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Section 1: 10-Q (10-Q)

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
For the quarterly period ended March 31, 2018
 
 
 
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: 000-54263
393483187_cwihighreslogo18.jpg
CAREY WATERMARK INVESTORS INCORPORATED
(Exact name of registrant as specified in its charter)
Maryland
 
26-2145060
(State of incorporation)
 
(I.R.S. Employer Identification No.)
 
 
 
50 Rockefeller Plaza
 
 
New York, New York
 
10020
(Address of principal executive office)
 
(Zip Code)
Investor Relations (212) 492-8920
(212) 492-1100
(Registrant’s telephone numbers, 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. Yes þ No o

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). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
Accelerated filer o
Non-accelerated filer þ
 
 
(Do not check if a smaller reporting company)
 
 
 
Smaller reporting company o
Emerging growth company o
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

Registrant has 139,383,445 shares of common stock, $0.001 par value, outstanding at May 4, 2018.
 




INDEX
 
 
Page No.
PART I — FINANCIAL INFORMATION
 
Item 1. Financial Statements (Unaudited)
 
 
 
 
 
 
 
 
 
PART II — OTHER INFORMATION
 
Item 6. Exhibits

Forward-Looking Statements

This Quarterly Report on Form 10-Q, or this Report, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, in Item 2 of Part I of this Report, contains forward-looking statements within the meaning of the federal securities laws. These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result” and similar expressions. These statements are based on the current expectations of our management. Forward-looking statements in this Report include, among others, statements about the impact of Hurricane Irma on certain hotels, including the condition of the properties, cost estimate and the timing of resumption of operations. It is important to note that our actual results could be materially different from those projected in such forward-looking statements. You should exercise caution in relying on forward-looking statements, as they involve known and unknown risks, uncertainties, and other factors that may materially affect our future results, performance, achievements or transactions. Information on factors that could impact actual results and cause them to differ from what is anticipated in the forward-looking statements contained herein is included in this Report as well as in our other filings with the Securities and Exchange Commission, or the SEC, including but not limited to those described in Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2017, as filed with the SEC on March 27, 2018, or the 2017 Annual Report. Except as required by federal securities laws and the rules and regulations of the SEC, we do not undertake to revise or update any forward-looking statements.

All references to “Notes” throughout the document refer to the footnotes to the consolidated financial statements of the registrant in Part I, Item 1. Financial Statements (Unaudited).


CWI 3/31/2018 10-Q 1




PART I — FINANCIAL INFORMATION
Item 1. Financial Statements.

CAREY WATERMARK INVESTORS INCORPORATED
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except share and per share amounts)
 
March 31, 2018
 
December 31, 2017
Assets
 
 
 
Investments in real estate:
 
 
 
Hotels, at cost
$
2,176,609

 
$
2,172,740

Accumulated depreciation
(242,638
)
 
(227,616
)
Net investments in hotels
1,933,971

 
1,945,124

Assets held for sale (Note 4)

 
105,124

Equity investments in real estate
123,961

 
131,344

Cash
88,547

 
47,994

Intangible assets, net
77,957

 
78,386

Restricted cash, inclusive of $— and $3,293, respectively, attributable to Assets
held for sale
61,647

 
84,382

Accounts receivable
57,799

 
38,359

Other assets
23,844

 
29,208

Total assets
$
2,367,726

 
$
2,459,921

Liabilities and Equity
 
 
 
Non-recourse debt, net, including debt attributable to Assets held for sale (Note 4)
$
1,346,641

 
$
1,420,913

WPC Credit Facility (Note 3)
41,637

 
68,637

Accounts payable, accrued expenses and other liabilities
133,529

 
136,343

Due to related parties and affiliates
4,348

 
3,611

Distributions payable
19,835

 
19,640

Other liabilities held for sale (Note 4)

 
2,889

Total liabilities
1,545,990

 
1,652,033

Commitments and contingencies (Note 10)

 


Common stock, $0.001 par value; 300,000,000 shares authorized; 139,189,741 and 137,826,503 shares, respectively, issued and outstanding
139

 
138

Additional paid-in capital
1,168,449

 
1,153,652

Distributions and accumulated losses
(405,534
)
 
(399,884
)
Accumulated other comprehensive loss
(152
)
 
(455
)
Total stockholders’ equity
762,902

 
753,451

Noncontrolling interests
58,834

 
54,437

Total equity
821,736

 
807,888

Total liabilities and equity
$
2,367,726

 
$
2,459,921


See Notes to Consolidated Financial Statements.

CWI 3/31/2018 10-Q 2




CAREY WATERMARK INVESTORS INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except share and per share amounts)
 
Three Months Ended March 31,
 
2018
 
2017
Revenues
 
 
 
Hotel Revenues
 
 
 
Rooms
$
91,792

 
$
104,351

Food and beverage
40,474

 
42,186

Other operating revenue
10,165

 
13,167

Total Hotel Revenues
142,431

 
159,704

Operating Expenses
 
 
 
Hotel Expenses
 
 
 
Rooms
21,814

 
23,516

Food and beverage
27,910

 
29,280

Other hotel operating expenses
6,265

 
7,143

Property taxes, insurance, rent and other
15,426

 
16,364

Sales and marketing
14,295

 
15,154

General and administrative
13,077

 
13,982

Repairs and maintenance
4,785

 
5,231

Management fees
4,672

 
5,565

Utilities
3,568

 
4,099

Depreciation and amortization
19,711

 
20,244

Total Hotel Expenses
131,523

 
140,578

 
 
 
 
Other Operating Expenses
 
 
 
Asset management fees to affiliate and other expenses
3,918

 
4,047

Corporate general and administrative expenses
2,968

 
2,509

Gain on hurricane-related property damage
(569
)
 

Total Other Operating Expenses
6,317

 
6,556

Operating Income
4,591

 
12,570

Other Income and (Expenses)
 
 
 
Interest expense
(16,781
)
 
(16,306
)
   Equity in (losses) earnings of equity method investments in real estate
(1,025
)
 
2,985

Net loss on extinguishment of debt

 
(141
)
Other income
122

 
26

Total Other Income and (Expenses)
(17,684
)
 
(13,436
)
Loss from Operations Before Income Taxes and Net Gain (Loss) on Sale of Real Estate
(13,093
)
 
(866
)
Benefit from income taxes
708

 
286

Loss from Operations Before Net Gain (Loss) on Sale of Real Estate
(12,385
)
 
(580
)
Net gain (loss) on sale of real estate, net of tax
31,929

 
(352
)
Net Income (Loss)
19,544

 
(932
)
Income attributable to noncontrolling interests (inclusive of Available Cash Distributions to a related party of $972 and $1,701, respectively)
(5,357
)
 
(4,480
)
Net Income (Loss) Attributable to CWI Stockholders
$
14,187

 
$
(5,412
)
Basic and Diluted Income (Loss) Per Share
$
0.10

 
$
(0.04
)
Basic and Diluted Weighted-Average Shares Outstanding
138,780,516

 
136,320,288

 
 
 
 
Distributions Declared Per Share
$
0.1425

 
$
0.1425


See Notes to Consolidated Financial Statements.

CWI 3/31/2018 10-Q 3




CAREY WATERMARK INVESTORS INCORPORATED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
(in thousands)
 
Three Months Ended March 31,
 
2018
 
2017
Net Income (Loss)
$
19,544

 
$
(932
)
Other Comprehensive Income
 
 
 
Unrealized gain on derivative instruments
315

 
105

Comprehensive Income (Loss)
19,859

 
(827
)
 
 
 
 
Amounts Attributable to Noncontrolling Interests
 
 
 
Net income
(5,357
)
 
(4,480
)
Unrealized gain on derivative instruments
(12
)
 
(1
)
Comprehensive income attributable to noncontrolling interests
(5,369
)
 
(4,481
)
Comprehensive Income (Loss) Attributable to CWI Stockholders
$
14,490

 
$
(5,308
)

See Notes to Consolidated Financial Statements.

CWI 3/31/2018 10-Q 4




CAREY WATERMARK INVESTORS INCORPORATED
CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)
Three Months Ended March 31, 2018 and 2017
(in thousands, except share and per share amounts)
 
CWI Stockholders
 
 
 
 
 
Shares
 
Common
Stock
 
Additional
Paid-In
Capital
 
Distributions
and Accumulated
Losses
 
Accumulated
Other
Comprehensive
Loss
 
Total CWI
Stockholders
 
Noncontrolling
Interests
 
Total
Balance at January 1, 2018
137,826,503

 
$
138

 
$
1,153,652

 
$
(399,884
)
 
$
(455
)
 
$
753,451

 
$
54,437

 
$
807,888

Net income
 
 
 
 
 
 
14,187

 
 
 
14,187

 
5,357

 
19,544

Shares issued, net of offering costs
1,026,208

 
1

 
11,082

 
 
 
 
 
11,083

 
 
 
11,083

Shares issued to affiliates
337,030

 

 
3,640

 
 
 
 
 
3,640

 
 
 
3,640

Distributions to noncontrolling interests
 
 
 
 
 
 
 
 
 
 

 
(972
)
 
(972
)
Shares issued under share incentive plans

 
 
 
 
75

 
 
 
 
 
75

 
 
 
75

Distributions declared ($0.1425 per share)
 
 
 
 
 
 
(19,837
)
 
 
 
(19,837
)
 
 
 
(19,837
)
Other comprehensive income
 
 
 
 
 
 
 
 
303

 
303

 
12

 
315

Balance at March 31, 2018
139,189,741

 
$
139

 
$
1,168,449

 
$
(405,534
)
 
$
(152
)
 
$
762,902

 
$
58,834

 
$
821,736

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2017
135,379,038

 
$
135

 
$
1,125,835

 
$
(326,748
)
 
$
(1,128
)
 
$
798,094

 
$
65,163

 
$
863,257

Net (loss) income
 
 
 
 
 
 
(5,412
)
 
 
 
(5,412
)
 
4,480

 
(932
)
Shares issued, net of offering costs
1,077,564

 
1

 
11,486

 
 
 
 
 
11,487

 
 
 
11,487

Shares issued to affiliates
220,853

 
1

 
2,354

 
 
 
 
 
2,355

 
 
 
2,355

Distributions to noncontrolling interests
 
 
 
 
 
 
 
 
 
 

 
(2,623
)
 
(2,623
)
Shares issued under share incentive plans

 
 
 
91

 
 
 
 
 
91

 
 
 
91

Distributions declared ($0.1425 per share)
 
 
 
 
 
 
(19,477
)
 
 
 
(19,477
)
 
 
 
(19,477
)
Other comprehensive income
 
 
 
 
 
 
 
 
104

 
104

 
1

 
105

Balance at March 31, 2017
136,677,455

 
$
137

 
$
1,139,766

 
$
(351,637
)
 
$
(1,024
)
 
$
787,242

 
$
67,021

 
$
854,263


See Notes to Consolidated Financial Statements.

CWI 3/31/2018 10-Q 5




CAREY WATERMARK INVESTORS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
 
Three Months Ended March 31,
 
2018
 
2017
Cash Flows — Operating Activities
 
 
 
Net income (loss)
$
19,544

 
$
(932
)
Adjustments to net income (loss):
 
 
 
Net (gain) loss on sale of real estate (Note 4)
(31,929
)
 
352

Depreciation and amortization
19,711

 
20,244

Asset management fees to affiliates settled in shares
3,560

 
3,614

Equity in losses (earnings) of equity method investments in real estate in excess of distributions received
2,152

 
(658
)
Straight-line rent adjustments
1,283

 
1,306

Amortization of deferred financing costs, fair market value of debt, ground lease intangible and other
863

 
825

Gain on hurricane-related property damage
(569
)
 

Amortization of stock-based compensation expense
75

 
91

Net loss on extinguishment of debt

 
138

Funding of hurricane/fire related remediation work
(8,742
)
 

Net changes in other operating assets and liabilities
(4,418
)
 
(3,038
)
Insurance proceeds for remediation work due to hurricane damage
806

 

Unearned business interruption insurance proceeds
250

 

Decrease in due to related parties and affiliates
(24
)
 
(750
)
Net Cash Provided by Operating Activities
2,562

 
21,192

 
 
 
 
Cash Flows — Investing Activities
 
 
 
Proceeds from the sale of real estate investments (Note 4)
135,491

 
5,361

Capital expenditures
(14,265
)
 
(10,322
)
Distributions received from equity investments in excess of equity income
5,721

 
989

Capital contributions to equity investments in real estate
(342
)
 

Hurricane/fire related property insurance proceeds
313

 

Repayments of loan receivable
110

 
67

Net Cash Provided by (Used in) Investing Activities
127,028

 
(3,905
)
 
 
 
 
Cash Flows — Financing Activities
 
 
 
Scheduled payments and prepayments of mortgage principal
(74,917
)
 
(20,880
)
Repayment of note payable to affiliate
(37,000
)
 

Distributions paid
(19,642
)
 
(19,292
)
Proceeds from issuance of shares, net of offering costs
11,083

 
11,487

Proceeds from note payable to affiliate
10,000

 
22,835

Distributions to noncontrolling interests
(972
)
 
(2,623
)
Scheduled payments of loan
(227
)
 
(77
)
Purchase of interest rate caps
(97
)
 

Repayment of Senior Credit Facility

 
(22,785
)
Proceeds from mortgage financing

 
15,500

Deposits for mortgage financing

 
(1,510
)
Deposits released for mortgage financing

 
100

Deferred financing costs

 
(431
)
Net Cash Used In Financing Activities
(111,772
)
 
(17,676
)
 
 
 
 
Change in Cash and Restricted Cash During the Period
 
 
 
Net increase (decrease) in cash and restricted cash
17,818

 
(389
)
Cash and restricted cash, beginning of period
132,376

 
120,347

Cash and restricted cash, end of period
$
150,194

 
$
119,958


See Notes to Consolidated Financial Statements.

CWI 3/31/2018 10-Q 6




CAREY WATERMARK INVESTORS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1. Business

Organization

Carey Watermark Investors Incorporated, or CWI, together with its consolidated subsidiaries, is a publicly-owned, non-listed real estate investment trust, or REIT, that invests in, manages and seeks to enhance the value of, interests in lodging and lodging-related properties, in the United States. We conduct substantially all of our investment activities and own all of our assets through CWI OP, LP, or the Operating Partnership. We are a general partner and a limited partner of, and own a 99.985% capital interest in, the Operating Partnership. Carey Watermark Holdings, LLC, or Carey Watermark Holdings, which is owned indirectly by both W. P. Carey Inc., or WPC, and Watermark Capital Partners, LLC, or Watermark Capital Partners, holds a special general partner interest in the Operating Partnership.

We are managed by Carey Lodging Advisors, LLC, or our Advisor, an indirect subsidiary of WPC. Our Advisor manages our overall portfolio, including providing oversight and strategic guidance to the independent hotel operators that manage our hotels. CWA, LLC, a subsidiary of Watermark Capital Partners, or the Subadvisor, provides services to our Advisor, primarily relating to acquiring, managing, financing and disposing of our hotels and overseeing the independent operators that manage the day-to-day operations of our hotels. In addition, the Subadvisor provides us with the services of Mr. Michael G. Medzigian, our Chief Executive Officer, subject to the approval of our independent directors.

We held ownership interests in 28 hotels at March 31, 2018, including 24 hotels that we consolidate, or our Consolidated Hotels, and four hotels that we record as equity investments, or our Unconsolidated Hotels.

Public Offerings

We raised $575.8 million through our initial public offering, which ran from September 15, 2010 through September 15, 2013, and $577.4 million through our follow-on offering, which ran from December 20, 2013 through December 31, 2014. In addition, from inception through March 31, 2018, $180.9 million of distributions were reinvested in our common stock as a result of our distribution reinvestment plan, or DRIP. We have fully invested the proceeds from both our initial public offering and follow-on offering.

Note 2. Basis of Presentation

Basis of Presentation

Our interim consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not necessarily include all information and footnotes necessary for a fair statement of our consolidated financial position, results of operations and cash flows in accordance with generally accepted accounting principles in the United States, or GAAP.

In the opinion of management, the unaudited financial information for the interim periods presented in this Report reflects all normal and recurring adjustments necessary for a fair statement of financial position, results of operations and cash flows. Our interim consolidated financial statements should be read in conjunction with our audited consolidated financial statements and accompanying notes for the year ended December 31, 2017, which are included in our 2017 Annual Report, as certain disclosures that would substantially duplicate those contained in the audited consolidated financial statements have not been included in this Report. Operating results for interim periods are not necessarily indicative of operating results for an entire year.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts and the disclosure of contingent amounts in our consolidated financial statements and the accompanying notes. Actual results could differ from those estimates.


CWI 3/31/2018 10-Q 7



Notes to Consolidated Financial Statements (Unaudited)

Basis of Consolidation

Our consolidated financial statements reflect all of our accounts, including those of our controlled subsidiaries. The portions of equity in consolidated subsidiaries that are not attributable, directly or indirectly, to us are presented as noncontrolling interests. All significant intercompany accounts and transactions have been eliminated.

When we obtain an economic interest in an entity, we evaluate the entity to determine if it should be deemed a variable interest entity, or VIE, and, if so, whether we are the primary beneficiary and are therefore required to consolidate the entity. We apply accounting guidance for consolidation of VIEs to certain entities in which the equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. Certain decision-making rights within a loan or joint-venture agreement can cause us to consider an entity a VIE. Limited partnerships and other similar entities which operate as a partnership will be considered a VIE unless the limited partners hold substantive kick-out rights or participation rights. Significant judgment is required to determine whether a VIE should be consolidated. We review the contractual arrangements provided for in the partnership agreement or other related contracts to determine whether the entity is considered a VIE, and to establish whether we have any variable interests in the VIE. We then compare our variable interests, if any, to those of the other variable interest holders to determine which party is the primary beneficiary of the VIE based on whether the entity (i) has the power to direct the activities that most significantly impact the economic performance of the VIE and (ii) has the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. The liabilities of these VIEs are non-recourse to us and can only be satisfied from each VIE’s respective assets.

At both March 31, 2018 and December 31, 2017, we considered five entities to be VIEs, four of which we consolidated as we are considered the primary beneficiary. The following table presents a summary of selected financial data of consolidated VIEs included in the consolidated balance sheets (in thousands):
 
March 31, 2018
 
December 31, 2017
Net investments in hotels
$
501,662

 
$
501,287

Intangible assets, net
38,448

 
38,649

Total assets
588,388

 
579,807

 
 
 
 
Non-recourse debt, net
$
341,535

 
$
341,563

Total liabilities
373,046

 
373,548


Accounting Policy Update

Distributions from Equity Method Investments — We classify distributions received from equity method investments using the cumulative earnings approach. Distributions received are considered returns on the investment and classified as cash inflows from operating activities. If, however, the investor’s cumulative distributions received, less distributions received in prior periods determined to be returns of investment, exceeds cumulative equity in earnings recognized, the excess is considered a return of investment and is classified as cash inflows from investing activities.


CWI 3/31/2018 10-Q 8



Notes to Consolidated Financial Statements (Unaudited)

Reclassifications

Certain prior period amounts have been reclassified to conform to the current period presentation.

Restricted Cash — In connection with our adoption of Accounting Standards Update, or ASU, 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, as described below, we revised our consolidated statements of cash flows to include restricted cash when reconciling the beginning-of-period and end-of-period cash amounts shown on the statement of cash flows. As a result, we retrospectively revised prior periods presented to conform to the current period presentation. Restricted cash consists primarily of amounts escrowed pursuant to the terms of our mortgage debt to fund planned renovations and improvements (including at hotels damaged by Hurricane Irma), property taxes, insurance, and normal replacement of furniture, fixtures and equipment at our hotels. The following table provides a reconciliation of cash and restricted cash reported within the consolidated balance sheets to the consolidated statements of cash flows (in thousands):
 
March 31, 2018
 
December 31, 2017
Cash
$
88,547

 
$
47,994

Restricted cash
61,647

 
84,382

Total cash and restricted cash
$
150,194

 
$
132,376


Recent Accounting Pronouncements

Pronouncements Adopted as of March 31, 2018

In May 2014, the Financial Accounting Standards Board, or FASB, issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 supersedes or replaces nearly all GAAP revenue recognition guidance. The new guidance establishes a new control-based revenue recognition model that changes the basis for deciding when revenue is recognized over time or at a point in time and expands the disclosures about revenue. The new guidance also applies to sales of real estate and the new principles-based approach is largely based on the transfer of control of the real estate to the buyer. We adopted this guidance for our interim and annual periods beginning January 1, 2018 using the modified retrospective method. We performed a comprehensive evaluation of the impact of the new standard across our revenue streams and determined that the timing of revenue recognition and its classification in our consolidated financial statements will remain substantially unchanged.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 intends to reduce diversity in practice for certain cash flow classifications, including, but not limited to (i) debt prepayment or debt extinguishment costs, (ii) contingent consideration payments made after a business combination, (iii) proceeds from the settlement of insurance claims, (iv) distributions received from equity method investees and (v) separately identifiable cash flows and application of the predominance principle. We retrospectively adopted this guidance for our interim and annual periods beginning January 1, 2018. As a result, we reclassified distributions received from equity method investments of $0.3 million from net cash provided by operating activities to net cash used in investing activities on the consolidated statement of cash flows for the three months ended March 31, 2017. The adoption of ASU 2016-15 did not have a material impact on our consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. ASU 2016-18 intends to reduce diversity in practice for the classification and presentation of changes in restricted cash on the statement of cash flows. ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. We retrospectively adopted this guidance for our interim and annual periods beginning January 1, 2018. See Restricted Cash above for additional information.


CWI 3/31/2018 10-Q 9



Notes to Consolidated Financial Statements (Unaudited)

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. ASU 2017-01 clarifies the definition of a business with the objective of adding guidance to assist companies and other reporting organizations with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The changes to the definition of a business will likely result in more acquisitions being accounted for as asset acquisitions across all industries. The guidance is effective for annual reporting periods beginning after December 15, 2017, and the interim periods within those annual periods. We adopted this guidance for our interim and annual periods beginning January 1, 2018. We have had no hotel acquisitions since the adoption of this guidance; however, we expect that certain future hotel acquisitions may be considered asset acquisitions rather than business combinations, which would affect the capitalization of acquisition costs (such costs are expensed for business combinations and capitalized for asset acquisitions).

In February 2017, the FASB issued ASU 2017-05, Other Income — Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20). ASU 2017-05 clarifies that a financial asset is within the scope of Subtopic 610-20 if it meets the definition of an in substance nonfinancial asset. The amendments define the term “in substance nonfinancial asset,” in part, as a financial asset promised to a counterparty in a contract if substantially all of the fair value of the assets (recognized and unrecognized) that are promised to the counterparty in the contract is concentrated in nonfinancial assets. If substantially all of the fair value of the assets that are promised to the counterparty in a contract is concentrated in nonfinancial assets, then all of the financial assets promised to the counterparty are in substance nonfinancial assets within the scope of Subtopic 610-20. This amendment also clarifies that nonfinancial assets within the scope of Subtopic 610-20 may include nonfinancial assets transferred within a legal entity to a counterparty. For example, a parent company may transfer control of nonfinancial assets by transferring ownership interests in a consolidated subsidiary. We adopted this guidance for our interim and annual periods beginning January 1, 2018. The adoption of ASU 2017-05 did not have a material impact on our consolidated financial statements.

Pronouncements to be Adopted after March 31, 2018

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 outlines a new model for accounting by lessees, whereby their rights and obligations under substantially all leases, existing and new, would be capitalized and recorded on the balance sheet. For lessors, however, the accounting remains largely unchanged from the current model, with the distinction between operating and financing leases retained, but updated to align with certain changes to the lessee model and the new revenue recognition standard. Additionally, the new standard requires extensive quantitative and qualitative disclosures. The new standard must be adopted using a modified retrospective transition of the new guidance and provides for certain practical expedients. Transition will require application of the new model at the beginning of the earliest comparative period presented. We will adopt this guidance for our interim and annual periods beginning January 1, 2019. We have not yet completed our analysis on this new standard, but we believe the application of the new standard will result in the recording of a right-of-use asset and a lease liability on the consolidated balance sheet for each of our ground leases at fair value upon adoption.

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. ASU 2017-12 will make more financial and nonfinancial hedging strategies eligible for hedge accounting. It also amends the presentation and disclosure requirements and changes how companies assess hedge effectiveness. It is intended to more closely align hedge accounting with companies’ risk management strategies, simplify the application of hedge accounting, and increase transparency as to the scope and results of hedging programs. ASU 2017-12 will be effective in fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. We are in the process of evaluating the impact of adopting ASU 2017-12 on our consolidated financial statements and expect to adopt the standard for the fiscal year beginning January 1, 2019.

Note 3. Agreements and Transactions with Related Parties

Agreements with our Advisor and Affiliates

We have an advisory agreement with our Advisor, which we refer to herein as the Advisory Agreement, to perform certain services for us under a fee arrangement, including managing our overall business, our investments and certain administrative duties. The Advisory Agreement has a term of one year and may be renewed for successive one-year periods. Our Advisor also has a subadvisory agreement with the Subadvisor, which we refer to herein as the Subadvisory Agreement, whereby our Advisor pays 20% of its fees earned under the Advisory Agreement to the Subadvisor in return for certain personnel services.


CWI 3/31/2018 10-Q 10



Notes to Consolidated Financial Statements (Unaudited)

The following tables present a summary of fees we paid; expenses we reimbursed; and distributions we made to our Advisor, the Subadvisor and other affiliates, as described below, in accordance with the terms of those agreements (in thousands):
 
Three Months Ended March 31,
 
2018
 
2017
Amounts Included in the Consolidated Statements of Operations
 
 
 
Asset management fees
$
3,560

 
$
3,614

Personnel and overhead reimbursements
1,438

 
1,424

Available Cash Distributions
972

 
1,701

Interest expense
378

 
12

Disposition fees (Note 4)
190

 
83

 
$
6,538

 
$
6,834

 
 
 
 
Other Transaction Fees Incurred
 
 
 
Capitalized loan refinancing fees
$
390

 
$

 
$
390

 
$


The following table presents a summary of the amounts included in Due to related parties and affiliates in the consolidated financial statements (in thousands):
 
March 31, 2018
 
December 31, 2017
Amounts Due to Related Parties and Affiliates
 
 
 
Other amounts due to our Advisor
$
1,782

 
$
1,282

Reimbursable costs
1,303

 
1,239

Accrued interest on WPC Credit Facility
1,094

 
715

Due to joint venture partners and other
165

 
158

Due to CWI 2
4

 
217

 
$
4,348

 
$
3,611


Asset Management Fees, Dispositions Fees and Loan Refinancing Fees

We pay our Advisor an annual asset management fee equal to 0.5% of the aggregate Average Market Value of our Investments, (as defined in the Advisory Agreement). Our Advisor is also entitled to receive disposition fees of up to 1.5% of the contract sales price of a property, as well as a loan refinancing fee of up to 1.0% of the principal amount of a refinanced loan, if certain conditions described in the Advisory Agreement are met. If our Advisor elects to receive all or a portion of its fees in shares, the number of shares issued is determined by dividing the dollar amount of fees by our most recently published estimated net asset value per share, or NAV. For the three months ended March 31, 2018 and 2017, we settled $3.6 million and $2.4 million, respectively, of asset management fees in shares of our common stock at our Advisor’s election. At March 31, 2018, our Advisor owned 3,257,297 shares (2.3%) of our outstanding common stock. Asset management fees are included in Asset management fees to affiliate and other expenses in the consolidated financial statements.

Available Cash Distributions

Carey Watermark Holdings’ special general partner interest entitles it to receive distributions of 10% of Available Cash (as defined in the limited partnership agreement of the Operating Partnership), or Available Cash Distributions, generated by the Operating Partnership, subject to certain limitations. In addition, in the event of the dissolution of the Operating Partnership, Carey Watermark Holdings will be entitled to receive distributions of up to 15% of net proceeds, provided certain return thresholds are met for the initial investors in the Operating Partnership. Available Cash Distributions are included in Income attributable to noncontrolling interests in the consolidated financial statements.


CWI 3/31/2018 10-Q 11



Notes to Consolidated Financial Statements (Unaudited)

Personnel and Overhead Reimbursements/Reimbursable Costs

Under the terms of the Advisory Agreement, our Advisor generally allocates expenses of dedicated and shared resources, including the cost of personnel, rent and related office expenses, between us and our affiliate, Carey Watermark Investors 2 Incorporated, or CWI 2, based on total pro rata hotel revenues on a quarterly basis. CWI 2 is a publicly owned, non-listed REIT that is also advised by our Advisor and invests in lodging and lodging-related properties. Pursuant to the Subadvisory Agreement, after we reimburse our Advisor, it will subsequently reimburse the Subadvisor for personnel costs and other charges, including the services of our Chief Executive Officer, subject to the approval of our board of directors. We have also granted restricted stock units to employees of the Subadvisor pursuant to our 2010 Equity Incentive Plan. These reimbursements are included in Corporate general and administrative expenses and Due to related parties and affiliates in the consolidated financial statements.

Other Amounts Due to our Advisor

This balance primarily represented asset management fees payable to our Advisor at both March 31, 2018 and December 31, 2017. The balance due at March 31, 2018 also includes amounts payable to the advisor for refinancing and disposition fees of $0.4 million and $0.2 million, respectively.

Other Transactions with Affiliates

WPC Credit Facility

During the third quarter of 2017, our board of directors and the board of directors of WPC approved secured loans from WPC to us of up to $100.0 million for acquisition funding purposes and $25.0 million for working capital purposes. On September 26, 2017, we entered into a secured credit facility, or the WPC Credit Facility, with our Operating Partnership as borrower and WPC as lender. The WPC Credit Facility consists of (i) a bridge term loan of $75.0 million, or the Bridge Loan, for the purpose of acquiring an interest in the Ritz-Carlton Bacara, Santa Barbara Venture and (ii) a $25.0 million revolving working capital facility, or the Working Capital Facility, to be used for our working capital needs. Unless the Advisory Agreement expires or is terminated, the Bridge Loan and Working Capital Facility are scheduled to mature on June 30, 2018 and December 31, 2018, respectively. We can request a three month extension of the Bridge Loan, which WPC may grant in its sole discretion. Both loans bear interest at LIBOR plus 1.0%; provided however, that upon the occurrence of certain events of default (as defined in the loan agreement), all outstanding amounts will be subject to a 2% annual interest rate increase. We serve as guarantor of the WPC Credit Facility and have pledged our unencumbered equity interests in certain properties as collateral, as further described in the pledge and security agreement entered into between the borrower and lender. On September 27, 2017, the Operating Partnership drew down $75.0 million from the Bridge Loan to acquire our interest in the Ritz-Carlton Bacara, Santa Barbara. During the fourth quarter of 2017, we repaid a total of $14.2 million towards the Bridge Loan and $15.0 million towards the Working Capital Facility. At December 31, 2017, the outstanding balances under the Bridge Loan and Working Capital Facility were $60.8 million and $7.8 million, respectively.

On January 16, 2018, the Operating Partnership drew down $10.0 million from the Working Capital Facility. During the first quarter of 2018, we repaid a total of $20.0 million towards the Bridge Loan and $17.0 million towards the Working Capital Facility. At March 31, 2018, the outstanding balances under the Bridge Loan and Working Capital Facility were $40.8 million and $0.8 million, respectively, with $24.2 million available to be drawn under the Working Capital Facility.

The WPC Credit Facility includes various customary affirmative and negative covenants. We were in compliance with all applicable covenants at March 31, 2018.

Jointly Owned Investments

At March 31, 2018, we owned interests in three jointly owned investments with CWI 2: the Ritz-Carlton Key Biscayne, a Consolidated Hotel, and the Marriott Sawgrass Golf Resort & Spa and the Ritz-Carlton Bacara, Santa Barbara, both Unconsolidated Hotels. A third-party also owns an interest in the Ritz-Carlton Key Biscayne.


CWI 3/31/2018 10-Q 12



Notes to Consolidated Financial Statements (Unaudited)

Note 4. Net Investments in Hotels

Net investments in hotels are summarized as follows (in thousands):
 
March 31, 2018
 
December 31, 2017
Buildings
$
1,550,014

 
$
1,554,798

Land
359,383

 
359,383

Furniture, fixtures and equipment
120,444

 
123,595

Building and site improvements
122,774

 
122,273

Construction in progress
23,994

 
12,691

Hotels, at cost
2,176,609

 
2,172,740

Less: Accumulated depreciation
(242,638
)
 
(227,616
)
Net investments in hotels
$
1,933,971

 
$
1,945,124


During the three months ended March 31, 2018, we retired fully depreciated furniture, fixtures and equipment aggregating $4.3 million.

Hurricane-Related Disruption

Hurricane Irma made landfall in September 2017 impacting five of our Consolidated Hotels; Hawks Cay Resort, Marriott Boca Raton at Boca Center, Ritz-Carlton Key Biscayne, Ritz-Carlton Fort Lauderdale and Staybridge Suites Savannah Historic District. All five hotels sustained damage and were forced to close for a period of time, except for Marriott Boca Raton at Boca Center, which was sold during the first quarter of 2018 (Note 4). All hotels reopened shortly after Hurricane Irma, with varying degrees of damage, with the exception of the Hawks Cay Resort, which is expected to fully reopen by midyear 2018. During the three months ended March 31, 2018, we recognized a $0.6 million gain resulting from a change in our estimate of the total aggregate damage incurred at the properties, comprised of the following (in thousands):
 
 
Three Months Ended
 
 
March 31, 2018
Net write-off of Fixed assets
 
$
5,658

Remediation work performed
 
5,797

Property damage insurance receivables
 
(12,024
)
 
 
$
(569
)

As of March 31, 2018 and December 31, 2017, we have received business interruption insurance proceeds of $9.3 million and $9.0 million, respectively, and have recorded a corresponding payable within Accounts payable, accrued expenses and other liabilities in our consolidated financial statements as the claims have not yet been settled and represent an advance from our insurance providers.

We are still assessing the impact of the hurricane on our hotels; the final net book value write-offs could vary significantly from our estimates and additional remediation work may be performed. Any changes to property damage estimates will be recorded in the periods in which they are determined and any additional remediation work will be recorded in the periods in which it is performed. 

Property Dispositions and Assets and Liabilities Held for Sale

On January 25, 2018, we sold our 100% ownership interest in the Marriott Boca Raton at Boca Center to an unaffiliated third‑party for a contractual sales price of $76.0 million and net proceeds after the repayment of debt of approximately $35.4 million, including the release of $1.4 million of restricted cash. We recognized a gain on sale of $12.3 million during the three months ended March 31, 2018. This property was classified as held for sale at December 31, 2017.


CWI 3/31/2018 10-Q 13



Notes to Consolidated Financial Statements (Unaudited)

On February 5, 2018, we sold our 100% ownership interests in the Hampton Inn Memphis Beale Street and Hampton Inn Atlanta Downtown to an unaffiliated third-party for a contractual sales price of $63.0 million and net proceeds after the repayment of debt of approximately $31.8 million, including the release of $2.0 million of restricted cash. We recognized a gain on sale of $19.6 million during the three months ended March 31, 2018. These properties were classified as held for sale at December 31, 2017.

At March 31, 2018, no properties were classified as held for sale.

Below is a summary of our assets and liabilities held for sale (in thousands):
 
March 31, 2018
 
December 31, 2017
Net investments in hotels
$

 
$
104,062

Accounts receivable

 
681

Other assets

 
377

Intangible assets, net

 
4

Assets held for sale
$

 
$
105,124

 
 
 
 
Non-recourse debt, net attributable to Assets held for sale
$

 
$
71,887

 
 
 
 
Accounts payable, accrued expenses and other liabilities
$

 
$
2,889

Due to related parties and affiliates

 

Other liabilities held for sale
$

 
$
2,889


Construction in Progress

At March 31, 2018 and December 31, 2017, construction in progress, recorded at cost, was $24.0 million and $12.7 million, respectively, and related primarily to renovations at the Hawks Cay Resort, the Marriott Raleigh City Center and the Equinox, a Luxury Collection Golf Resort & Spa at March 31, 2018, and renovations at the Marriott Raleigh City Center, the Equinox, a Luxury Collection Golf Resort & Spa, the Sheraton Austin Hotel at the Capitol and the Ritz-Carlton Fort Lauderdale at December 31, 2017 (Note 10). We capitalize interest expense and certain other costs, such as property taxes, property insurance, utilities expense and hotel incremental labor costs, related to hotels undergoing major renovations. We capitalized $0.7 million and $0.4 million of such costs during the three months ended March 31, 2018 and 2017, respectively. At March 31, 2018 and December 31, 2017, accrued capital expenditures were $5.7 million and $6.0 million, respectively, representing non-cash investing activity.

Note 5. Equity Investments in Real Estate

At March 31, 2018, we owned equity interests in four Unconsolidated Hotels, two with unrelated third parties and two with CWI 2. We do not control the ventures that own these hotels, but we exercise significant influence over them. We account for these investments under the equity method of accounting (i.e., at cost, increased or decreased by our share of earnings or losses, less distributions, plus contributions and other adjustments required by equity method accounting, such as basis differences from acquisition costs paid to our Advisor that we incur and other-than-temporary impairment charges, if any).

Under the conventional approach of accounting for equity method investments, an investor applies its percentage ownership interest to the venture’s net income to determine the investor’s share of the earnings or losses of the venture. This approach is inappropriate if the venture’s capital structure gives different rights and priorities to its investors. We have priority returns on several of our equity method investments. Therefore, we follow the hypothetical liquidation at book value method in determining our share of these ventures’ earnings or losses for the reporting period, as this method better reflects our claim on the ventures’ book value at the end of each reporting period. Earnings for our equity method investments are recognized in accordance with each respective investment agreement and, where applicable, based upon the allocation of the investment’s net assets at book value as if the investment were hypothetically liquidated at the end of each reporting period.

Hurricane-Related Disruption

The Marriott Sawgrass Golf Resort & Spa was impacted by Hurricane Irma when it made landfall in September 2017. The hotel sustained damage and was forced to close for a short period of time.

CWI 3/31/2018 10-Q 14



Notes to Consolidated Financial Statements (Unaudited)


During the three months ended March 31, 2018, the Marriott Sawgrass Golf Resort & Spa Venture recognized a $0.3 million hurricane gain, comprised of: a $0.9 million gain resulting from a change in estimate of our the total damage incurred at the property, partially offset by a $0.6 million loss resulting from pre-existing damage (which was discovered as a result of the hurricane and is not covered by insurance). During the first quarter of 2018 the venture recorded a $0.6 million net increase to fixed assets, reduced the total remediation work costs incurred by $0.3 million and reduced its insurance receivable by $0.6 million.

We are still assessing the impact of the hurricane on the venture, and the final net book value write-offs could vary significantly from our estimate and additional remediation work may be performed. Any changes to the estimates for property damage will be recorded by the venture in the periods in which they are determined, and any additional remediation work will be recorded by the venture in the periods in which it is performed. 

The following table sets forth our ownership interests in our equity investments in real estate and their respective carrying values. The carrying values of these ventures are affected by the timing and nature of distributions (dollars in thousands):
Unconsolidated Hotels
 
State
 
Number
of Rooms
 
% Owned
 
Acquisition Date
 
Hotel Type
 
Carrying Value at
 
 
 
 
 
 
March 31, 2018
 
December 31, 2017
Ritz-Carlton Bacara, Santa Barbara Venture (a) (b)
 
CA
 
358

 
40%
 
9/28/2017
 
Resort
 
$
63,656

 
$
65,126

Ritz-Carlton Philadelphia Venture (c)
 
PA
 
301

 
60%
 
5/15/2015
 
Full-service
 
31,681

 
38,469

Marriott Sawgrass Golf Resort & Spa Venture (d) (e)
 
FL
 
514

 
50%
 
4/1/2015
 
Resort
 
28,056

 
27,162

Hyatt Centric French Quarter Venture (f)
 
LA
 
254

 
80%
 
9/6/2011
 
Full-service
 
568

 
587

 
 
 
 
1,427

 
 
 
 
 
 
 
$
123,961

 
$
131,344

___________
(a)
This investment represents a tenancy-in-common interest; the remaining 60% interest is owned by CWI 2.
(b)
No cash distributions were received from this investment during the three months ended March 31, 2018.
(c)
We received cash distributions of $1.3 million from this investment during the three months ended March 31, 2018. During the first quarter of 2018, we also received a distribution of $4.4 million representing a return of capital for our share of proceeds from a mortgage refinancing in January 2018. We capitalized the refinancing fee paid to the Advisor totaling $0.4 million.
(d)
We received cash distributions of $0.7 million from this investment during the three months ended March 31, 2018.
(e)
This investment is considered a VIE (Note 2). We do not consolidate this entity because we are not the primary beneficiary and the nature of our involvement in the activities of the entity allows us to exercise significant influence, but does not give us power over decisions that significantly affect the economic performance of the entity.
(f)
We received cash distributions of $0.4 million from this investment during the three months ended March 31, 2018.

The following table sets forth our share of equity in (losses) earnings from our Unconsolidated Hotels, which are based on the hypothetical liquidation at book value model, as well as certain amortization adjustments related to basis differentials from acquisitions of investments (in thousands):
 
 
Three Months Ended March 31,
Venture
 
2018
 
2017
Ritz-Carlton Bacara, Santa Barbara Venture
 
$
(1,950
)
 
$

Ritz-Carlton Philadelphia Venture
 
(1,476
)
 
806

Marriott Sawgrass Golf Resort & Spa Venture
 
1,623

 
1,385

Westin Atlanta Venture (a)
 
391

 
319

Hyatt Centric French Quarter Venture
 
387

 
475

Total equity in (losses) earnings of equity method investments in real estate
 
$
(1,025
)
 
$
2,985

___________
(a)
On October 19, 2017, the venture sold the Westin Atlanta Perimeter North to an unaffiliated third-party.

No other-than-temporary impairment charges related to our investments in these ventures were recognized during the three months ended March 31, 2018 or 2017.


CWI 3/31/2018 10-Q 15



Notes to Consolidated Financial Statements (Unaudited)

At March 31, 2018 and December 31, 2017, the unamortized basis differences on our equity investments were $7.5 million and $7.2 million, respectively. Net amortization of the basis differences reduced the carrying values of our equity investments by $0.1 million during both the three months ended March 31, 2018 and 2017.

The following tables present combined summarized financial information of our Marriott Sawgrass Golf Resort & Spa Venture and Ritz-Carlton Philadelphia Venture. Amounts provided are the total amounts attributable to the ventures and does not represent our proportionate share (in thousands):
 
 
March 31, 2018
 
December 31, 2017
Real estate, net
 
$
227,189

 
$
229,356

Other assets
 
26,045

 
20,839

Total assets
 
253,234

 
250,195

Debt
 
142,019

 
135,705

Other liabilities
 
26,006

 
23,399

Total liabilities
 
168,025

 
159,104

Members’ equity
 
$
85,209

 
$
91,091

 
Three Months Ended March 31,
 
2018
 
2017
Revenues
$
26,151

 
$
24,674

Expenses
(24,487
)
 
(24,451
)
Gain on hurricane-related property damage
312

 

Net income attributable to equity method investments
$
1,976

 
$
223


Note 6. Intangible Assets and Liabilities

Intangible assets and liabilities, included in Intangible assets, net and Accounts payable, accrued expenses and other liabilities, respectively, in the consolidated financial statements, are summarized as follows (dollars in thousands):
 
 
 
March 31, 2018
 
December 31, 2017
 
Amortization Period (Years)
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net Carrying
Amount
Finite-Lived Intangible Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
Villa/condo rental programs
45 – 55
 
$
72,400

 
$
(5,391
)
 
$
67,009

 
$
72,400

 
$
(5,015
)
 
$
67,385

Below-market hotel ground leases and parking garage lease
10 – 93
 
11,655

 
(775
)
 
10,880

 
11,655

 
(726
)
 
10,929

In-place leases
8 – 21
 
135

 
(67
)
 
68

 
135

 
(63
)
 
72

Total intangible assets, net
 
 
$
84,190

 
$
(6,233
)
 
$
77,957

 
$
84,190

 
$
(5,804
)
 
$
78,386

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Finite-Lived Intangible Liability
 
 
 
 
 
 
 
 
 
 
 
 
 
Above-market hotel ground lease
85
 
$
(2,100
)
 
$
95

 
$
(2,005
)
 
$
(2,100
)
 
$
89

 
$
(2,011
)

Net amortization of intangibles was $0.4 million for both the three months ended March 31, 2018 and 2017. Amortization of the villa/condo rental programs and in-place lease intangibles are included in Depreciation and amortization, and amortization of below-market hotel ground lease, below-market hotel parking garage lease and above-market hotel ground lease intangibles are included in Property taxes, insurance, rent and other in the consolidated financial statements.


CWI 3/31/2018 10-Q 16



Notes to Consolidated Financial Statements (Unaudited)

Note 7. Fair Value Measurements

The fair value of an asset is defined as the exit price, which is the amount that would either be received when an asset is sold or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The guidance establishes a three-tier fair value hierarchy based on the inputs used in measuring fair value. These tiers are: Level 1, for which quoted market prices for identical instruments are available in active markets, such as money market funds, equity securities and U.S. Treasury securities; Level 2, for which there are inputs other than quoted prices included within Level 1 that are observable for the instrument, such as certain derivative instruments, including interest rate caps and swaps; and Level 3, for securities that do not fall into Level 1 or Level 2 and for which little or no market data exists, therefore requiring us to develop our own assumptions.

Items Measured at Fair Value on a Recurring Basis

Derivative Assets and Liabilities — Our derivative assets and liabilities are comprised of interest rate swaps and caps that were measured at fair value using readily observable market inputs, such as quotations on interest rates. These derivative instruments were classified as Level 2 as these instruments are custom, over-the-counter contracts with various bank counterparties that are not traded in an active market (Note 8).

We did not have any transfers into or out of Level 1, Level 2 and Level 3 category of measurements during the three months ended March 31, 2018 or 2017. Gains and losses (realized and unrealized) recognized on items measured at fair value on a recurring basis included in earnings are reported in Other income and (expenses) in the consolidated financial statements.

Our non-recourse debt, net, which we have classified as Level 3, had a carrying value of $1.3 billion and $1.4 billion, and an estimated fair value of $1.3 billion and $1.4 billion at March 31, 2018 and December 31, 2017, respectively. We determined the estimated fair value using a discounted cash flow model with rates that take into account the interest rate risk. We also considered the value of the underlying collateral, taking into account the quality of the collateral and the then-current interest rate.

We estimated that our other financial assets and liabilities had fair values that approximated their carrying values at both March 31, 2018 and December 31, 2017.

Items Measured at Fair Value on a Non-Recurring Basis (Including Impairment Charges)

We periodically assess whether there are any indicators that the value of our real estate investments may be impaired or that their carrying value may not be recoverable.

For real estate assets held for investment and related intangible assets in which an impairment indicator is identified, we follow a two-step process to determine whether an asset is impaired and to determine the amount of the charge. First, we compare the carrying value of the property’s asset group to the estimated future undiscounted net cash flows that we expect the property’s asset group will generate, including any estimated proceeds from the eventual sale of the property’s asset group. If this amount is less than the carrying value, the property’s asset group is considered not recoverable. We then measure the impairment charge as the excess of the carrying value of the property’s asset group over the estimated fair value of the property’s asset group, which is primarily determined using market information from outside sources, such as broker quotes, recent comparable sales or third-party appraisals. If relevant market information is not available or is not deemed appropriate, we perform a future net cash flow analysis, discounted for the inherent risk associated with each investment.

We classify real estate assets as held for sale when we have entered into a contract to sell the property, all material due diligence requirements have been satisfied or we believe it is probable that the disposition will occur within one year. When we classify an asset as held for sale, we compare the asset’s fair value less estimated cost to sell to its carrying value, and if the fair value less estimated cost to sell is less than the property’s carrying value, we reduce the carrying value to the fair value less estimated cost to sell. We base the fair value on the contract and the estimated cost to sell on information provided by brokers and legal counsel. We will continue to review the property for subsequent changes in the fair value and may recognize an additional impairment charge, if warranted.


CWI 3/31/2018 10-Q 17



Notes to Consolidated Financial Statements (Unaudited)

We determined that the significant inputs used to value these investments fall within Level 3 for fair value reporting. As a result of our assessments, we calculated an impairment charge based on market conditions and assumptions that existed at the time. The valuation of real estate is subject to significant judgment and actual results may differ materially if market conditions or the underlying assumptions change. We did not recognize any impairment charges during the three months ended March 31, 2018 or 2017.

Note 8. Risk Management and Use of Derivative Financial Instruments

Risk Management

In the normal course of our ongoing business operations, we encounter economic risk. There are two main components of economic risk that impact us: interest rate risk and market risk. We are primarily subject to interest rate risk on our interest-bearing assets and liabilities. Market risk includes changes in the value of our properties and related loans.

Derivative Financial Instruments

When we use derivative instruments, it is generally to reduce our exposure to fluctuations in interest rates. We have not entered into, and do not plan to enter into, financial instruments for trading or speculative purposes. In addition to entering into derivative instruments on our own behalf, we may also be a party to derivative instruments that are embedded in other contracts, which are considered to be derivative instruments. The primary risks related to our use of derivative instruments include: (i) a counterparty to a hedging arrangement defaulting on its obligation and (ii) a downgrade in the credit quality of a counterparty to such an extent that our ability to sell or assign our side of the hedging transaction is impaired. While we seek to mitigate these risks by entering into hedging arrangements with large financial institutions that we deem to be creditworthy, it is possible that our hedging transactions, which are intended to limit losses, could adversely affect our earnings. Furthermore, if we terminate a hedging arrangement, we may be obligated to pay certain costs, such as transaction or breakage fees. We have established policies and procedures for risk assessment, as well as the approval, reporting and monitoring of derivative financial instrument activities.

We measure derivative instruments at fair value and record them as assets or liabilities, depending on our rights or obligations under the applicable derivative contract. Derivatives that are not designated as hedges must be adjusted to fair value through earnings. For a derivative designated, and that qualified, as a cash flow hedge, the effective portion of the change in fair value of the derivative is recognized in Other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of the change in fair value of any derivative is immediately recognized in earnings.

The following table sets forth certain information regarding our derivative instruments on our Consolidated Hotels (in thousands):
Derivatives Designated as Hedging Instruments 
 
 
 
Asset Derivatives Fair Value at
 
Liability Derivatives Fair Value at
 
Balance Sheet Location
 
March 31, 2018
 
December 31, 2017
 
March 31, 2018
 
December 31, 2017
Interest rate caps
 
Other assets
 
$
88

 
$
1

 
$

 
$

Interest rate swap
 
Other assets
 
1

 

 

 

Interest rate swap
 
Accounts payable, accrued expenses and other liabilities
 

 

 

 
(2
)
 
 
 
 
$
89

 
$
1

 
$

 
$
(2
)

All derivative transactions with an individual counterparty are governed by a master International Swap and Derivatives Association agreement, which can be considered as a master netting arrangement; however, we report all our derivative instruments on a gross basis in our consolidated financial statements. At both March 31, 2018 and December 31, 2017, no cash collateral had been posted nor received for any of our derivative positions.

We recognized unrealized income of $0.1 million and unrealized losses of $0.1 million, respectively, in Other comprehensive income on derivatives in connection with our interest rate swaps and caps during the three months ended March 31, 2018 and 2017.


CWI 3/31/2018 10-Q 18



Notes to Consolidated Financial Statements (Unaudited)

We reclassified $0.2 million from Other comprehensive income on derivatives into Interest expense during both the three months ended March 31, 2018 and 2017.

Amounts reported in Other comprehensive income related to interest rate swaps and caps will be reclassified to Interest expense as interest expense is incurred on our variable-rate debt. At March 31, 2018, we estimated that an additional $0.3 million, inclusive of amounts attributable to noncontrolling interests of less than $0.1 million, will be reclassified as Interest expense during the next 12 months related to our interest rate swaps and caps.

Interest Rate Swaps and Caps

We are exposed to the impact of interest rate changes primarily through our borrowing activities. To limit this exposure, we attempt to obtain mortgage financing on a long-term, fixed-rate basis. However, from time to time, we or our investment partners may obtain variable-rate non-recourse mortgage loans and, as a result, may enter into interest rate swap or cap agreements with counterparties. Interest rate swaps, which effectively convert the variable-rate debt service obligations of a loan to a fixed rate, are agreements in which one party exchanges a stream of interest payments for a counterparty’s stream of cash flow over a specific period. The notional, or face, amount on which the swaps are based is not exchanged. An interest rate cap limits the effective borrowing rate of variable-rate debt obligations while allowing participants to share in downward shifts in interest rates. Our objective in using these derivatives is to limit our exposure to interest rate movements.

The interest rate swaps and caps that we had outstanding on our Consolidated Hotels at March 31, 2018 were designated as cash flow hedges and are summarized as follows (dollars in thousands): 
 
 
Number of
 Instruments
 
 
 
Fair Value at
Interest Rate Derivatives
 
 
Notional Amount
 
March 31, 2018
Interest rate caps
 
7
 
$
295,171

 
$
88

Interest rate swap
 
1
 
46,910

 
1

 
 
 
 
 
 
$
89


Credit Risk-Related Contingent Features

We measure our credit exposure on a counterparty basis as the net positive aggregate estimated fair value of our derivatives, net of any collateral received. No collateral was received as of March 31, 2018. At March 31, 2018, both our total credit exposure and the maximum exposure to any single counterparty were $0.1 million.

Some of the agreements we have with our derivative counterparties contain cross-default provisions that could trigger a declaration of default on our derivative obligations if we default, or are capable of being declared in default, on certain of our indebtedness. At March 31, 2018, we had not been declared in default on any of our derivative obligations. At March 31, 2018, we had no derivatives that were in a net liability position. At December 31, 2017, the estimated fair value of our derivatives in a net liability position was less than $0.1 million, which included accrued interest and any nonperformance risk adjustments. If we had breached any of these provisions at December 31, 2017, we could have been required to settle our obligations under these agreements at their aggregate termination value of less than $0.1 million.

Note 9. Debt

Non-Recourse Debt

Our non-recourse debt consists of mortgage notes payable, which are collateralized by the assignment of hotel properties. The following table presents the non-recourse debt, net on our Consolidated Hotel investments (dollars in thousands):
 
 
 
 
 
 
Carrying Amount at
 
 
Interest Rate Range
 
Current Maturity Date Range (a)
 
March 31, 2018
 
December 31, 2017
Fixed rate
 
3.6% – 6.5%
 
6/2019 – 4/2024
 
$
1,048,057

 
$
1,082,367

Variable rate (b)
 
3.9% – 8.9%
 
4/2018 – 12/2020
 
298,584

 
338,546

 
 
 
 
 
 
$
1,346,641

 
$
1,420,913

___________
(a)
Many of our mortgage loans have extension options, which are subject to certain conditions. The maturity dates in the table do not reflect the extension options.

CWI 3/31/2018 10-Q 19



Notes to Consolidated Financial Statements (Unaudited)

(b)
The interest rate range presented for these mortgage loans reflect the rates in effect at March 31, 2018 through the use of an interest rate cap or swap, when applicable.

Most of our mortgage loan agreements contain “lock-box” provisions, which permit the lender to access or sweep a hotel’s excess cash flow and would be triggered under limited circumstances, including the failure to maintain minimum debt service coverage ratios. If a provision were triggered, we would generally be permitted to spend an amount equal to our budgeted hotel operating expenses, taxes, insurance and capital expenditure reserves for the relevant hotel. The lender would then hold all excess cash flow after the payment of debt service in an escrow account until certain performance hurdles are met.

Holiday Inn Manhattan 6th Avenue Chelsea

At December 31, 2016, the minimum debt service coverage ratio for the Holiday Inn Manhattan 6th Avenue Chelsea was not met; therefore, a cash management agreement was enacted that permits the lender to sweep the hotel’s excess cash flow. As of March 31, 2018, this ratio was met, however, the cash management agreement will remain in effect until the ratio is met for two consecutive quarters.

Lake Arrowhead Resort and Spa

At June 30, 2017, the minimum debt service coverage ratio for the Lake Arrowhead Resort and Spa was not met; therefore we were required to fund $0.5 million into a lender-held reserve account that will be released after a specified debt service coverage ratio is achieved for two consecutive quarters. We funded the required $0.5 million into the lender-held reserve account during the third quarter of 2017, which is included in Restricted cash in our consolidated balance sheet.

Although all required debt service has been paid on time, as of March 31, 2018, this property did not meet a minimum debt service coverage ratio, which resulted in an event of default entitling the lender to certain rights under the loan agreement, up to and including, taking possession of the property and commencing foreclosure proceedings. The loan matures on June 23, 2018 and we are currently in discussions with the lender.

Ritz-Carlton Fort Lauderdale

At September 30, 2017, the minimum debt service coverage ratio for both the senior mortgage loan and mezzanine loan for the Ritz-Carlton Fort Lauderdale were not met; therefore, we entered into a cash management agreement that permits the lender to sweep the hotel’s excess cash flow. As of March 31, 2018, this ratio was still not met and the cash management agreement remained in effect.

Courtyard Pittsburgh Shadyside

At March 31, 2018, the minimum debt service coverage ratio for the Courtyard Pittsburgh Shadyside was not met; therefore, we entered into a cash management agreement that permits the lender to sweep the hotel’s excess cash flow.

Covenants

Pursuant to our mortgage loan agreements, our consolidated subsidiaries are subject to various operational and financial covenants, including minimum debt service coverage ratios. Except as discussed above, at March 31, 2018, we were in compliance with the applicable covenants for each of our mortgage loans.

WPC Credit Facility

At March 31, 2018, we had outstanding balances under the Bridge Loan and Working Capital Facility of $40.8 million and $0.8 million, respectively, with $24.2 million available to be drawn on the Working Capital Facility. These loans are described in Note 3.


CWI 3/31/2018 10-Q 20



Notes to Consolidated Financial Statements (Unaudited)

Scheduled Debt Principal Payments

Scheduled debt principal payments during the remainder of 2018, each of the next four calendar years following December 31, 2018 and thereafter are as follows (in thousands):
Years Ending December 31,
 
Total
2018 (remainder) (a) (b)
 
$
183,445

2019
 
109,626

2020
 
222,362

2021
 
458,253

2022
 
244,104

Thereafter through 2024
 
176,870

 
 
1,394,660

Unamortized deferred financing costs
 
(6,382
)
Total
 
$
1,388,278

___________
(a)
Balance includes $131.9 million of scheduled balloon payments on four consolidated mortgage loans. We currently intend to refinance these mortgage loans, although there can be no assurance that we will be able to do so on favorable terms, if at all.
(b)
Includes $40.8 million and $0.8 million of loan proceeds from the Bridge Loan and Working Capital Facility, respectively, from WPC (Note 3).

Note 10. Commitments and Contingencies

At March 31, 2018, we were not involved in any material litigation. Various claims and lawsuits arising in the normal course of business are pending against us, but we do not expect the results of such proceedings to have a material adverse effect on our consolidated financial position or results of operations.

Hotel Management Agreements

As of March 31, 2018, our Consolidated Hotel properties were operated pursuant to long-term management agreements with 12 different management companies, with initial terms ranging from five to 30 years. For hotels operated with separate franchise agreements, each management company receives a base management fee, generally ranging from 1.0% to 3.5% of hotel revenues. Four of our management agreements contain the right and license to operate the hotels under specified brands; no separate franchise agreements exist and no separate franchise fee is required for these hotels. The management agreements that include the benefit of a franchise agreement incur a base management fee ranging from 3.0% to 3.5% of hotel revenues. The management companies are generally also eligible to receive an incentive management fee, which is typically calculated as a percentage of operating profit, either (i) in excess of projections with a cap or (ii) after the owner has received a priority return on its investment in the hotel. For the three months ended March 31, 2018 and 2017, we incurred management fee expense, including amortization of deferred management fees, of $4.7 million and $5.6 million, respectively.

Franchise Agreements

As of March 31, 2018, we had 12 franchise agreements with Marriott-owned brands, five with Hilton-owned brands, two with InterContinental Hotels owned brands and one with a Hyatt owned brand related to our Consolidated Hotels. The franchise agreements have initial terms ranging from 15 to 25 years (excluding four hotels that receive the benefits of a franchise agreement pursuant to management agreements, as discussed above). Also, three of our Consolidated Hotels are independent and not subject to franchise agreements. Our franchise agreements grant us the right to the use of the brand name, systems and marks with respect to specified hotels and establish various management, operational, record-keeping, accounting, reporting and marketing standards and procedures that the licensed hotel must comply with. In addition, the franchisor establishes requirements for the quality and condition of the hotel and its furniture, fixtures and equipment, and we are obligated to expend such funds as may be required to maintain the hotel in compliance with those requirements. Typically, our franchise agreements provide for a license fee, or royalty, of 3.0% to 7.0% of room revenues and, if applicable, 2.0% to 3.0% of food and beverage revenue. In addition, we generally pay 1.0% to 4.0% of room revenues as marketing and reservation system contributions for the system-wide benefit of brand hotels. Franchise fees are included in sales and marketing expense in our consolidated

CWI 3/31/2018 10-Q 21



Notes to Consolidated Financial Statements (Unaudited)

financial statements. For the three months ended March 31, 2018 and 2017, we incurred franchise fee expense, including amortization of deferred franchise fees, of $4.1 million and $4.7 million, respectively.

Renovation Commitments

Certain of our hotel franchise and loan agreements require us to make planned renovations to our Consolidated Hotels (Note 4). We do not currently expect, and are not obligated, to fund any planned renovations on our Unconsolidated Hotels beyond our original investment. The table below does not reflect any renovation work to be undertaken as a result of Hurricane Irma, as discussed in Note 4.

At March 31, 2018, eight hotels were either undergoing renovation or in the planning stage of renovations, and we currently expect that three will be completed during the remainder of 2018, four will be completed during the first half of 2019 and one will be completed during the second half of 2019. The following table summarizes our capital commitments related to our Consolidated Hotels (in thousands):        
 
 
March 31, 2018
 
December 31, 2017
Capital commitments
 
$
65,543

 
$
84,325

Less: amounts paid
 
(38,854
)
 
(43,179
)
Unpaid commitments
 
26,689

 
41,146

Less: amounts in restricted cash designated for renovations
 
(20,515
)
 
(13,136
)
Unfunded commitments (a)
 
$
6,174

 
$
28,010

___________
(a)
Of our unfunded commitments at both March 31, 2018 and December 31, 2017, approximately $0.5 million of unrestricted cash on our balance sheet was designated for renovations.

Capital Expenditures and Reserve Funds

With respect to our hotels that are operated under management or franchise agreements with major international hotel brands and for most of our hotels subject to mortgage loans, we are obligated to maintain furniture, fixtures and equipment reserve accounts for future capital expenditures at these hotels, sufficient to cover the cost of routine improvements and alterations at the 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% and 5% of the respective hotel’s total gross revenue. As of March 31, 2018 and December 31, 2017$30.0 million and $32.9 million, respectively, was held in furniture, fixtures and equipment reserve accounts for future capital expenditures, and is included in Restricted cash in the consolidated financial statements.

Ground Lease Commitments

Three of our hotels are subject to ground leases. Scheduled future minimum ground lease payments during the remainder of 2018, each of the next four calendar years following December 31, 2018 and thereafter are as follows (in thousands):
Years Ending December 31,
 
Total
2018 (remainder)
 
$
2,444

2019
 
3,328

2020
 
3,404

2021
 
3,482

2022
 
3,562

Thereafter through 2106
 
647,555

Total
 
$
663,775



CWI 3/31/2018 10-Q 22



Notes to Consolidated Financial Statements (Unaudited)

For both the three months ended March 31, 2018 and 2017, we recorded rent expense of $0.9 million, both inclusive of percentage rents of $0.1 million, related to these ground leases, which are included in Property taxes, insurance, rent and other in the consolidated financial statements. Additionally, we recorded straight-line rent adjustment expense related to these ground leases of $1.3 million for both the three months ended March 31, 2018 and 2017.

Note 11. Equity

Reclassifications Out of Accumulated Other Comprehensive Loss

The following tables present a reconciliation of changes in Accumulated other comprehensive loss by component for the periods presented (in thousands):
 
 
Three Months Ended March 31,
Gains and Losses on Derivative Instruments
 
2018
 
2017
Beginning balance
 
$
(455
)
 
$
(1,128
)
Other comprehensive income (loss) before reclassifications
 
147

 
(149
)
Amounts reclassified from accumulated other comprehensive loss to:
 
 
 
 
Interest expense
 
168

 
174

Equity in earnings of equity method investments in real estate
 

 
80

Total
 
168

 
254

Net current period other comprehensive income
 
315

 
105

Net current period other comprehensive income attributable to noncontrolling interests
 
(12
)
 
(1
)
Ending balance
 
$
(152
)
 
$
(1,024
)

Distributions Declared

During the first quarter of 2018, our board of directors declared a quarterly distribution of $0.1425 per share, which was paid on April 16, 2018 to stockholders of record on March 29, 2018, in the aggregate amount of $19.8 million.

We paid distributions of $19.6 million during the three months ended March 31, 2018, representing distributions declared during the three months ended December 31, 2017.

Note 12. Income Taxes

We elected to be treated as a REIT and believe that we have been organized and have operated in such a manner to maintain our qualification as a REIT for federal and state income tax purposes. As a REIT, we are generally not subject to corporate level federal income taxes on earnings distributed to our stockholders. Since inception, we have distributed at least 100% of our taxable income annually and intend to do so for the tax year ending December 31, 2018. Accordingly, we have not included any provisions for federal income taxes related to the REIT in the accompanying consolidated financial statements for the three months ended March 31, 2018 and 2017. We conduct business in various states and municipalities within the United States, and, as a result, we or one or more of our subsidiaries file income tax returns in the U.S. federal jurisdiction and various state jurisdictions. As a result, we are subject to certain state and local taxes and a provision for such taxes is included in the consolidated financial statements.

Certain of our subsidiaries have elected taxable REIT subsidiary, or TRS, status. A TRS may provide certain services considered impermissible for REITs and may hold assets that REITs may not hold directly. The accompanying consolidated financial statements include an interim tax provision for our TRSs for the three months ended March 31, 2018 and 2017. Current income tax expense was $0.9 million and $1.1 million for the three months ended March 31, 2018 and 2017, respectively.

Our TRSs are subject to U.S. federal and state income taxes. As such, deferred tax assets and liabilities are established for temporary differences between the financial reporting basis and the tax basis of assets and liabilities at the enacted tax rates expected to be in effect when the temporary differences reverse. A valuation allowance for deferred tax assets is provided if we believe that it is more likely than not that we will not realize the tax benefit of deferred tax assets based on available evidence at

CWI 3/31/2018 10-Q 23



Notes to Consolidated Financial Statements (Unaudited)

the time the determination is made. A change in circumstances may cause us to change our judgment about whether a deferred tax asset will more likely than not be realized. We generally report any change in the valuation allowance through our income statement in the period in which such changes in circumstances occur. In December 2017, the Tax Cuts and Jobs Act was enacted, which reduced the federal corporate income tax rate from 35% to 21%, effective January 1, 2018. Tax reform also contained other provisions that may have an impact on the future realizability of our deferred tax assets. The majority of our deferred tax assets relates to net operating losses, interest expense limitation and accrued expenses. The majority of our deferred tax liabilities relates to differences between the tax basis and financial reporting basis of the villa/condo rental management agreements. Benefit from income taxes included deferred income tax benefits of $1.6 million and $1.4 million for the three months ended March 31, 2018 and 2017, respectively.


CWI 3/31/2018 10-Q 24




Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to provide the reader with information that will assist in understanding our financial statements and the reasons for changes in certain key components of our financial statements from period to period. Management’s Discussion and Analysis of Financial Condition and Results of Operations also provides the reader with our perspective on our financial position and liquidity, as well as certain other factors that may affect our future results. Our Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the 2017 Annual Report and subsequent reports filed under the Securities Exchange Act of 1934, as amended, or the Exchange Act.

Business Overview

As described in more detail in Item 1 of the 2017 Annual Report, we are a publicly-owned, non-listed REIT that invests in, manages and seeks to enhance the value of, interests in lodging and lodging-related properties. At March 31, 2018, we held ownership interests in 28 hotels, with a total of 7,817 rooms.

We have invested the proceeds from our initial public offering and follow-on offering in a diversified lodging portfolio, including full-service, select-service and resort hotels. Our results of operations are significantly impacted by seasonality and hotel renovations. We have invested and then initiated significant renovations at certain hotels. Generally, during the renovation period, a portion of total rooms are unavailable and hotel operations are often disrupted, negatively impacting our results of operations.

Significant Developments

Net Asset Value

Our Advisor calculated our NAV as of year-end by relying in part on appraisals of the fair market value of our real estate portfolio and estimates of the fair market value of our mortgage debt, both provided by independent third parties as of December 31, 2017. The net amount was then adjusted for estimated disposition fees payable to our advisor and our other net assets and liabilities at the same date. Our NAV as of December 31, 2017 was $10.41 per share; please see our Current Report on Form 8-K dated April 11, 2018 for additional information regarding the calculation of our NAV.

Dispositions

On January 25, 2018, we sold our 100% ownership interest in the Marriott Boca Raton at Boca Center to an unaffiliated third‑party for a contractual sales price of $76.0 million and net proceeds after the repayment of debt of approximately $35.4 million, including the release of $1.4 million of restricted cash. We recognized a gain on sale of $12.3 million during the three months ended March 31, 2018 (Note 4).

On February 5, 2018, we sold our 100% ownership interests in the Hampton Inn Memphis Beale Street and Hampton Inn Atlanta Downtown to an unaffiliated third-party for a contractual sales price of $63.0 million and net proceeds after the repayment of debt of approximately $31.8 million, including the release of $2.0 million of restricted cash. We recognized a gain on sale of $19.6 million during the three months ended March 31, 2018 (Note 4).

WPC Credit Facility

During the first quarter of 2018, the Operating Partnership drew down $10.0 million from the Working Capital Facility and repaid a total of $20.0 million towards the Bridge Loan and $17.0 million towards the Working Capital Facility.

At March 31, 2018, the outstanding balances under the Bridge Loan and Working Capital Facility were $40.8 million and $0.8 million, respectively, with $24.2 million available to be drawn on the Working Capital Facility (Note 3).


CWI 3/31/2018 10-Q 25




Financial and Operating Highlights

(Dollars in thousands, except average daily rate, or ADR, and revenue per available room, or RevPAR)
 
 
Three Months Ended March 31,
 
 
2018
 
2017
Hotel revenues
 
$
142,431

 
$
159,704

Gain on hurricane-related property damage
 
(569
)
 

Net income (loss) attributable to CWI stockholders
 
14,187

 
(5,412
)
 
 
 
 
 
Cash distributions paid
 
19,642

 
19,292

 
 
 
 
 
Net cash provided by operating activities (a)
 
2,562

 
21,192

Net cash provided by (used in) investing activities (a)
 
127,028

 
(3,905
)
Net cash used in financing activities
 
(111,772
)
 
(17,676
)
 
 
 
 
 
Supplemental financial measures: (b)
 
 
 
 
FFO attributable to CWI stockholders
 
2,971

 
14,492

MFFO attributable to CWI stockholders
 
3,752

 
15,960

 
 
 
 
 
Consolidated Hotel Operating Statistics
 
 
 
 
Occupancy
 
75.1
%
 
73.9
%
ADR
 
$
222.12

 
$
221.74

RevPAR
 
166.88

 
163.76

___________
(a)
On January 1, 2018, we adopted ASU 2016-15 and ASU 2016-18, which revised how certain items are presented in the consolidated statements of cash flows. As a result of adopting this guidance, we retrospectively revised Net cash provided by operating activities and Net cash provided by (used in) investing activities within our consolidated statements of cash flows for the three months ended March 31, 2017, as described in Note 2.
(b)
We consider the performance metrics listed above, including funds from operations, or FFO, and modified funds from operations, or MFFO, which are supplemental measures that are not defined by GAAP, or non-GAAP measures, to be important measures in the evaluation of our results of operations and capital resources. We evaluate our results of operations with a primary focus on the ability to generate cash flow necessary to meet our objective of funding distributions to stockholders. See Supplemental Financial Measures below for our definitions of these non-GAAP measures and reconciliations to their most directly comparable GAAP measures.
    
The comparison of our results period over period is influenced by both the number and size of the hotels consolidated in each of the respective periods. At March 31, 2018, we owned 24 Consolidated Hotels, compared to 28 Consolidated Hotels at March 31, 2017.


CWI 3/31/2018 10-Q 26




Portfolio Overview

The following table sets forth certain information for each of our Consolidated Hotels and our Unconsolidated Hotels at March 31, 2018:
Hotels
 
State
 
Number
of Rooms
 
% Owned
 
Acquisition Date
 
Hotel Type
 
Renovation Status at March 31, 2018 (a)
Consolidated Hotels
 
 
 
 
 
 
 
 
 
 
 
 
2012 Acquisitions
 
 
 
 
 
 
 
 
 
 
 
 
Hilton Garden Inn New Orleans French Quarter/CBD
 
LA
 
155

 
88
%
 
6/8/2012
 
Select-service
 
Completed
Lake Arrowhead Resort and Spa
 
CA
 
173

 
97
%
 
7/9/2012
 
Resort
 
Completed
Courtyard San Diego Mission Valley
 
CA
 
317

 
100
%
 
12/6/2012
 
Select-service
 
Completed
2013 Acquisitions
 
 
 
 
 
 
 
 
 
 
 
 
Courtyard Pittsburgh Shadyside
 
PA
 
132

 
100
%
 
3/12/2013
 
Select-service
 
Completed/ Planned future
Hutton Hotel Nashville
 
TN
 
250

 
100
%
 
5/29/2013
 
Full-service
 
Completed
Holiday Inn Manhattan 6th Avenue Chelsea
 
NY
 
226

 
100
%
 
6/6/2013
 
Full-service
 
Completed
Fairmont Sonoma Mission Inn & Spa
 
CA
 
226

 
100
%
 
7/10/2013
 
Resort
 
Completed
Marriott Raleigh City Center
 
NC
 
400

 
100
%
 
8/13/2013
 
Full-service
 
Completed/ Planned future
Hawks Cay Resort (b) (c)
 
FL
 
423

 
100
%
 
10/23/2013
 
Resort
 
Completed
Renaissance Chicago Downtown
 
IL
 
560

 
100
%
 
12/20/2013
 
Full-service
 
Completed/ Planned future
2014 Acquisitions
 
 
 
 
 
 
 
 
 
 
 
 
Hyatt Place Austin Downtown
 
TX
 
296

 
100
%
 
4/1/2014
 
Select-service
 
None planned
Courtyard Times Square West
 
NY
 
224

 
100
%
 
5/27/2014
 
Select-service
 
None planned
Sheraton Austin Hotel at the Capitol
 
TX
 
367

 
80
%
 
5/28/2014
 
Full-service
 
Completed
Hampton Inn & Suites/Homewood Suites Denver Downtown Convention Center
 
CO
 
302

 
100
%
 
6/25/2014
 
Select-service
 
Planned future
Sanderling Resort
 
NC
 
125

 
100
%
 
10/28/2014
 
Resort
 
Completed/ In progress
Staybridge Suites Savannah Historic District
 
GA
 
104

 
100
%
 
10/30/2014
 
Select-service
 
Completed
Marriott Kansas City Country Club Plaza
 
MO
 
295

 
100
%
 
11/18/2014
 
Full-service
 
Completed
2015 Acquisitions
 
 
 
 
 
 
 
 
 
 
 
 
Westin Minneapolis
 
MN
 
214

 
100
%
 
2/12/2015
 
Full-service
 
In progress
Westin Pasadena
 
CA
 
350

 
100
%
 
3/19/2015
 
Full-service
 
Completed
Hilton Garden Inn/Homewood Suites Atlanta Midtown
 
GA
 
228

 
100
%
 
4/29/2015
 
Select-service
 
None planned
Ritz-Carlton Key Biscayne (d)
 
FL
 
451

 
47
%
 
5/29/2015
 
Resort
 
Completed/ Planned future
Ritz-Carlton Fort Lauderdale (e)
 
FL
 
197

 
70
%
 
6/30/2015
 
Resort
 
Completed/ Planned future
Le Méridien Dallas, The Stoneleigh
 
TX
 
176

 
100
%
 
11/20/2015
 
Full-service
 
Completed
2016 Acquisition
 
 
 
 
 
 
 
 
 
 
 
 
Equinox, a Luxury Collection Golf Resort & Spa
 
VT
 
199

 
100
%
 
2/17/2016
 
Resort
 
In progress
 
 
 
 
6,390

 
 
 
 
 
 
 
 
Unconsolidated Hotels
 
 
 
 
 
 
 
 
 
 
 
 
Hyatt New Orleans French Quarter
 
LA
 
254

 
80
%
 
9/6/2011
 
Full-service
 
Completed
Marriott Sawgrass Golf Resort & Spa (f)
 
FL
 
514

 
50
%
 
4/1/2015
 
Resort
 
Completed
Ritz-Carlton Philadelphia
 
PA
 
301

 
60
%
 
5/15/2015
 
Full-service
 
Completed
Ritz-Carlton Bacara, Santa Barbara (g)
 
CA
 
358

 
40
%
 
9/28/2017
 
Resort
 
Planned future
 
 
 
 
1,427

 
 
 
 
 
 
 
 
___________
(a)
Status excludes any renovation work to be undertaken as a result of Hurricane Irma.
(b)
As a result of damage sustained from Hurricane Irma, this hotel is currently closed and is expected to fully reopen by midyear 2018.
(c)
Includes 246 privately owned villas that participate in the villa/condo rental program at March 31, 2018, of which 137 were available for rent as a result of damage caused by Hurricane Irma.
(d)
CWI 2 owns an interest of approximately 19% in this venture. Also, the number of rooms presented includes 149 condo-hotel units that participate in the villa/condo rental program at March 31, 2018.
(e)
Includes 31 condo-hotel units that participate in the villa/condo rental program at March 31, 2018.
(f)
On October 3, 2014, we acquired the Marriott Sawgrass Golf Resort & Spa as a Consolidated Hotel. On April 1, 2015, we sold a 50% controlling interest to CWI 2 and began accounting for our interest in the hotel as an equity method investment.

CWI 3/31/2018 10-Q 27




(g)
This investment represents a tenancy-in-common interest; the remaining 60% interest is owned by CWI 2.

Results of Operations

We evaluate our results of operations with a primary focus on our ability to generate cash flow necessary to meet our objectives of funding distributions to stockholders and increasing the value of our real estate investments. As a result, our assessment of operating results gives less emphasis to the effect of unrealized gains and losses, which may cause fluctuations in net income for comparable periods but have no impact on cash flows, and to other non-cash charges, such as depreciation and impairment charges.

In addition, we use other information that may not be financial in nature, including statistical information, to evaluate the operating performance of our business, such as occupancy rate, ADR or RevPAR. Occupancy rate, ADR and RevPAR are commonly used measures within the hotel industry to evaluate operating performance. RevPAR, which is calculated as the product of ADR and occupancy rate, is an important statistic for monitoring operating performance at our hotels. Our occupancy rate, ADR and RevPAR performance may be impacted by macroeconomic factors such as U.S. economic conditions, regional and local employment growth, personal income and corporate earnings, business relocation decisions, business and leisure travel, new hotel construction and the pricing strategies of competitors.

The comparability of our results year over year are impacted by, among other factors, the timing of acquisition and/or disposition activity and the timing of any renovation-related activity.


CWI 3/31/2018 10-Q 28




The following table presents our comparative results of operations (in thousands):
 
 
Three Months Ended March 31,
 
 
2018
 
2017
 
Change
Hotel Revenues
 
$
142,431

 
$
159,704

 
$
(17,273
)
 
 
 
 
 
 
 
Hotel Expenses
 
131,523

 
140,578

 
(9,055
)
 
 
 
 
 
 
 
Other Operating Expenses
 
 
 
 
 
 
Asset management fees to affiliate and other expenses
 
3,918

 
4,047

 
(129
)
Corporate general and administrative expenses
 
2,968

 
2,509

 
459

Gain on hurricane-related property damage
 
(569
)
 

 
(569
)
Total Other Operating Expenses
 
6,317

 
6,556

 
(239
)
 
 
 
 
 
 
 
Operating Income
 
4,591

 
12,570

 
(7,979
)
 
 
 
 
 
 
 
Other Income and (Expenses)
 
 
 
 
 
 
Interest expense
 
(16,781
)
 
(16,306
)
 
(475
)
Equity in (losses) earnings of equity method investments in real estate
 
(1,025
)
 
2,985

 
(4,010
)
Net loss on extinguishment of debt (Note 9)
 

 
(141
)
 
141

Other income
 
122

 
26

 
96

Total Other Income and (Expenses)
 
(17,684
)
 
(13,436
)
 
(4,248
)
 
 
 
 
 
 
 
Loss from Operations Before Income Taxes and Net Gain (Loss) on Sale of Real Estate
 
(13,093
)
 
(866
)
 
(12,227
)
Benefit from income taxes
 
708

 
286

 
422

Loss from Operations Before Net Gain (Loss) on Sale of Real Estate
 
(12,385
)
 
(580
)
 
(11,805
)
Net gain (loss) on sale of real estate, net of tax
 
31,929

 
(352
)
 
32,281

Net Income (Loss)
 
19,544

 
(932
)
 
20,476

Income attributable to noncontrolling interests
 
(5,357
)
 
(4,480
)
 
(877
)
Net Income (Loss) Attributable to CWI Stockholders
 
$
14,187

 
$
(5,412
)
 
$
19,599

Supplemental Financial Measure:(a)