and Restatement of Declaration of Trust of RLJ Lodging Trust (incorporated by reference to Exhibit 3.1 to the Registrant's Current Report on Form 8-K filed on May 7, 2015)
3.3
 
Articles Supplementary to Articles of Amendment and Restatement of Declaration of Trust (incorporated by reference to Exhibit 3.1 to the Registrant's Current Report on Form 8-K filed on February 26, 2015)
3.4
 
Second Amended and Restated Bylaws of RLJ Lodging Trust (incorporated by reference to Exhibit 3.2 to the Registrant's Current Report on Form 8-K filed on February 26, 2015)
31.1*
 
Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*
 
Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*
 
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS
 
XBRL Instance Document
 
Submitted electronically with this report
101.SCH
 
XBRL Taxonomy Extension Schema Document
 
Submitted electronically with this report
101.CAL
 
XBRL Taxonomy Calculation Linkbase Document
 
Submitted electronically with this report
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
 
Submitted electronically with this report
101.LAB
 
XBRL Taxonomy Label Linkbase Document
 
Submitted electronically with this report
101.PRE
 
XBRL Taxonomy Presentation Linkbase Document
 
Submitted electronically with this report

 *Filed herewith

40
Exhibit
EXHIBIT 31.1



 
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
I, Thomas J. Baltimore, Jr., certify that:
 
1.                   I have reviewed this Quarterly Report on Form 10-Q of RLJ Lodging Trust;
 
2.                   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.                   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.                   The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
a.                   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
b.                   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
c.                    Evaluated the effectiveness of the registrant’s disclosure controls and procedures, and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and
 
d.                   Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5.                   The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of trustees (or persons performing the equivalent functions):
 
a.                   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
b.                   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
 
RLJ LODGING TRUST
 
 
Dated: November 5, 2015
/s/ THOMAS J. BALTIMORE, JR.
 
Thomas J. Baltimore, Jr.
 
President, Chief Executive Officer and Trustee
 


Exhibit
EXHIBIT 31.2



 
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
I, Leslie D. Hale, certify that:
 
1.                   I have reviewed this Quarterly Report on Form 10-Q of RLJ Lodging Trust;
 
2.                   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.                   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.                   The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
a.                   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
b.                   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
c.                    Evaluated the effectiveness of the registrant’s disclosure controls and procedures, and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and
 
d.                   Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5.                   The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of trustees (or persons performing the equivalent functions):
 
a.                   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
b.                   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
 
RLJ LODGING TRUST
 
 
Dated: November 5, 2015
/s/ LESLIE D. HALE
 
Leslie D. Hale
 
Executive Vice President, Chief Financial Officer and Treasurer
 


Exhibit
EXHIBIT 32.1



 
Certification Pursuant To
18 U.S.C. Section 1350,
as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
 
In connection with the Quarterly Report of RLJ Lodging Trust (the “Company”) on Form 10-Q for the period ended September 30, 2015 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Thomas J. Baltimore, Jr., President, Chief Executive Officer and Trustee of the Company, and I, Leslie D. Hale, Chief Financial Officer and Treasurer of the Company, certify, to our knowledge, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
 
(1)                       the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
 
(2)                       the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
 
RLJ LODGING TRUST
 
 
Dated: November 5, 2015
/s/ THOMAS J. BALTIMORE, JR.
 
Thomas J. Baltimore, Jr.
 
President, Chief Executive Officer and Trustee
 
 
 
/s/ LESLIE D. HALE
 
Leslie D. Hale
 
Executive Vice President, Chief Financial Officer and Treasurer